-----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, Uq7jOt8TD2nHgusybYziQ7FblCIw7GBK45JaLFLbtk+UE7rKvwN1p5VPmsjMzc1v KJZI6Lf3s7eHpSXQZ8k32A== 0000928385-99-002414.txt : 19990809 0000928385-99-002414.hdr.sgml : 19990809 ACCESSION NUMBER: 0000928385-99-002414 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19990502 FILED AS OF DATE: 19990730 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEWBRIDGE NETWORKS CORP CENTRAL INDEX KEY: 0000827301 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 980077506 STATE OF INCORPORATION: A6 FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13316 FILM NUMBER: 99675161 BUSINESS ADDRESS: STREET 1: 600 MARCH ROAD PO BOX 13600 STREET 2: KANATA ONTARIO CANADA CITY: K2K 2E6 STATE: A6 BUSINESS PHONE: 6135913600 MAIL ADDRESS: STREET 1: 600 MARCH ROAD STREET 2: KANATA ONTARIO CANADA CITY: K2K 2E6 STATE: A6 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 2, 1999 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 incorporation or organization) (I.R.S. Employer Identification No.) 600 March Road, Kanata, Ontario, Canada K2K 2E6 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (613) 591-3600 Securities registered pursuant to Section 12(b) of the Act: Common Shares, no par value New York Stock Exchange (Title of class) (Name of each exchange on which registered) The common shares are also listed on The Toronto Stock Exchange in Canada. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At June 17, 1999 the aggregate market value of the voting stock held by non- affiliates of the registrant was approximately Cdn$5,600,944,000. The number of common shares of the registrant outstanding as at June 17, 1999 was 180,427,602. Exhibit index begins on Page 85 Page 1 of 231 EXCHANGE RATES Financial information herein is expressed in Canadian dollars ($ or Cdn$), unless expressly stated in United States dollars (US$) or otherwise. The Company maintains its financial data in Canadian dollars. The high and low exchange rates (the highest and lowest rates at which Canadian dollars were sold), the average exchange rate (the average of the exchange rates on the last day of each month during the period), and the period end exchange rate of the Canadian dollar in exchange for United States dollars in each of the five 12 month periods ended May 2, 1999, as calculated from the exchange rates reported by the Federal Reserve Bank of New York, are set forth below.
12 Month Period Ended ----------------------------------------------------- May 2, April 30, April 30, April 30, April 30, 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- High US$0.6982 US$0.7317 US$0.7513 US$0.7527 US$0.7457 Low 0.6341 0.6832 0.7145 0.7224 0.7023 Average 0.6619 0.7099 0.7319 0.7345 0.7248 Period End 0.6860 0.6992 0.7158 0.7345 0.7355
On June 17, 1999, the noon buying rate in New York City for the Canadian dollar as reported by the Federal Reserve Bank of New York was US$1.00 = Cdn$1.4610 (equivalent to US$0.6845 = Cdn$1.00). ____________________________________ The following trademarks are mentioned in this Report on Form 10-K: Newbridge(R), MainStreetXpress(TM) and MainStreet(R) which are trademarks of Newbridge Networks Corporation. Page 2 NEWBRIDGE NETWORKS CORPORATION TABLE OF CONTENTS
Page ---- PART I Item 1. Business General....................................................... 4 Networking Industry........................................... 4 Business Strategy............................................. 6 Products...................................................... 7 Research and Product Development.............................. 8 Sales, Marketing and Distribution............................. 9 Customer Service and Support.................................. 10 Manufacturing................................................. 10 Competition................................................... 11 Government Regulation......................................... 11 Proprietary Rights............................................ 12 Employees..................................................... 12 Item 2. Properties..................................................... 12 Item 3. Legal Proceedings.............................................. 13 Item 4. Submission of Matters to a Vote of Security Holders............ 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Common Share Price Range and Dividends........................ 14 Cautionary Statement Regarding Forward-Looking Information.... 15 Certain Tax Considerations.................................... 20 Item 6. Selected Financial Data........................................ 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 41 Item 8. Financial Statements and Supplementary Data.................... 43 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 74 PART III Item 10. Directors and Executive Officers of the Registrant............. 75 Item 11. Executive Compensation......................................... 78 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 78 Item 13. Certain Relationships and Related Transactions................. 79 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................... 80 SIGNATURES............................................................... 83
Page 3 PART I Item 1. BUSINESS GENERAL Newbridge Networks Corporation (the "Company" or "Newbridge") designs, manufactures, markets and services networking solutions to customers in more than 100 countries. Newbridge customers include the world's 350 largest service providers and more than 10,000 corporations, government organizations and other institutions. The Company was incorporated in June 1986 in Ontario under the Canada Business Corporations Act. NETWORKING INDUSTRY Communications networks may be broadly categorized as local area networks (LANs) and wide area networks (WANs). As the term suggests, LANs typically cover a smaller geographic footprint, such as an office floor, a building, or an enterprise campus, and normally serve the needs of a single corporate user. WANs, on the other hand cover a broader geographic area in a hierarchical fashion; for example, a metropolitan area network will connect to a pan-national network which, in turn, links to a global WAN infrastructure. Today's communications networks are experiencing unprecedented change, driven by two principal factors: the Internet and convergence of data, voice and video traffic. These changes require an overhaul to the existing global public telecommunications infrastructure as discussed below. The Internet The Internet is changing the way we work and live. Internet traffic has been growing at an exponential rate over the last number of years and this extraordinary growth has forced service providers and Internet Service Providers (ISPs) to build their network infrastructures at an unprecedented rate. The growth in Internet traffic is being driven by a number of factors. As its value as an information pool and communications/business resource continues to increase, more and more individuals and companies are going on line. Additionally, the growing use of the multimedia capabilities of the World Wide Web has increased the amount of data that needs to be transmitted for the typical Web page. Multimedia is defined as the combination of multiple media forms of information. While formats vary and will continue to evolve, they typically involve elements such as voice, text, graphics, image, video, and audio. Combinations of these media provide powerful communications tools, but they are not tolerant of the quality impairing delays associated with "best effort" Internet protocol (IP) networks based on legacy router technology. Such next-generation high-bandwidth applications are driving the need for networks that deliver greater capacity and scalability, performance, quality, and reliability. Convergence of Data, Voice and Video Traffic As the Internet continues to grow in terms of its capabilities, reach and capacity, the amount of data traffic on the public telecommunications network, or public switched telephone network (PSTN), as it is known as, now exceeds the total amount of voice traffic in a growing number of countries throughout the world. At current growth rates, this will be the case on a global basis Page 4 within a few years. This phenomenon, together with the convergence of traffic types encompassing combinations of voice, video and various forms of data into multimedia communications packages, and the growth of voice over IP (VoIP), voice over frame relay (VoFR), voice over asynchronous transfer mode (VoATM), is leading network engineers with the service providers to plan and design so called "next generation networks" (NGNs) to handle voice, data, and video traffic over a single, unifying, broadband multiservice infrastructure. This converged network infrastructure involves the migration from a highly centralized, narrowband circuit-switched architecture to a distributed architecture where the call control and advanced intelligent network (AIN) functionality reside on intelligent call and service control servers. The relatively inflexible narrowband circuit switches are being replaced by flexible broadband packet/cell switches distributed throughout the network. This transition will occur in stages, with long distance toll or tandem Class 4 switches being the first to migrate, followed by the local or end Class 5 switching centers. Higher Capacity Backbones Both traffic carrying requirements and capacity are increasing at every point in the network hierarchy. Higher bandwidth traffic and capacity within LANs puts greater capacity pressure on what has traditionally been the first point of constriction or bottleneck within the public or wide area network, namely the access portion of the network. New, broadband access technologies, such as cable modems, various high speed digital subscriber loop technologies (such as ADSL and SDSL) and broadband wireless access based on LMDS (local multipoint distribution system) are breaking down the access or "last mile" roadblock. This, in turn, is putting increasing pressure on the backbone or core of the network. Where DS-3 (45 Mbit/s or millions of bits per second) connections were considered adequate only a few years ago, many Internet backbones today are constructed using OC-3 (155 Mbit/s) links, and these are moving quickly to OC-12 (622 Mbit/s) and OC-48 (2.4 Gbit/s or billions of bits per second) speeds. Competitive Landscape for Service Providers The networking industry has seen the birth and growth of a large number of new service providers, particularly since the mainstream commercialization of the Internet. The new generation, or "alternate" service providers - including competitive local exchange service providers (CLECs), competitive access providers (CAPs), Internet Service Providers (ISPs) and competitive long distance service providers - coupled with deregulation throughout the industry, have put increasing pressure on the established service providers. This competitive challenge requires the established service providers to reduce costs and optimize network resources, while the growing demand for new communications services requires them to invest in new infrastructures. In order to reconcile these conflicting needs, service providers are migrating the current disparate array of networks and services offered from their networks onto a single, unifying, broadband infrastructure. The scalability, flexibility, and inherent quality of service (QoS) of asynchronous transfer mode (ATM) switching technology make it well suited for multiple traffic types or services, including delay-sensitive traffic such as real-time voice or video, enabling service providers to launch new, higher margin, value-added services. At the same time service providers can lower their up-front and operating costs and improve the manageability of their overall network infrastructure by consolidating their present disparate networks onto one ATM-based network. Page 5 For example, real-world business case analyses related to the transition from a narrowband circuit-switched architecture to a broadband packet/cell network infrastructure estimate that the new solution represents less than half the cost and one-tenth the space requirements of conventional circuit switches. BUSINESS STRATEGY The Company's business strategy is to provide comprehensive, fully managed, end- to-end wide area networking solutions to service providers and corporate customers based on a broad product family that cost effectively addresses their constantly evolving communications requirements. Newbridge products are designed in accordance with an "evergreen" architecture to provide customers with a seamless migration and integration path across the entire product family. The full product family is highly flexible and scalable to meet evolving customer requirements. Products are software controlled and remotely manageable for ease of use, efficiency and cost effectiveness. All Newbridge products are designed to comply with industry standards throughout the world in order to deliver optimal interoperability and performance in multiprotocol, multivendor networks. The Company's architectural approach for broadband, multiservice WANs is directed at providing solutions to issues facing service providers in the core, edge and access points of the networks. At the core of the WAN, the Company's strategy focuses on the accelerating deployment of a new core infrastructure that is highly robust and scalable and capable of supporting various types and classes of service including "business class" IP. The Company delivers ATM and IP products for the core of the service provider network to collapse multiple services onto a single platform. The Company's product strategy also encompasses the access portion of the network. In addition to a multi-service access server (MRAS) family of products, the Company provides various access solutions, with a specific Product Group focussed on this high-end segment of the access market. Particular areas of focus within broadband access include the relatively new and rapidly evolving digital subscriber loop (DSL) and LMDS broadband wireless markets. The Company's product strategy for broadband WANs enables service providers to compete successfully in the face of increasing competition and deregulation by reducing capital and operational costs associated with network infrastructure and creating differentiated, business class service offerings by delivering multiple services on a single network. The Company also addresses the enterprise network market with various WAN and WAN access products based on ATM and TDM technologies and supplements its network solutions offerings through strategic alliances and other collaborative undertakings. The Company extends its business strategy through alliances and strong relations with a family of over 20 Newbridge Affiliate companies. The Newbridge Affiliate companies, in which Newbridge owns an equity stake, generally address markets within the networking industry which are complementary to the Newbridge product offering. Many of the Newbridge Affiliate companies are addressing opportunities related to equipment and services for networks optimized for IP traffic. In March 1996 Newbridge and Siemens formed an alliance encompassing common branding under the MainStreetXpress banner and joint sales, marketing and customer service activities. PRODUCTS Page 6 Newbridge has developed a broad family of digital networking products that are effective in the core, edge and access portions of service provider or corporate WANs. These products operate under a highly scalable, center-weighted network and service management system, which is advantageous for large bandwidth- intensive networks. Newbridge products employ a common architecture that allows TDM, X.25, frame relay, ATM, SMDS and LAN internetworking to coexist within the same network and provides a migration path from legacy narrowband to next generation broadband networks. The Newbridge family of ATM and IP products includes high performance core, edge and access switches for service provider networks. Network operators can build consolidated networks that deliver services for a variety of applications, employing various forms of access technologies, managed by a single, end-to-end network and service management system. This approach enables operators to reduce infrastructure costs and create differentiated service offerings by provisioning multiple services on a single, unifying, broadband, multiservice network. The MainStreetXpress 36170 Multiservices Switch is a high capacity platform, designed to scale from 800 Mbit per second to over 50 Gbit/s. The platform supports a broad array of services, including native cell relay, frame relay, circuit emulation for advanced private line services, LAN connectivity, managed IP services, SMDS services, switched voice services, broadcast-quality video services, broadband wireless access and other high-capacity access technologies such as DSL. The modular architecture of the MainStreetXpress 36170 switch enables network operators to expand from a single-shelf system to a large multi- shelf system in an as-needed fashion. The high port density of the system translates into competitive per-port pricing. The Company's MainStreetXpress product line also includes the MainStreetXpress 36190 Core Services Switch, a high performance ATM backbone or core switch, designed to scale beyond one terabit (trillion bits) per second, as well as the MainStreetXpress 36150 Access Switch for premium video service, the MainStreetXpress 36177 ATM Multiservices Access Switch, the MainStreetXpress 36030 and 36060 Modular LAN Service Units for LAN access and the MainStreetXpress 36100 Access Concentrator. TDM products from Newbridge, such as the 3600 and 3645 MainStreet Bandwidth Managers, are market leading platforms in delivering private line services throughout the world because of their wide range of voice and data interfaces, adherence to the full range of domestic and international standards, quality and reliability, end-to-end and remote network manageability, and flexibility for seamless expansion and migration as networks grow and applications evolve. Based on the 3600 MainStreet Bandwidth Manager, the 36120 MainStreet Packet Transfer Engine frame relay system can be used to deploy frame relay or X.25 networks over a TDM circuit switched network infrastructure. This product interworks with the Company's TDM and ATM systems for seamless end-to-end, multiservice network solutions. Newbridge also addresses the access market segment with products that enable service providers to deploy multiple services and permit access to those services for customers with multiple applications. These products include a variety of WAN access devices for connecting remote and small sites and devices to extend the network to the end points of both circuit and packet/cell switched connections. Page 7 Newbridge complements products providing connectivity with an extensive suite of network and service management software products ranging from configuration and alarm monitoring to interfaces to umbrella management systems and customer service management systems. The MainStreetXpress 46020 Network Manager provides unified management of Newbridge and third-party networks across multiple technologies, including circuit switching, packet/cell switching, SMDS and X.25. It features a rich, object-oriented graphical user interface (GUI) for efficient user navigation, and a scalable client/server architecture to provide simultaneous access for up to 128 operators and cost-effective management for networks containing up to 5,000 nodes and 100,000 network paths. Sales of networking products and related services accounted for 100% of the Company's sales in fiscal 1999, fiscal 1998 and fiscal 1997. RESEARCH AND PRODUCT DEVELOPMENT The Company's research and product development activities apply the latest technologies to the development of advanced functionality in networking hardware and software. In its product development strategy, Newbridge employs an "evergreen" approach in which new products and features are designed to integrate seamlessly with existing products. This approach protects customers' investment in their installed base of networking equipment. The Company's research and development strategy also focuses on leveraging product functionality developed for one market to deliver products addressing other markets. In addition to the ongoing evolution of product functionality, a significant portion of the research and development effort is directed towards expanding the breadth of network solutions for new value-added service capabilities and access technologies. Major initiatives include development of higher and lower capacity ATM multiservice switches and interfaces; development of broadband access platforms, switches, forwarding engines, interfaces and services optimized for IP traffic; and related network and service management software. In addition to the Company's internal research and product development, the Newbridge development strategy includes investments in affiliated companies developing networking technology complementary to Newbridge. The markets for Newbridge products are characterized by rapid technological change. To maintain its leadership position in advanced networking technologies, Newbridge is committed to research and development. The Company conducts the majority of its research and development in a lower cost environment compared with many competitors. Because of the Company's focus on and commitment to research and development, coupled with the cost advantages, the Newbridge strategy has been oriented towards in-house product development. This is in contrast with some other networking vendors who devote proportionately fewer resources to research and development and who have more often taken the approach of obtaining technology and products through the acquisition of other companies. Newbridge believes that its strategy results in a more cohesive product solution set for delivering seamless end-to-end networking solutions. Research and development project schedules for high technology products are inherently difficult to predict, and there can be no assurance that the Company will achieve its expected initial shipment dates of products in development. Because timely availability of new and enhanced products is critical to the success of the Company, delays in availability of these products, or lack of market acceptance of such products, could adversely affect the Company. Page 8 The Company's ability to anticipate changes in technology, industry standards and communications service provider offerings, and to develop and introduce new and enhanced products on a timely basis that are successful in the market, will be a significant factor in the Company's competitive position and its prospects for growth. For additional discussion of the Company's research and development expenditures in fiscal 1999, 1998 and 1997, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." SALES, MARKETING AND DISTRIBUTION Newbridge sells its products in more than 100 countries. The Company has established direct sales forces throughout the world, as well as marketing and distribution arrangements with service providers, original equipment manufacturers (OEMs), distributors and dealers. In March 1996, the Company formed an alliance with Siemens which includes common branding under the MainStreetXpress name for broadband WAN products and joint sales and marketing efforts. Siemens sells the Company's circuit switched networking products, ATM products and network and service management products, primarily to service providers in Europe, Latin America and Asia. Newbridge products are also distributed throughout the world by AT&T Solutions, Alcatel and other telecommunications equipment suppliers, as well as by global service providers and consortia. The Newbridge sales force in the United States and Canada sells directly to service providers and other communications service providers. In the United States, a portion of the direct sales force is focussed on established service providers including interexchange service providers and Regional Bell Operating Companies (RBOCs), such as SBC and Bell Atlantic. The other portion of the direct sales force is dedicated to the emerging alternate service providers. Newbridge also sells to Fortune 1000 sized companies and institutions, predominantly through distributors. The product line is sold throughout Europe, the Middle East and Africa by a direct sales force as well as through OEMs and distributors. In Latin America and the Asia Pacific region, networking products are sold primarily through distributors, which are supported by local Newbridge sales and support offices. In Latin America, the Company holds a majority equity interest in certain of its distributors. The Newbridge sales organization throughout the world receives support from product line management and network solutions groups which provide product strategy and consultation on industry trends and pricing, and which solicit customer feedback for research and product development planning. The Company's marketing activities are centrally coordinated and emphasize complete network solutions for the service provider markets (established service providers and new generation or alternate service providers) and the enterprise network market. The amount of sales, cost of sales and expenses, and operating contribution attributable to the Company's geographically-based operating segments, the amount of identifiable assets attributable to the Company's principal geographic regions and the amount of export sales from the Company's operations in Canada for each of the last three fiscal years are set forth in Page 9 Note 20 to the Consolidated Financial Statements. For additional discussion of the Company's geographic segments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." CUSTOMER SERVICE AND SUPPORT Reliability, performance, up-time and average mean-time-to-repair are important factors customers consider in developing long term relationships with potential suppliers of networking systems. The increasing dependency of many domestic and international customers upon information networks to run virtually all aspects of their businesses has generated a demand for a very rapid service response time. To satisfy this customer demand, the Company offers 24-hour Network Technical Assistance Centers, complemented by the service support organizations of the Company's distributors. Because of the remote diagnostic capabilities of the Company's products, support engineers can immediately begin to diagnose and solve field problems. When necessary, support engineers are dispatched from the Company's sales and support offices or by third party technical support service providers. The Company's standard product warranty covers defects in material and workmanship and generally applies for 3 to 15 months after shipment. MANUFACTURING The principal steps in the manufacturing process are the purchase and management of materials, assembly, testing and final inspection. Because Newbridge manufactures and assembles the majority of its products, the Company maintains direct control over production, quality and product availability. The Company purchases parts and components for assembly of its products from a large number of suppliers through a worldwide sourcing program. Although the Company single sources certain components, no single supplier has accounted for more than 10% of the Company's total purchases in any of the past three fiscal years. Newbridge has established strong relationships with key vendors to reduce the risk of significant shortages or delays relating to availability of materials. Shortages or delays in the supply of components, however, could adversely affect the Company's ability to meet scheduled product shipments in any particular fiscal quarter, which could materially affect the Company's operating results. The Company currently has its principal manufacturing, logistics and warehousing facilities in Canada. The Company also has logistics and warehousing facilities in the United States, Ireland, the United Kingdom, France, Hong Kong, and Malaysia. The Company schedules some production of its products based on internal sales forecasts. The Company's manufacturing procedures are designed to assure rapid response to customer orders, but may, in certain circumstances, create risk of excess or inadequate inventory if orders do not match forecast. In the fourth quarter of fiscal 1999, the Company's revenues were below Management's expectations, predominantly due to the combination of orders for the Company's product being skewed towards the end of the quarter, and inadequate inventory of certain components. Because a substantial portion of customer orders are filled within the fiscal quarter that they are received and because of the ability of customers to revise or cancel orders and change delivery schedules without significant penalty, Management believes that the Company's backlog as of any given date is not necessarily indicative of actual revenues for any succeeding period. Page 10 COMPETITION The market for the Company's products is characterized by rapid technological change, convergence of technologies, mergers and acquisitions of service providers and equipment suppliers, evolving standards, and regulatory developments. Many of the Company's competitors and potential competitors have greater financial, technological, manufacturing, marketing, and personnel resources than the Company. The Company's principal competitors include Cisco Systems, Lucent Technologies and Nortel Networks, as well as traditional circuit switched equipment vendors such as Tellabs. Principal competitive factors are product line capabilities including integration of multiple applications onto a single network, network management capabilities, ability to offer complete end-to-end networking solutions, scalability, price, reliability, adherence to standards, and market presence. Certain competitors, including traditional telecommunications equipment vendors, such as Ericsson, Fujitsu, Lucent Technologies and Nortel Networks have a very large installed base in service provider and enterprise networks, some of which can be upgraded to accommodate new technologies and features. The networking industry recently has been consolidating through strategic alliances, mergers and acquisitions thereby creating companies with larger market shares, financial resources, customer bases, sales forces, product offerings, research and development and marketing resources. Increasing competition from larger competitors may adversely affect the Company's business, particularly with respect to sales and service resources, networking equipment pricing or vendor financing packages offered to potential customers. GOVERNMENT REGULATION The sale of networking products may be affected by governmental regulatory policies, the imposition of service provider tariffs, and taxation of telecommunications services, which may also affect the availability of high capacity digital transmission lines. These policies are under continuous review and are subject to change. In the United States, regulatory policies are likely to have a significant impact on the competitive environment in which the Company operates. The Telecommunications Act of 1996 and associated regulatory developments is affecting many regulatory restrictions in the telecommunications market. Deregulation enables local exchange telephone service providers, RBOCs, long distance service providers, and other communications service providers, as well as cable television operators and electric utilities to compete with each other in offering local and long distance voice and data communications services. In addition, the RBOCs are now permitted to manufacture and sell telecommunications equipment under certain conditions. Given the substantial resources and large customer base of the RBOCs, Newbridge could face competition from these companies should they satisfy these conditions and elect to manufacture networking products. The regulatory environment in the European Union continues to promote competition for provision of communications services and to open markets for telecommunications equipment vendors. Member states which have not already fully liberalized their telecommunications markets by January 1, 1998 are required to have in place the regulatory and licensing structures that will enable new operators to enter their markets. Page 11 Deregulation is resulting in mergers among the RBOCs and other major telecommunications companies throughout the world. Although the impact of mergers that have been announced or are in process cannot be predicted, greater concentration in the market for telecommunications services could adversely affect the market for networking products. Government regulatory authorities have established regulations which, among other things, set installation and equipment standards for private telecommunications systems and require that all newly installed hardware be registered and meet certain government standards. Management believes that the Company currently complies with, and expects to be able to continue to comply with these requirements. PROPRIETARY RIGHTS The name Newbridge, the Company's corporate logo, and MainStreet are registered trademarks of the Company in approximately 50 countries. A number of the Company's other trademarks and service marks are registered in Canada as well as in various other jurisdictions. The Company also claims rights to a number of unregistered trademarks, including MainStreetXpress, and other intellectual property rights. The Company protects its trademarks, inventions, trade secrets, and other proprietary rights by contract, trademark registration, patent registration and appropriate trademark and copyright markings, as well as with internal security. The Company licenses certain intellectual property rights from third parties. Management believes that the Company's competitive success will depend primarily on the innovative skills, technical competence and marketing abilities of the Company's employees. The Company has entered into technology licenses with other companies, and may need to continue to do so in the future, because of the existence of the large number of patents in the networking field, the rapid rate of issuance of new patents, new standards that may be issued, or to obtain important technology. Such licenses may impact the Company's operating results. EMPLOYEES As of May 2, 1999, the Company had 6,530 employees. None of the Company's employees is represented by a collective bargaining agreement nor has the Company ever experienced any work stoppage. Management believes the Company's relations with its employees are good. Item 2. PROPERTIES The Company owns its corporate headquarters as well as facilities for reasearch and development, sales and marketing in Kanata, Ontario. The Company also owns facilities in Newport, Wales for sales, marketing, network services and logistics and warehousing. Newbridge leases other facilities in Kanata primarily used for manufacturing from companies owned by Mr. Terence H. Matthews, Chairman of the Board and Chief Executive Officer of the Company and its largest single shareholder. In addition to Kanata, Ontario, the Company also leases logistics and warehouse space in Rennes, France; Shannon, Ireland; Ogdensburg, New York; Hong Kong and Kuala Lumpur, Malaysia. The Company conducts research and development in leased facilities in Rennes, France; metropolitan London, England; Herndon, Virginia; and Vancouver, British Columbia. The Company also leases sales and support facilities throughout the United States and Canada, and Page 12 in over 40 locations throughout Europe, the Middle East and Africa, in over 25 locations in the Asia Pacific region, and over 10 locations in Latin America. Item 3. 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. The Court entered an order and final judgment approving the settlement and dismissing the lawsuit with prejudice on October 23, 1998. 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 some of the standardized functions on the Newbridge frame relay and ATM switch products, along with its ADPCM (adaptive differential pulse code modulation) and card initialization implementations, infringe certain United States patent rights claimed by Lucent Technologies. The Complaint requests actual and trebled damages in an unspecified amount. 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 and is defending 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. From time to time, the Company receives notifications that it is or may be infringing the intellectual property rights of third parties. There can be no assurance that any such claims or potential claims will not require the Company to enter into license agreements or result in protracted and costly litigation, regardless of the merits of such claims. No assurance can be given that any necessary licenses will be available or that, if available, such licenses can be obtained on commercially reasonable terms. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Page 13 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON SHARE PRICE RANGE AND DIVIDENDS Market Price The Common Shares are listed for trading on the New York Stock Exchange in the United States under the symbol NN and are listed for trading on The Toronto Stock Exchange in Canada under the symbol NNC. The following table sets forth the range of high and low sale prices for the Company's Common Shares during the current fiscal year through June 17, 1999 and the fiscal years ended May 2, 1999 and April 30, 1998.
New York Toronto Stock Exchange Stock Exchange Price Range Price Range ------------------------ ----------------------- High Low High Low ---- --- ---- --- Fiscal year 2000: First quarter (through June 17, 1999) US$38 US$25 /1/2/ Cdn$55.20 Cdn$37.65 Fiscal year 1999: Fourth quarter US$39 /1/2/ US$23 /1/2/ Cdn$58.00 Cdn$35.55 Third quarter 39 /7/8/ 20 /5/16/ 60.50 31.55 Second quarter 24 /7/16/ 15 /7/16/ 37.75 23.85 First quarter 32 /3/4/ 20 /1/8/ 47.00 30.35 Fiscal year 1998: Fourth quarter US$30 /7/16/ US$18 /15/16/ Cdn$43.20 Cdn$27.00 Third quarter 58 /7/8/ 25 /7/8/ 82.75 37.50 Second quarter 69 /3/8/ 42 /1/2/ 95.00 58.90 First quarter 52 /7/16/ 31 /1/2/ 72.20 43.80
At June 17, 1999 there were 1,206 shareholders of record of the Company. Under the provisions of the Investment Canada Act, as amended (the "IC Act"), the acquisition by non-Canadians, or by corporations in which non-Canadians have a majority controlling interest, of control of a corporation incorporated in Canada and carrying on business in Canada is subject to notification and may be subject to review and approval in certain instances. Given the current value of the gross assets of the Company, the IC Act requires a non-Canadian who makes an investment to acquire control of the Company to file an application for review and obtain an approval. Page 14 Dividends The Company has not paid cash dividends on its Common Shares, and it presently intends to continue this policy for the foreseeable future in order to retain earnings for the development of the Company's business. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION The Company cautions that certain statements in this Report and in the Company's other periodic reports filed pursuant to the United States Securities Exchange Act of 1934, as amended (the "Exchange Act"), in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere, may be forward-looking statements within the meaning of Section 21E of the Exchange Act, the "safe harbor" for forward-looking statements enacted in the Private Securities Litigation Reform Act of 1995. The forward-looking statements that may be contained in the Company's reports under the Exchange Act and in other oral or written statements made by the Company or by its authorized representatives involve a number of risks and uncertainties. As a consequence, actual results might differ materially from results forecast or suggested in these forward-looking statements. Some of these risks and uncertainties are identified in the discussion to follow. Additional information regarding these factors and other important factors that could cause actual results to differ materially may be referred to as part of particular forward-looking statements. The forward-looking statements made by the Company or on its behalf are qualified in their entirety by reference to the important factors discussed below and to those that may be discussed as part of particular forward-looking statements. The Company cautions that the following important factors, among others, could cause actual results for the fiscal year ending April 30, 2000 and for subsequent financial reporting periods to differ materially from those forecast or suggested in any forward-looking statement made by the Company or on its behalf, in this Report or otherwise. A number of these important factors have been discussed in this Annual Report on Form 10-K for the fiscal year ended May 2, 1999 and its quarterly reports on Form 10-Q as previously filed with the United States Securities and Exchange Commission. Potential Fluctuations in Quarterly Results and Growth Rate A significant portion of the Company's 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. 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. The Company's manufacturing procedures are designed to assure rapid response to customer demand, but may, in certain circumstances, create risk of excess or inadequate inventory if orders do not match forecast. Moreover, shortages or delays in the supply of manufacturing components at acceptable prices could adversely affect the Company's ability to meet scheduled product shipments in any particular quarter, which could materially affect the Company's operating results. Because a substantial portion of customer orders are filled within the fiscal quarter of receipt, and because of the ability of customers to revise or cancel orders and change delivery schedules without significant penalty, quarter to quarter revenues and, to a greater degree, net earnings, may be subject to greater variability. Quarterly operating results are consequently difficult to predict, even towards the end of a given fiscal quarter. The Page 15 Company's ability to meet financial expectations may be adversely affected if the non-linear pattern of shipments from month to month continues. In addition, the Company is subject to a degree of variation in quarterly sales as a substantial portion of sales is derived from less mature markets outside of North America and Western Europe. These markets can be more susceptible to uncontrollable and changing factors including foreign currency exchange rates, political or economic conditions in a specific country or region, trade protection measures, government spending patterns, and other factors. In the latter part of fiscal 1998, the Company's sales in the Asia Pacific region declined. Sales in these less mature markets are also often subject to customer financing, licensing or other import or foreign exchange controls, and other pre-conditions that can result in requirements to ship orders only if all components ordered are shipped at the same time ("ship-complete" requirements). Delays in orders and the Company's ability to fulfill orders with ship-complete requirements may cause quarter to quarter revenues and, to a greater degree, net earnings, to be subject to greater variability and less predictability. In recent fiscal periods, the Company has increased the proportion of revenue derived from service providers. This market is characterized by large contracts, although purchases against these contracts will vary from quarter to quarter. Unforeseen delays in product deliveries or closing large sales, introductions of new products by the Company or its competitors, seasonal or fiscal patterns of customer capital expenditures or other conditions affecting the networking industry in particular or the economy generally during any fiscal quarter could cause quarterly revenue and, to a greater degree, net earnings, to vary greatly. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Manufacturing". Technological Changes The market for the Company's products is characterized by rapid technological change, evolving industry standards, frequent product introductions and evolving methods used by service providers and corporations in building and managing networks. Such changes in the market for networking products may adversely affect the Company's ability to sell its products. The Company's operating results will depend in significant part upon its ability to maintain the competitiveness of its product offerings while reducing unit manufacturing costs. In fiscal 2000, the Company expects that the demand for networking products will continue the trend toward ATM, IP, and other packet based technologies and away from circuit switched networking products. The Company cautions that its sales may grow at a slower rate in the future than historical rates of sales growth. The growth of the Company's sales may be subject to the rate at which service providers deploy service offerings based on newer technologies such as ATM and IP. Although most network equipment suppliers have introduced ATM-based product offerings and many service providers have implemented or announced intentions to implement ATM, the degree of commercial acceptance of ATM switching technology has not been determined. A key element of the Company's business strategy is utilizing ATM technology in its network solutions. Accordingly, the Company's future sales growth and results of operations are dependent on continued growth and market acceptance of ATM technology. In addition, quarter to quarter revenues may be subject to greater variability due to longer sales cycles often associated with the adoption of new technologies. Page 16 The Company's ability to anticipate changes in technology, industry standards and the evolution in methods of constructing and managing networks, and to develop and introduce new and enhanced products on a timely basis that are successful in the market, will be significant factors in the Company's competitive position and its prospects for growth. Moreover, if technologies or standards supported by the Company's products or service provider service offerings based on the Company's products become obsolete or fail to gain widespread commercial acceptance, the Company's business may be adversely affected. As a result, Management believes that continued significant expenditures for research and development will be required in the future. Research and development project schedules for high technology products are inherently difficult to predict, and there can be no assurance that the Company will achieve its expected initial shipment dates of products in development. Because timely availability of new and enhanced products is critical to the success of the Company, delays in availability of these products, or lack of market acceptance of such products, could adversely affect the Company. See "Business". Competition and Strategic Alliances The market for the Company's products is also characterized by intense competition. The Company competes for customers on the basis of product line capabilities including integration of multiple applications onto a single network, network and service management capabilities, ability to offer complete end-to-end networking solutions, scalability, price, reliability, adherence to standards, and market presence. An increase in competition could require increased spending by the Company on research and development and sales and marketing and may otherwise adversely affect the Company's business. Many of the Company's competitors and potential competitors have greater financial, technological, manufacturing, marketing, and personnel resources than the Company. The networking industry has been consolidating through mergers and acquisitions thereby creating companies with larger market shares, financial resources, customer bases, sales forces, product offerings, research and development and marketing resources. These larger competitors typically have product lines that address a broader spectrum of networking requirements, and have greater sales and services resources to address the market for service providers. Increasing competition from larger competitors may also adversely affect the Company's business with respect to networking equipment pricing or vendor financing packages offered to potential customers. Continued consolidation of the networking industry could result in a strengthening of the Company's competitors and may adversely affect the Company's competitive position. See "Business-- Competition". The Company has an alliance with Siemens, formed to facilitate a coordinated sales and marketing approach and reseller arrangements. There can be no assurance that the alliance will lead to competitive products or marketing. In addition, if this relationship fails to develop as planned, the Company's business and operating results could be adversely affected. Acquisitions The Company's strategy includes acquisitions to enhance its business, diversify its marketing and distribution, and supplement its product development. Acquisitions involve numerous risks, including difficulties in the integration of the operations, technologies and products of the acquired enterprises with those of the Company, the diversion of management and financial resources to the task of integration of the respective businesses, the entry into markets in which Page 17 Newbridge has limited direct prior experience and where competitors have stronger market positions, and the potential loss of key employees of the acquired enterprises. In view of these challenges, if the Company is unable to integrate acquired enterprises efficiently and effectively, it may not obtain the anticipated benefits of acquisitions, and its business and operating results could be adversely affected. For example, the restructuring costs of $181,444,000 incurred in fiscal 1998 were attributable largely to the operations of Ungermann-Bass Networks, Inc. acquired in fiscal 1997. In addition, acquisitions may affect financial results. For example, in fiscal 1998 the Company acquired RadNet Ltd. and charged to net earnings $52,762,000 related to the amortization of purchased research and development in process. Dependence on Key Employees The Company's success depends upon the continued contributions of its employees, many of whom would be difficult to replace. Newbridge believes that its future success will depend, in significant part, upon its ability to attract, retain and motivate skilled and talented engineers, sales and marketing personnel, and management. Competition for such personnel is intense. Failure to attract, retain and motivate key employees could adversely affect the Company's business and operating results. In June 1998 the Company appointed a new President and Chief Operating Officer. Over the year following the appointment there have been a number of additional changes in senior management. There are risks inherent in any reorganization, and the Company can give no assurances that these recent appointments will ensure that the Company achieves its objectives. Market Price Volatility of Common Shares The Company's Common Shares have been subject to substantial market price volatility, some of which has occurred when there have been variations between the Company's actual or anticipated financial results and the published expectations of investment analysts and in the aftermath of public announcements by the Company and its competitors. In addition, the stock market has experienced extreme price and volume fluctuations from time to time which have affected the market price of many technology companies in particular and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions, may adversely affect the market price of the Company's Common Shares. Because of the Company's reliance on stock options as an incentive to its employees, changes in the market price of the Company's Common Shares could adversely affect the Company's ability to attract and retain key employees. Regulation The sale of networking products may be affected by government regulatory policies, the imposition of service provider tariffs, and taxation of telecommunications services, which may also affect the availability of high capacity digital transmission lines. These policies are under continuous review and are subject to change. In the United States, regulatory policies are likely to have a significant impact on the competitive environment in which the Company operates. The Telecommunications Act of 1996 and associated regulatory developments is affecting many regulatory restrictions in the telecommunications market. Deregulation is stimulating increasingly competitive offerings by communications service providers. In addition, the RBOCs are now permitted to manufacture and sell telecommunications equipment under certain conditions. Given the substantial resources and large customer base of the RBOCs, Page 18 Newbridge could face competition from these companies should they satisfy these conditions and elect to manufacture networking products. Notwithstanding the deregulatory process in the United States and elsewhere, government regulatory authorities have established regulations which, among other things, set installation and equipment standards for private telecommunications systems and require that all newly installed hardware be registered and meet certain government standards. Service providers also establish standards for interconnection and integration of network equipment with public switched telephone networks. Although the Company designs its products to comply with international standards, to the extent those standards are changed or if the Company is unable to manufacture standards compliant products on a cost effective basis, the Company's business may be adversely affected. See "Business -- Government Regulation" and "Networking Industry". Proprietary Rights The Company protects its trademarks, inventions, trade secrets, and other proprietary rights by contract, trademark registration, patent registration and appropriate trademark and copyright markings, as well as with internal security. The Company licenses certain intellectual property rights from third parties. There can be no assurance that the steps taken by the Company to protect its intellectual property rights will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. In addition, some foreign countries do not have or enforce laws that protect the Company's intellectual property rights to the same extent as do the laws of the United States and Canada. The Company is subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. From time to time the Company has received claims of infringement of other parties' proprietary rights, and has been sued by Lucent Technologies as described in "Legal Proceedings". There can be no assurance that third parties will not assert infringement claims in the future with respect to the Company's current or future products or that any such claims will not require the Company to enter into license agreements or result in protracted and costly litigation, regardless of the merits of such claims. No assurance can be given that any necessary licenses will be available or that, if available, such licenses can be obtained on commercially reasonable terms. Foreign Currency Exposure and Concentration of Credit Risk Because substantial portions of the Company's sales, cost of sales and other expenses are denominated in U.S. dollars and Pounds Sterling, the Company's results of operations are subject to change based on fluctuations in the rates of exchange of those currencies for the Canadian dollar. The Company uses financial instruments, principally forward exchange contracts, in its management of foreign currency exposures. Realized and unrealized gains and losses on foreign exchange contracts are recognized and offset foreign exchange gains and losses on the underlying net asset or net liability position. These contracts primarily require the Company to purchase and sell certain foreign currencies with or for Canadian dollars at contractual rates. Several major financial institutions are counterparties to the Company's financial instruments. It is Company practice to monitor the financial standing of the counterparties and limit the amount of exposure to any one institution. The Company may be exposed to a credit loss in the event of nonperformance by the counterparties to these contracts. With respect to accounts receivable, concentration of credit risk is limited due to the diverse areas covered by the Company's operations. The Company has credit evaluation, approval and monitoring processes intended to mitigate potential credit risks. Anticipated bad debt loss has Page 19 been provided for in the allowance for doubtful accounts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures About Market Risks". Other Factors The Company further cautions that the factors referred to above and those referred to as part of particular forward-looking statements may not be exhaustive, and that new risk factors emerge from time to time in its rapidly changing business. The Company does not undertake to update any forward-looking statements it may make or has made on its behalf to reflect changes in its expectations or assumptions or the risks and uncertainties referred to. CERTAIN TAX CONSIDERATIONS The following discussion outlines Canadian and United States federal income tax consequences of ownership of the Company's Common Shares that could be relevant for persons who are not residents of Canada. Gains on Disposition of Common Shares Under the provisions of the 1980 Convention between Canada and the United States with respect to Taxes on Income and on Capital, as amended by the 1983, 1984, 1995 and 1997 Protocols thereto (the "Convention"), United States corporations or individual residents of the United States ("U.S. Shareholders") that do not, and are not deemed to, use or hold the Common Shares in carrying on a business in Canada ("Unconnected U.S. Shareholders") generally will not be subject to Canadian federal income tax on any capital gain recognized upon the disposition of their Common Shares, provided that the value of the Common Shares is not derived principally from real property situated in Canada, as determined at the time of their disposition. The Company is of the view that the Common Shares currently do not derive their value principally from such real property. For United States federal income tax purposes, an Unconnected U.S. Shareholder generally will recognize a capital gain or loss on the disposition of Common Shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. Shareholder's adjusted basis in the Common Shares. Capital losses are deductible to the extent of capital gains and, in the case of non-corporate U.S. Shareholders, may be used to offset up to US$3,000 of ordinary income (US$1,500 in the case of married individuals filing separately). Taxation of Dividends Dividends paid to Unconnected U.S. Shareholders owning less than 10% of the voting shares of the Company generally are subject to Canadian withholding tax at the reduced rate of 15% under the Convention. In the case of a corporate Unconnected U.S. Shareholder owning 10% or more of such shares, the withholding tax rate generally is reduced to 5% under the Convention. Unconnected U.S. Shareholders generally will treat the gross amount of dividends paid by the Company, without reduction for Canadian withholding taxes, as ordinary taxable income for United States federal income tax purposes. In certain circumstances, however, Unconnected U.S. Shareholders may be eligible to receive a foreign tax credit for such taxes and, in the case of a corporate Unconnected U.S. Shareholder owning 10% or more of the voting shares of the Company, for a portion of the Canadian taxes paid by the Company itself. Dividends paid by the Company to United States corporations will not, however, give rise to the dividends Page 20 received deduction generally allowed those corporations under United States federal income tax law. Item 6. Selected Financial Data The income statement data of the Company presented below for each of the five fiscal years ended May 2, 1999 and the balance sheet data as at fiscal year end dates in 1999, 1998, 1997, 1996 and 1995 have been derived from the audited Consolidated Financial Statements of the Company that are included as part of this Annual Report on Form 10-K and the Company's Annual Reports on Form 10-K for the prior three fiscal years. The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.
Fiscal Year Ended ---------------------------------------------------------------- May 2, April 30, April 30, April 30, April 30, 1999 1998 1997 1996 1995 (Canadian dollars, in thousands, except per share data) Income Statement Data: Sales $1,790,705 $1,620,620 $1,376,727 $ 921,244 $ 800,523 Cost of sales 751,874 625,065 507,588 319,745 260,471 ---------- ---------- ---------- ---------- --------- Gross margin 1,038,831 995,555 869,139 601,499 540,052 Expenses Selling, general and administrative 531,308 494,429 346,106 231,060 196,073 Research and development 264,421 258,879 155,330 97,205 66,066 Restructuring costs /(1)/ 118,030 181,444 -- -- -- Purchased research and development in process /(2)/ -- 52,762 96,940 -- -- ---------- ---------- ---------- ---------- --------- Income from operations 125,072 8,041 270,763 273,234 277,913 Interest income, net 8,121 9,761 18,605 22,607 15,952 Net gain on investments /(3)/ 188,726 50,401 (1,564) 12,715 -- Other expenses (20,802) (12,889) (8,051) (3,443) (6,512) ---------- ---------- ---------- ---------- --------- Earnings before income taxes and non-controlling interest 301,117 55,314 279,753 305,113 287,353 Provision for income taxes 121,303 73,001 117,718 100,779 96,944 Non-controlling interest 653 631 5,118 1,470 2,019 ---------- ---------- ---------- ---------- --------- Net earnings (loss) /(4)/ $ 179,161 $ (18,318) $ 156,917 $ 202,864 $ 188,390 ========== ========== ========== ========== ========= Earnings (loss) per share Basic $ 1.01 $ (0.10) $ 0.92 $ 1.22 $ 1.16 Fully diluted $ 1.01 $ (0.10) $ 0.91 $ 1.19 $ 1.11 Weighted average number of shares Basic 177,630 174,617 170,510 165,842 162,891 Fully diluted 177,630 174,617 184,595 179,665 175,823
Page 21
Fiscal Year Ended --------------------------------------------------------------- May 2, April 30, April 30, April 30, April 30, 1999 1998 1997 1996 1995 (Canadian dollars, in thousands, except per share data) Income Statement Data (continued): U.S. GAAP /(5)/ Net earnings (loss) $179,161 $(18,318) $156,917 $202,864 $188,390 Earnings (loss) per share Basic $1.01 $(0.10) $0.92 $1.22 $1.16 Diluted $0.99 $(0.10) $0.90 $1.19 $1.13 Diluted-- US US$0.66 US$(0.07) US$0.66 US$0.87 US$0.82 Weighted average number of shares Basic 177,630 174,617 170,510 165,842 162,891 Diluted 180,376 174,617 174,525 170,990 166,646 May 2, April 30, April 30, April 30, April 30, 1999 1998 1997 1996 1995 (Canadian dollars in thousands) Balance Sheet Data: Working capital $1,243,991 $ 945,892 $ 638,392 $ 658,087 $ 491,888 Total assets 2,470,624 1,966,825 1,496,703 1,093,417 827,163 Short term debt (including current portion of long term obligations) 2,869 4,136 7,353 2,302 2,562 Long term obligations 384,021 383,311 10,817 860 3,493 Shareholders' equity 1,529,219 1,233,620 1,126,499 902,686 674,645
- ----------- (1) See Note 14 to the Consolidated Financial Statements. (2) See Note 15 to the Consolidated Financial Statements. (3) See Note 16 to the Consolidated Financial Statements. (4) Pro forma net earnings, which exclude net gain on investments and non- recurring charges, relating primarily restructuring costs and purchased research and development, for the periods presented are disclosed in the "Net Earnings (Loss)" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations". (5) Financial information in this Annual Report on Form 10-K is presented in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"), which also conform in all material respects with accounting principles generally accepted in the United States ("U.S. GAAP"), except for the disclosure of certain cash equivalents on the Consolidated Balance Sheets and investing activities on the Consolidated Statements of Cash Flows, as disclosed in Note 2, the write off of purchased research and development in process, as disclosed in Note 15, and the method of calculation of earnings per share, as disclosed in Note 18. Page 22 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain parts of the following discussion and analysis may be forward-looking statements that involve a number of risks and uncertainties. As a consequence, actual results might differ materially from results forecast or suggested in any forward-looking statements. See "Market for Registrant's Common Equity and Related Stockholder Matters -- Cautionary Statement Regarding Forward-Looking Information". Results of Operations The following table sets forth, for the fiscal years indicated, the percentage of sales represented by certain items in the Company's Consolidated Statements of Earnings.
Fiscal Year Ended ----------------------------------- May 2, April 30, April 30, 1999 1998 1997 Sales 100.0% 100.0% 100.0% Cost of sales 42.0 38.6 36.9 ----- ----- ----- Gross margin 58.0 61.4 63.1 Expenses Selling, general and administrative 29.7 30.5 25.1 Research and development 14.7 16.0 11.3 Restructuring costs 6.6 11.2 -- Purchased research and development in process -- 3.2 7.0 ----- ----- ----- Income from operations 7.0 0.5 19.7 Interest income, net 0.5 0.6 1.3 Net gain on investments 10.5 3.0 -- Other expenses (1.2) (0.7) (0.7) ----- ----- ----- Earnings before income taxes and non-controlling interest 16.8 3.4 20.3 Provision for income taxes 6.8 4.5 8.5 Non-controlling interest 0.0 0.0 0.4 ----- ----- ----- Net earnings (loss) 10.0% (1.1)% 11.4% ===== ===== =====
Page 23
Sales Fiscal Year Ended ------------------------------------ May 2, April 30, April 30, 1999 1998 1997 (Canadian dollars in thousands) Sales $1,790,705 $1,620,620 $1,376,727 ========== ========== ========== Increase over prior year 10% 18% 49%
Sales grew in fiscal 1999 compared to fiscal 1998 due to increased sales volume of products based on packet technologies for wide area network applications (WAN Packet products) offset in part by a decline in revenues from products based on packet technologies for local area network applications (LAN Packet products). Sales grew in fiscal 1998 compared to fiscal 1997 due to increased sales volume of both WAN Packet and LAN Packet products, offset in part by a decline in sales of circuit switched networking products. The following table illustrates, for the periods indicated, the percentage of sales that comprise each of the Company's major product lines.
Fiscal Year Ended ------------------------------- May 2, April 30, April 30, 1999 1998 1997 WAN Packet products 59% 46% 33% Circuit switched networking products 38 41 57 LAN Packet products 3 13 10 --- --- --- 100% 100% 100% === === ===
The following table illustrates, for the periods indicated, the annual sales growth rates for each of the Company's major product lines.
Fiscal Year Ended ------------------------------- May 2, April 30, April 30, 1999 1998 1997 WAN Packet 43% 62% 98% Circuit switched networking 2 -15 20 LAN Packet -78 56 673
Growth in sales of WAN Packet products was predominantly the result of increased acceptance and demand by service providers throughout the world for the Company's asynchronous transfer mode (ATM) products. Sales of circuit switched networking products have been and are expected to be subject to potential declines and quarterly variability as customers throughout the world increasingly adopt packet technologies. LAN Packet product revenues declined in fiscal 1999 relative to fiscal 1998 as a 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 Page 24 Company restructured its activities in the LAN business, including the former UB, in the third quarter of fiscal 1998 and instituted an end of life program in the second quarter of fiscal 1999 to discontinue the sale and development of LAN Layer 2 Switching products. In fiscal 1998 and in fiscal 1997 LAN Packet product revenues increased, mainly as a result of the purchase of UB. The Company expects the proportion of sales derived from WAN Packet products to continue to increase relative to sales derived from circuit switched networking products in fiscal 2000 when compared to fiscal 1999. Sales growth, however, may be impeded due to longer sales cycles often associated with the adoption of newer, less established technologies. The Company sells its products to service providers for applications that provide a range of value-added services, such as Virtual Private Networks (VPNs), wide area network support and Internet access, and for resale to end users. Deliveries to original equipment manufacturers (OEMs) for service provider customers and deliveries under certain large contracts with service providers contributed significantly to sales in fiscal 1999, fiscal 1998 and fiscal 1997. Sales to Siemens AG and subsidiaries were generally under OEM arrangements for resale to end users. Sales to service providers and enterprises as a percentage of total sales and the proportion of sales to Siemens AG were as follows.
Fiscal Year Ended ------------------------------- May 2, April 30, April 30, 1999 1998 1997 Service providers 75% 69% 66% Enterprises 25 31 34 --- --- --- 100% 100% 100% === === === Sales to Siemens A.G. 18% 16% 18% === === ===
The proportion of revenue derived from service providers in fiscal 1999 increased relative to fiscal 1998 due to the decline in revenues of former UB Networks products, which largely serve enterprise customers. The proportion of revenue derived from service providers in fiscal 1998 increased relative to fiscal 1997 primarily as a result of increased acceptance and demand by service providers for the Company's WAN Packet products. The following table sets forth, for the periods indicated, the percentage of consolidated sales derived by sales management in each of the principal geographic regions in which the Company operates.
Fiscal Year Ended ------------------------------ May 2, April 30, April 30, 1999 1998 1997 Americas Region 51% 51% 49% European Region 35% 31% 33% Asia Pacific Region 14% 18% 18%
Sales increased in fiscal 1999 relative to fiscal 1998 in both the Americas Region and the European Region, although sales decreased in the Asia Pacific Region during the same period as a result of a downturn in economic activity in that region. For additional geographic segment information, see Note 20 to the Consolidated Financial Statements. Page 25 Because substantial portions of the Company's sales, cost of sales and other expenses are denominated in U.S. dollars and Pounds Sterling, the Company's results of operations are subject to change based on fluctuations in the rates of exchange of those currencies for the Canadian dollar. The decrease in exchange rates of the Canadian dollar for the Pound Sterling and the U.S. dollar during fiscal 1999, relative to exchange rates during fiscal 1998, resulted in a 6% or $91,248,000 positive variance in reported sales as compared to fiscal 1998. The decrease in exchange rates of the Canadian dollar for the Pound Sterling and the U.S. dollar during fiscal 1998, relative to exchange rates during fiscal 1997, resulted in a 7% or $95,736,000 positive variance in reported sales as compared to fiscal 1997. As substantial portions of the Company's cost of sales and other expenses are also incurred in U.S. dollars and Pounds Sterling, the variations in rates of exchange did not result in a material variance in net earnings for fiscal 1999, fiscal 1998 or fiscal 1997. For information related to the Company's policies in its management of foreign exchange exposures, see "Quantitative and Qualitative Disclosures About Market Risk" and Note 10 to the Consolidated Financial Statements. The Company derives a significant portion of its sales from products shipped against orders received in each fiscal quarter and from products shipped against firm purchase orders released in that fiscal quarter. As is prevalent in emerging segments of the networking industry, a disproportionate amount of the Company's shipments occur in the third month of each fiscal quarter. In addition, customers have the ability to revise or cancel orders and change delivery schedules without significant penalty. As a result, the Company operates without significant backlog and schedules some production and budgets expenses based on forecasts of sales, which are difficult to predict. Unforeseen delays in product deliveries or closing large sales, introductions of new products by the Company or its competitors, seasonal patterns of customer capital expenditures or other conditions affecting the networking industry in particular or the economy generally during any fiscal quarter could cause quarterly revenue and, to a greater degree, net earnings, to vary greatly. Quarterly operating results are consequently difficult to predict, even towards the end of a given fiscal quarter. The Company may become subject to sales fluctuations toward the end of calendar 1999 as the issue of Year 2000 date compliance may influence customer buying patterns. Sales mix shifts may occur due to customers limiting their purchases of networking equipment to products that they have already tested for Year 2000 Compliance within their networks, which would shift sales mix away from emerging product offerings and software upgrades. Sales declines could result if customers decide to delay expansion of their networks to after January 1, 2000. The majority of the Company's current product offerings have Year 2000 Compliant versions available and all emerging offerings are designed to be Year 2000 Compliant, so the Company does not anticipate significant sales fluctuations associated with Year 2000 date compliance. The Company will have a better indication of potential fluctuations in the second half of calendar 1999. Refer to the "Year 2000 Date Compliance" section of this report for a summary of the Company's program for ensuring that all of its products are Year 2000 date compliant. Page 26 Cost of Sales and Gross Margin
Fiscal Year Ended ----------------------------------- May 2, April 30, April 30, 1999 1998 1997 (Canadian dollars in thousands) Gross margin $1,038,831 $995,555 $869,139 ========== ======== ======== As a percentage of sales 58% 61% 63%
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 fiscal 1999 relative to fiscal 1998 due to the continuing shift in the mix of sales from higher gross margin circuit switched networking products to lower margin WAN Packet products. In addition, the gross margin, expressed as a percentage of sales, was negatively impacted by lower average selling prices as the Company experienced increased competition on product pricing, particularly in the market for products based on packet technologies. The decline in the gross margin as a percentage of sales in fiscal 1998 relative to fiscal 1997 was primarily the result of the decline in revenues from circuit switched networking products, which carried gross margins above the average gross margins earned on the Company's other products. The impact on product pricing of increased competition, particularly in the market for products based on packet technologies, may constrain the Company's ability to maintain gross margins with reductions in per unit costs. As a result, the gross margin as a percentage of sales may deteriorate in fiscal 2000 compared to fiscal 1999. Selling, General and Administrative Expenses
Fiscal Year Ended --------------------------------- May 2, April 30, April 30, 1999 1998 1997 (Canadian dollars in thousands) Selling, general and administrative expenses $531,308 $494,429 $346,106 ======== ======== ======== As a percentage of sales 30% 31% 25% Increase over prior year 7% 43% 50%
Selling, general and administrative expenses increased in fiscal 1999 relative fiscal 1998 principally as a result of increased remuneration costs associated with salary increases and the addition of sales, marketing and technical support personnel. Other increases in fiscal 1999 relative to fiscal 1998 included amortization costs associated with upgrading information technology infrastructure, and increased marketing costs related to the introduction of new products and expanded advertising programs. Page 27 The decrease in selling, general and administrative expenses as a percentage of sales in fiscal 1999 relative to fiscal 1998 resulted from the lower percentage increase in expenditures as compared to the larger percentage increase in revenues over the same period. Management anticipates that selling, general and administrative expenses as a percentage of sales will continue to decline in fiscal 2000 relative to fiscal 1999. The increase in selling, general and administrative expenses as a percentage of sales in fiscal 1998 over fiscal 1997 reflects the higher cost structure of companies acquired during fiscal 1997 and the impact of sequential sales declines in the first three quarters of fiscal 1998. Research and Development
Fiscal Year Ended -------------------------------- May 2, April 30, April 30, 1999 1998 1997 (Canadian dollars in thousands) Gross research and development expenditures $339,844 $305,357 $195,229 Investment tax credits 37,846 34,971 26,400 Customer, government and other funding 30,013 5,507 9,484 Net deferral (amortization) of software development costs 7,564 6,000 4,015 -------- -------- -------- Net research and development expenses $264,421 $258,879 $155,330 ======== ======== ======== Gross expenditures as a percentage of sales 19% 19% 14% Increase in gross expenditures over prior year 11% 56% 49% Recoveries as a percentage of gross expenditures 22% 15% 20% Net research and development expenses as a percentage of sales 15% 16% 11% Increase in net expenditures over prior year 2% 67% 60%
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 sequential increases in gross research and development expenditures in fiscal 1999 and fiscal 1998 reflect spending on the development of higher and lower capacity ATM switches and interfaces, development of switches, forwarding engines, interfaces and services for IP traffic, and related network management and service software. The majority of the increase resulted from salary increases for engineering staff and increased amortization associated with capital deployed in research and development. Recoveries increased as a percentage of gross expenditures in fiscal 1999 compared to fiscal 1998 due to an increase in customer, government and other funding. The increase in customer, government and other funding is mainly as a result of funding secured for the Company's broadband wireless access product initiative, as described in Note 13 to the Consolidated Financial Statements. Management expects the level of recoveries, as a percentage of gross research and development expenditures, in fiscal 2000 to approximate or exceed the level in Page 28 fiscal 1999 based on current levels of committed customer, government and other funding relative to planned spending levels. Recoveries decreased as a percentage of gross expenditures in fiscal 1998 compared to fiscal 1997 due to declines in investment tax credits and in customer, government and other funding as a proportion of gross research and development expenditures. The markets for the Company's products are characterized by continuing technological change. The Company plans to increase gross research and development expenditures in fiscal 2000 relative to fiscal 1999 to address the requirements of service providers as they invest in new infrastructures to meet the challenges of growing demand for new communications services and increased competition. Restructuring Costs Restructuring costs are comprised of the following.
Fiscal Year Ended ------------------------------ May 2, April 30, April 30, 1999 1998 1997 Restructuring programs, April 1999 $ 73,570 $ -- $ -- Layer 2 Switching End of Life 37,928 -- -- Asia Pacific Resources Relocation 6,532 -- -- LAN business restructuring, November 1997 -- 181,444 -- -------- -------- -------- $118,030 $181,444 $ -- ======== ======== ========
In April 1999, the Company decided to streamline the operations of regional sales and support organizations as well as its marketing and product development organizations. The restructuring costs associated with the sales, support and marketing organizations ("Sales and Marketing") consisted primarily of costs related to workforce and facilities reductions, as the Company has announced a reduction in the number of locations in which it will have a physical presence in favour of distributors in certain markets, and subcontractors for certain functions. Restructuring costs associated with product development relate primarily to asset impairment losses related to the capping, discontinuation or divestiture of the development of certain products, and the centralization of development laboratories to make the development process more efficient. Restructuring costs of $73,570,000 comprise the following:
Sales and Product Marketing Development Total Asset impairment losses Inventory $ 2,606 $ 8,994 $11,600 Property, plant and equipment 6,576 29,104 35,680 Other current and non-current assets 568 2,249 2,817 ------- ------- ------- 9,750 40,347 50,097 ------- ------- ------- Provision for restructuring Reduction in work force 14,595 427 15,022 Reduction in facilities 6,627 -- 6,627 Other restructuring costs 1,653 171 1,824 ------- ------- ------- 22,875 598 23,473 ------- ------- ------- Restructuring costs $32,625 $40,945 $73,570 ======= ======= =======
Page 29 All of the amounts listed in the provision for restructuring are reflected in accrued liabilities as at May 2, 1999. The provision for the reduction in work force includes severance, related medical and other benefits, and other obligations to employees. The provision includes termination benefits for approximately 200 employees. The work force reductions will occur in Japan, Russia and various other countries. The Company anticipates that these work force reductions will be substantially completed in the first half of fiscal 2000. The provision for the reduction in facilities comprises primarily lease payments and fixed costs associated with the closure of sales, support and administrative facilities in Europe, Japan and the United States. The Company expects to complete these facilities closures in the first half of fiscal 2000. The provision for other restructuring costs comprises professional fees and other various direct incremental costs associated with the restructuring plan. In October 1998, the Company decided to discontinue the sale and development of local area network (LAN) Layer 2 Switching products as part of the enhancement of the focus on the Company's dominant and more profitable products. This program, substantially complete at the end of fiscal 1999, created impairment losses associated with certain assets deployed in this business and obligations related to fulfilling previous customer commitments. In October 1998, the Company commenced relocating certain employees and activities that support the Asia Pacific region from Kanata, Ontario to Hong Kong and Malaysia in order to provide more efficient and cost effective services to customers in that region. The charge of $6,532,000 incurred in October 1998 reflects the accrual of involuntary termination benefits, lease cancellation penalties and other direct costs associated with the transition. As at May 2, 1999, $1,215,000 of these costs had been incurred. Additional costs related to the transfer of personnel and equipment, the recruitment of new staff and the expansion of facilities in Hong Kong are being expensed as incurred. These additional costs, estimated at $9,000,000, were not significant in fiscal 1999 with the majority of the costs to be incurred during the first two quarters of fiscal 2000. In November 1997, the Company restructured its activities relating to its LAN business. The restructuring plan involved the formation of an 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 addressed the LAN market, the restructuring plan created impairment losses on certain assets associated with the LAN business and liabilities associated with restructuring activities. Accordingly, the Company recognized restructuring costs of $181,444,000 in the third quarter of fiscal 1998. The restructuring plan is completed. Purchased 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 ATM networks, for cash consideration of $53,676,000. The majority of the purchase price ($52,762,000) was allocated to purchased research and development in process. Under accounting principles generally accepted in Canada, the Page 30 purchased research and development in process was amortized on a straight line basis over its estimated useful life of six months. Accordingly, the Company recorded amortization of $52,762,000 in fiscal 1998. The Company capitalized purchased research and development in process of $96,940,000 in fiscal 1997 related to the acquisition of UB Networks. The Company reviewed the recoverability of the purchased research and development in process during the fourth quarter of the fiscal 1997, and determined that it no longer met all the criteria for deferral, which resulted in the balance being written off as a charge to net earnings. Interest and Other Expenses
Fiscal Year Ended --------------------------------- May 2, April 30, April 30, 1999 1998 1997 (Canadian dollars in thousands) Interest income $34,248 $11,581 $19,956 Interest expense on long term obligations 26,127 1,820 1,351 Other expenses 20,802 10,448 9,615
Interest income earned in fiscal 1999 increased as compared to fiscal 1998 due to an increase in the average cash position maintained by the Company. The primary contributors to the increase in the cash position were proceeds received from the sale of long term investments and proceeds from the issuance of Senior Notes in April 1998. Interest income earned in fiscal 1998 decreased as compared to fiscal 1997 due to declines in the cash position maintained by the Company and due to declines in interest rates earned on investments. Interest expense on long term obligations increased in fiscal 1999 relative to fiscal 1998 and fiscal 1997 primarily due to the issuance of US$225,000,000 in Senior Notes in April 1998. Other expenses increased in fiscal 1999 relative to fiscal 1998 and fiscal 1997 primarily as a result of the Company's equity share of its affiliate companies losses. Page 31 Net Gain on Investments
Fiscal Year Ended --------------------------------- May 2, April 30, April 30, 1999 1998 1997 (Canadian dollars in thousands) Cambrian Systems Corporation $131,748 $ -- $ -- Advanced Computer Communications 128,336 -- -- Vienna Systems Corporation 15,846 -- -- Tundra Semiconductor Corporation 11,748 -- -- Broadband Networks Inc. -- 47,960 -- West End Systems Corp. (33,521) -- -- Other divestitures -- 6,528 -- Investment impairment write downs (65,431) (4,087) (1,564) -------- ------- ------- $188,726 $50,401 $(1,564) ======== ======= =======
In December 1998, the Company sold its minority ownership position in Cambrian Systems Corporation ("Cambrian") to Northern Telecom Limited ("Nortel") for cash proceeds of US$95,674,000 (Cdn$147,158,000). The proceeds include an earn-out payment of US$1,935,000 (Cdn$2,855,000) received by the Company as a result of certain specified financial performance targets being met by Cambrian. The proceeds exclude future potential earn-out payments of approximately US$21,000,000 which will be received by the Company if certain specified financial performance targets are met by Cambrian. In October 1998, the Company completed the sale of its majority ownership position in Advanced Computer Communications ("ACC") to Telefonaktiebolaget LM Ericsson for cash proceeds of US$167,319,000 (Cdn$258,308,000). ACC's results of operations were consolidated with the Company's results for the first six months of fiscal 1999 ended November 1, 1998. The results of operations and the financial position of ACC were not significant relative to the Company's consolidated results of operations and financial position for all periods presented. In December 1998, the Company sold its minority ownership position in Vienna Systems Corporation to Nokia Corporation for cash proceeds of $39,716,000. In February 1999, the Company sold a portion of its minority ownership position in Tundra Semiconductor Corporation for cash proceeds of $19,498,000 as part of an initial and secondary share offering by Tundra. In January 1998, the Company sold its minority interest in Broadband Networks Inc. to Nortel for proceeds of $66,672,000. The proceeds received included cash of $23,775,000 and Nortel shares valued at $42,897,000. On February 10, 1999 West End Systems Corp., a manufacturer of access and transmission products for the communications and cable television industries, filed an assignment in bankruptcy under the Canadian Bankruptcy and Insolvency Act. As a result, the Company recorded losses related to the Company's minority ownership position in West End Systems Corp. and unsecured trade accounts outstanding. The Company evaluates, on an ongoing basis, the value of its long term investments considering the evolution of the market segments of investee companies, any impact of Page 32 deteriorating economic conditions in various countries, and any other specific information which indicates impairment of value of these investments. In fiscal 1999, the financial performance of certain investee companies as well as deteriorating economic conditions in Brazil and Russia led to investment impairment write downs of $65,431,000. Income Taxes
Fiscal Year Ended ------------------------------- May 2, April 30, April 30, 1999 1998 1997 Income tax rate 40% 132% 42% Income tax rate excluding non-recurring gains and charges 30% 30% 31%
The income tax rates for fiscal 1999, fiscal 1998 and fiscal 1997 differ from the income tax rates, excluding non-recurring gains and charges, due to limits on the deductibility of certain elements of restructuring costs recorded in fiscal 1999 and fiscal 1998 and purchased research and development in process recorded in fiscal 1998 and fiscal 1997. The composite rates of income tax, excluding non-recurring gains and charges, for fiscal 1999, 1998 and 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 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, excluding non-recurring gains and charges, will remain lower than the statutory rate because of the deductibility related to manufacturing and processing activities and research and development expenditures in Canada as well as other tax planning measures undertaken by the Company. See Note 17 to the Consolidated Financial Statements. Non-Controlling Interest The non-controlling interests' share of net earnings in fiscal 1999, fiscal 1998 and fiscal 1997 represented less than 1% of the Company's sales in fiscal 1999, fiscal 1998 and fiscal 1997. The non-controlling interests' share of net earnings in fiscal 1997 of $5,118,000 related primarily to profits from the operations of Transistemas S.A., an Argentine systems integrator of networking products. As at May 2, 1999 there are non-controlling interests in three of the Company's subsidiaries. All three of these subsidiaries are systems integrators of networking products in Latin America. Page 33 Net Earnings (Loss)
Fiscal Year Ended ------------------------------- May 2, April 30, April 30, 1999 1998 1997 (Canadian dollars in thousands) Net earnings (loss) $ 179,161 $(18,318) $156,917 Non-recurring gains and charges Restructuring costs 118,030 181,444 -- Purchased research and development in process -- 52,762 96,940 Settlement of litigation/(1)/ -- 2,642 -- Net gain on investments (188,726) (50,401) 1,564 Provision for income taxes on non-recurring gains and charges 53,329 767 -- --------- -------- -------- Pro forma net earnings, excluding non-recurring gains and charges $ 161,794 $168,896 $255,421 ========= ======== ======== Pro forma net earnings, excluding non-recurring gains and charges, as a percent of sales 9% 10% 19% Pro forma net earnings, excluding non-recurring gains and charges, per share Canadian GAAP Basic $ 0.91 $ 0.97 $ 1.50 Fully diluted $ 0.91 $ 0.97 $ 1.45 U.S. GAAP Basic $ 0.91 $ 0.97 $ 1.50 Diluted $ 0.90 $ 0.95 $ 1.46 Diluted - US US$ 0.59 US$ 0.68 US$ 1.07
(1) Included within selling, general and administrative expenses on the Consolidated Statement of Earnings. Page 34 A reconciliation of the major components of the change in net earnings, as compared to the prior fiscal year, for each of the fiscal years reported is as follows.
Fiscal Year Ended ------------------------------- May 2, April 30, April 30, 1999 1998 1997 (Canadian dollars in thousands) Gross margin from sales increase $104,484 $153,972 $297,394 (Decrease) in product gross margins as a percentage of sales (61,208) (27,556) (29,754) (Increase) in operating expenses (45,063) (249,230) (173,171) (Increase) in interest and other expenses, net (11,994) (9,677) (10,174) Decrease (increase) in income taxes on pro forma net earnings 4,260 45,484 (21,136) (Increase) decrease in non-controlling interest (22) 4,487 (3,648) -------- -------- -------- (Decrease) increase in pro forma net earnings (9,543) (82,520) 59,511 Change in non-recurring gains and charges, net of income taxes 207,022 (92,715) (105,458) -------- -------- Increase (decrease) in net earnings 197,479 (175,235) (45,947) Net earnings (loss) in prior year (18,318) 156,917 202,864 -------- -------- -------- Net earnings (loss) $179,161 $(18,318) $156,917 ======== ======== ========
Reconciliation of Financial Results to United States Accounting Principles The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). These 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, the write off of purchased in process research and development, as disclosed in Note 15, and the method of calculation of earnings per share, as disclosed in Note 18. Other than the accounting treatment associated with any future acquisitions or mergers, the Company expects that the differences in future years will not be significant. Page 35 Financial Condition During the fiscal year ended May 2, 1999 working capital increased from $945,892,000 to $1,243,991,000. As at May 2, 1999 the Company had $879,694,000 of cash and cash equivalents, which represented an increase of $380,416,000 during fiscal 1999. The most significant contributing item to the increase in cash and cash equivalents in fiscal 1999 was proceeds from the sale of long term investments, which amounted to $456,966,000 (see Note 16 to the Consolidated Financial Statements). A summary of the major cash flow components by activity is as follows.
May 2, April 30, April 30, 1999 1998 1997 (Canadian dollars in thousands) Net earnings (loss) $179,161 $(18,318) $ 156,917 Add back items not affecting cash Non recurring (gains) and charges (73,551) 183,805 96,940 Amortization and other non-cash charges 235,062 158,474 118,096 (Increase) decrease in working capital, excluding cash and cash equivalents (121,688) (222,436) (148,579) Cash flow from operating activities 218,984 101,525 223,374 -------- --------- --------- Additions to property, plant and equipment (213,903) (276,778) (131,641) Proceeds on sale of long term investments 456,966 66,672 -- Long term investments and other (184,882) (199,581) (267,960) Cash flow from investing activities 58,181 (409,687) (399,601) -------- Proceeds from stock option exercises 112,293 89,430 54,096 Net increase (decrease) in long term debt 2,533 366,312 (5,218) -------- --------- --------- Cash flow from financing activities 114,826 455,742 48,878 -------- --------- --------- Impact of foreign currency translation and cash from acquisitions (11,575) 17,794 5,504 -------- --------- --------- Net cash flow during the period $380,416 $ 165,374 $(121,845) ======== ========= =========
Principal components of the Company's working capital are accounts receivable, inventory, and accounts payable. 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. Accounts receivable, as a proportion of revenue, remained consistent in fiscal 1999 as compared to fiscal 1998. Inventory turns improved during the year from 3.2 times in fiscal 1998 to 3.6 times in fiscal 1999. In April 1998 the Company issued US$225,000,000 Senior Notes due April 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 entered into and received $50,000,000 under a long term loan agreement. The loan agreement includes a term loan portion and a demand loan portion, both Page 36 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 term loan is secured by 654,220 Nortel shares. The demand loan, which is unsecured, 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 $156,258,000, primarily with banks in Canada, the United Kingdom, the United States and Chile. At May 2, 1999 $5,881,000 was being utilized under these credit facilities, primarily attributed to non-wholly owned subsidiary Coasin S.A. During fiscal 1999 and fiscal 1998 the Company generated cash proceeds of $456,966,000 and $66,672,000, respectively, on the sale of equity positions in the following companies. Details of each transaction are described in Note 16 to the Consolidated Financial Statements.
May 2, April 30, April 30, 1999 1998 1997 (Canadian dollars in thousands) Advanced Computer Communications $258,308 $ -- $ -- Cambrian Systems Corporation 147,158 -- -- Vienna Systems Corporation 39,716 -- -- Tundra Semiconductor Corporation 19,498 -- -- Broadband Networks Inc. -- 66,672 -- Less: escrow provisions (7,714) -- -- -------- -------- ----- Proceeds on sale of long term investments $456,966 $66,672 $ -- ======== ======== =====
Capital expenditures for fiscal 1999 of $213,903,000 declined as compared to those of fiscal 1998 ($276,778,000) because there was no major facilities expansion cost incurred during fiscal 1999. Capital expenditures for fiscal 1998 exceeded those of fiscal 1997 as the Company invested in new facilities in Canada, in land in the metropolitan area of Washington, D.C., in research and development and manufacturing equipment and in information systems. Management anticipates that the level of capital expenditures for fiscal 2000 will be approximately consistent with the level of capital expenditures incurred in fiscal 1999. 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 2000, 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 adequate to meet its operating and capital expenditure requirements through the end of fiscal 2000 and into the foreseeable future. Management believes that inflation did not have a material effect on operations during the fiscal year ended May 2, 1999. Page 37 Recent Developments In May 1999, the Company completed its investment in TeraBridge Technologies Corporation ("Terabridge"), which specializes in delivering intelligent call and service control products to service providers and is headquartered in Gurnee, Illinois. The Company acquired a 19% equity ownership position for US$60,000,000 (Cdn$90,511,000) and has an option to increase its equity ownership position to 50% for US$10,000,000. In June 1999, the Company announced a definitive agreement to acquire Stanford Telecommunications Inc. ("STII") (STII: NASDAQ), a leading supplier of broadband wireless technology and products. The net purchase price of the acquisition is estimated at US$280,000,000 (Cdn$ 411,740,000) which represents the gross purchase price of approximately US$490,000,000 (Cdn$720,545,000) net of proceeds from the divestiture of divisions of STII that are unrelated to the Company's core business. The boards of directors of the Company and STII have approved an agreement and plan of merger, subject to conditions including approval by STII's stockholders, whereby the Company will acquire all of the outstanding shares of common stock of STII in a tax-free, stock-for-stock exchange. Under the agreement STII stockholders will receive for each share of common stock US$30 in the Company stock plus a contingent value right (CVR) which will give them a participation in the proceeds on the sale of other operations above a minimum amount. This participation will also be payable in the form of the Company common shares. The CVR is expected to have a value of up to US$5 per share. Year 2000 Date Compliance The Company acknowledges the Year 2000 transition as a serious business issue and is committed to addressing the challenge of becoming Year 2000 date compliant. The Company's program ("Year 2000 Date Compliance"), established in May 1997, addresses compliance both externally, to our customers, suppliers, and other associates, and internally for the Company's systems and procedures. The program continues to receive sponsorship and support from the highest levels of the Company's Management and regular progress meetings are conducted, including formal quarterly reports to a senior management committee. Despite the extensive efforts dedicated to the program, there can be no assurance that all Year 2000 Date Compliance activities will be completed before problems associated with the Year 2000 transition potentially occur. Various formal messages for conveying Year 2000 Date Compliance information to customers and other external parties have been developed for Company products. . Year 2000 Date Compliance Statement to Customers and Definition of Terms, which indicates how the Company interprets Year 2000 Date Compliance; . The Year 2000 Date Compliance Requirements Specification, which sets forth evaluation of products for Year 2000 Date Compliance; . Year 2000 Date Compliance Product List, which lists the Year 2000 Date Compliance characterization for the majority of the Company's products and releases, including many "discontinued" product offerings. Page 38 The Company has completed the evaluation of its major product offerings. The majority of products have been classified as either Compliant, having Compliant versions currently available or are Date Compliance Not Applicable. The majority of older or "discontinued" product offerings have been reviewed, with certain offerings found to be Non-Compliant, and others that will not be evaluated for Year 2000 Date Compliance. All the formal messages and Year 2000 Date Compliance Additional Notes are available on the Company's worldwide web site at http://www.newbridge.com/year2000/. The Company recognizes that customers view the Year 2000 rollover as a sensitive time for their networks and are looking for reassurance that their organizations will continue to receive service support during this time. It is the Company's intent to fulfill our contractual obligations to customers during this period. Throughout the Year 2000 and the following leap year rollovers the three regional Newbridge Technical Assistance Centers will be operating under the normal practice of 24 hour, 365 days a year service coverage, including readiness to address Year 2000 issues. The Company will also ensure staffing during the rollover period of its Strategic Network Services and Network Design groups during the rollover period as a component of the Year 2000 Date Compliance Contingency Planning process. The Company is investigating the various means by which technical information is disseminated to customers to ensure the most effective delivery of Year 2000 bulletins during the transition period. Formal messages from the Company's service organizations to customers and other external parties are available on the Company's worldwide web site at http://www.newbridge.com/year2000/. The internal compliance element of Year 2000 Date Compliance includes the distribution of responsibility among fourteen "Program Areas" of which each of the Company's operating groups is represented by at least one. Each group is responsible for eight main activities that address the exposure of their Program Areas, as follows. i) Awareness - Inform all employees and ensure awareness of Year 2000 Date Compliance issues and how they affect the employees, their customers and their suppliers. This includes ensuring support and dedication to the program throughout the Company. ii) Inventory - Take stock of all information technology (IT) systems and equipment and non-IT systems and equipment in use by the Company potentially affected by Year 2000 Date Compliance. iii) Impact Analysis - Assess the significance of each item in the inventory in order to prioritize investigation and testing activities. iv) Investigation and Testing - Examine items recorded during the inventory stage to determine their state of compliance based on the priority set during the impact analysis stage. This step includes requesting product information from suppliers and the formal testing of systems and equipment under controlled conditions. v) Remedial Activities - After analyzing the compliance status of an item, determine remedial action, if any, to be taken should an item be found to be non-compliant. Actions include fixing errors, following a path to make the item compliant, or complete replacement with a compliant alternative. vi) Implementation/Adoption - Once compliance status has been reached the item is made available for use. Page 39 vii) Critical Supplier Assessment - Identify, analyze and assess the Year 2000 readiness of critical suppliers of products and services. Actions include judging assurances that equipment supplied is date compliant, the supplier is also diligently undertaking a Year 2000 readiness plan with respect to its own internal systems to minimize the risk of supply disruptions and that contingency planning activities are active. To assist with and to standardize this task, a formal Year 2000 Date Compliance Supplier Assessment process is being used of which one part is the use of formal readiness questionnaires. The Company's supplier assessment initiatives commenced in April 1998 with a mass mailing to over 11,500 vendors from which the Critical Supplier list was originally built. Further targeted mailings and vendor contacts have since been adopted. The Company has not yet obtained adequate assurances from suppliers with respect to their Year 2000 readiness because a significant number (nearly 40% as at end of May, 1999) of questionnaires sent to critical suppliers have not generated a response. The Company will use alternate suppliers in the event that the supplier does not provide satisfactory answers. viii) Contingency Planning - Identify, review and address methods by which the potential of Year 2000 related risks can be further mitigated before they occur. Identify, review and address the criteria for invoking a contingency plan. Identify, review and address the steps which may be necessary to cope with actual operational problems including, as an integral part, increases in service and support resources. To assist with and to standardize this task, a formal Year 2000 Date Compliance Contingency Planning process is being used following a business function review and Year 2000 risk exposure assessment. An essential part of this process is the formulation of Crisis Communications Plans for Year 2000 scenarios. The Company believes that PC desktop and Unix hardware environments are substantially compliant. Repeatable automated inventory and remediation procedures are used to monitor, install and maintain compliance. Adoption of compliant versions of wide area network equipment is completed and compliance of office-based local area networks and telephony is proceeding as planned in accordance with office relocations and infrastructure reinforcement initiatives. The Company believes that compliance of all business-critical systems has been substantially completed. To meet changing business requirements the Company continues to re-evaluate applications that are scheduled for retirement prior to the Year 2000 rollover and, in some cases, is ensuring their compliance as a part of ongoing risk mitigation. The Company's efforts to ensure awareness are on-going throughout the program, disseminated via the Company's internal web site and through various print media, which recently included a brochure "The Year 2000 Problem and You" attached to employee pay stubs. The costs incurred for Year 2000 Date Compliance are financed internally by the operating groups within the framework of their operating budgets have not had a material impact on the Company's financial results (operating expenses as a percentage of sales, for example). Incremental spending on the Year 2000 Date Compliance issue is limited to specific program costs which are outside of the normal course of business and are necessitated purely as a result of Year 2000 date compliance. Incremental spending incurred in fiscal periods reported to date and projected to be spent in fiscal 2000 associated with the Year 2000 transition represent less than 1% of the Company's revenues and expected revenues. There can be no assurance that Page 40 these costs will not be greater than anticipated, however, as the Company progresses through its program and greater certainty regarding costs, particularly related to remediation and contingency plans for identified risks, will be possible. The Company is still assessing the potential impact of Year 2000 Date Compliance on its suppliers and customers and currently cannot fully determine the effect on its operations and financial condition if key suppliers or customers do not adequately prepare for Year 2000 Date Compliance transition on a timely basis. Failure of critical suppliers or customers to address the issue on a timely basis could result in material financial risk to the Company. As a result, the Company is actively undertaking Year 2000 Date Compliance contingency planning as an integral part of the overall program, including service and support requirements for its customers over the Year 2000 rollover period. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company conducts business in several major international currencies through its worldwide operations. The Company uses financial instruments, principally forward exchange contracts, in its management of foreign currency exposures. The Company does not enter into forward exchange contracts for trading purposes. The Company's management of foreign currency exposures is based upon estimates of the net asset or net liability position of various currencies, and to the extent that these estimates are over or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses. Realized and unrealized gains and losses on foreign exchange contracts are recognized and offset foreign exchange gains and losses on the underlying net asset or net liability position. The net foreign currency gains and losses, if any, are recognized in the Consolidated Statements of Earnings as "Other income (expense)". The forward exchange contracts primarily require the Company to purchase and sell certain foreign currencies with or for Canadian dollars at contractual rates. The table that follows presents a summary of the value of forward exchange rate contracts outstanding at May 2, 1999 for each currency in which the Company has hedged a foreign currency exposure. The term of all forward exchange contracts outstanding at May 2, 1999 was less than one year. The values shown are the Canadian dollar values of the agreed upon amounts for each foreign currency that will be delivered to a third party on the agreed upon date. Page 41
Average Currency Contract Rate Value (Canadian dollars in thousands) Forward contracts to sell foreign currencies for Canadian Dollars: Euro 1.6131 $ 86,531 Japanese Yen 0.0125 27,491 British Pound 2.4380 22,430 Singapore Dollar 0.8744 6,630 -------- 143,082 -------- Forward contracts to sell Canadian Dollars for foreign currencies: Euro 1.5902 48,977 U.S. Dollar 1.4900 54,534 British Pound 2.3593 32,558 Singapore Dollar 0.8853 1,328 -------- 137,397 -------- Forward contracts to sell foreign currencies for other foreign currencies: U.S. Dollar for British Pound 1.6116 42,817 British Pound for U.S. Dollar 1.6079 19,935 Euro for U.S. Dollar 1.0574 12,441 Euro for British Pound 0.6804 4,434 All other foreign currency contracts 2,922 -------- 82,549 -------- Total forward exchange contracts outstanding at May 2, 1999 $363,028 ========
The unrealized gains or losses on these contracts represent hedges of foreign exchange gains and losses on the Company's underlying net asset or net liability position of the various currencies. As a result, Management does not expect future gains or losses on these contracts to have a material impact on the Company's financial results. The Company maintains an investment portfolio consisting of debt securities of various issuers, types and maturities. The securities that are classified as held to maturity are recorded on the balance sheet at amortized cost. Due to the average maturities and conservative nature of the investment portfolio, a sudden change in interest rates would not have a material effect on the value of the portfolio. In January 1998 the Company entered into a Forward Share Price Hedge Agreement with a major bank in order to fix the value of 545,976 Northern Telecom Limited (Nortel) shares pledged as security against a term loan. In January 1999 the Company amended the Forward Share Price Hedge Agreement in order to fix the value of a further 108,244 Nortel shares. The terms of the amended Share Price Hedge Agreement provide the Company with the option of delivering 654,220 Nortel shares in January 2003 for proceeds of $51,613,000, or the present value of $51,613,000, if terminated prior to January 2003, or delivering the cash equivalent of the market value of 654,220 Nortel shares at January 2003 or at the date of early termination. In April 1998 the Company issued US$225,000,000 Senior Notes due April 2003 bearing a coupon rate of 6.51%. Prior to the closing of the Senior Notes the Company entered into a swap transaction with a major bank under which the effective coupon rate on US$200,000,000 of the Senior Notes was fixed at 6.678%. Page 42 In January 1998 the Company entered into and received $50,000,000 under a loan agreement which includes a term loan portion and a demand loan portion. The term loan bears interest at a fixed rate of 5.46% and the demand loan bears interest at a floating rate equal to one month's bankers acceptance rate. The demand loan portion of the loan agreement was approximately $15,000,000 at May 2, 1999. Item 8. Financial Statements and Supplementary Data The following financial statements and supplementary data are filed as part of this Annual Report on Form 10-K: Financial Statements Auditors' Report to the Shareholders Consolidated Statements of Earnings and Retained Earnings for the years ended May 2, 1999, April 30, 1998 and 1997 Consolidated Balance Sheets as at May 2, 1999 and April 30, 1998 Consolidated Statements of Cash Flows for the years ended May 2, 1999, April 30, 1998 and 1997 Consolidated Statements of Shareholders' Equity for the years ended May 2, 1999, April 30, 1998 and 1997 Notes to the Consolidated Financial Statements Selected Quarterly Financial Data (unaudited) Page 43 AUDITORS' REPORT To the Shareholders of Newbridge Networks Corporation: We have audited the consolidated balance sheets of Newbridge Networks Corporation as at May 2, 1999 and April 30, 1998 and the consolidated statements of earnings, shareholders' equity and cash flows for the years ended May 2, 1999, April 30, 1998 and April 30, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at May 2, 1999 and April 30, 1998 and the results of its operations and the changes in its financial position for the years ended May 2, 1999, April 30, 1998 and April 30, 1997 in accordance with accounting principles generally accepted in Canada which, except as disclosed in Note 2, Note 15 and Note 18 to the consolidated financial statements, also conform in all material respects with accounting principles generally accepted in the United States. /s/ Deloitte and Touche LLP Chartered Accountants Ottawa, Canada June 1, 1999, except Note 23 which is as of June 22, 1999 Page 44 NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (Canadian dollars, amounts in thousands except per share data)
Years Ended --------------------------------- May 2, April 30, April 30, 1999 1998 1997 Sales $1,790,705 $1,620,620 $1,376,727 Cost of sales 751,874 625,065 507,588 ---------- ---------- ---------- Gross margin 1,038,831 995,555 869,139 Expenses Selling, general and administrative 531,308 494,429 346,106 Research and development (Note 13) 264,421 258,879 155,330 Restructuring costs (Note 14) 118,030 181,444 -- Purchased research and development in process (Note 15) -- 52,762 96,940 ---------- ---------- ---------- Income from operations 125,072 8,041 270,763 Interest income 34,248 11,581 19,956 Interest expense on long term obligations (26,127) (1,820) (1,351) Net gain on investments (Note 16) 188,726 50,401 (1,564) Other expenses (20,802) (12,889) (8,051) ---------- ---------- ---------- Earnings before income taxes and non-controlling interest 301,117 55,314 279,753 Provision for income taxes (Note 17) 121,303 73,001 117,718 Non-controlling interest 653 631 5,118 ---------- ---------- ---------- Net earnings (loss) $ 179,161 $ (18,318) $ 156,917 ========== ========== ========== Earnings (loss) per share (Note 18) Basic $ 1.01 $ (0.10) $ 0.92 Fully diluted $ 1.01 $ (0.10) $ 0.91 Weighted average number of shares Basic 177,630 174,617 170,510 Fully diluted 177,630 174,617 184,595
See accompanying Notes to the Consolidated Financial Statements. Page 45 NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED BALANCE SHEETS (Canadian dollars in thousands)
May 2, April 30, 1999 1998 Assets Cash and cash equivalents (Note 2) $ 879,694 $ 499,278 Accounts receivable, net of provision for returns and doubtful accounts of $16,217 (April 30, 1998 - $13,067) 472,811 428,527 Inventories (Note 3) 210,286 196,285 Prepaid expenses 46,753 32,728 Other current assets 46,160 44,872 ---------- ---------- 1,655,704 1,201,690 Property, plant and equipment (Note 4) 455,483 450,735 Goodwill (Note 5) 40,022 72,719 Software development costs (Note 6) 35,909 28,299 Future tax benefits (Note 17) 59,999 50,443 Other assets (Note 7) 223,507 162,939 ---------- ---------- $2,470,624 $1,966,825 ========== ========== Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 190,630 $ 127,040 Accrued liabilities 201,361 118,771 Income taxes 16,853 5,851 Current portion of long term obligations 2,869 4,136 ---------- ---------- 411,713 255,798 Long term obligations (Note 9) 384,021 383,311 Future tax obligations (Note 17) 123,088 71,197 Non-controlling interest 22,583 22,899 ---------- ---------- 941,405 733,205 ---------- ---------- Share capital (Note 11) Common shares - 180,104,582 outstanding (April 30, 1998 - 175,686,083 outstanding) 572,990 456,510 Accumulated foreign currency translation adjustment 27,238 27,280 Retained earnings 928,991 749,830 ---------- ---------- 1,529,219 1,233,620 ---------- ---------- $2,470,624 $1,966,825 ========== ==========
See accompanying Notes to the Consolidated Financial Statements. Page 46 NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Canadian dollars in thousands)
Years Ended ---------------------------------- May 2, April 30, April 30, 1999 1998 1997 Operating activities Net earnings (loss) $ 179,161 $ (18,318) $ 156,917 Items not affecting cash Amortization 182,547 125,429 82,987 Future tax benefits and obligations 46,698 27,158 22,989 Non-controlling interest 674 (1,390) 5,118 Restructuring costs 118,030 181,444 -- Purchased research and development in process -- 52,762 96,940 Net gain on investments (191,581) (50,401) 1,564 Other 5,143 7,277 5,438 Cash effect of changes in: Accounts receivable (99,291) (32,931) (87,976) Inventories (70,724) (86,288) (20,767) Prepaid expenses and other current assets (16,832) (13,004) (13,668) Accounts payable and accrued liabilities 49,893 (50,766) (34,615) Income taxes 15,266 (39,447) 8,447 --------- --------- --------- 218,984 101,525 223,374 --------- --------- --------- Investing activities Additions to property, plant and equipment (213,903) (276,778) (131,641) Proceeds on sale of long term investments (Note 16) 456,966 66,672 -- Acquisitions of subsidiaries, excluding cash acquired -- (58,936) (220,645) Capitalized software development costs (20,801) (16,069) (12,457) Additions to other assets (164,081) (124,576) (34,858) --------- --------- --------- 58,181 (409,687) (399,601) --------- --------- --------- Financing activities Issue of common shares 112,293 89,430 54,096 Increase in long term obligations 44,671 378,628 1,515 Repayment of long term obligations (42,138) (12,316) (6,733) --------- --------- --------- 114,826 455,742 48,878 --------- --------- --------- Increase (decrease) in cash and cash equivalents 391,991 147,580 (127,349) Effect of foreign currency translation on cash (11,575) 15,919 (2,585) Cash from acquisition of subsidiaries -- 1,875 8,089 --------- --------- --------- 380,416 165,374 (121,845) Cash and cash equivalents, beginning of the year 499,278 333,904 455,749 --------- --------- --------- Cash and cash equivalents, end of the year $ 879,694 $ 499,278 $ 333,904 ========= ========= =========
See accompanying Notes to the Consolidated Financial Statements. Page 47 NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Canadian dollars in thousands)
Accumulated Common Shares Foreign Retained Shareholders' --------------------- Number Amount Currency Earnings Equity At April 30, 1996 168,676,280 290,170 1,285 611,231 902,686 Exercise of employees' and directors' options 3,182,704 54,096 54,096 Income tax benefit related to stock options 7,122 7,122 Effect of foreign currency translation 5,678 5,678 Net earnings 156,917 156,917 ----------- ------- ----- ------- --------- At April 30, 1997 171,858,984 351,388 6,963 768,148 1,126,499 Exercise of employees' and directors' options 3,827,099 89,430 89,430 Income tax benefit related to stock options 15,692 15,692 Effect of foreign currency translation 20,317 20,317 Net loss (18,318) (18,318) ----------- ------- ------ ------- --------- At April 30, 1998 175,686,083 456,510 27,280 749,830 1,233,620 Exercise of employees' and directors' options 4,418,499 112,293 112,293 Income tax benefit related to stock options 4,187 4,187 Effect of foreign currency translation (42) (42) Net earnings 179,161 179,161 ----------- -------- -------- -------- ---------- At May 2, 1999 180,104,582 $572,990 $27,238 $928,991 $1,529,219 =========== ======== ======== ======== ==========
See accompanying Notes to the Consolidated Financial Statements. Page 48 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) 1. Significant Accounting Policies The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). These 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, the write off of purchased in process research and development, as disclosed in Note 15, and the method of calculation of earnings per share, as disclosed in Note 18. Basis of Consolidation The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. Investments in companies in which the Company has significant influence are accounted for by the equity method. Investments in which the Company does not control or have significant influence over the investee are accounted for by the cost method. Fiscal Year In fiscal 1998 and years prior the Company's fiscal quarters were 13 weeks long and closed on a Sunday, except the fourth quarter which closed on April 30. Commencing in fiscal 1999 the Company adopted the policy of closing its fiscal years on the Sunday closest to April 30. Accordingly, fiscal 1999 was 52 weeks long with interim fiscal quarters closing on a Sunday and 13 weeks long. Occasionally fiscal years will be 53 weeks long, the first occurrence of which will be for the fiscal year ending May 2, 2004. Revenue Recognition and Warranties Revenue from product sales is generally recorded on shipment provided that no significant obligations remain, with a provision for estimated returns recorded at that time. In addition, a provision for potential warranty claims is provided for at the time of sale, based on warranty terms and prior claims experience. Service revenue is recognized when the service is performed, or, in the case of maintenance contracts, is recognized as costs are incurred to secure and fulfill the contract. Government Incentives and Investment Tax Credits Government incentives and investment tax credits are recorded as a reduction of the expense or the cost of the asset acquired to which the incentive applies. The benefits are recognized when the Company has complied with the terms and conditions of the approved grant program or the applicable tax legislation. Software Development Costs Certain applications and systems software development costs are capitalized once technical feasibility has been established for the product, the Company has identified a market for the product and intends to market the developed product. No other development costs are capitalized. Such capitalized costs are amortized over the expected life of the related product. Page 49 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) Inventories Finished goods are valued at the lower of cost (first in, first out) and net realizable value. Work in process and raw materials are valued at the lower of cost and replacement cost. Property, Plant and Equipment Property, plant and equipment are stated at cost. Buildings and equipment are generally amortized on a declining balance basis at rates calculated to amortize the cost of the assets over their estimated useful lives. Leasehold improvements are amortized using a straight line basis over the term of the lease. Goodwill Goodwill is stated at the difference between the Company's cost of the investments less its proportionate share of the fair value of the net assets of the subsidiaries. Goodwill is amortized on a straight line basis over the estimated useful life of the goodwill, generally between ten and twenty years. The recoverability of such costs is reviewed on an ongoing basis. Foreign Currency Translation The Consolidated Financial Statements are prepared using Canadian dollars. All operations whose principal economic activities are undertaken in currencies other than Canadian dollars have been determined to be self-sustaining. The assets and liabilities of non-Canadian operations are translated at fiscal year end exchange rates and the resulting unrealized exchange gains or losses are accumulated as a separate component of shareholders' equity described in the Consolidated Balance Sheets as "Accumulated foreign currency translation adjustment". The statements of earnings of such operations are translated at exchange rates prevailing during the fiscal year. Other monetary assets and liabilities, which are denominated in currencies foreign to the local currency of any one operation, are translated to the local currency at fiscal year end exchange rates, and transactions included in earnings are translated at rates prevailing during the fiscal year. Exchange gains and losses resulting from the translation of these amounts are included in the Consolidated Statements of Earnings. Use of Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the Consolidated Financial Statements and the reported amounts of sales and expenses during the reporting periods presented. Actual results could differ from the estimates made by Management. Page 50 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for reporting comprehensive income and its components in the financial statements. The Company has adopted SFAS 130. In June 1998, FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 requires all derivatives to be recorded on the balance sheet at fair value. SFAS 133 is effective for fiscal years beginning after June 15, 2000. The Company is in the process of evaluating the impact of the reporting requirements of SFAS 133. CICA Handbook - Accounting Section 1540, Cash Flow Statements, which replaces existing Section 1540 Statement of Changes in Financial Position was issued in June 1998 and is effective for fiscal years beginning after July 31, 1998. The impact of this standard will be the disclosure of purchases, maturities and sales of marketable securities as an investing activity on the Statement of Cash Flows, in a manner consistent with U.S. GAAP, as is described in Note 2 to these financial statements. Under this new standard, investing and financing activities that do not require the use of cash or cash equivalents will be excluded from the Statement of Cash Flows. However, these activities will be disclosed elsewhere in the consolidated financial statements. The Company will adopt this standard in the first quarter of fiscal 2000. 2. Cash and Cash Equivalents Components of cash and cash equivalents are:
May 2, 1999 April 30, 1998 ------------------- ------------------- Amortized Market Amortized Market Cost Value Cost Value Cash $666,019 $666,019 $467,464 $467,464 Held to maturity marketable securities Maturing within one year: Corporate debt securities 213,675 213,683 22,447 22,447 Available for sale marketable securities Equity securities -- -- 9,367 9,367 --------- -------- -------- -------- $879,694 $879,702 $499,278 $499,278 ========= ======== ======== ========
Held to maturity marketable securities are investments with original maturities of three months or more. Available for sale securities are common shares of publicly traded companies, which have certain resale restrictions, principally acquired upon the Company's disposition of its minority interest in Broadband Networks Inc. Under U.S. GAAP held to maturity and available for sale marketable securities would be disclosed as a separate caption on the Consolidated Balance Sheets. Held to maturity marketable securities are carried at amortized cost. The unrealized gains and losses are not included in the Consolidated Statements of Earnings as these gains and losses are unlikely to be realized due to the Company's intent to hold the underlying securities to maturity. During fiscal 1999 there were no realized gains or losses and unrealized gains of Page 51 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) $70,000 and unrealized losses of $62,000 on held to maturity securities. During fiscal 1998 there were no realized or unrealized gains or losses on held to maturity securities. Available for sale securities are carried at the lower of cost and market. During fiscal 1999 the Company incurred $707,000 of realized losses and in fiscal 1998 the Company realized gains of $573,000 from available for sale securities. 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.
Years Ended ----------------------------------- May 2, April 30, April 30, 1999 1998 1997 Investing activities in short term marketable securities: Held to maturity securities Maturities $ 287,723 $ 185,958 $ 508,890 Purchases (478,951) (72,126) (475,092) --------- --------- --------- (191,228) 113,832 33,798 Available for sale securities Sales 9,367 569 -- Purchases -- (9,317) -- --------- --------- --------- (181,861) 105,084 33,798 Investing activities, as reported 58,181 (409,687) (399,601) --------- --------- --------- Investing activities, U.S. GAAP $(123,680) $(304,603) $(365,803) ========= ========= ========= Increase (decrease) in cash and cash equivalents, as reported $ 380,416 $ 165,374 $(121,845) Investing activities in short term marketable securities (181,861) 105,084 33,798 --------- --------- --------- Increase (decrease) in cash and cash equivalents, U.S. GAAP $ 198,555 $ 270,458 $ (88,047) ========= ========= =========
3. Inventories
May 2, April 30, 1999 1998 Finished goods $118,251 $129,850 Work in process 27,807 18,178 Raw materials 64,228 48,257 -------- -------- $210,286 $196,285 ======== ========
Page 52 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) 4. Property, Plant and Equipment
Amortization May 2, April 30, Rate 1999 1998 Land -- $ 16,118 $ 14,763 Buildings 2.5%--5% 92,390 88,189 Equipment 10%--50% 803,399 705,744 Furniture and fixtures 10%--33% 43,878 45,067 Leasehold improvements Lease term 27,530 27,797 ------- ------- 983,315 881,560 Accumulated amortization (527,832) (430,825) ------- ------- $ 455,483 $ 450,735 ======= ======= Capital leases included above $ 2,683 $ 6,606 ======= =======
Years Ended -------------------------------- May 2, April 30, April 30, 1999 1998 1997 Amortization on property, plant and equipment $163,097 $ 112,175 $ 73,364 ======== ========= ========= Amortization on property, plant and equipment under capital leases $ 1,384 $ 2,035 $ 1,523 ======== ========= =========
5. Goodwill
May 2, April 30, 1999 1998 Goodwill, beginning of the year $ 72,719 $ 125,565 Additions associated with investments -- 15,377 Amortization (2,752) (5,683) Divestitures (29,945) (1,232) LAN business restructuring (Note 14) -- (61,308) --------- --------- Goodwill, end of the year $ 40,022 $ 72,719 ========= ========= Accumulated goodwill amortization $ 7,131 $ 11,098 ========= =========
Page 53 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) 6. Software Development Costs
May 2, April 30, 1999 1998 Balance, beginning of the year $ 28,299 $22,299 Amount capitalized 20,755 15,627 Amortization (13,145) (9,627) -------- ------- Balance, end of the year $ 35,909 $28,299 ======== =======
7. Other Assets
May 2, April 30, 1999 1998 Long term investments Accounted for by the equity method $ 29,236 $ 30,163 Accounted for by the cost method 161,901 103,980 -------- -------- 191,137 134,143 Other assets 32,370 28,796 -------- -------- $223,507 $162,939 ======== ========
8. Bank Credit Facilities At May 2, 1999 short term bank credit facilities consisted of operating lines of credit in the aggregate amount of $156,258,000, primarily with banks in Canada, the United Kingdom, the United States, and Chile. At May 2, 1999 $5,881,000 was being utilized under these credit facilities, primarily attributed to non-wholly owned Chilean subsidiary Coasin S.A. The Company's primary facility with a Canadian bank in the amount of $100,000,000 is unsecured. Certain of the other bank facilities are secured by the accounts receivable and other assets of the borrowing subsidiary. The Company complies with all covenants and restrictions contained in the credit facilities agreements. Page 54 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) 9. Long Term Obligations
May 2, April 30, 1999 1998 6.51% Senior Notes, due 2003 $330,602 $322,098 Loan agreement, due 2003 50,000 50,000 Term loans 3,150 11,033 Capital lease obligations 3,138 4,316 -------- -------- 386,890 387,447 Current portion of long term obligations (2,869) (4,136) -------- -------- Long term obligations $384,021 $383,311 ======== ========
In April 1998 the Company issued US$225,000,000 Senior Notes due April 2003 bearing a coupon rate of 6.51%. Costs associated with the issue totaled US$1,303,000. Prior to the closing of the Senior Notes the Company entered into a swap transaction with a major bank under which the effective coupon rate on US$200,000,000 of the Senior Notes was fixed at 6.678%. 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. The Company complies with all covenants and restrictions contained in the Senior Notes. The fair value of Senior Notes at May 2, 1999 is estimated at US$226,369,000 In January 1998 the Company entered into and received $50,000,000 under a loan agreement that 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. The term loan is secured by 654,220 Northern Telecom Limited (Nortel) shares. The demand loan is unsecured. The Company complies with all covenants and restrictions contained in the long term loan agreement. The fair value of the term loan at May 2, 1999 is estimated at $48,510,000. Page 55 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) Future payments under long term obligations and operating leases at May 2, 1999 are as follows.
Principal Amount Minimum on Mortgages Capital Lease Operating and Term Loans Payments Leases Fiscal 2000 $ 1,630 $1,335 $ 37,516 Fiscal 2001 433 1,663 24,869 Fiscal 2002 3,171 302 19,153 Fiscal 2003 378,144 9 15,403 Fiscal 2004 150 -- 14,079 Thereafter 224 -- 75,523 -------- ------ -------- $383,752 3,309 $186,543 ======== ======== Less imputed interest (171) ------ $3,138 ======
Interest paid on capital leases was $456,000 (fiscal 1998 -- $401,000; fiscal 1997 -- $266,000). 10. Financial Instruments and Concentration of Credit Risk The Company uses financial instruments, principally forward exchange contracts, in its management of foreign currency exposures. Realized and unrealized gains and losses on foreign exchange contracts are recognized and offset foreign exchange gains and losses on the underlying net asset or net liability position. These contracts primarily require the Company to purchase and sell certain foreign currencies with or for Canadian dollars at contractual rates. At May 2, 1999 the Company had $363,028,000 in outstanding foreign exchange contracts (April 30, 1998 - $170,084,000). In January 1998 the Company entered into a Forward Share Price Hedge Agreement with a major bank in order to fix the value of the Nortel shares pledged as security against a term loan (see Note 9). In January 1999 the Company amended the Forward Share Price Hedge Agreement in order to fix the value of a further 108,244 Nortel shares. The terms of the amended Forward Share Price Hedge Agreement provide the Company with the option of delivering 654,220 Nortel shares in January 2003 for proceeds of $51,613,000 or the present value of $51,613,000 if terminated prior to January 2003, or delivering the cash equivalent of the market value of 654,220 Nortel shares at January 2003 or at the date of early termination. Several major financial institutions are counterparties to the Company's financial instruments. It is Company practice to monitor the financial standing of the counterparties and limit the amount of exposure to any one institution. The Company may be exposed to a credit loss in the event of nonperformance by the counterparties to these contracts, but does not anticipate such nonperformance. Page 56 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) With respect to accounts receivable, concentration of credit risk is limited due to the diverse areas covered by the Company's operations. The Company has credit evaluation, approval and monitoring processes intended to mitigate potential credit risks. Anticipated bad debt loss and product returns have been provided for in the allowance for returns and doubtful accounts. Net additions to the provision for returns and doubtful accounts (fiscal 1999 -- $3,150,000; fiscal 1998 -- $2,495,000) primarily relate to estimates for products to be returned and have been charged to sales. The carrying amounts for cash, marketable securities, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. 11. Share Capital Authorized An unlimited number of Common Shares. An unlimited number of participating preferred shares, ranking in priority upon distribution of assets over Common Shares, may be issued in series with additional provisions as fixed by the Board of Directors. Employee Stock Option Plans The Company has established the Newbridge Networks Corporation Consolidated Key Employee Stock Option Plan (the "Plan") applicable to full-time employees, directors and consultants of the Company and its subsidiaries. The options under the Plan are granted at the then-current fair market value of the Common Shares of the Company and generally may be exercised in equal proportions during the years following the first, second, third and fourth anniversary of the date of grant, and expire on the fifth anniversary or upon termination of employment. Options granted under the Plan prior to August 1, 1996 generally may be exercised in equal proportions during the years following the first, second and third anniversary of the date of grant, and expire on the fourth anniversary or upon termination of employment. In addition to the number of options outstanding as at May 2, 1999, the aggregate number of options which may be granted under the Plan was 6,624,514. Page 57 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) Activity in the stock option plan is summarized below.
Option Price -------------------------- Weighted Options Low High Average Options outstanding April 30, 1996 13,123,704 $ 4.73 $43.74 $22.73 Granted during fiscal 1997 7,098,800 $30.18 $46.33 $38.89 Cancelled and expired (785,073) $ 4.76 $44.31 $25.74 Exercised (3,182,704) $ 4.73 $34.23 $17.23 ---------- Options outstanding April 30, 1997 16,254,727 $19.47 $46.33 $30.72 Granted during fiscal 1998 9,817,645 $38.86 $64.96 $44.75 Cancelled and expired (1,779,070) $19.63 $64.31 $42.46 Exercised (3,827,099) $19.47 $43.74 $23.92 ---------- Options outstanding April 30, 1998 20,466,203 $19.47 $64.96 $37.70 Granted during fiscal 1999 8,841,475 $24.65 $42.80 $35.21 Cancelled and expired (2,054,355) $19.63 $64.31 $40.14 Exercised (4,418,499) $19.47 $55.92 $25.79 ---------- Options outstanding May 2, 1999 22,834,824 $19.47 $64.96 $38.82 ========== Options outstanding April 30, 1998 Vested 5,979,342 $19.47 $46.33 $28.26 Unvested 14,486,861 $19.47 $64.96 $41.59 ---------- 20,466,203 $19.47 $64.96 $37.70 ========== Options outstanding by range: $19.47 to $30.00 4,341,730 $30.01 to $45.00 11,845,623 $45.00 to $64.96 4,278,850 ---------- 20,466,203 ========== Weighted average remaining contractual life 3.32 years ========== Options outstanding May 2, 1999 Vested 5,863,481 $19.47 $64.96 $37.89 Unvested 16,971,343 $24.65 $64.96 $39.14 ---------- 22,834,824 $19.47 $64.96 $38.82 ========== Options outstanding by range: $19.47 to $30.00 2,542,777 $30.01 to $45.00 16,474,522 $45.00 to $64.96 3,817,525 ---------- 22,834,824 ========== Weighted average remaining contractual life 3.48 years ==========
Page 58 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) Stock Based Compensation The Company applies APB 25 and related interpretations in accounting for its Consolidated Key Employee Stock Option Plan. Accordingly, no compensation expense has been recognized for its stock based compensation plan. Had compensation costs for the Company's Consolidated Key Employee Stock Option Plan been determined based on the fair value at the grant date for awards under the Plan, consistent with the methodology prescribed under SFAS 123, the Company's net earnings (loss) and earnings (loss) per share would have been decreased to the following pro forma amounts.
Years Ended --------------------------------- May 2, April 30, April 30, 1999 1998 1997 Net earnings (loss), as reported $179,161 $(18,318) $156,917 Estimated stock based compensation costs (90,102) (75,164) (35,085) -------- -------- -------- Pro forma net earnings (loss) $ 89,059 $(93,482) $121,832 ======== ======== ======== Basic pro forma earnings (loss) per share $ 0.50 $ (0.54) $ 0.71 ======== ======== ======== Fully diluted pro forma earnings (loss) per share $ 0.50 $ (0.54) $ 0.71 ======== ======== ========
The weighted average fair value of all options granted during fiscal 1999, 1998 and 1997 was estimated as of the date of grant using the Black-Scholes option pricing model with the following and weighted average results and assumptions.
Years Ended ------------------------------- May 2, April 30, April 30, 1999 1998 1997 Weighted average fair value of of options issued $19.91 $25.32 $18.65 Expected option life, in years 4.5 4.5 4.3 Volatility 65.57% 63.98% 50.18% Risk free interest rate 4.9% 5.9% 6.4% Dividend yield nil nil nil
The Black-Scholes model used by the Company to calculate option values, as well as other currently accepted option valuation models, were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values. Accordingly, Management believes that this model does not necessarily provide a reliable single measure of the fair value of the Company's stock option awards. Page 59 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) Employee Share Purchase Plan The Company's Employee Stock Purchase Plan ("ESPP"), was effective June 1, 1999 and allows eligible employees to authorize payroll deductions up to 10% of their salary to purchase Common Shares of the Company at a price of 85% of the then current stock price (as defined in the ESPP). Employees purchasing shares under the ESPP must hold the shares for a minimum of one year. The Company has reserved 500,000 Common Shares for issuance under the ESPP. 12. Comprehensive Income The Company has adopted the United States Financial Accounting Standards Board Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. This statement requires disclosure of Comprehensive Income, which includes reported net earnings adjusted for other comprehensive income. Other comprehensive income includes items that cause changes in shareholders' equity but are not related to share capital or net earnings which, for the Company, comprises only the foreign currency translation adjustment.
Years Ended -------------------------------- May 2, April 30, April 30, 1999 1998 1997 Net earnings (loss) $179,161 $(18,318) $156,917 Other comprehensive income: Foreign currency translation adjustment (42) 20,317 5,678 -------- -------- -------- Comprehensive income $179,119 $ 1,999 $162,595 ======== ======== ========
13. Research and Development During the year, the Company recorded Canadian Investment Tax Credits of $37,846,000 (fiscal 1998 -- $34,971,000; fiscal 1997 -- $26,400,000) as a reduction of research and development expenses. The Company recorded government and customer funding during the year of $29,234,000 (fiscal 1998 -- $5,507,000; fiscal 1997 -- $9,484,000) as a reduction in research and development expenses included in the consolidated statements of earnings. Funding from the government of the province of British Columbia amounted to $10,000,000 during the year and is contingently repayable over a period not to exceed ten years. Repayment of the funding is based on a percentage of sales of products developed in British Columbia and a percentage of sales of products sold in British Columbia. Any funding not repaid at the end of the ten year period would be forgiven. The Company also recorded funding of $17,540,000 during the year related to eligible research and development expenditures of its broadband wireless program. Royalties are due to the funding companies based on a percentage of sales of products developed under the program. The funding companies own the intellectual property rights for products developed under the program. The Company has an option to acquire those rights under certain terms and conditions. As part of the arrangements, Newbridge has provided licencing of certain technologies to the funding companies including Asynchronous Transfer Mode ("ATM") switch software and related technology. Page 60 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) 14. Restructuring Costs Restructuring costs are comprised of the following.
Years Ended ------------------------------ May 2, April 30, April 30, 1999 1998 1997 Restructuring programs, April 1999 $ 73,570 $ -- $ -- Layer 2 Switching End of Life 37,928 -- -- Asia Pacific Resources Relocation 6,532 -- -- LAN business restructuring, November 1997 -- 181,444 -- -------- --------- --------- $118,030 $181,444 $ -- ======== ========= =========
In April 1999, the Company decided to streamline the operations of regional sales and support organizations as well as its marketing and product development organizations. The restructuring costs associated with the sales, support and marketing organizations ("Sales and Marketing") consisted primarily of costs related to workforce and facilities reductions, as the Company has announced a reduction in the number of locations in which it will have a physical presence in favour of distributors in certain markets, and subcontractors for certain functions. Restructuring costs associated with product development relate primarily to asset impairment losses related to the capping, discontinuation or divestiture of the development of certain products, and the centralization of development laboratories to make the development process more efficient. Restructuring costs of $73,570,000 comprised the following:
Sales and Product Marketing Development Total Asset impairment losses Inventory $ 2,606 $ 8,994 $11,600 Property, plant and equipment 6,576 29,104 35,680 Other current and non-current assets 568 2,249 2,817 ------- ------- ------- 9,750 40,347 50,097 ------- ------- ------- Provision for restructuring Reduction in work force 14,595 427 15,022 Reduction in facilities 6,627 -- 6,627 Other restructuring costs 1,653 171 1,824 ------- ------- ------- 22,875 598 23,473 ------- ------- ------- Restructuring costs $32,625 $40,945 $73,570 ======= ======= =======
All of the amounts listed in the provision for restructuring are reflected in accrued liabilities as at May 2, 1999. Page 61 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) The provision for the reduction in work force includes severance, related medical and other benefits, and other obligations to employees. The provision includes termination benefits for approximately 200 employees. The work force reductions will occur in Japan, Russia and various other countries. The Company anticipates that these work force reductions will be substantially completed in the first half of fiscal 2000. The provision for the reduction in facilities comprises primarily lease payments and fixed costs associated with the closure of sales, support and administrative facilities in Europe, Japan and the United States. The Company expects to complete these facilities closures in the first half of fiscal 2000. The provision for other restructuring costs comprises professional fees and other various direct incremental costs associated with the restructuring plan. In October 1998, the Company decided to discontinue the sale and development of local area network (LAN) Layer 2 Switching products as part of the enhancement of the focus on the Company's dominant and more profitable products. This program, which was completed during the fiscal 1999, created impairment losses of $30,690,000 associated with certain assets deployed in this business and obligations related to fulfilling previous customer commitments of $7,238,000, all of which was incurred prior to the end of fiscal 1999. In October 1998, the Company commenced relocating certain employees and activities that support the Asia Pacific region from Kanata, Ontario to Hong Kong and Malaysia in order to provide more efficient and cost effective services to customers in that region. The charge of $6,532,000 incurred in October 1998 reflects the accrual of involuntary termination benefits, lease cancellation penalties and other direct costs associated with the transition. As at May 2, 1999, $1,215,000 of these costs had been incurred. Additional costs related to the transfer of personnel and equipment, the recruitment of new staff and the expansion of facilities in Hong Kong are not included in the Asia Pacific Resources Relocation charge and are being expensed as incurred. These additional costs are estimated at $9,000,000, with the majority of the costs to be incurred during the first two quarters of fiscal 2000. In November 1997, the Company restructured its activities relating to its LAN business. The restructuring plan involved the formation of an 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 addressed the LAN market, the restructuring plan created impairment losses on certain assets associated with the LAN business and liabilities associated with restructuring activities. Accordingly, the Company recognized restructuring costs of $181,444,000 in the third quarter of fiscal 1998. The provision recorded for this restructuring plan in November 1997, predominantly related to reductions in the Company's workforce, was $39,638,000. During fiscal 1998, $34,345,000 of these expenditures were incurred with the remaining $5,293,000 incurred in fiscal 1999. The restructuring plan has been completed. Page 62 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) 15. Purchased 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 ATM networks, for cash consideration of $53,676,000. The majority of the purchase price ($52,762,000) was allocated to purchased research and development in process. The amount allocated to purchased research and development in process was determined through valuation techniques common in the high technology industry. Under accounting principles generally accepted in Canada, the purchased research and development in process was amortized on a straight line basis over its estimated useful life of six months. Under U.S. GAAP, purchased research and development in process acquired by the Company was written off at the time of acquisition. 16. Net Gain on Investments
Fiscal Year Ended ------------------------------- May 2, April 30, April 30, 1999 1998 1997 (Canadian dollars in thousands) Cambrian Systems Corporation $131,748 $ -- $ -- Advanced Computer Communications 128,336 -- -- Vienna Systems Corporation 15,846 -- -- Tundra Semiconductor Corporation 11,748 -- -- Broadband Networks Inc. -- 47,960 -- West End Systems Corp. (33,521) -- -- Other divestitures -- 6,528 -- Investment impairment write downs (65,431) (4,087) (1,564) -------- ------- ------- $188,726 $50,401 $(1,564) ======== ======= =======
In December 1998, the Company sold its minority ownership position in Cambrian Systems Corporation ("Cambrian") to Nortel for cash proceeds of US$95,674,000 (Cdn$147,158,000). The proceeds include an earn-out payment of US$1,935,000 (Cdn$2,855,000) received by the Company as a result of certain specified financial performance targets being met by Cambrian. The proceeds exclude future potential earn-out payments of approximately US$21,000,000 which will be received by the Company if certain specified financial performance targets are met by Cambrian. In October 1998, the Company completed the sale of its majority ownership position in Advanced Computer Communications ("ACC") to Telefonaktiebolaget LM Ericsson for cash proceeds of US$167,319,000 (Cdn$258,308,000). ACC's results of operations were consolidated with the Company's results for the first six months of fiscal 1999 ended November 1, 1998. The results of operations and the financial position of ACC were not significant relative to the Company's consolidated results of operations and financial position for all periods presented. In December 1998, the Company sold its minority ownership position in Vienna Systems Corporation to Nokia Corporation for cash proceeds of $39,716,000. Page 63 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) In February 1999, the Company sold a portion of its minority ownership position in Tundra Semiconductor Corporation for cash proceeds of $19,498,000 as part of an initial and secondary share offering by Tundra. In January 1998, the Company sold its minority interest in Broadband Networks Inc. to Nortel for proceeds of $66,672,000. The proceeds received included cash of $23,775,000 and Nortel shares valued at $42,897,000. On February 10, 1999 West End Systems Corp., a manufacturer of access and transmission products for the communications and cable television industries, filed an assignment in bankruptcy under the Canadian Bankruptcy and Insolvency Act. As a result, the Company recorded losses related to its minority ownership position in West End Systems Corp. and unsecured trade accounts outstanding. The Company evaluates, on an ongoing basis, the value of its long term investments considering the evolution of the market segments of investee companies, any impact of deteriorating economic conditions in various countries, and any other specific information which indicates impairment of value of these investments. In fiscal 1999, the financial performance of certain investee companies as well as deteriorating economic conditions in Brazil and Russia led to investment impairment write downs of $65,431,000. 17. Income Taxes The components of the provision for income taxes are as follows:
Years Ended ------------------------------ May 2, April30, April 30, 1999 1998 1997 Current $ 78,968 $45,843 $ 94,729 Future 42,335 27,158 22,989 -------- ------- -------- $121,303 $73,001 $117,718 ======== ======= ========
The provision for income taxes reported differs from the amount computed by applying the Canadian statutory rate to income before income taxes for the following reasons.
Years Ended --------------------------------- May 2, April 30, April 30, 1999 1998 1997 Earnings before income taxes Domestic $280,968 $ 222,597 $182,745 Foreign 20,149 (167,283) 97,009 -------- -------- -------- $301,117 $ 55,314 $279,754 ======== ========= ======== Statutory income tax rate (Canada) 43.5% 43.5% 43.5% ======== ========= ========
Page 64 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data)
Years Ended --------------------------------- May 2, April 30, April 30, 1999 1998 1997 Expected provision for income tax $130,986 $ 24,062 $121,693 Canadian rate adjustment for research and development activities (4,236) (6,166) (5,062) Canadian rate adjustment for manufacturing and processing activities (13,075) (19,032) (15,625) Loss carryforwards utilized -- -- (7,262) Foreign tax differential (21,428) (13,865) (39,539) Purchased research and development in process -- 22,952 42,169 Recognition of goodwill devaluation -- 26,677 -- Non-deductible reserves and surtaxes 29,056 38,373 21,344 -------- -------- -------- Reported income tax provision $121,303 $ 73,001 $117,718 ======== ======== ========
The components of the annual temporary differences giving rise to the related future tax provision are as follows:
Years Ended ------------------------------- May 2, April 30, April 30, 1999 1998 1997 Tax depreciation in excess of accounting amortization $ 1,864 $ 7,163 $ 4,530 Accounting provisions not deductible (5,715) 6,804 3,570 Research and development expenses deducted for tax purposes in excess of accounting (677) 677 2,530 Restructuring charges 46,443 10,909 13,127 Losses available to offset future income taxes and other 420 1,605 (768) ------- ------- ------- Future income tax expense $42,335 $27,158 $22,989 ======= ======= =======
Page 65 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) The components of the future tax benefit (obligation) classified by the source of temporary differences that gave rise to the benefit (obligation) are as follows:
Future Tax Benefit Future Tax Obligation ------------------- ----------------------- May 2, April 30, May 2, April 30, 1999 1998 1999 1998 Accounting depreciation in excess of (less than) tax depreciation $ 5,064 $13,853 $ (38,636) $(45,561) Accounting provisions not deductible 13,845 22,409 (93) (14,372) Research and development expenses deducted for tax purposes less than (in excess of) accounting -- -- (11,007) (11,684) Provisions related to restructuring charges 41,090 21,412 -- -- Divestitures -- -- (73,352) -- Other -- -- -- 420 Valuation allowance -- (7,231) -- -- ------- ------- --------- -------- $59,999 $50,443 $(123,088) $(71,197) ======= ======= ========= ========
The Company recorded a future tax benefit for net operating loss carryovers associated with certain acquisitions. These losses will expire at various dates through the year 2012. The components of the future tax benefit (obligation) classified by the source of timing difference that gave rise to the credit are not materially different from the temporary differences as calculated under the application of U.S. GAAP. At May 2, 1999, the Company had available investment tax credits of approximately $53,106,000 for the reduction of future years' Canadian federal income tax liability. These credits, which are subject to customary review procedures by Revenue Canada, expire during the years 2007 to 2009. Of this amount $10,913,000 has been applied to reduce the future tax obligation. No recognition has been given in these financial statements to the potential tax benefits associated with the remaining balance of investment tax credits. Under U.S. GAAP the remaining balance of investment tax credits would be disclosed, offset by a valuation allowance. Page 66 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) 18. Earnings (Loss) per Share Basic earnings (loss) per share has been calculated on the basis of net earnings (loss) for the period divided by the daily weighted average number of Common Shares outstanding during the fiscal year. The calculation of fully diluted earnings per share assumes that, if a dilutive effect is produced, all outstanding options had been exercised at the later of the beginning of the fiscal period and the option issue date, and includes an allowance for imputed earnings of $28,943,000 (fiscal 1998 -- $18,521,000; fiscal 1997 -- $11,589,000) derived from the investment of funds which would have been received at an after tax rate of 3.5% (fiscal 1998 -- 3.0%; fiscal 1997 -- 3.1%). 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 period, 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.
Years Ended ------------------------------- May 2, April 30, April 30, 1999 1998 1997 Net earnings (loss) per share Basic $ 1.01 $ (0.10) $ 0.92 Diluted $ 0.99 $ (0.10) $ 0.90 Net earnings (loss) per share - in U.S. dollars Basic $ 0.67 $ (0.07) $ 0.68 Diluted $ 0.66 $ (0.07) $ 0.66 Weighted average number of shares Basic 177,630 174,617 170,510 Net effect of dilutive stock options 2,746 -- 4,015 -------- -------- -------- Diluted 180,376 174,617 174,525 ======== ======== ========
Page 67 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) 19. Related Party Transactions The Company leases facilities in Canada from companies controlled by Terence H. Matthews, Chairman of the Board of Directors, Chief Executive Officer and the largest shareholder of the Company, under terms and conditions reflecting prevailing market conditions at the time the leases were entered into. Approximately 355,000 square feet has been leased for various terms expiring between September 1999 and February 2004 at rates between $9.25 and $14.00 per square foot (approximately $3,505,000 per year). The Company also purchased $878,000 of services from these companies throughout fiscal 1999 (fiscal 1998 -- $1,053,000). During the fiscal year ended May 2, 1999 the Company purchased approximately $5,287,000 (fiscal 1998 -- $2,533,000) of equipment and services under usual terms and conditions from a corporation in which the Company has no equity interest, but which is controlled by Terence H. Matthews. The Company accounts for its equity interests in certain associated companies using the equity method of accounting. The Company is represented on the Boards of Directors of these companies. During the fiscal year ended May 2, 1999, the Company paid $1,729,000 for research and development services from these associated companies under usual trade terms and conditions (fiscal 1998 -- $2,448,000). The Company also purchased $18,220,000 of equipment and software under usual trade terms and conditions, generally for resale (fiscal 1998 -- $10,126,000) and sold $21,533,000 of equipment and software to these companies under usual trade terms and conditions, generally for resale (fiscal 1998 -- $13,846,000). The Company accounts for its equity interests in certain associated companies using the cost method of accounting. The Company is generally represented on the Boards of Directors of these companies. During the fiscal year ended May 2, 1999 the Company paid $1,556,000 for research and development services from these associated companies under usual trade terms and conditions (fiscal 1998 -- $48,000). The Company also purchased $8,294,000 of equipment and software under usual trade terms and conditions, generally for resale (fiscal 1998 -- $7,226,000). The Company sold $10,035,000 of equipment and software to these associated companies under usual trade terms and conditions, generally for resale (fiscal 1998 -- $6,100,000). The Company has guaranteed $14,498,000 of obligations of certain of these associated companies. The Company pays a net royalty between 2% and 10%, depending on the level of cumulative royalties paid, on all sales of products developed as a result of subcontracted research and development previously performed under agreements between the Company and corporations controlled by three directors of the Company. Royalty payments under these agreements were $564,000 (fiscal 1998 -- $294,000). Page 68 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) 20. Business Segment Information The Company designs, manufactures, markets and services networking solutions to customers in more than 100 countries. Management organizes the Company into four principal operating segments for making operating decisions and assessing performance. The four operating segments comprise three sales and support organizations (North and South America, Europe Middle East and Africa, and Asia Pacific) and one Corporate resources group which develops and manufactures products, provides marketing and operational support and makes strategic investments. Revenues generated by the Corporate group are predominantly derived from the consolidation of non-wholly owned subsidiaries. Cost of sales for the three sales and support organizations is stated at the cost to manufacture and does not include any markups.
Years Ended -------------------------------------- May 2, April 30, April 30, 1999 1998 1997 North and South America Sales $ 765,183 $ 649,388 $ 561,784 Cost of sales and expenses 414,240 365,494 299,408 ---------- ---------- ---------- Operating contribution 350,943 283,894 262,376 ---------- ---------- ---------- Europe, Middle East and Africa Sales $ 614,842 $ 511,444 $ 444,885 Cost of sales and expenses 311,025 258,676 214,439 ---------- ---------- ---------- Operating contribution 303,817 252,768 230,446 ---------- ---------- ---------- Asia Pacific Sales $ 234,424 $ 273,581 $ 231,625 Cost of sales and expenses 124,518 127,712 96,323 ---------- ---------- ---------- Operating contribution 109,906 145,869 135,302 ---------- ---------- ---------- Corporate Sales $ 176,256 $ 186,207 $ 126,433 Cost of sales and expenses 697,820 626,491 386,854 ---------- ---------- ---------- Operating contribution (521,564) (440,284) (260,421) ---------- ---------- ---------- Total Sales $1,790,705 $1,620,620 $1,376,727 Cost of sales and expenses 1,547,603 1,378,373 1,009,024 ---------- ---------- ---------- Operating contribution 243,102 242,247 367,703 Restructuring costs (118,030) (181,444) -- Purchased research and development in process -- (52,762) (96,940) ---------- ---------- ---------- Income from operations 125,072 8,041 270,763 Non-operating income 176,045 47,273 8,990 Provision for income taxes (121,303) (73,001) (117,718) Non-controlling interest (653) (631) (5,118) ---------- ---------- ---------- Net earnings (loss) $ 179,161 $ (18,318) $ 156,917 ========== ========== ==========
Page 69 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) The Company manages its assets by geographic region, rather than through the operating segments. Decision making and performance assessment with regard to assets is done on a geographic basis because the operating segments may share assets and accountability by operating segment would be less readily determinable.
Years Ended ---------------------------------- May 2, April 30, April 30, 1999 1998 1997 Identifiable Assets Canada $1,290,601 $ 685,315 $ 405,126 United States 444,356 480,148 397,808 Europe 414,487 499,361 370,875 Asia Pacific 187,486 183,507 218,015 Latin America 133,694 118,494 104,879 ---------- ---------- ---------- $2,470,624 $1,966,825 $1,496,703 ========== ========== ==========
Years Ended ---------------------------------- May 2, April 30, April 30, 1999 1998 1997 Capital Expenditure Canada $ 143,590 $ 176,276 $ 81,678 United States 30,903 57,877 26,723 Europe 25,494 31,579 18,115 Asia Pacific 5,875 6,861 3,081 Latin America 8,041 4,185 2,044 ---------- ---------- ---------- $ 213,903 $ 276,778 $ 131,641 ========== ========== ==========
Years Ended ---------------------------------- May 2, April 30, April 30, 1999 1998 1997 Amortization Canada $ 110,863 $ 74,070 $ 54,271 United States 31,097 23,558 17,381 Europe 29,487 20,810 8,338 Asia Pacific 5,966 3,955 1,096 Latin America 5,134 3,036 1,902 ---------- ---------- ---------- $ 182,547 $ 125,429 $ 82,987 ========== ========== ==========
Page 70 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) Export sales from operations in Canada (excluding inter-subsidiary sales) were as follows.
Years Ended ------------------------------ May 2, April 30, April 30, 1999 1998 1997 Latin America $152,210 $171,245 $169,377 Asia Pacific 7,786 48,010 49,166 -------- -------- -------- $159,996 $219,255 $218,543 ======== ======== ========
Sales to Siemens A.G. and subsidiaries, generally under OEM arrangements for resale to end users, were 18% of sales for fiscal 1999, 16% of total sales for fiscal 1998 and were 18% of total sales in fiscal 1997. The following table illustrates, for the periods indicated, the percentage of sales that comprise each of the Company's major product lines.
Fiscal Year Ended ----------------------------------- May 2, April 30, April 30, 1999 1998 1997 WAN Packet products 59% 46% 33% Circuit switched networking products 38 41 57 LAN Packet products 3 13 10 ---- ---- ---- 100% 100% 100% ==== ==== ====
21. 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. The Court entered an order and final judgement approving the settlement and dismissing the lawsuit with prejudice in October 1998. The Company recorded the expense in connection with the settlement of $2,642,000 in the fourth quarter of fiscal 1998, which represents 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 some of the standardized functions on the Newbridge frame relay and ATM switch products, along with its ADPCM (adaptive Page 71 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) differential pulse code modulation) and card initialization implementations, infringe certain United States patent rights claimed by Lucent Technologies. The Complaint requests actual and trebled damages in an unspecified amount. 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 and is defending 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. 22. Uncertainty Due to the Year 2000 Issue The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information that uses year 2000 dates is processed. In addition, similar problems may arise in some systems that use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure that could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 23. Subsequent Events In May 1999, the Company completed its investment in TeraBridge Technologies Corporation ("Terabridge"), which specializes in delivering intelligent call and service control products to service providers and is headquartered in Gurnee, Illinois. The Company acquired a 19% equity ownership position for US$60,000,000 (Cdn$90,511,000) and has an option to increase its equity ownership position to 50% for US$10,000,000. In June 1999, the Company announced a definitive agreement to acquire Stanford Telecommunications Inc. ("STII") (STII: NASDAQ), a leading supplier of broadband wireless technology and products. The net purchase price of the acquisition is estimated at US$280,000,000 (Cdn$ 411,740,000) which represents the gross purchase price of approximately US$490,000,000 (Cdn$720,545,000) net of proceeds from the divestiture of divisions of STII that are unrelated to the Company's core business. The boards of directors of the Company and STII have approved an agreement and plan of merger, subject to conditions including approval by STII's stockholders, whereby the Company will acquire all of the outstanding shares of common stock of STII in a tax-free, stock-for-stock exchange. Under the agreement STII stockholders will receive for each share of common stock US$30 in the Company stock plus a contingent value right (CVR) which will give them a participation in the proceeds on the sale of other operations above a minimum amount. This participation will also be payable in the form of the Company common shares. The CVR is expected to have a value of up to US$5 per share. Page 72 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS May 2, 1999, April 30, 1998 and April 30, 1997 (Canadian dollars, tabular amounts in thousands except per share data) For the purpose of this transaction, the value of a Newbridge common share shall equal the ten-day average closing price on the New York Stock Exchange, ending on the fifth trading day immediately preceding STII's stockholder vote, expected in October. If the Newbridge stock price, pursuant to this calculation, is below US$24 and the Company does not exercise its right to adjust the exchange ratio, STII's board will be permitted to terminate the Agreement. Page 73 SELECTED QUARTERLY FINANCIAL DATA The quarterly financial data for the fiscal years ended May 2, 1999 and April 30, 1998 are derived from unaudited consolidated financial statements of the Company which include, in the opinion of Management, all normal and recurring adjustments considered necessary for a fair statement of results for such periods. The selected quarterly financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.
Fiscal 1998 Quarters Ended Fiscal 1999 Quarters Ended -------------------------------------- ----------------------------------- Aug 3, Nov 2, Feb 1, Apr 30, Aug 2, Nov 1, Jan 31, May 2, 1997 1997 1998 1998 1998 1998 1999 1999 ---- ---- ---- ---- ---- ---- ---- ---- (Canadian dollars, amounts in thousands except per share data) Sales $434,738 $432,169 $ 358,520 $395,193 $426,056 $456,781 $450,753 $457,115 Gross margin 274,008 272,368 213,707 235,472 274,008 267,457 262,791 259,089 Net earnings (loss)/(1)/ 64,354 57,993 (144,283) 3,618 35,520 53,314 120,119 (29,792) Earnings (loss) per share Basic $ 0.37 $ 0.33 $ 0.82 $ 0.02 $ 0.20 $ 0.30 $ 0.68 $ (0.17) Fully diluted $ 0.36 $ 0.33 $ 0.82 $ 0.02 $ 0.20 $ 0.30 $ 0.64 $ (0.17) Weighted average number of shares Basic 172,964 174,733 175,376 175,598 176,105 176,766 177,596 180,105 Fully diluted 189,082 174,733 175,376 175,598 176,105 176,766 199,951 180,105 U.S. GAAP Net earnings (loss)/(1)/ $ 64,354 $ 57,993 $(170,664) $ 29,999 $ 35,520 $ 53,314 $120,119 $(29,792) Earnings (loss) per share/(2)/ Basic $ 0.37 $ 0.33 $ (0.97) $ 0.17 $ 0.20 $ 0.30 $ 0.68 $ (0.17) Diluted $ 0.36 $ 0.32 $ (0.97) $ 0.17 $ 0.20 $ 0.30 $ 0.66 $ (0.17) Diluted - US$ US$ 0.26 US$ 0.23 US$ (0.68) US$ 0.12 US$ 0.14 US$ 0.20 US$ 0.43 US$ (0.11) Weighted average number of shares Basic 172,964 174,733 175,376 175,598 176,105 176,766 177,596 180,105 Diluted 179,821 182,728 175,376 175,598 176,105 176,766 182,030 180,105
_____________ (1) Includes non-recurring gains and charges. See Notes 14, 15 and 16 to the Consolidated Financial Statements. (2) See Note 18 to the Consolidated Financial Statements. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Page 74 PART III Item 10. Directors and Executive Officers of the Registrant The directors and executive officers of the Company and their ages at June 17, 1999 are:
Name and Municipality of Residence Age Position - ---------------------------------- --- -------- Terence H. Matthews 56 Chairman of the Board, Chief Executive Kanata, Ontario, Canada Officer and Director Peter D. Charbonneau 45 Vice Chairman of the Board Ottawa, Ontario, Canada and Director Alan G. Lutz 53 President, Chief Operating Officer McLean, Virginia, USA and Director James D. Arseneault 39 Executive Vice President Internetworking Woodlawn, Ontario, Canada Products Group Satjiv S. Chahil 49 Executive Vice President, Marketing Los Altos, California, USA Pearse J. Flynn 36 Executive Vice President and General Graystones, Kirkmalcolm, Scotland Manager, European Region Roger K.Y. Fung 46 Executive Vice President and General Happy Valley, Hong Kong Manager, Asia Pacific Region Giulio M. Gianturco 43 Executive Vice President and General Sudbury, Massachusetts, USA Manager, Americas Region Brian M. Jervis 48 Executive Vice President, Switching Almonte, Ontario, Canada Product Group Conrad W. Lewis 46 Executive Vice President, Access Stittsville, Ontario, Canada Products Group Dr. Donald Mills 65 Corporate Vice President, Administration Kanata, Ontario, Canada and Director Peter A. Nadeau 43 Corporate Vice President and Ottawa, Ontario, Canada General Counsel Kenneth B. Wigglesworth 35 Executive Vice President, Finance and Kanata, Ontario, Canada Chief Financial Officer
All of the above mentioned executive officers, with the exception of Alan G. Lutz, Satjiv S. Chahil, Pearse J. Flynn, Giulio M. Gianturco, and Brian M. Jervis, have been employed by the Company in various capacities during the past five years. Alan G. Lutz joined the Company in June 1998 as President, Chief Operating Officer and a Director of the Company. Prior to joining the Company, Mr. Lutz was Senior Vice President and Group General Manager, Communication Products Group for Compaq Computer, a worldwide information technology company and supplier of personal computers, since Page 75 November 1996. He served as Executive Vice President, Unisys Corporation and President, Computer Systems Group from May 1994 to October 1996. Satjiv S. Chahil joined Newbridge in February 1999 as Executive Vice President, Marketing. Prior to joining the Company, Mr. Chahil was President of Chahil.com, a marketing consulting organization based in California's Silicon Valley, since May 1997. From August 1992 to April 1997 Mr. Chahil was an executive at Apple Computer Inc., a leading personal computer company, and most recently was Corporate Senior Vice President responsible for Worldwide Marketing and Corporate Communications. Mr. Chahil also has extensive experience in global sales and marketing roles at IBM and Xerox. Pearse J. Flynn joined the Company in February 1999 as Executive Vice President, European Region. Prior to joining the Company, from June 1987 to January 1999, Mr. Flynn served in various capacities at Compaq Computer Corporation, a leading information technology company and supplier of personal computers. Most recently, Mr. Flynn held the position Vice President, Worldwide Channel Services. Giulio M. Gianturco joined the Company in November 1998 as Executive Vice President and General Manager, Americas Region. Prior to joining the Company, from January 1998 to November 1998, Mr. Gianturco served as President, Digital Networks Products Group at Cabletron Systems, a supplier of LAN and WAN equipment. From June 1995 to January 1998 he served in various capacities at Digital Equipment Corporation ("DEC"), a worldwide information technology company, most recently as Vice President - Americas. From November 1991 until joining DEC, Mr. Gianturco served as National Channel Manager at AT&T, a nation wide service provider in the USA, in their Global Business Communications unit. Brian M. Jervis joined Newbridge in November 1998 as Executive Vice President, Switching Products Group. During the five years prior to joining the Company Mr. Jervis served in various capacities at Northern Telecom Limited, most recently as Senior Vice President and General Manager of Magellan Passport/DPN (Data Packet Networks).
Name and Municipality of Residence Age Position - ---------------------------------- --- -------- Dr. Denzil J. Doyle 67 Director Kanata, Ontario, Canada Alan D. Horn 47 Director Toronto, Ontario, Canada Trevor G. Jones 60 Director Willowdale, Ontario, Canada Graham C. C. Miller 68 Director Cotuit, Massachusetts, USA Kent H. E. Plumley 62 Director Kanata, Ontario, Canada Dr. John C. J. Thynne 67 Director London, England
Page 76 Terence H. Matthews founded the Company in June 1986 and has served as Chairman of the Board, Chief Executive Officer and a Director of the Company since that time. From the inception of the Company to June 1993 Mr. Matthews also served as President. Mr. Matthews also serves as Chairman of the Board of Directors for Crosskeys Systems Corporation and Tundra Semiconductor Corporation. Peter D. Charbonneau has been Vice Chairman of the Board of the Company since June 1998 and a Director of the Company since December 1996. Mr. Charbonneau was President and Chief Operating Officer of the Company from December 1996 to June 1998. From January 1987 to December 1996, Mr. Charbonneau held a variety of positions with the Company, most recently as Executive Vice President and Chief Financial Officer. Mr. Charbonneau is also a director of Crosskeys Systems Corporation. Dr. Denzil J. Doyle has been a Director of the Company since September 1987. Dr. Doyle has been Chairman of Capital Alliance Ventures Inc., a venture capital company specializing in investments in high technology companies since November 1995, and President of Doyletech Corporation, a consulting corporation specializing in new business ventures, since November 1982. He is also a director of International Datacasting Corporation, a manufacturer of satellite data broadcasting equipment. Dr. Doyle is a member of the Employee Compensation Committee and the Directors' Affairs Committee of the Board of Directors of the Company. Alan D. Horn has been a Director of the Company since July 1991. Mr. Horn has been Vice President, Finance and Chief Financial Officer of Rogers Communications Inc., a communications company, since October 1996. From April 1990 to October 1996 he was President and Chief Operating Officer of Rogers Telecommunications Limited, an investment holding company. He is Chairman of the Audit Committee and a member of the Directors' Affairs Committee of the Board of Directors of the Company. Trevor G. Jones has been a Director of the Company since June 1991. Mr. Jones has been President of JWA Associates, a business consulting company, since April 1991. Mr. Jones is Chairman of the Directors' Affairs Committee and a member of the Audit Committee of the Board of Directors of the Company. Graham C. C. Miller has been a Director of the Company since September 1987. Mr. Miller is Chairman Emeritus of LTX Corporation, a manufacturer of semiconductor testing equipment, was Chairman of the Board of Directors from 1976 through to 1998, and was President and Chief Executive Officer until February 1994. He is a member of the Audit Committee and the Directors' Affairs Committee of the Board of Directors of the Company. Dr. Donald Mills has been Corporate Vice President, Administration of the Company since April 1989. Dr. Mills has been a Director of the Company since September 1988. Kent H. E. Plumley has been a Director of the Company since June 1986. Mr. Plumley has been a partner of Osler, Hoskin & Harcourt, Barristers & Solicitors, since May 1990. Mr. Plumley is the Chairman of the Employee Compensation Committee of the Board of Directors of the Company. Dr. John C. J. Thynne has been a Director of the Company since April 1992. Dr. Thynne has been Managing Director of Camrose Consultancy Services since January 1991. Dr. Thynne is a member of the Audit Committee and Employee Compensation Committee of the Board of Directors of the Company. Page 77 All directors of the Company hold office until the next annual meeting of shareholders or until the election and qualification of their successors. Executive officers of the Company are appointed by and serve at the discretion of the Board of Directors. Item 11. Executive Compensation The information required by this item is incorporated herein by reference to Exhibit 99 to this Annual Report on Form 10-K, "Statement of Executive Compensation" as set forth in the form of the Company's proxy circular for the annual and special meeting of shareholders to be held on September 23, 1999. Such incorporation by reference shall not be deemed to specifically incorporate by reference the information contained under the sub-captions "Report on Executive Compensation" and "Performance Graph". Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information regarding the ownership of the Company's Common Shares as at June 17, 1999 (i) by each person known by the Company to own beneficially more than 5% of the Company's Common Shares, (ii) by each of the Company's directors and (iii) by all directors and executive officers of the Company as a group. The information as to beneficial ownership is presented in accordance with the rules and regulations under the United States Securities Exchange Act of 1934 and consequently may differ from similar information that appears in the Company's proxy circular prepared in accordance with the Canada Business Corporations Act for the annual and special meeting of shareholders to be held on September 23, 1999.
Shares Issuable Within 60 Days Total Shares Shares Currently Upon Exercise Beneficially % of Name and Address Directly Owned of Options/(1)/ Owned Class - ----------------------------------------------------------------------------------------------- Terence H. Matthews 39,710,908 nil 39,726,908/(2)/ 22.02% Kanata, Ontario FMR Corp. 18,375,407 nil 18,375,407/(3)/ 10.18% Boston, Massachusetts, USA Donald Mills 784,016 1,325 801,341/(4)/ * Kent H. E. Plumley 289,187 24,500 358,909/(5)/ * Peter D. Charbonneau 28,000 102,250 283,650/(6)/ * Alan G. Lutz 10,000 166,666 176,666 * John C. J. Thynne 34,000 17,000 51,000 * Graham C. C. Miller 35,616 10,500 46,116/(7)/ * Denzil J. Doyle 29,000 10,500 43,200/(8)/ * Trevor G. Jones 8,000 12,000 20,000 * Alan D. Horn nil nil nil
Page 78 All directors and executive officers as a group (19 persons) 41,045,225 529,723 41,810,220/(9)/ 23.17% _______________ * Less than 1% (1) Shares issuable upon exercise of stock options that are exercisable within 60 days of June 17, 1999. (2) Includes 4,974,000 shares owned directly; 16,000 shares beneficially owned through his wife, as to which shares he disclaims beneficial ownership; 32,379,153 shares beneficially owned through control of Wesley Clover Corporation; 1,745,920 shares beneficially owned through 2874806 Canada Inc.; 595,000 shares beneficially owned through control of 3090-8081 Quebec Inc.; 16,835 shares beneficially owned through 2985314 Canada Inc., and 1,745,920 shares beneficially owned through 2874814 Canada Inc. (3) Shares held by Fidelity Management & Research Company, an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, as amended, and a subsidiary of FMR Corp. (4) Includes 16,000 shares beneficially owned through his wife, as to which shares he disclaims beneficial ownership. (5) Includes 42,872 shares and 2,350 shares issuable within 60 days upon the exercise of options beneficially owned through his wife, as to which shares and shares issuable upon the exercise of options he disclaims beneficial ownership. (6) Includes 153,400 shares beneficially owned through his wife, as to which shares he disclaims beneficial ownership. (7) Includes 35,616 shares owned jointly with his wife. (8) Includes 3,500 shares beneficially owned through his wife, as to which shares he disclaims beneficial ownership. (9) Includes, in the aggregate, 232,922 shares and 2,350 shares issuable within 60 days of June 17, 1999 upon the exercise of options beneficially owned through spouses and children, as to which shares and shares issuable upon the exercise of options they disclaim beneficial ownership. Except as otherwise indicated, the persons in the table have sole voting and investment powers with respect to all Common Shares beneficially owned by them subject to community property laws where applicable and the information contained in the footnotes to the table. Statements contained in the table as to shares beneficially owned by directors and executive officers or over which they exercise control or direction are, in each instance, based upon information obtained from such directors and executive officers. The Company is not aware of any person except the holders set forth above who beneficially owns or exercises control or direction over shares carrying more than 5% of the votes attached to such shares of the Company as at June 17, 1999. Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference to Exhibit 99 to this Annual Report on Form 10-K, "Statement of Executive Compensation" as set forth in the form of the Company's proxy circular for the annual and special meeting of shareholders to be held on September 23, 1999. Such incorporation by reference shall not be deemed to specifically incorporate by reference the information contained under the sub-captions "Report on Executive Compensation" and "Performance Graph". Page 79 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) The following financial statements and supplementary data are filed as part of this Report under Item 8:
Page ---- Financial Statements Auditors' Report to the Shareholders............................. 44 Consolidated Statements of Earnings and Retained Earnings for the years ended May 2, 1999, and April 30, 1998 and 1997................. 45 Consolidated Balance Sheets as at May 2, 1999 and April 30, 1998................................ 46 Consolidated Statements of Cash Flows for the years ended May 2, 1999, and April 30 1998 and 1997............ 47 Consolidated Statements of Shareholders' Equity for the years ended May 2, 1999, and April 30 1998 and 1997............ 48 Notes to the Consolidated Financial Statements................... 49 Selected Quarterly Financial Data (unaudited)...................... 74
(b) The Registrant filed no reports on Form 8-K during the fourth quarter of the fiscal year ended May 2, 1999. (c) The following exhibits are filed or incorporated by reference as part of this Report (Exhibit 10.1 and 10.2 are compensatory plans or arrangements): 3.1 Articles of Amalgamation. 3.2 By-Law No. 3./(1)/ 10.1 Newbridge Networks Corporation Consolidated Key Employee Stock Option Plan, as amended./(2)/ 10.2 Newbridge Networks Corporation 1999 Key Employee Stock Option Plan./(2)/ 10.3-- 10.7 [Reserved] 10.8 Credit Facilities Letter dated December 19, 1997 between Newbridge Networks Corporation and Royal Bank of Canada./(3)/ 10.9 Loan Agreement dated January 30, 1998 between Newbridge Networks Corporation and Citibank Canada./(2)/ 10.10 Note Purchase Agreement dated April 28, 1998 between Newbridge Networks Corporation and the Purchasers named therein./(2)/ 10.11-- 10.13 [Reserved] Page 80 10.14 License Agreement effective May 1, 1994 between 2880016 Canada Inc. and Newbridge Networks Corporation; Development Agreement effective May 1, 1994 between 2880016 Canada Inc. and Newbridge Networks Corporation./(4)/ 10.15 License Agreement effective May 1, 1994 between 3015955 Canada Inc. and Newbridge Networks Corporation; Development Agreement effective May 1, 1994 between 3015955 Canada Inc. and Newbridge Networks Corporation./(4)/ 10.16 License Agreement effective May 1, 1994 between 3028623 Canada Inc. and Newbridge Networks Corporation; Development Agreement effective May 1, 1994 between 3028623 Canada Inc. and Newbridge Networks Corporation./(4)/ 10.17 Lease dated May 29, 1997 for 76,230.65 square feet at 359 Terry Fox Drive, Kanata, Ontario./(1)/ 10.18 Agreement and Purchase and Sale dated February 16, 1996 for approximately 25,000 square feet at Langstone Business Park, Langstone, Newport, Wales./(5)/ 10.19 Reserved 10.20 Lease dated May 1, 1995 for 1,882 square feet, more or less, at 362 Terry Fox Drive, Kanata, Ontario./(4)/ 10.21 Lease dated April 1, 1995 for 13,106 square feet, more or less, at 50 Sandhill Road, Kanata, Ontario./(4)/ 10.22 Lease dated April 23, 1997 for 242,856.67 square feet, more or less, at 349 Terry Fox Drive, Kanata, Ontario./(1)/ 10.23 Sublease dated October 1, 1996 for 20,718 square feet, more or less, at 350 Terry Fox Drive, Kanata, Ontario./(1)/ 10.23a Letter Agreement dated March 12, 1998 amending Sublease referred to in Exhibit 10.23. 10.24 Non-Competition Agreement between Terence Matthews and Newbridge Networks Corporation dated October 14, 1987. 10.25 Employment Agreement between Alan G. Lutz and Newbridge Networks Corporation dated May 21, 1998./(2)/ 10.26 Lease amendment between Kanata Research Park Corporation and Newbridge Networks Corporation dated January 7, 1998 for 10,930 square feet at 555 Legget Drive. 10.27 Lease amendment between Crosskeys Systems Corporation, Kanata Research Park Corporation and Newbridge Networks Corporation dated September 21, 1998. Page 81 10.28 Lease assignment dated November 5, 1998 between Castleton Network Systems Corporation, Kanata Research Park Corporation and Newbridge Networks Corporation. 10.29 Lease agreement between Kanata Research Park Corporation and Newbridge Networks Corporation dated February 26, 1999 amending Sublease referred to in Exhibit 10.17. 10.30 Lease agreement between Kanata Research Park Corporation and Newbridge Networks Corporation dated March 15, 1999 for 6,832 square feet at 555 Legget Drive. 10.31 Lease agreement between Kanata Research Park Corporation and Newbridge Networks Corporation dated March 15, 1999 for 1,151 square feet at 555 Legget Drive. 11.1 Computation of earnings per share under accounting principles generally accepted in Canada. 11.2 Computation of earnings per share under accounting principles generally accepted in the United States. 21 Subsidiaries of the Registrant. 23 Consent of Independent Accountants. 27 Financial Data Schedule. 99 "Statement of Executive Compensation" as set forth in the form of the Company's proxy circular for the annual and special meeting of shareholders to be held on September 23, 1999, incorporated by reference in Items 11 and 13 of this Annual Report on Form 10-K, to the extent set forth therein. This exhibit shall not be deemed to be "soliciting material" or to be "filed" with the United States Securities and Exchange Commission for purposes of Section 14 of the United States Securities Exchange Act of 1934, nor shall it be deemed to be a "management proxy circular" for the purposes of soliciting proxies under the Canada Business Corporations Act. ___________ (1) Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 1-13316) for the fiscal year ended April 30, 1997. (2) Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 1-13316) for the fiscal year ended April 30, 1998. (3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q (File No. 1-13316) for the fiscal quarter ended February 1, 1998. (4) Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 1-13316) for the fiscal year ended April 30, 1995. (5) Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 1-13316) for the fiscal year ended April 30, 1996. Page 82 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NEWBRIDGE NETWORKS CORPORATION Date: June 17, 1999 By: /s/ Terence H. Matthews ----------------------- Terence H. Matthews, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: June 17, 1999 By: /s/ Terence H. Matthews ----------------------- Terence H. Matthews, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) Date: June 17, 1999 By: /s/ Kenneth B. Wigglesworth --------------------------- Kenneth B. Wigglesworth, Executive Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) Date: June 17, 1999 By: /s/ Alan G. Lutz ---------------- Alan G. Lutz, President, Chief Operating Officer and Director Page 83 Date: June 17, 1999 By: /s/ Peter D. Charbonneau ------------------------ Peter D. Charbonneau, Vice Chairman of the Board and Director Date: June 17, 1999 By: /s/ Dr. Denzil J. Doyle ----------------------- Dr. Denzil J. Doyle, Director Date: June 17, 1999 By: /s/ Alan D. Horn ---------------- Alan D. Horn, Director Date: June 17, 1999 By: /s/ Trevor G. Jones ------------------- Trevor G. Jones, Director Date: June 17, 1999 By: /s/ Graham C. C. Miller ----------------------- Graham C. C. Miller, Director Date: June 17, 1999 By: /s/ Dr. Donald Mills -------------------- Dr. Donald Mills, Corporate Vice President and Director Date: June 17, 1999 By: /s/ Kent H. E. Plumley --------------------- Kent H. E. Plumley, Director Date: June 17, 1999 By: /s/ Dr. John C. J. Thynne ------------------------- Dr. John C. J. Thynne, Director Page 84 EXHIBIT INDEX Exhibit No. Page - --- ---- 3.1 Articles of Amalgamation. 88 3.2 By-Law No. 3./(1)/ 10.1 Newbridge Networks Corporation Consolidated Key Employee Stock Option Plan, as amended./(2)/ 10.2 Newbridge Networks Corporation 1999 Key Employee Stock Option Plan./(2)/ 10.3-- 10.7 [Reserved] 10.8 Credit Facilities Letter dated December 19, 1997 between Newbridge Networks Corporation and Royal Bank of Canada./(3)/ 10.9 Loan Agreement dated January 30, 1998 between Newbridge Networks Corporation and Citibank Canada./(2)/ 10.10 Note Purchase Agreement dated April 28, 1998 between Newbridge Networks Corporation and the Purchasers named therein./(2)/ 10.11-- 10.13 [Reserved] 10.14 License Agreement effective May 1, 1994 between 2880016 Canada Inc. and Newbridge Networks Corporation; Development Agreement effective May 1, 1994 between 2880016 Canada Inc. and Newbridge Networks Corporation./(4)/ 10.15 License Agreement effective May 1, 1994 between 3015955 Canada Inc. and Newbridge Networks Corporation; Development Agreement effective May 1, 1994 between 3015955 Canada Inc. and Newbridge Networks Corporation./(4)/ 10.16 License Agreement effective May 1, 1994 between 3028623 Canada Inc. and Newbridge Networks Corporation; Development Agreement effective May 1, 1994 between 3028623 Canada Inc. and Newbridge Networks Corporation./(4)/ 10.17 Lease dated May 29, 1997 for 76,230.65 square feet at 359 Terry Fox Drive, Kanata, Ontario./(1)/ 10.18 Agreement and Purchase and Sale dated February 16, 1996 for approximately 25,000 square feet at Langstone Business Park, Langstone, Newport, Wales./(5)/ 10.19 [Reserved] 10.20 Lease dated May 1, 1995 for 1,882 square feet, more or less, at 362 Terry Fox Drive, Kanata, Ontario./(4)/ Page 85 Exhibit No. Page - --- ---- 10.21 Lease dated April 1, 1995 for 13,106 square feet, more or less, at 50 Sandhill Road, Kanata, Ontario./(4)/ 10.22 Lease dated April 23, 1997 for 242,856.67 square feet, more or less, at 349 Terry Fox Drive, Kanata, Ontario./(1)/ 10.23 Sublease dated October 1, 1996 for 20,718 square feet, more or less, at 350 Terry Fox Drive, Kanata, Ontario./(1)/ 10.23a Letter Agreement dated March 12, 1998 amending Sublease referred to in Exhibit 10.23./(2)/ 10.24 Non-Competition Agreement between Terence Matthews and Newbridge Networks Corporation dated October 14, 1987. 108 10.25 Employment Agreement between Alan G. Lutz and Newbridge Networks Corporation dated May 21, 1998./(2)/ 10.26 Lease amendment between Kanata Research Park Corporation and Newbridge Networks Corporation dated January 7, 1998 for 10,930 square feet at 555 Legget Drive. 114 10.27 Lease amendment between CrossKeys Systems Corporation, Kanata Research Park Corporation and Newbridge Networks Corporation dated September 21, 1998. 119 10.28 Lease assignment dated November 5, 1998 between Castleton Network Systems Corporation, Kanata Research Park Corporation and Newbridge Networks Corporation. 123 10.29 Lease agreement between Kanata Research Park Corporation and Newbridge Networks Corporation dated February 26, 1999 amending Sublease referred to in Exhibit 10.17. 128 10.30 Lease agreement between Kanata Research Park Corporation and Newbridge Networks Corporation dated March 15, 1999 for 6,832 square feet at 555 Legget Drive. 133 10.31 Lease agreement between Kanata Research Park Corporation and Newbridge Networks Corporation dated March 15, 1999 for 1,151 square feet at 555 Legget Drive. 181 11.1 Computation of earnings per share under accounting principles generally accepted in Canada. 227 11.2 Computation of earnings per share under accounting principles generally accepted in the United States. 228 21 Subsidiaries of the Registrant. 229 23 Consent of Independent Accountants. 230 Page 86 Exhibit No. Page - --- ---- 27 Financial Data Schedule. 231 99 "Statement of Executive Compensation" as set forth in the form of the Company's proxy circular for the annual and special meeting of shareholders to be held on September 23, 1999, incorporated by reference in Items 11 and 13 of this Annual Report on Form 10-K, to the extent set forth therein. This exhibit shall not be deemed to be "soliciting material" or to be "filed" with the United States Securities and Exchange Commission for purposes of Section 14 of the United States Securities Exchange Act of 1934, nor shall it be deemed to be a "management proxy circular" for the purposes of soliciting proxies under the Canada Business Corporations Act. ________________ (1) Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 1-13316) for the fiscal year ended April 30, 1997. (2) Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 1-13316) for the fiscal year ended April 30, 1998. (3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q (File No. 1-13316) for the fiscal quarter ended February 1, 1998. (4) Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 1-13316) for the fiscal year ended April 30, 1995. (6) Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 1-13316) for the fiscal year ended April 30, 1996. Page 87 EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 Page 88 Industry Canada Industrie Canada Certificate Certificat of Amalgamation de fusion Canada Business Loi canadienne sur Corporations Act les societes par actions NEWBRIDGE NETWORKS CORPORATION SOCIETE PAR ACTIONS DE REGIME FEDERAL DE RESEAUX NEWBRIDGE 299165-9 Name of corporation-Denomination de la societe Corporation number-Numero de la societe I hereby certify that the above-named Je certifie que la societe susmentionnee corporation resulted from an amalgamation, est issue d'une fusion, en vertu de under section 185 of the Canada Business l'article 185 de la Loi Canadienne sur Corporations Act, of the corporations set les societes par actions, out in des societes the attached articles of amalgamation. Les statuts de fusion ci- joints. Director - Directeur January 6, 1994/le 6 janvier 1994 Date of Amalgamation - Date de fusion Page 89 Industry Canada Industrie Canada FORM 9 FORMULE 9 Canada Business Loi regissant les societes ARTICLES OF AMALGAMATION STATUTS DE FUSION Corporations Act par actions de regime federal (SECTION 185) (ARTICLE 185) 1 - Name of amalgamated corporation Denomination de la societe issue de la fusion NEWBRIDGE NETWORKS CORPORATION SOCIETE PAR ACTIONS DE REGIME FEDERAL DE RESEAUX NEWBRIDGE 2 - The place in Canada where the registered office is to Lieu au Canada ou doit etre situe le siege social be situated Regional Municipality of Ottawa-Carleton 3 - The classes and any maximum number of shares that the Categories et tout nombre maximal d'actions que la societe est corporation is authorized to issue autorisee a ernettre See attached Schedule A 4 - Restrictions, if any, on share transfers Restrictions sur le transfert des actions, s'il y alieu None 5 - Number (or minimum and maximum number) of directors Nombre (ou nombre minimal et maximal) d'administrateurs Minimum of one (1) - maximum of fifteen (15) 6 - Restricitions, if any, on business the corporation may carry on Limites imposees a l'activite commerciale de la societe, s'il y lieu None 7 - Other provisions, if any Autres dispositions, s'il y a lieu See attached Schedule B 8 - The amalgamation has been approved pursuant to that section La fusion a ete Page 90 approuvee en accord avec l'article ou le or subsection of the Act which is indicated as follows: paragraphe de la Loi indique ci-apres. 183 X 184(1) 184(2) 9 - Name of the amalgamating corporations Corporation No. Signature Date Title Denomination des societes fusionnantes No de la societe Titre NEWBRIDGE NETWORKS CORPORATION 270281-9 James C. Avis Jan. 6/94 Secretary ELCOMBE SYSTEMS LIMITED 268981-2 James C. Avis Jan. 6/94 Secretary For Departmental Use Only - A L'Usage du ministrie seulement Filed - Deposee Corporation No. - No de la societe 299165-9 January 10, 1994 SCHEDULE "A" 3. The classes and any maximum number of shares that the Corporation is authorized to issue: COMMON SHARES - ------------- (a) an unlimited number of Common Shares without nominal or par value (the "Common Shares"), the holders of which are entitled: (i) to one vote per share at all meetings of shareholders, except meetings at which only holders of a specified class of shares are entitled to vote; (ii) subject to the rights, privileges, restrictions and conditions attaching to any other class or series of shares of the Corporation, to receive any dividends declared and payable by the Corporation on the Common Shares; and (iii) subject to the rights, privileges, restrictions and conditions attaching to any other class or series of shares of the Corporation, to receive the remaining property of the Corporation upon a liquidation, dissolution or winding-up of the Corporation; Page 91 PREFERRED SHARES (b) an unlimited number of Preferred Shares without nominal or par value (the "Preferred Shares") which, as a class, have attached thereto the following rights, privileges, restrictions and conditions: (i) the directors of the Corporation may, at any time and from time to time, issue the Preferred Shares in one or more series, each series to consist of such number of shares as may before issuance thereof be fixed by the directors; (ii) the directors of the Corporation may (subject as hereinafter provided) from time to time before issuance determine the designation, rights, privileges, restrictions and conditions to attach to the Preferred Shares of each series including, without limiting the generality of the foregoing, the rate, amount or method of calculation of dividends, whether cumulative or non-cumulative or partially cumulative, and whether such rate, amount or method of calculation shall be subject to change or adjustment in the future, the currency or currencies of payment, the date or dates and place or places of payment thereof, the rights of retraction, if any, vested in the holder of Preferred Shares of such series, and the prices and the other terms and conditions of any rights of retraction and whether any additional rights of retraction may be vested in such holders in the future, voting rights (if any) and conversion rights (if any) and any sinking fund, purchase fund or other provisions attaching to the Preferred Shares of such series, the whole subject to the issue by the Director, Corporations Branch, Department of Consumer and Corporate Affairs, of a certificate of amendment in respect of articles of amendment in prescribed form to designate a series of shares; (iii) when any fixed cumulative dividends or amounts payable on a return of capital are not paid in full, the Preferred Shares of all series shall participate rateably in respect of such dividends including accumulations, if any, in accordance with amounts which would be payable on the Preferred Shares if all such dividends were declared and paid in full, and on any return of capital in accordance with sums which would be payable on such return of capital if all amounts so payable were paid in full; (iv) the Preferred Shares of each series shall rank on a parity with the Preferred Shares of every other series with respect to priority in payment of dividends and in the distribution of assets in the event of liquidation, dissolution or winding-up of the Corporation, whether voluntary or Page 92 involuntary; (v) in the event of the liquidation, dissolution or winding-up of the Corporation or other distribution of assets of the Corporation among shareholders for the purpose of winding-up its affairs, the holders of the Preferred Shares shall, before any amount shall be paid to or any property or assets of the Corporation shall be distributed among the holders of the Common Shares or any other shares of the Corporation ranking junior to the Preferred Shares, be entitled to receive (a) an amount equal to the amount of the redemption price specified therefor, together with, in the case of cumulative Preferred Shares all unpaid cumulative dividends (which for such purpose shall be calculated as if such cumulative dividends were accruing from day to day for the period from the expiration of the last period for which cumulative dividends have been paid up to and including the date of distribution) and in the case of non- cumulative dividends, all declared and unpaid non-cumulative dividends, and (b) if such liquidation, dissolution, winding-up or distribution shall be voluntary, an additional amount equal to the premium, if any, which would have been payable on the redemption of the said Preferred Shares if they had been called for redemption by the Corporation on the date of liquidation, dissolution, winding-up or distribution and, if said Preferred Shares couldnot be redeemed on such date, then an additional amount equal to the greatest premium, if any, which would have been payable on the redemption of said Preferred Shares; (vi) no dividends shall at any time be declared or paid on or set apart for payment on the Common Shares or any other shares of the Corporation ranking junior to the Preferred Shares unless all dividends up to and including the dividend payable for the last completed period for which such dividends shall be payable on each series of Preferred Shares then issued and outstanding shall have been declared and paid or set apart for payment at the date of such declaration or payment or setting apart for payment on the Common Shares or such other shares of the Corporation ranking junior to the Preferred Shares nor shall the Corporation call for redemption or redeem or purchase for cancellation or reduce or otherwise pay off any of the Preferred Shares (less than the total amount then outstanding) or any Common Shares or any other shares of the Corporation ranking junior to the Preferred Shares unless all dividends up to and including the dividend payable for the last completed period for which such dividends shall be payable on each series of the Preferred Shares then issued and outstanding shall have been declared and paid or set apart for payment at the date of such call for redemption, purchase, reduction or other payment; (vii) the Preferred Shares of any series may be purchased for cancellation or Page 93 made subject to redemption by the Corporation at such times and at such prices and upon such other terms and conditions as may be specified in the rights, privileges, restrictions and conditions attaching to the Preferred Shares of such series as set forth in the resolution of the board of directors of the Corporation and certificate of amendment relating to such series; (viii) the approval of the holders of the Preferred Shares, given in the manner described in paragraph (ix) below, shall be required for the creation of any new shares ranking prior to or on a parity with the Preferred Shares; and (ix) the provisions of paragraph (i) to (viii), inclusive, and of this paragraph (ix) may be repealed, altered, modified, amended or varied in whole or in part only with the prior approval of the holders of the Preferred Shares given in the manner hereinafter specified in addition to any other approval required by the Canada Business Corporations Act or any other applicable statutory provision of like or similar effect, from time to time in force. The approval of the holders of the Preferred Shares with respect to any and all matters hereinbefore referred to may be given by at least 66-2/3% of the votes cast at a meeting of the holders of the Preferred Shares duly called for that purpose and held upon at least 21 days' notice at which the holders of a majority of the outstanding Preferred Shares are present or represented by proxy. If at any such meeting the holders of a majority of the outstanding Preferred Shares are not present or represented by proxy within-one-half an hour after the time appointed for such meeting, then the meeting shall be adjourned to such date being not less than 30 days later and to sucb time and place as may be appointed by the chairman of the meeting and not less than 21 days' notice shall be given of such adjourned meeting but it shall be necessary in such notice to specify the purpose for which the meeting was originally called. At such adjourned meeting the holders of the Preferred Shares present or represented by proxy may transact the business for which the meeting was originally called and resolution passed thereat by not less than 66-2/3% of the votes cast at such adjourned meeting and the conduct thereof shall be from time to time prescribed by the by-laws of the Corporation with respect to meetings of shareholders. On every poll taken at every such meeting or adjourned meeting every holder of Preferred Shares shall be entitled to one vote in respect of each Preferred Share held by him. SERIES A PREFERRED SHARES - ------------------------- (c) The directors of the Corporation hereby fix the number of shares for the first series of the Preferred Shares at 3,846,155 shares; Page 94 (d) The directors of the Corporation hereby determine that the designation of the first series of Preferred Shares is Series A Convertible Preferred Shares (hereinafter called the "Series A Preferred Shares") and that the rights, privileges, restrictions and conditions attaching to the Series A Preferred Shares (in addition to the rights, privileges, restrictions and conditions attaching to the Preferred Shares as a class) shall be as follows: ARTICLE 1 INTERPRETATION 1.1 Definitions In these Articles: ----------- (a) "Businass Day" in respect of any specified place means any day other than a ------------ Saturday, a Sunday or any other day that is a statutory or civic holiday in such place; (b) "close of business," means the normal closing hour of the principal office ------------------ of the Transfer Agent; (c) "Common Shares" means the common shares of the Corporation; ------------- (d) "Conversion Price" as at any particular time, means the conversion price ---------------- at which the Series A Preferred Shares are convertible into Common Shares in accordance with Article 3; (e) "Conversion Privilege" means the right to convert any of the Series A -------------------- Preferred Shares into Common Shares in accordance with Article 3; (f) "Directors" means the board of directors of the Corporation and reference --------- without more to action by the Directors shall mean action by the Directors as a board or by any authorized committee thereof; (g) "herein", "hereto", "hereunder", "hereof", "hereby" and similar expressions ------ ------ --------- ------ ------ mean or refer to these Series A Preferred Share provisions and not to any particular Section, subsection, subdivision or portion hereof, and the expressions "Article", "Section" and "subsection", followed by a number and/or ------- ------- ---------- letter mean and refer to the specified Article, Section or subsection hereof; Page 95 (h) "holder", in respect of any share of a specified class or series means the ----- registered holder thereof; and (i) "Transfer Agent" means the Company or such person or persons from time to -------------- time appointed by the Directors as the transfer agent and registrar for the Series A Preferred Shares and includes any agent of such transfer agent. 1.2 Interpretation -------------- (a) Words importing the singular number only include the plural and vice versa and words importing any gender include all genders. (b) All dollar amounts referred to herein shall be in lawful money of the United States and on any date, the Canadian dollar equivalent thereto shall be based on the Bank of Canada noon rate of exchange in effect on the third Business Day prior to such date. (c) The division of these Series A Preferred Share provisions into Articles, Sections, subsections, clauses, subclauses or other subdivisions and insertion of headings are for convenience of reference only and shall not affect the construction or interpretation hereof. (d) In the event that any date upon or by which any action is required to be taken by the Corporation hereunder is not a Business Day, then such action shall be required to be taken on or by the next succeeding day which is a Business Day. ARTICLE 2 DIVIDENDS 2.1 Payments of Dividends --------------------- The holders shall have the right to receive such dividends (if any) as the Directors in their discretion may declare, provided that the Series A Preferred Shares and the Common Shares shall rank equally as to dividends and all dividends declared in any fiscal year shall be declared and paid in equal or equivalent amounts per share on all the Series A Preferred Shares and all the Common Shares outstanding at the time without preference or distinction. ARTICLE 3 CONVERSION PRIVILEGE Page 96 3.1 Conversion into Common Shares ----------------------------- The holder of Series A Preferred Shares shall have the right, at such holder's option, at any time, to convert any or all of such shares into fully paid and non-assessable Common Shares at a Conversion Price of $2.60 per Common Share, such Conversion Price being subject to adjustment from time time as provided in Section 3.4. The number of Common Shares issuable upon conversion of any Series A Preferred Shares shall, subject to the exception as to fractions contained in Section 3.2, be computed by multiplying the number of Series A Preferred Shares to be converted by $2.60 and dividing the product by the Conversion Price. 3.2 Conversion Procedure -------------------- (1) The right to convert any Series A Preferred Shares into Common Shares may be exercised by surrendering, at any office of the Transfer Agent at which the Series A Preferred Shares are transferable, the certificate representing such shares and a notice in writing (which notice shall be and be deemed to be irrevocable) specifying the election to convert such Series A Preferred Shares, the number of Series A Preferred Shares desired to be converted and the name or names in which the Common Shares resulting from such conversion are to-be registered. Such notice shall be signed by the holder of such shares or such holder's agent duly appointed by an instrument in writing satisfactory to the Transfer Agent. If any of the Common Shares are to be issued to a person or persons other than the holder of Series A Preferred Shares, the signature of the holder of such notice of conversion shall be guaranteed in a manner satisfactory to the Transfer Agent. (2) If less than all of the Series A Preferred Shares represented by any certificate surrendered pursuant to Section 3.2(l) are to be converted, the holder shall be entitled to receive, at the expense of the Corporation, a new certificate representing the Series A Preferred Shares comprised in the certificate so surrendered which are not to be converted. (3) Upon the conversion of any Series A Preferred Shares, there shall be no payment or adjustment by the Corporation or by the holder of such Series A Preferred Shares on account of any dividend either on the shares so converted or on the Common Shares resulting from such conversion. (4) The share certificates representing the Common Shares resulting from any conversion of Series A Preferred Shares shall be issued as promptly as practicable in the name of the holder of the Series A Preferred Shares so converted, or subject to payment by such holder of any stock transfer or other applicable taxes, in such name or names as such holder may direct Page 97 in writing (either in the notice referred to in Section 3.2(l) or otherwise). (5) The Conversion Privilege shall be deemed to have been exercised, and the holder of the Series A Preferred Shares so converted (or any person or persons in whose name or names such holder shall have directed certificates representing Common Shares to be issued) shall be deemed to become a holder of Common Shares of record for all purposes, on the date of surrender of the certificates representing the Series A Preferred Shares so converted accompanied by the notice referred to in Section 3.2(l), notwithstanding any delay in the delivery of the certificates representing the Common Shares into which such Series A Preferred Shares have been converted, provided, however, that in the event the share transfer registers for Common Shares shall be closed on such date, the surrender of the Series A Preferred Shares and the conversion thereof to Common Shares shall be effective on the next succeeding day on which such share transfer registers are open. 3.3 Avoidance of Fractional Shares ------------------------------ In any case where a fraction of a Common Share would otherwise be issuable upon conversion of one or more Series A Preferred Shares: (a) the Conversion Privilege shall be deemed to have been exercised only with respect to that number of Series A Preferred Shares as can be converted into a whole number of Common Shares; and (b) the Corporation shall adjust such fractional interest in a Common Share by the payment by cheque of an amount equal to the product of such fractional interest and the Conversion Price applicable to the conversion of such Series A Preferred Shares. 3.4 Adjustment of Conversion Privilege ---------------------------------- (1) Definitions ----------- In this Section 3.4: (a) "Additional Common Shares" mean all Common Shares issued by the ------------------------ Corporation after the Original Issue Date and all Common Shares issuable by the Corporation on the conversion of Convertible Securities after the Original issue Date, other than Common Shares issued or issuable: (i) upon conversion of any Series A Preferred Shares; Page 98 (ii) to officers, directors or employees of, or consultants to, the Corporation pursuant to a stock option or option plan or other employee stock incentive programs contemplated by the Corporation on the Original Issue Date; (iii) as consideration for the-purchase of intellectual property rights and technology pursuant to an agreement dated June 9, 1986 between Mr. Terence H. Matthews, Newbridge Communication Networks Corp. and the Corporation; and (iv) by way of stock dividend declared pursuant to Section 2.1; (b) "Convertible Securities" mean any evidences of indebtedness, shares or --------------------- other securities directly or indirectly convertible into or exchangeable for Common Shares; (c) "current market value" of the Common Shares at any date means a price -------------------- per share equal to the last board lot sale price on The Toronto Stock Exchange, on the trading day next preceding such date, or, if the Common Shares are not then listed on The Toronto Stock Exchange, on such other stock exchange on which such shares are listed as may be selected for such purpose by the Directors, or, the Common Shares are not listed on any stock exchange, the current market value as determined in good faith by the Directors; (d) "Original Issue date" means October 14, 1987; and (e) "Option" shall mean any right, option or warrant to subscribe for, ------ purchase or otherwise acquire either Common Shares or Convertible Securities. (2) Share Reorganization -------------------- If and whenever the Corporation shall: (i) subdivide the outstanding Common Shares into a greater number of shares; or (ii) consolidate the outstanding Common Shares into a smaller number of shares; (any of such event being herein called "Sharp Reorganization"), the conversion -------------------- Price shall be adjusted, effective immediately after the record date at which the holders of Common Shares are determined for the purposes of the Share Reorganization, or, if no record date is fixed the effective date of the Share Reorganization, by multiplying the Page 99 Conversion Price in effect on such record or effective date by a fraction of which: (A) the numerator shall be the number of Common Shares outstanding on such record or effective date; and (B) the denominator shall be the number of Common Shares outstanding after giving effect to such Share Reorganization, including, in the case of securities exchangeable for or convertible into Common Shares, the number of Common Shares that would have been outstanding if such securities had been exchanged for or converted into Common Shares on such record or effective date. (3) Capital Reorganization ---------------------- If and whenever there shall occur a reclassification or redesignation of the Common Shares or any change of the Common Shares into other shares, otherwise than in a Share Reorganization (any such event being herein called "Capital ------- Reorganization"), the holder of any Series A Preferred Shares who exercises the - -------------- Conversion Privilege after the effective date of Capital Reorganization shall be entitled to receive and shall accept, upon the exercise of such right, in lieu of the number of Common Shares to which such holder was theretofore entitled upon exercise of the Conversion Privilege , the aggregate number of shares Or other securities or property of the Corporation or of the body corporate resulting from such Capital Reorganization that such holder would have been entitled to receive as a result of such Capital Reorganization if, on the effective date thereof, such holder had been the holder of the number of Common Shares to which such holder was theretofore entitled upon conversion; provided, -------- however, that no Capital Reorganization shall bet carried into effect unless all necessary steps shall have been taken so that the holders of Series A Preferred Shares shall thereafter be entitled to receive such number of shares or other securities of the Corporation or of the body corporate resulting from such Capital Reorganization, subject to adjustment thereafter in accordance with the provisions of the same, as nearly as may be possible, as those contained in this Section 3.4 and Section 3.5. (4) Conversion Price Adjustment --------------------------- If and whenever the Corporation shall issue Additional Common Shares without consideration or for a consideration per share less than $2.60 or the market price of the Series A Preferred Shares, whichever is greater and if such issuance does not constitute a Share Reorganization or Special Distribution (any such event being herein called an "Additional Distribution"), the Conversion ----------------------- Price shall be adjusted concurrently with such issue or deemed issue by multiplying the Conversion Price by a fraction of which: (A) the numerator shall be the number of Common Shares outstanding Page 100 immediately prior to such issue excluding any Common Shares which were issued as a result of any exclusion enumerated in Section 3.4(l)(a) but including the number of Common Shares which could be purchased based on the aggregate consideration received by the Corporation for the total number of Additional Common Shares so issued at the then Conversion Price, and (B) the denominator shall be the number of Common Shares outstanding immediately prior to such issue excluding any Common Shares which were issued as a result of any exclusion enumerated in Section 3.4(l)(a) but including the number of such Additional Common Shares so issued. For purposes of this Section 3.4(4), the consideration received by the Corporation for the issue of any Additional Common Shares shall be computed as follows: (X) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (Y) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the directors; and (Z) in the event Additional Common Shares are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received for the Additional Common Shares, computed as provided in clauses (M) and (Y) above, as determined in good faith by the Directors. (5) Special Distribution -------------------- If and whenever the Corporation shall issue or distribute to holders of Common Shares: (a) shares of the Corporation of any class other than Common Shares; (b) Options or Convertible Securities; (c) evidences of indebtedness; or (d) any other assets (excluding cash dividends); for less than fair consideration (as determined by the Board of Directors) and if such issuance or distribution does not constitute a Share Reorganization (any such event being herein called "Special Distribution "), the Conversion Price -------------------- shall be adjusted, Page 101 effective immediately after the record date at which the holders of Common Shares are determined for purposes of the Special Distribution, by multiplying the Conversion Price in effect on such record date by a fraction of which: (i) the numerator shall be the difference between: (A) the product of the number of Common Shares outstanding on such record date and - the current market value of the Common Shares on such date; and (B) the fair market value to the holders of Common Shares, as determined by the Directors (whose determination shall be conclusive) of the shares, rights, options, warrants, evidences of indebtedness or other assets issued or distributed in the Special Distribution, and (ii) the denominator shall be the product of the number of Common Shares outstanding on such record date and the current market value of the Common Shares on such date. 3.5 Adjustment Rules ---------------- The following rules and procedures shall be applicable to adjustments of the Conversion Privilege made pursuant to Section 3.4: (a) no adjustment in the Conversion Price shall be required unless such adjustment would result in a change of at least $0.01 in the Conversion Price then in effect, provided, however, that any adjustments which, but for the provisions of this Section 3.5(a) would otherwise have been required to be made, shall be carried forward and taken into account in any subsequent adjustments; (b) no adjustment in the Conversion Price shall be made in respect of any event described in Section 3.4 (other than an event described in Section 3.4 (2) (i) or (ii) and in Section 3. 4 (3) ) if the holders of the Series A Preferred Shares are entitled to participate in such event on the same terms mutatis mutandis as if they had converted ---------------- their Series A Preferred Shares prior to the effective date of such event; (c) no adjustment in the Conversion Price shall be made pursuant to Section 3.4 in respect of the issue from time to time of Common Shares to holders of Common Shares who exercise an option to receive substantially equivalent dividends in Common Shares in lieu of receiving cash dividends or pursuant to any dividend reinvestment plan of the Page 102 Corporation; (d) if a dispute shall at any time arise with respect to any adjustment of the Conversion Privilege, such dispute shall be conclusively determined by the auditor of the Corporation or, if they are unable or unwilling to act, by a firm of independent chartered accountants selected by the Directors and in any such determination, shall be binding upon the Corporation and all transfer agents and shareholder's of the Corporation; and (e) forthwith after any adjustment of the Conversion Privilege pursuant to Section 3.4, the Corporation: (i) file with the Transfer Agent a certificate certifying as to the particulars of such adjustment and, in reasonable detail, the event requiring and the manner of determining such adjustment; and (ii) give written notice to the holders of Series A Preferred Shares of the Conversion Privilege following such adjustment. 3.6 Mandatory Conversion -------------------- After receiving a receipt for a final prospectus for and prior to the closing of an underwritten public offering of the Common Shares of the Corporation, the Corporation may at its option, by notice in writing to each of the holders, require the holders to convert all of the issued and outstanding Series A Preferred Shares held by such holders into Common Shares at the Conversion Price. A notice of conversion shall be given by the Corporation not less than 10 days prior to and shall be subject to the closing of the underwritten public offering of the Common Shares of the Corporation and shall specify therein the date fixed for closing such offering and the date upon which the Series A Preferred Shares will be deemed to be converted into Common Shares at the Conversion Price. 3.7 Cancellation ------------ All Series A Preferred Shares surrendered upon the exercise of the conversion right shall be cancelled by the Transfer Agent and the number thereof shall not be restored to the status of authorized but unissued shares. 3.8 Reservation of Common Shares ---------------------------- So long as any of the Series A Preferred Shares are outstanding and entitled to the Conversion Privilege and at any time that the authorized number of Common Shares is not unlimited, the Corporation shall reserve and at all times hold out of its Page 103 unissued Common Shares, against the Conversion Privilege herein conferred upon the holders of the Series A Preferred Shares, a sufficient number of unissued Common Shares to be converted upon the basis and upon the terms and conditions provided in this Article 3. 3.9 Compliance with Laws -------------------- If any Common Shares reserved or to be reserved for the purpose of conversion of the Series A Preferred Shares hereunder, require registration with or approval of any governmental authority under any Canadian or Provincial law before such shares may be validly issued upon conversion, the Corporation will take such action as may be necessary to secure such registration or approval, as the case may be. ARTICLE 4 VOTING RIGHTS 4.1 Voting Rights ------------- Each holder shall be entitled to receive notice of and to attend any annual or special meeting of the shareholders of the Corporation and shall be entitled to one vote for each Series A Preferred Share held by such holder. ARTICLE 5 LIQUIDATION 5.1 Liquidation ----------- In the event of the liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of assets of the Corporation among its shareholders for the purpose of winding up its affairs, the holders of the Series A Preferred Shares shall be entitled to receive, before any distribution of any part of the assets of the Corporation among the holders of any other shares, an amount equal to $2.60 plus an amount equal to any dividends declared thereon and unpaid and no more. For the purposes of this Section 5.1, liquidation includes a disposition of substantially all of the assets of the Corporation whether by sale, merger or other reorganization. Upon payment of the amounts so payable to them, the holders of the Series A Preferred Shares shall not be entitled to share in any further distribution of assets of the Corporation. ARTICLE 6 PURCHASE 6.1 Purchase -------- Page 104 Subject to the provisions of applicable law, the Corporation may purchase at any time all or from time to time any number of the outstanding Series A Preferred Shares in the open market or pursuant to tenders received by the Corporation upon invitation for tenders addressed to all holders at the lowest price or prices which in the opinion of the Directors such shares are obtainable but not exceeding $2.60 per Series A Preferred Share. If upon any invitation for tenders, the Corporation receives tenders for Series A Preferred Shares at the same price in an aggregate number greater than the number for which the Corporation is prepared to accept tenders, the shares to be purchased shall be selected from the shares offered at such price as nearly as may be pro rata, disregarding fractions, according to the number of Series A Preferred Shares offered in each such tender, in such manner as the Directors in their sole discretion shall determine. ARTICLE 7 FURTHER SERIES OF PREFERRED SHARES 7.1 Further Series of Preferred Shares ---------------------------------- So long as the Series A Preferred Shares are outstanding, the Corporation shall not, without the approval of the holders of the Series A Preferred Shares, issue any further series of Preferred Shares. ARTICLE 8 MISCELLANEOUS 8.1 Modification ------------ The rights, privileges, restrictions and conditions attaching to the Series A Preferred Shares may be repealed, altered, modified, amended or varied in whole or in part only with the prior approval of the holders of the Series A Preferred Shares given in the manner provided in Section 8.2 in addition to any other approval required by the Canada Business Corporations Act or any other applicable statutory provision of like or similar effect, from time to time in force. 8.2 Approval -------- The approval of the holders of the Series A Preferred Shares with respect to any and all matters hereinbefore referred to may be given by at least 66 2/3% of the votes cast at a meeting of the holders duly called for that purpose and held upon at least 21 days notice, at which the holders of a majority of the outstanding Series A Preferred Shares are present or represented by proxy. If at any such meeting the holders of a majority of the outstanding Series A Preferred Shares are not present or represented by proxy within one-half an hour after the time appointed for such meeting, then the meeting shall be adjourned to such date being less than 30 days later and to such time and place as may be appointed the chairman of the meeting and not less than 21 days notice shall be given for such adjourned meeting but it shall not be necessary in such Page 105 notice to specify the purpose for which the meeting was originally called. At such adjourned meeting the holders present or represented by proxy shall constitute a quorum and may transact the business for which the meeting was originally called and resolution passed thereat by not less than 66 2/3% of the votes cast at such adjourned meeting shall be effective notwithstanding that the holders of a majority of the Series A Preferred Shares are not present or represented by proxy and the conduct thereof shall be from time to time prescribed by the by-laws of the Corporation with respect to meetings of shareholders. On every poll taken at every such meeting or adjourned meeting every holder shall be entitled to one vote in respect of each Series A Preferred Share held by him. 8.3 Notices ------- Any notice required or permitted to be given to a holder shall be mailed by letter, postage prepaid, or delivered to such holder at his address as it appears on the records of the Corporation or in the event of the address of any such holder not so appearing then to the last known address of such holder. The accidental failure to give notice to one or more of such shareholders shall not affect the validity of any action requiring the giving of notice by the Corporation. Any notice given as aforesaid shall be deemed to be given on the date upon which it is mailed or delivered. Page 106 SCHEDULE "B" (a) Without in any way limiting the borrowing powers of the directors under the Canada Business Corporations Act, as amended from time to time, the Board of Directors may from time to time, in such amounts and on such terms as it deem expedient: (i) borrow money on the credit of the Corporation; (ii) limit or increase the amount to be borrowed; (iii) issue debentures or other securities of the Corporation; (iv) pledge or sell such debentures or other securities for such sums and at such prices as may be deemed expedient; (v) secure any such debentures, or other securities, or any other present or future borrowing or liability of the Corporation, by mortgage, hypothec, charge or pledge of all or any currently owned or subsequently acquired real and personal, moveable and immoveable, property of the Corporation, and the undertaking and rights of the Corporation. Nothing in this paragraph limits or restricts the borrowing of money by the Corporation on bills of exchange or promissory notes made, drawn, accepted or endorsed by or on behalf of the Corporation. The Board of Directors may from time to time delegate to such one or more of the directors and officers of the Corporation or persons as may be designated by the Board all or any of the powers conferred on the Board above -to such extent and in such manner as the Board shall determine at the time of such delegation. For greater certainty the foregoing powers conferred on the directors shall be deemed to include the powers conferred on a company by Division VII of the Special Corporate Powers Act, being Chapter P-16 of the Revised Statutes of Quebec, 1977 and every statutory provision that may be substituted therefor or for any provision therein. Page 107 STATUTORY DECLARATION PROVINCE OF ONTARIO ) IN THE MATTER OF the Canada ) Canada Business Corporations ) Act and in the Articles of ) Amalgamation of Newbridge ) Networks Corporation and ) Elcombe Systems Limited I, James C. Avis, of the City of Ottawa, in the Province of Ontario do solemnly declare that: 1. I am the Secretary of Elcombe Systems Limited, one of the amalgamating corporations (the "Corporation") and as such have personal knowledge of the matters in this declaration. 2. I have conducted such examinations of the books and records of the Corporation and have made such inquiries and investigations as are necessary to enable me to make this declaration. 3. I have satisfied myself that there are reasonable grounds for believing that: (a) the Corporation is and the amalgamated corporation Will be able to pay its liabilities as they become due; (b) the realizable value of the assets of the amalgamated corporation will not be less than the aggregate of its liabilities and stated capital of all classes; (c) no creditor of the Corporation will be prejudiced by the amalgamation. And I make this solemn declaration conscientiously believing the same to be true and knowing that it is of the same force and effect as if made under oath by virtue of the Canada Evidence Act. DECLARED before me at the City ) of Ottawa, in the ) Province of Ontario, this 29/th/ ) day of December, 1993. ) /s/ James C. Avis ----------------- ______________________ A Commissioner, etc. Page 108 EX-10.24 3 EXHIBIT 10.24 EXHIBIT 10.24 Page 109 NON-COMPETITION AGREEMENT THIS AGREEMENT made the 14th day of October, 1987 BETWEEN TERENCE H. MATTHEWS, of the City of Kanata, in the Province of Ontario (hereinafter called the "Matthews") AND NEWBRIDGE NETWORKS CORPORATION, a corporation incorporated pursuant to the Canada Business Corporations Act having its registered office at 1501 Baxter Road, Ottawa, Ontario (hereinafter called the "Corporation"). WHEREAS Matthews owns or controls a majority of the outstanding voting shares in the capital of the Corporation; and WHEREAS it is a condition of the proposed sale of Series A Preferred Shares of the Corporation to certain investors that Matthews execute and deliver this Agreement to the Corporation at the time of the closing of the share purchase transaction contemplated by such sale; NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises and sum of $2.00 now paid by each party to the other (the receipt of which is hereby acknowledged by each of the parties) the parties hereto hereby respectively covenant and agree as follows: 1. Matthews covenants and agrees with the Corporation that: (a) he will not at any time while an officer, employee or shareholder of the Corporation or its affiliates (the "Group Companies") or at any time within a Page 110 period of two years thereafter either solely or jointly with any person, directly or indirectly, carry on or be engaged or concerned or interested or in any way assist in any of the Territories (as hereinafter defined) in the manufacture, leasing, distribution or sale of any goods or the supply of any services substantially similar to or competing with any goods or services which have been manufactured, leased, distributed, sold or supplied in the normal course of the business by any of the Group Companies except as a shareholder holding less than 5.5% of the outstanding shares of any corporation offering its shares to the public; Page 111 Page 2 (b) the Territories to which paragraph I (a) shall apply are: (i) within the Province of Ontario; (ii) within Canada, (iii) within North America; and (iv) within any municipality, city or town, as the case may be, within which any person, firm, corporation or other entity which is or has been a customer of the Corporation at any time within two years preceding the date on which this Agreement terminates, carries on business; (c) he will not at any time while an officer, employee or shareholder of any of the Group Companies or at any time within a period of two years thereafter, either on his own account or as agent of any person, canvass or solicit or accept orders for any goods or services similar to or competing with any goods or services which have been leased, sold or supplied in the normal course of the business by any of the Group Companies or induce or endeavour to induce any such person to cease being a customer of any of the Group Companies; and (d) he will not at any time while an officer, employee or shareholder of any of the Group Companies or at any time within a period of two years thereafter, either on his own account or as agent of any person, canvass or solicit for employment any person who is, or has been an employee of any of the Group Companies or endeavour to induce any such person to cease being an employee of any of the Group Page 112 Companies. 2. Any notice or other instrument required or permitted to be given to Matthews hereunder shall be in writing and may be given by delivering the same addressed to Matthews at 7 Oakeswood #3, Kanata, Ontario. Any notice or other instrument required or permitted to be given to the Corporation hereunder shall be in writing and may be given by delivering the same addressed to the Corporation at 1051 Baxter Road, Ottawa, Ontario. Any notice or other instrument aforesaid if delivered shall be deemed to have been given or made on the date on which it was delivered. Matthews or the Corporation may change his or its address for service from time to time by notice given in accordance with the foregoing. 3. This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. Page 113 Page 3 4. This Agreement is not assignable by either party hereto without the prior written consent of the other. 5. If any covenant or provision in this Agreement is determined to be void or unenforceable in whole or in part, it shall not be deemed to affect or impair the validity of any other covenant or provision hereof and Matthews hereby agrees that all such covenants and provisions are reasonable and valid and hereby waives all defences to the strict enforcement thereof by the IN WITNESS WHEREOF this Agreement has been executed by the parties hereto. SIGNED, SEALED & DELIVERED ) in the presence of: ) ) ) /s/ Terence H. Matthews ----------------------- NEWBRIDGE NETWORKS CORPORATION Per: /s/ Terence H. Matthews ----------------------------- Page 114 EX-10.26 4 EXHIBIT 10.26 EXHIBIT 10.26 Page 115 THIS AGREEMENT made the 7/th/ day of January, 1998 B E T W E E N: KANATA RESEARCH PARK CORPORATION (Hereinafter called the "Landlord") OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION (Hereinafter called the "Tenant") OF THE SECOND PART AMENDMENT TO LEASE WHEREAS pursuant to a written lease dated the 28th day of July, 1997 (the "Lease") and pursuant to a written amendment to lease dated the 24th day of October, 1997 ("Amendment to Lease") Castleton Network Systems Corporation leased Ten Thousand Nine Hundred and Thirty (10,930) certified rentable square feet on the sixth (6th) floor of the building known municipally as 555 Legget Drive (the "Building") from the Landlord. AND WHEREAS pursuant to paragraph 18:00 of the Lease the Landlord and Tenant have agreed to relocate the Leased Premises from the sixth (6th) floor to the seventh (7th) floor of the Building; THEREFORE in consideration of the rents covenants and conditions contained herein, the Landlord and Tenant agree as follows: 1. The Landlord and Tenant agree that the Tenant shall relocate to the seventh (7th ) floor of the Building and vacate the sixth (6th) floor of the Building effective February 1, 1999. 2. The Lease, as amended, shall be further amended effective February 1, 1999 as follows: a) Paragraph 1.00 shall be amended by deleting the reference to "Nine Thousand Six Hundred and Fifty-Five point Nine Four (9,655.94) useable [Ten thousand Eight Hundred and Fourteen point Six Five (10,814.65) rentable" and replacing same with "Ten Thousand Nine Hundred and Ninety-Three point One (10,993.10) certified rentable" and by deleting the reference to "sixth (6/th/) floor" and replacing same with "seventh (7/th/) floor)". b) Notwithstanding the increase in area of the Leased Premises the Tenant shall continue to pay Annual and Additional Rent based upon the certified area of the sixth (6th) floor of the Building of Nine Thousand Seven Hundred and Fifty-Nine (9,759) usable [Ten Thousand Nine Hundred and Thirty rentable] square feet, therefore the table in Paragraph 3:00 of the Lease as amended shall be deleted and replaced with the following: Rental Rate per For Square foot For Leased Common Total Page 116 Years per annum Premises Area per annum ----- --------- -------- ---- --------- 1-5 $ 13.25 $ 129,305.82 $ 15,516.68 $ 144,822.50 b) Schedule "B" shall be replaced with Schedule "B" attached hereto. c) Schedule "D" shall re replaced with Schedule "D" attached hereto. d) Schedule "F" shall be deleted. 5. The Tenant shall lease the Leased Premises in an "as is" condition save for the following work to be performed by the Landlord at the Landlord's expense: a) Disconnect all electrified poles relating to the furniture panels on the sixth (6th) floor of the Building and reconnect same on the seventh (7th) floor of the Building. b) Connect existing communications cable infrastructure on the seventh (7th) floor. c) Install an additional 135 cable drops on the seventh (7th) floor. d) Move the Tenant's furniture from the sixth (6th) floor to seventh (7th) floor. e) Supply and install mag lock and motion sensor at suite entry door. f) Activate card reader at suite entry door. SAVE AND EXCEPT as set out herein all other terms and conditions of the Lease and Amendment to Lease shall remain unchanged and shall apply to the Leased Premises and all capitalized terms used herein shall have the same meaning as in the Lease. IN WITNESS WHEREOF the parties hereto have affixed their corporate seals duly attested to by the hands of their authorized signing officers. SIGNED, SEALED AND DELIVERED In the Presence of: ) KANATA RESEARCH PARK ) CORPORATION ) ) Per:__________________________________ ) Name: Bronwen A. Heins ) Title: President ) I have the authority to bind the corporation. ) ) ) NEWBRIDGE NETWORKS ) CORPORATION ) ) Per:__________________________________ ) Name: D. Mills ) Title: Vice President Administration ) C/S ) Per:__________________________________ ) Name: Peter Nadeau ) Title: Vice President, General Counsel ) I/We have the authority to bind the corporation. Page 117 SCHEDULE "B" 7/th/ Floor Plan ---------------- Page 118 PARKING a. During the Term the Landlord hereby agrees to allow the Tenant to park One (1) vehicle per Three Hundred and Twenty-Three (323) rentable square feet of Leased Premises, in the parking facilities located on the Lands ("parking facilities"). In the event the Landlord constructs a parking structure on the Lands, the Tenant shall then be called upon to pay for parking. b. The Landlord shall not be responsible for any theft, loss or damage to the Tenant's vehicles whatsoever, or for injury to the Tenant or others in the parking facilities. c. The Landlord shall have the right to establish rules and regulations governing the use of the parking facilities from time to time and the Tenant hereby agrees to observe and abide by all such rules and regulations. Page 119 EX-10.27 5 EXHIBIT 10.27 EXHIBIT 10.27 Page 120 THIS AGREEMENT made the 21st day of September, 1998 BETWEEN: CROSSKEYS SYSTEMS CORPORATION (Hereinafter called the "Sublandlord") OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION (Hereinafter called the "Subtenant") OF THE SECOND PART AND: KANATA RESEARCH PARK CORPORATION (Hereinafter called the "Landlord") OF THE THIRD PART AMENDMENT TO LEASE WHEREAS by written Lease dated the 1st day of May, 1996 (the "Headlease"), Kanata Research Park Corporation leased to the Sublandlord, all those premises comprising all of the building known municipally as 350 Terry Fox Drive, (the "Building") in the City of Kanata as more particularly described in the Headlease (the "Leased Premises"). AND WHEREAS by written Sublease dated the 1st day of October, 1996 (the "Sublease"), the Sublandlord subleased to the Subtenant a portion of the Leased Premises comprising twenty thousand and seven hundred and eighteen (20,718) usable [twenty two thousand one hundred and forty nine (22,149) rentable] square feet of space on the third (3rd) floor of the Building as shown on the floor plan attached hereto as Schedule "A" (the Sub-leased Premises"); AND WHEREAS the Subtenant renewed its Sublease the 1st day of October, 1997 for a term of one (1) year. AND WHEREAS by written Amendment to Lease dated the 12th day of March, 1998 the Subtenant released a part of its Sub-leased Premises whereby the Sub-leased Premises comprised of sixteen thousand two hundred and eighteen (16,218) usable [seventeen thousand three hundred and thirty four (17,334) rentable] square feet. -2- Page 121 AND WHEREAS the Subtenant wishes to release a further part of its Sub- leased Premises and renew the Sublease for a term of twelve (12) months and the Sublandlord and Landlord are in agreement therewith. THEREFORE in consideration of the rents covenants and conditions contained herein, the Sublandlord and Subtenant agree as follows: 1. Effective October 1, 1998 eight thousand five hundred and sixty five (8,565) usable [nine thousand two hundred and fourteen (9,214) rentable] square feet shall be released by the Subtenant back to the Sublandlord. 2. The Sublease shall be amended effective October 1, 1998 as follows: a) The reference to "sixteen thousand two hundred and eighteen (16,218) usable [seventeen thousand three hundred and thirty four (17,334) rentable]" shall be replaced with "seven thousand six hundred and fifty three (7,653) usable [eight thousand one hundred and nineteen point eighty three (8,119.83) rentable]". b) Paragraph 1 (b) shall be amended by deleting the table contained therein and replacing same with the following: Rental Rate/Sq.Ft. For Sub Leased Term Per Annum Premises --------------------------------------------------- 1 year $11.25 $91,348.08 c) Paragraph 3 shall be amended by deleting the reference to "eighteen point twenty eight percent (18.28%) and replacing same with eight point sixty three percent (8.63%)". d) Schedule "A" shall be deleted and replaced with Schedule "A" attached hereto. 3. The Sublandlord hereby renews the Sublease for a term of one (1) year commencing on the 1st day of October, 1998 and ending on the 30th day of September, 1999 ("Renewal Term"). The Subtenant shall be liable for any renovations performed on the Subleased Premises and shall be solely responsible in returning the Subleased Premises to its pre-subleased state subject to the Sublandlord's request. 4. Notwithstanding the release of the eight thousand five hundred and sixty five (8,565) usable square feet of space by the Subtenant to the Sublandlord the Subtenant -3- Page 122 shall be responsible for any year end Additional Rent adjustments for such space up to September 30, 1998. SAVE AND EXCEPT as set out herein all other terms and conditions of the Sublease shall remain unchanged and all capitalized terms used herein shall have the same meaning as in the Sublease. IN WITNESS WHEREOF the parties hereto have affixed their corporate seals duly attested to by the hands of their authorized signing officers. SIGNED, SEALED AND DELIVERED In the Presence of: ) ) KANATA RESEARCH PARK ) CORPORATION ) ) ) ) Per:_____________________c/s ) Name: ) Title: ) I/We have the authority to bind the corporation. ) ) NEWBRIDGE NETWORKS ) CORPORATION ) ) ) ) Per:_____________________c/s ) Name: ) Title: ) I/We have the authority to bind the corporation. ) ) CROSSKEYS SYSTEMS ) CORPORATION ) ) ) ) Per:_____________________c/s ) Name: ) Title: ) I/We have the authority to bind the corporation. Page 123 EX-10.28 6 EXHIBIT 10.28 EXHIBIT 10.28 Page 124 THIS INDENTURE made the 5/th/ day of November, 1998. BETWEEN: CASTLETON NETWORK SYSTEMS CORPORATION (Hereinafter called the "Assignee") OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION (Hereinafter called the "Assignor") OF THE SECOND PART AND: KANATA RESEARCH PARK CORPORATION (Hereinafter called the "Landlord") OF THE THIRD PART WHEREAS by written Lease dated the 28/th/ day of July, 1997, (the "Lease") and by a written amendment to Lease dated the 24/th/ day of October, 1997, (the "Amendment to Lease") made between the Assignor as "Tenant"and the Landlord, the Landlord did demise unto the Tenant the Leased Premises therein described which Leased Premises is located in the Building known municipally as 555 Legget Drive, subject to the Tenant's covenants and agreements therein contained; AND WHEREAS the Assignor has agreed to sell and assign its interests and obligations under the Lease unto the Assignee and the Landlord is in agreement with this assignment; NOW THIS INDENTURE WITNESSETH that in consideration of ten dollars ($10.00) now paid by the Assignee to the Assignor (the receipt and sufficiency of which is hereby acknowledged) the Assignor doth hereby grant and assign unto the Assignee as of November 5th, 1998, those Leased Premises leased by the Landlord to the Tenant in the aforesaid Lease, together with the unexpired residue of the Term therein, and all benefit and advantage to be derived therefrom; TO HAVE AND TO HOLD the same unto the Assignee, its successors and assigns, subject to the payment of the rent and the observance and performance of the Tenant's covenants and conditions contained in the Lease; AND the Assignor hereby covenants with the Assignee that, notwithstanding any act of the Assignor, the Lease is a good, valid and subsisting Lease, and that the rents thereby reserved have been duly paid up to the 5/th/ day of November 1998, and the covenants and Page 125 conditions therein contained have been duly paid and performed by the Assignor up to the date hereof, save for any year end adjustments; AND the Assignor now has good right, full power and absolute authority to assign the Lease and Leased Premises in the manner aforesaid, according to the true intent and meaning of these presents; AND that subject to the payment of rent, and the Tenant's covenants and the conditions contained in the Lease, the Assignee may enter into and upon and hold and enjoy the Leased Premises for the residue of the Term granted by the Lease and every renewal thereof (if any) for its own use and benefit, without any interruption of the Assignor or any other person whomever claiming or to claim by, through or under the Assignor; AND that the Assignor shall and will from time to time, and that at all times hereafter, at the request and cost of the Assignee, execute such further assurance of the said Leased Premises as the Assignee shall reasonably require; AND the Assignee hereby covenants with the Landlord and the Assignor that the Assignee shall and will from time to time during all the residue of the Term granted by the Lease, and every renewal thereof, pay the rent and perform the Tenant's covenants, conditions and agreements therein respectively reserved and contained, and indemnify and save harmless the Assignor therefrom and from all actions, suits, costs, losses, charges, damages and expenses for or in respect thereof; THE Landlord hereby consents to the within Assignment and notwithstanding any other terms of this Assignment: (a) the Assignee covenants and agrees with the Landlord to pay the rent as set out in the Lease and to observe and perform all of the Tenant's covenants, obligations, and agreements as set out in the Lease as fully and effectively as if the Assignee had been named the Tenant in the Lease; (b) the Assignor shall in no way be relieved of any liability or responsibility under the Lease and shall continue to be responsible for the due performance of each and every covenant, proviso, condition and agreement to be performed and observed by the Tenant under the Lease and hereby waives any right to require the Landlord to proceed against the Assignee or to pursue any other remedy whatsoever which may be available to the Landlord before proceeding against the Assignor; (c) none of the following or any combination thereof shall release, discharge or in any way change or reduce the obligations of the Assignor under the Lease; (i) neglect of forbearance of the Landlord in endeavouring to obtain payment of the rent or other amounts required to be paid under the Lease, as and when due; (ii) delay by the Landlord in enforcing performance or observance of the covenants, provisos, conditions or agreements to be performed and observed by the Assignor under the Lease; (iii) any extension of time given by the Landlord to the Assignor or any other act or failure to act by the Landlord. (d) the Landlord shall be under no obligation whatsoever to notify the Assignor of the default in payment, condition or proviso under the Lease and the Landlord may Page 126 exercise its right of re-entry or its right to terminate the Lease without notice to the Assignor; (e) the Assignee covenants and agrees with the Landlord to adjust all financial matters with the Landlord under the Lease notwithstanding that any such adjustments relate to a period of occupancy of the Leased Premises by the Assignor. The Assignee covenants and agrees with the Assignor that: (a) the Assignee will assume and perform all the obligations of the Assignor arising out of the Lease from and including the 5/th/ day of November, 1998 to the end of the Term of the Lease and any renewals thereof; (b) the Assignee will indemnify and save harmless the Assignor from all costs and liabilities arising out of the Lease incurred from and including the 5/th/ day of November, 1998. The Assignor covenants and agrees with the Assignee that: (a) the Assignor will indemnify and save harmelss the Assignee from all costs and liabilities arising out of the Lease incurred prior to the 5th day of November, 1998. AND it is hereby declared and agreed that these presents and everything herein contained shall respectively enure to the benefit of and be binding upon the parties hereto, their heirs, executors, administrators, successors and assigns respectively. IN WITNESS WHEREOF the said parties hereto have hereunto set their hands and seals. SIGNED, SEALED AND DELIVERED In the presence of: ASSIGNEE: CASTLETON NETWORK SYSTEMS CORPORATION Per: ___________________________ Name: Title: Per: ___________________________ Name: Peter Nadeau Title: Director C/S ASSIGNOR: NEWBRIDGE NETWORKS CORPORATION Per: ___________________________ Name: D. Mills Title: Vice President Administration Page 127 Per: ______________________________ Name: Peter Nadeau Title: Vice President, General Counsel C/S LANDLORD: KANATA RESEARCH PARK CORPORATION Per: ______________________________ Name: Bronwen A. Heins Title: President C/S Page 128 EX-10.29 7 EXHIBIT 10.29 EXHIBIT 10.29 Page 129 THIS AGREEMENT made the 26th day of February, 1999 B E T W E E N : KANATA RESEARCH PARK CORPORATION (Hereinafter called the "Landlord") OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION (Hereinafter called the "Tenant") OF THE SECOND PART AMENDMENT TO LEASE WHEREAS pursuant to a written lease dated the 29th day of May, 1997 (the "Lease") the Tenant leased those premises consisting of the building known municipally as 359 Terry Fox Drive (the "Building") and comprising approximately Seventy Six Thousand Two Hundred & Thirty point Sixty Five (76,230.65) rentable square feet of space on the ground floor ("Leased Premises") from the Landlord. AND WHEREAS the Tenant wishes to lease additional premises from the Landlord and the Landlord is in agreement therewith. THEREFORE in consideration of the rents covenants and conditions contained herein, the Landlord and Tenant agree as follows: 1. The Tenant hereby agrees to lease additional space comprising approximately Six Hundred & Seventy Eight (678) rentable square feet ("Additional Premises") commencing March 1, 1999 and ending the last day of May, 2002. 2. The Lease shall be amended effective March 1, 1999 as follows: a) Paragraph 1.00 shall be amended by adding after the words "ground floor" the words "and an area on the Second (2nd) floor comprising approximately Six Hundred & Seventy Eight (678) rentable square feet". b) Paragraph 1.01 c) shall be amended by deleting the reference to "Seventy Nine percent (79%) and replacing same with "Seventy Nine point Sixty Six percent (79.66%)". Page 130 c) Paragraph 3.00 shall be amended by adding the table contained herein: Second Floor Premises
Rental Rate Per Sq. Ft. Per Total Per Annum --------------------------- --------------- Term Annum ---- ----- March 1/99 - May 31/02 $9.25 $6,271.50
d) Paragraph 3.01 shall be amended by deleting the reference to "Fifty Eight Thousand Seven Hundred & Sixty One and Thirteen Cents ($58,761.13)" and replacing same with "Sixty Five Thousand and Thirty Two Dollars & Sixty Three Cents ($65,032.63)". e) Schedule "B" shall be amended to include the second (2nd) floor plan attached hereto as Schedule "B". 3. The Tenant shall lease the Additional Premises in an "as is" condition. There shall be no leasehold improvement allowance provided by the Landlord for the Additional Premises. SAVE AND EXCEPT as set out herein all other terms and conditions of the Lease shall remain unchanged and shall apply to the Additional Premises and all capitalized terms used herein shall have the same meaning as in the Lease. IN WITNESS WHEREOF the parties hereto have affixed their corporate seals duly attested to by the hands of their authorized signing officers. SIGNED, SEALED AND DELIVERED In the Presence of: ) KANATA RESEARCH PARK ) CORPORATION ) ) ) c/s ) Per:_____________________________ ) Name: ) Title: ) I have the authority to bind the corporation. ) Page 131 ) NEWBRIDGE NETWORKS CORPORATION ) ) ) Per:_____________________________________ ) Name: ) Title: ) ) Per:_____________________________________ ) Name: ) Title: ) I/We have the authority to bind the corporation. Page 132 SCHEDULE "B" Second Floor Plan ----------------- DATED the 26th day of February, 1999 - ----------------------------------------------------------------------------- B E T W E E N : KANATA RESEARCH PARK CORPORATION OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION OF THE SECOND PART - ------------------------------------------------------------------------------ AMENDMENT TO LEASE - ------------------------------------------------------------------------------ PAGE 133 EX-10.30 8 EXHIBIT 10.30 EXHIBIT 10.30 Page 134 THIS INDENTURE made this 15/th/ day of March, 1999. BETWEEN: KANATA RESEARCH PARK CORPORATION (Hereinafter called the "Landlord") OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION (Carrying on Business as Newbridge Learning Services) (Hereinafter called the "Tenant") OF THE SECOND PART WITNESSETH that in consideration of the rents, covenants, conditions and agreements herein contained, the Landlord and the Tenant covenant and agree as follows: 1.00 LEASED PREMISES The Landlord hereby leases to the Tenant all those premises consisting of approximately Six Thousand Eight Hundred & Thirty Two (6,832) rentable square feet of space on the Seventh (7th) floor (herein called the "Leased Premises") of the building known municipally as 555 Legget Drive, Tower "B" (herein called the "Building") in the City of Kanata which said building is erected on the lands (herein called the "Lands") described in Schedule "A" annexed hereto. The Leased Premises are more particularly outlined on the floor plan annexed hereto and marked Schedule "B". The parties acknowledge that the foregoing calculation of the area of the Leased Premises has been estimated only and that the actual area of the Leased Premises shall be subject to certification by the Landlord. 1.01 ADDITIONAL DEFINITIONS For the purposes of this Lease and any additions or amendments thereto: (a) "Improvements" means all improvements located on the Lands, including the Building, the parking lot or structure servicing the Building and other facilities and physical structures which are for the exclusive use of occupants of the Building; Page 135 (b) "Common Areas" means at any time those portions of the Lands and Building not leased or designated for lease to tenants but provided to be used in common by (or by the sublesses, agents, employees, customers or licensees of) the Landlord, Tenant and other tenants of the Building, whether or not they are open to general public and shall include any fixtures, chattels, systems, decor, signs, facilities or landscaping contained in those areas or maintained or used in connection with them, and shall be deemed to include the city sidewalks adjacent to the Lands and any pedestrian walkway system (either above or below ground), park, or other public facility in respect of which the Landlord is from time to time subject to obligations arising from the Lands and Building. (c) "Tenant's Proportionate Share" means percent Six point Sixty Seven percent (6.67%) provided the said percentage may be varied based on the actual area of the Leased Premises as certified by the Landlord. 2.00 TERM To have and to hold the Leased Premises for and during the Term, (hereinafter called the "Term") of Five (5) years to be computed from the 1st day of May, 1999 or from the date the Tenant takes occupancy of the Leased Premises, whichever is sooner, and from thenceforth next ensuing and fully to be completed and ended on the last day of April, 2004. 2.01 INABILITY TO GIVE OCCUPANCY It is hereby agreed that if the Landlord is unable to deliver vacant possession of the Leased Premises on the date of commencement of the Term by reason of the Leased Premises or the Building being uncompleted or by reason of any previous tenant or occupant overholding (but not by reason of circumstances beyond the Landlord's control or by reason of the failure of the Tenant to complete Tenant's Work herein or by reason of the Tenant failing on or before the date occurring six (6) weeks prior to the commencement of the Term herein to supply all necessary approvals and specifications which the Landlord requires in order to complete the Leasehold Improvements herein,) the Landlord shall diligently exercise all of its rights to obtain completion and vacant possession of the Leased Premises and the rent payable hereunder shall abate at a rental per day equal to 1/365/th/ of the Annual Rent payable until such completion or vacant possession is obtained but the Landlord shall not be liable to the Tenant for damages of any nature whatsoever and this Lease shall continue in full force and effect subject only to the abatement of rent as aforesaid. 2.02 EARLY OCCUPANCY If the Tenant occupies the Leased Premises prior to the commencement of the Term, then during the period up to the date of commencement the Tenant shall be a tenant of the Landlord subject to all the covenants, conditions and agreements set out in this Lease and at a rental per day equal to 1/365/th/ of Page 136 the Annual Rent and Additional Rent and such rental shall be paid on or before the commencement of the Term. 2.03 OVERHOLDING If the Tenant shall continue to occupy the Leased Premises after the expiration of this Lease with or without the consent of the Landlord and without any further written agreement, the Tenant shall be a monthly tenant at a rent equivalent to 150% of the Monthly Rent and Additional Rent hereby reserved and subject to all the terms and conditions herein set out except as to length of tenancy. 3.00 RENT - Basic Rent In each year during the Term of this Lease the Tenant covenants and agrees to pay without any set-off or deduction whatsoever, to the Landlord, as rent for the Leased Premises, and for the non-exclusive use of the common areas of the Building on which the Leased Premises is located (which common area allocation shall be 12% of the area of the Leased Premises), the following:
Rental Rate Per For Leased For Common Total Per Year Sq. Foot Per Annum Premises Area Annum ---- ------------------ -------- ---- ----- 1-5 $15.00 $91,500 $10,980 $102,480
herein called "Annual Rent". The Annual Rent will be adjusted proportionately for any lease year which is other than twelve months. 3.01 MONTHLY RENTAL The Annual Rent shall be payable in equal monthly installments (hereinafter called the "Monthly Rent") in advance on the first day of each calendar month during the Term. If the Term commences on any day other than the first (1/st/) or ends on any day other than the last of a calendar month, rent for the fraction of a month at the commencement and at the end of the Term shall be prorated at a rate per day equal to 1/365/th/ of the Annual Rent payable. The Annual Rent and the Monthly Rent may be varied based on the actual area of the Leased Premises as certified by the Landlord. 3.02 ADDITIONAL RENT The Tenant covenants to pay as additional rent all sums to be paid to the Landlord hereunder including, without limiting the generality of the foregoing, all tax on the Tenant's leasehold improvements, Goods and Services Tax and the Tenant's Proportionate Share of the Tax, Capital Tax, Landlord's Business Tax and Operating Costs (herein called "Additional Rent"). 3.03 ESTIMATED ADDITIONAL RENTALS Page 137 During the Term, the Tenant shall pay to the Landlord monthly in advance on the 1st day of each and every month during the Term, one-twelfth (1/12) of the amount of such annual Additional Rent as reasonably estimated by the Landlord to be due from the Tenant. Such estimates may be adjusted from time to time and re-adjusted by the Landlord and the Tenant shall pay to the Landlord monthly installments of Additional Rent according to such estimates, as so adjusted. 3.04 DEFICIENCY OF ADDITIONAL RENT If the aggregate amount of such estimated Additional Rent payments made by the Tenant in any year should be less than the Additional Rent due for such year, then the Tenant shall pay to the Landlord as Additional Rent within ten (10) days of receipt of notice thereof from the Landlord the amount of such deficiency. 3.05 EXCESS OF ADDITIONAL RENTAL INSTALLMENTS If the aggregate amount of such Additional Rent payments made by the Tenant in any year of the Term should be greater than the Additional Rent due for such year, then should the Tenant not be otherwise in default hereunder, the amount of such excess will be applied by the Landlord to the next succeeding installments of such Additional Rent due hereunder; and if there be any such excess for the last year of the Term, the amount thereof will be refunded by the Landlord to the Tenant within thirty (30) days after the completion of the Landlord's year-end review provided the Tenant is not otherwise in default under the terms of the Lease. 3.06 PRO-RATING OF ADDITIONAL RENT If only part of any calendar year is included within the Term the amount of the Additional Rent payable by the Tenant for such partial year shall be prorated and shall be based upon the estimates made by the Landlord and upon a final determination of such Additional Rent, the amount remaining unpaid at the termination of this Lease shall, notwithstanding such termination, be adjusted and paid within a reasonable time thereafter. 3.07 PREPAYMENT OF ADDITIONAL RENT Notwithstanding the foregoing, if the Landlord is required to pay any amount, which it is entitled to collect from the tenants of the Building, more frequently than provided for in this Lease or if the Landlord is required to prepay any such amount, the Tenant shall pay to the Landlord its portion of such amount calculated in accordance with this Lease, forthwith upon demand. 3.08 DISPUTE AS TO AMOUNT OF ADDITIONAL RENT In the event of any dispute by the Tenant as to the amount of any Additional Rent claimed by the Landlord or the amount of the Tenant's Proportionate Page 138 Share thereof, the opinion of the Landlord's auditors shall be conclusive and binding as to the amount thereof for any period to which the opinion relates. 3.09 POST-DATED CHEQUES The Tenant shall, on or before the commencement of each and every Lease Year of the Term, including the first Lease Year, deliver to the Landlord a series of post-dated cheques, one for each month of the Lease Year, drawn for an amount equal to the amount of Monthly Rent and the Additional Rent (as estimated by the Landlord) payable in each month of such Lease Year, provided that the first such payment is to include also any pro-rated Monthly Rent and Additional Rent for the period from the date of the commencement of the Term to the first day of the first full calendar month in the Term, provided further that the obligation in the first Lease Year shall be adjusted to take into account all advance rental paid hereunder. 3.10 ADVANCE RENTAL The Landlord hereby acknowledges receipt from the Tenant of the sum of Thirty Two Thousand Five Hundred & Thirty Dollars and Fifty Six Cents ($32,530.56) inclusive of G.S.T. to be held without interest and applied against the first and last months' Monthly Rent and Additional Rent. 3.11 MANNER AND PLACE OF PAYMENT OF RENT All rent shall, until further written notice is received from the Landlord, be paid by the Tenant without any prior demand therefor to Kanata Research Park Corporation, at par in the City of Kanata at the principal office of, Kanata Research Park Corporation, 555 Legget Drive, Suite 206, Kanata, Ontario, Canada K2K 2X3, or at such other place in Canada as Kanata Research Park Corporation may designate in writing from time to time and shall be payable in lawful money of Canada. The Landlord agrees that payments made to Kanata Research Park Corporation pursuant to this Lease shall be deemed to be payments made to the Landlord and the Tenant shall not be required to see to the application thereof. 3.12 DEFAULT Any sums received by the Landlord from or for the account of the Tenant when the Tenant is in default hereunder may be applied at the Landlord's option to the satisfaction, in whole or part, of any of the obligations of the Tenant then due hereunder in such manner as the Landlord sees fit, and regardless of any designation or instructions of the Tenant to the contrary. 3.13 ACCRUAL OF RENT Rent shall be considered as annual and accruing from day to day, and where it becomes necessary for any reason to calculate such rent for an irregular period of less than one (1) year an appropriate apportionment and adjustment shall be made. Where the calculation of any Additional Rent is not made until Page 139 after the termination of this Lease, the obligation of the Tenant to pay such Additional Rent shall survive the termination of this Lease and such amounts shall be payable by the Tenant upon demand by the Landlord. 3.14 NET LEASE The Tenant acknowledges and agrees that it is intended that this Lease shall be a completely carefree net lease for the Landlord and that the Landlord shall not be responsible during the Term for any costs, charges, expenses or outlays of any nature whatsoever arising from or relating to the Leased Premises, whether foreseen or unforeseen and whether or not within the contemplation of the parties at the commencement of the Term except as shall be otherwise expressly provided for in this Lease and other than Income Tax due by the Landlord, the Tenant shall be responsible for any business transfer tax, value added tax, multi-stage sales tax, goods and services tax or any other tax or levy on rental income that may be charged, levied or assessed by any government or other applicable taxing authority against the Landlord whether known as a goods and services tax or any other name ("Goods and Services Tax"). 4.00 TENANT'S BUSINESS TAX In each and every year during the Term the Tenant covenants to pay and discharge prior to the same becoming due and payable all taxes, rates, duties and assessments and other charges that may be levied, rated, charged or assessed against or in respect of the Tenant's or other occupant's use and occupancy of the Leased Premises or in respect of the Tenant's or other occupant's leasehold improvements, equipment, machinery, trade fixtures and facilities situate or installed on or in the Leased Premises and every tax and licence fee in respect of any and every business carried on in the Leased Premises or in respect of the use or occupancy thereof by the Tenant (and any and every subtenant, licensee or occupant thereof) whether such taxes, rates, duties, assessments and licence fees are charged by any municipal, parliamentary, school or other body during the term hereby demised. The Tenant will indemnify and keep indemnified the Landlord from and against payment of all loss, costs, charges and expenses occasioned by, or arising from any and all such taxes, rates, duties, assessments, licence fees, and any and all taxes which may in future be levied or charged in lieu of such taxes; and any such loss, costs, charges and expenses suffered by the Landlord may be collected by the Landlord as rent with all rights of distress and otherwise as reserved to the Landlord in respect of rent in arrears. The Tenant further covenants and agrees that upon written request of the Landlord, the Tenant will promptly deliver to the Landlord for inspection receipts for payment of all such taxes, rates, duties, assessments, licence fees and other charges in respect of all improvements, equipment and facilities of the Tenant on or in the Leased Premises or in respect of any business carried on in the Leased Premises which were due and payable up to one (1) month prior to such request. 4.01 LANDLORD'S BUSINESS TAX Page 140 In the event that there are any taxes, rates, duties, assessments or charges levied, rated, charged or assessed against the Landlord by any municipal or other governmental authority with respect to the Landlord's use or occupancy of any part of the Building or the Land which the Tenant is entitled to use in common with other persons or with respect to any other part of the Building which the Landlord uses or occupies for the purpose of supplying services to the Leased Premises (such taxes, rates, duties, assessments or charges hereinafter called the "Landlord's Business Tax"), then it is agreed that in addition to all other sums, the Tenant is required to pay pursuant to this Lease, the Tenant shall pay to the Landlord as Additional Rent, the Tenant's Proportionate Share of such Landlord's Business Tax. 4.02 TAX ON TENANT'S LEASEHOLD IMPROVEMENTS The Tenant shall pay to the Landlord as Additional Rent, in respect of each applicable tax year, an amount equal to that portion of the Tax for such tax year, as determined by the Landlord, which may reasonably be regarded as being attributable to the fixtures, improvements, installations, alterations, additions and equipment from time to time made, erected or installed by or on behalf of the Tenant in the Leased Premises. 4.03 PROPERTY TAX "Tax" in this Lease means an amount equivalent to all taxes, rates, duties, levies and assessments whatsoever levied, rated, charged or assessed by any municipal, parliamentary, educational, school or other governmental authority charged upon the Building, the Lands, the property and all improvements now or hereafter appurtenant thereto or upon the Landlord on account thereof including all taxes, rates, duties, levies and assessments for local improvements and including any tax which has been attracted by the Tenant's leasehold improvements and equipment and for which the Tenant is responsible hereunder and excluding any portion of Tax payable solely by any other tenant and excluding any Tax charged against or applicable to the other office buildings constructed on the Lands and the parking spaces (excluding visitor parking) applicable to such buildings and excluding such taxes as corporate income, capital gains, profits or excess profits, taxes assessed upon the income of the Landlord, and shall also include any and all taxes which may in future be levied in lieu of Tax as hereinbefore defined. 4.04 ALLOCATION OF TAX If the Tax or any portion thereof that may be payable by the Tenant by reason of this Lease, depends upon an assessment or an approximation of an assessment which has not been made by the taxing authority or authorities having jurisdiction, the Landlord shall determine the same; any such determination made by the Landlord shall be binding upon the Tenant unless shown to be unreasonable or erroneous in some substantial respect. The Landlord shall have the right from time to time to reasonably allocate and Page 141 re-allocate Taxes not charged separately to the various buildings (including the Building) and the parking garages located on the Lands. 4.05 SEPARATE SCHOOL TAXES If the Tenant or any subtenant or licensee of the Tenant or any occupant of the Leased Premises shall elect to have the Leased Premises or any part thereof assessed for separate school taxes, the Tenant shall pay to the Landlord, as additional rent, as soon as the amount of the separate school taxes is ascertained, any amount by which the amount of separate school taxes exceeds the amount which would have been payable for Tax had such election not been made and if the Tenant or any subtenant or licensee of the Tenant shall elect to have the Leased Premises or any part thereof assessed for separate school taxes as aforesaid and if such separate school taxes are less than the taxes which would have been payable for school taxes had such election not been made, then and in that event, the Tenant shall be entitled to deduct from the rent for the first month of the year following which such taxes were payable, the amount by which the separate school taxes were less than the amount which would have been payable for school taxes in the year prior to such month. 4.06 TAX APPEAL Any expense incurred by the Landlord in obtaining or attempting to obtain a reduction in the amount of the Tax or the assessment upon which the Tax may be based, shall be added to and included in the amount of the Tax and if the Tenant shall have paid its Proportionate Share of the Tax and the Landlord shall thereafter receive a refund of any portion of the Tax, the Landlord shall make an appropriate refund to the Tenant. 4.07 CAPITAL TAX "Capital Tax" means the tax or excise imposed or capable of being imposed upon the Landlord by any government authority having jurisdiction which is measured or based in whole or in part upon the taxable capital employed by the Landlord, which said taxable capital shall be deemed to be the cost to the Landlord of said Building and Lands computed as if the amount of such tax were that amount due if the Building and the Lands were the only property of the Landlord, the Landlord was entitled to no capital deduction, investment allowance or any other deduction whatsoever. For the purpose of this paragraph the Term "investment allowance" and "capital deduction" shall be defined by reference to the applicable taxing statute. 5.00 OPERATING COSTS "Operating Costs" in this Lease means the total charges, expenses, costs, fees, rentals, disbursements or outlays incurred, accrued, paid, payable or attributable whether by the Landlord or others on behalf of the Landlord for complete repair, maintenance, operation, cleaning and management of the Building, Lands and all the improvements thereon and the components of Page 142 each of them (herein collectively called the "Property") such as are in keeping with maintaining the standard of a first class commercial Property so as to give it high character and distinction; and including, without limiting the generality of the foregoing, the cost of all repairs and replacements required for such operation and maintenance, the cost of maintaining and repairing the heating, air-conditioning, ventilating and mechanical systems and equipment in the Building, the cost of operating and maintaining any elevators, (including the cost of service contracts); the costs of providing hot and cold water; the costs of providing electricity not otherwise chargeable to tenants; the costs of all fuel, gas and steam used in heating, ventilating and air-conditioning; the cost of energy conservation devices or equipment; the cost of snow removal; landscape maintenance including the cost of replacing any landscaping on the Lands; the cost of window cleaning; the cost of insurance premiums for fire, casualty, liability, rental and any other insurance coverage maintained by the Landlord in connection with the Property; telephone and other utility costs; the amount paid or payable for all salaries, wages and benefits and other payments paid to or on behalf of persons engaged in the cleaning, supervision, maintenance and repair of the Property (including wages of the on site Property Manager); the cost of accounting services necessary to prepare the statements and opinions for the tenants and to compute the rents and other charges payable by the tenants of the Building; the cost of porters, guards and other protection services; the cost of providing security services; the cost of garbage or refuse removal from the Building not otherwise chargeable to tenants; the cost of repair and maintenance of the roadways, curbs, paving, walkways, pools, landscaping, lighting and other common facilities and outside areas; cost of services provided for the common use of the tenants; building management fees or an administrative fee (not exceeding the going rate charged by trust companies or first class building Management Companies for building management in the Regional Municipality of Ottawa- Carleton for similar buildings); the cost of service contracts with independent contractors and all other expenses, paid or payable by the Landlord in connection with the operation of the Property, but such Operating Costs shall not include any interest on any debt or capital; retirement of any debt; any amounts directly chargeable by the Landlord to any tenant or tenants of the Building and the cost of any repairs paid for by insurance proceeds or for which the Landlord was reimbursed by insurance proceeds. 5.01 ALLOCATION OF OPERATING COSTS In determining the Operating Costs attributable to the Building, the Landlord shall have the right from time to time to reasonably allocate and re-allocate such Operating Costs which represent operating costs incurred for facilities or services shared by the Building and such other buildings as are owned or operated by the Landlord and which are not charged or allocated separately against the Building and any such other building or buildings. Any such determination made by the Landlord shall be binding upon the Tenant unless shown to be unreasonable or erroneous in some substantive respect. The Tenant shall have the right to reasonable access to the books and records of Page 143 the Landlord to conduct an examination and to ascertain whether allocations of Operating Costs made by the Landlord have been made reasonably. 5.02 FULL OCCUPANCY If in any year the Building has not been fully occupied for the whole year, the amount of the Operating Costs for such year may be adjusted by the Landlord, acting reasonably, to an amount which reflects what the amount of the Operating Costs would be if the Building had been fully occupied for the whole year. 5.03 USE OF ELECTRICITY The Tenant's use of electricity in the Leased Premises shall be for the operation of office lighting and business machines, such as typewriters, desktop computers and other small office machines and shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the Leased Premises. In order to ensure that such capacity is not exceeded and to avert possible adverse effect upon the Building's electrical service, the Tenant shall not, without the Landlord's prior written consent in each instance, connect any additional fixtures, appliances or equipment (other than normal office electrical fixtures, lamps, typewriters and similar small office machines) to the Building's electric distribution system or make any alteration or addition to the electrical system of the Leased Premises existing at the commencement of the Term. If the Landlord grants such consent, the cost of all additional risers and other equipment required therefor shall be paid as Additional Rent by the Tenant to the Landlord upon demand. As a condition to granting such consent, the Landlord may require the Tenant to agree to pay an increase in the Additional Rent for Operating Costs by an amount which will reasonably reflect the increased cost of the Landlord of the additional electrical services to be furnished to the Leased Premises by the Landlord. 5.04 METERS The Tenant covenants to pay for the cost of any additional metering which may be required by the Landlord to be installed in the Building for the purpose of determining the amount of electricity consumed by the Tenant in the Leased Premises. 6.00 ASSIGNING OR SUBLETTING The Tenant covenants that it will not assign or sublet the Leased Premises or any part thereof without the prior written consent of the Landlord, which consent shall not be unreasonably withheld save and except in the event of any of the following, in which case the Landlord may arbitrarily withhold its consent: (a) an assignment or sublet of the whole of the Leased Premises, the terms of which have a net present value that are less or more than the Page 144 net present value of the terms of the Lease (not including the value of initial leasehold improvements, leasing commissions or inducements of any kind under the Lease) and in the latter event if the Landlord consents to such assigned or sublet the Tenant shall pay the increased value to the Landlord as Additional Rent.; (b) a sublet of a part of the Leased Premises; (c) where the assignee or subtenant is then a tenant of the Landlord at the Building and the Landlord has or will have during the next following six (6) months, vacant space for rent in the Building. 6.01 REQUEST TO ASSIGN OR SUBLET If the Tenant requests the Landlord's consent to an assignment of this Lease or to a subletting of the whole or any part of the Leased Premises, the Tenant shall submit to the Landlord the name and address of the proposed assignee or subtenant together with a copy of an offer or agreement to assign or sublet or the sublease or assignment and such additional information as to the nature of its business and its financial responsibility and standing (including financial statements) as the Landlord may reasonably require ("required information"). 6.02 LANDLORD'S RIGHT TO CANCEL Upon receipt of such request and the required information from the Tenant, the Landlord shall have the right, exercisable in writing within thirty (30) days after such receipt, to cancel and terminate this Lease if the request is to assign this Lease or to sublet all of the Leased Premises, or, if the request is to sublet a portion of the Leased Premises only, to cancel and terminate this Lease with respect to such portion, in each case as of the date set forth in the Landlord's notice of exercise of right ("Landlord's notice of termination"), which shall be neither less than sixty (60) days nor more than one hundred and twenty (120) days following the delivery of the Landlord's notice of termination. If the Landlord shall exercise such right, the Tenant shall surrender possession of the entire Leased Premises or the portion which is the subject of the right, as the case may be, on the date set forth in the Landlord's notice of termination in accordance with the provisions of this Lease relating to the surrender of the Leased Premises at the expiration of the Term. If this Lease shall be cancelled as to a portion of the Leased Premises only, the rent payable by the Tenant under this Lease shall be abated proportionately. In the event that the Landlord shall not exercise the right to cancel this Lease, then the Landlord's consent to any such request to assign or sublet shall not be unreasonably withheld. 6.03 ASSIGNMENT AGREEMENT The Landlord's consent to any assignment may be conditional upon the assignee entering into an assignment in form and content satisfactory to the Landlord, to perform, observe and keep each and every covenant, condition Page 145 and agreement in this Lease on the part of the Tenant to be performed, observed and kept including the payment of rent and all other sums and payments agreed to be paid or payable under this Lease on the days and times and in the manner specified. 6.04 CONSENT NOT TO RELEASE TENANT In no event shall any assignment or subletting to which the Landlord may have consented release or relieve the Tenant from his obligations fully to perform all the terms, covenants and conditions of this Lease to be performed. 6.05 CHANGE IN CORPORATE CONTROL If the Tenant is a corporation or if this Lease, with the written consent of the Landlord, is assigned to a corporation, and if at any time during the Term any part or all of the corporate shares or voting rights of shareholders shall be transferred by sale, assignment, bequest, inheritance, trust, operation of law or other disposition, or treasury shares be issued, so as to result in a change in the control of such corporation by the person or persons now owning a majority of the corporate shares thereof, the Landlord may terminate this Lease at any time after such change in control by giving the Tenant thirty (30) days prior written notice of such termination. The Tenant shall, at the request of the Landlord, make available to the Landlord for inspection or copying, or both, all books and records of the Tenant which, alone or with other data, show the applicability or inapplicability of this paragraph. If any stockholder or shareholder of the Tenant shall, after the request of the Landlord so to do, fail or refuse to furnish forthwith to the Landlord any data verified by the affidavit of such stockholder or shareholder or other credible person, which data, alone or with other data show the applicability or inapplicability of this paragraph, the Landlord may terminate this Lease by giving the Tenant thirty (30) days' prior written notice of such termination. 6.06 NOTICE OF CHANGE OF CONTROL Where there is a change in corporate control of the Tenant, the Tenant shall forthwith so advise the Landlord in writing. 6.07 COST OF CONSENT The Tenant further agrees that prior to any consent for assignment, subletting or change in control being effective and binding upon the Landlord, the Tenant shall pay on demand the Landlord's reasonable costs (including the Landlord's own administrative costs) incurred in connection with the Tenant's request for such consent. 7.00 TENANT'S COVENANTS The Tenant further covenants with the Landlord as follows: 7.01 TENANT REPAIRS Page 146 To repair, maintain and keep the Leased Premises and all trade fixtures and improvements therein in good and substantial repair subject only to defects in construction of the structural members of the Building, reasonable wear and tear and damage by fire, lightning and tempest or other casualty against which the Landlord is insured (herein collectively referred to as "Tenant Repair Exceptions"); and that the Landlord may enter and view state of repair and that the Tenant will repair according to notice in writing, except for Tenant Repair Exceptions and that the Tenant will leave the Leased Premises in good repair, except for Tenant Repair Exceptions. Notwithstanding anything hereinbefore contained, the Landlord may in any event make repairs to the Leased Premises without notice if such repairs are, in the Landlord's opinion, necessary for the protection of the Building and the Tenant covenants and agrees with the Landlord that if the Landlord exercises any such option to repair, the Tenant will pay to the Landlord together with the next instalment of Monthly Rent which shall become due after the exercise of such option all sums which the Landlord shall have expended in making such repairs and that such sums, if not so paid within such time, shall be recoverable from the Tenant as rent in arrears. Provided further that in the event that the Landlord from time to time makes any repairs as hereinbefore provided, the Tenant shall not be deemed to have been relieved from the obligation to repair and leave the Leased Premises in a good state of repair. 7.02 RULES AND REGULATIONS That the Tenant and his employees and all persons visiting or doing business with him on the Leased Premises shall be bound by and shall observe rules and regulations annexed hereto or as may hereafter be reasonably set by the Landlord of which notice in writing shall be given to the Tenant and upon such notice being delivered all such rules and regulations shall be deemed to be incorporated into and form part of this Lease. 7.03 USE OF PREMISES The Leased Premises shall be used only for office purposes. 7.04 INCREASE IN INSURANCE PREMIUMS That it will not keep, use, sell or offer for sale in or upon the Leased Premises any article which may be prohibited by any insurance policy in force from time to time covering the Building including any regulations made by any fire insurance underwriters applicable to such policies. In the event the Tenant's occupancy or conduct or business in, or on the Leased Premises, whether or not the Landlord has consented to the same, results in any increase in premiums for the insurance carried from time to time by the Landlord with respect to the Building, the Tenant shall pay any such increase in premiums as Additional Rent within ten (10) days after bills for such additional premiums shall be rendered by the Landlord. In determining whether increased premiums are a result of the Tenant's use or occupancy of the Leased Premises, a schedule issued by the organization computing the insurance rate Page 147 on the Building showing the various components of such rate, shall be conclusive evidence of the several items and charges which make up such rate. The Tenant shall promptly comply with all reasonable requirements of the insurance authority or of any insurer now or hereafter in effect relating to the Leased Premises. 7.05 CANCELLATION OF INSURANCE If any policy of insurance upon the Building or any part thereof or upon the Lands or any part thereof shall be cancelled or rendered voidable by the insurer by reason of any act, omission or occupation of the Leased Premises or any part thereof by the Tenant, any assignee or subtenant of the Tenant or by anyone permitted by the Tenant to be upon the Leased Premises, and the Tenant, after receipt of notice from the Landlord, shall have failed to immediately reinstate such insurance policies or avoid cancellation of such insurance policies, the Landlord may at its option determine this Lease forthwith by leaving upon the Leased Premises notice in writing of its intention so to do and thereupon rent and any other payments for which the Tenant is liable under this Lease shall be apportioned and paid in full to the date of such determination and the Tenant shall immediately deliver up possession of the Leased Premises to the Landlord and the Landlord may re-enter and take possession of the same or the Landlord shall pay any increased cost of such insurance and the Tenant shall pay as Additional Rent, on demand, the amount by which the premiums for such insurance are so increased. 7.06 OBSERVANCE OF LAW To comply promptly at its own expense with all provisions of law including without limitation, federal and provincial legislative enactments, building by-laws, and any other governmental or municipal regulations which relate to the partitioning, equipment, operation and use of the Leased Premises, and to the making of any repairs, replacements, alterations, additions, changes, substitutions or improvements of or to the Leased Premises. And to comply with all police, fire and sanitary regulations imposed by any federal, provincial or municipal authorities or made by fire insurance underwriters, and to observe and obey all governmental and municipal regulations and other requirements governing the conduct of any business conducted in the Leased Premises. Provided that in default of the Tenant so complying the Landlord may at its option where possible comply with any such requirement and the cost of such compliance shall be payable on demand by the Tenant to the Landlord as Additional Rent. 7.07 WASTE AND OVERLOADING OF FLOORS Not to do or suffer any waste or damage, disfiguration or injury to the Leased Premises or the fixtures and equipment thereof or permit or suffer any overloading of the floors thereof; and not to place therein any safe, heavy business machine or other heavy thing without first obtaining the consent in writing of the Landlord; and not to use or permit to be used any part of the Leased Premises for any dangerous, noxious or offensive trade or business Page 148 and not to cause or permit any nuisance in, at or on the Leased Premises; and without the prior consent in writing of the Landlord, the Tenant will not bring onto or use in the Leased Premises or permit any person subject to the Tenant to bring onto or use on the Leased Premises any fuel or combustible material for heating, lighting or cooking nor will it allow onto the Leased Premises any stove, burner, kettle, apparatus or appliance for utilizing the same and the Tenant will not purchase, acquire or use electrical current or gas for consumption on the Leased Premises except from such supplier thereof as shall have been approved in writing by the Landlord. 7.08 INSPECTION To permit the Landlord, its servants or agents to enter upon the Leased Premises at any time and from time to time for the purpose of inspection and of making repairs, alterations or improvements to the Leased Premises or to the Building and the Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort occasioned thereby. The Landlord, its servants or agents may at any time and from time to time enter upon the Leased Premises to remove any article or remedy any condition which, in the opinion of the Landlord, reasonably arrived at, would be likely to lead to cancellation of any policy of insurance and such entry by the Landlord shall not be deemed to be a re-entry. The Tenant shall, upon written request of the Landlord, produce audited Financial Statements of the Tenant, which statements shall include a Balance Sheet, Income Statement, Statement of Retained Earnings, Statement of Source and Application of Funds. 7.09 INDEMNITY TO LANDLORD To promptly indemnify and save harmless the Landlord for any and all liabilities, damages, costs, claims, suits or actions of any nature or kind including the full cost to the Landlord in resisting or defending the same to which the Landlord shall or may become liable or suffer arising out of or by reason of: (a) any breach, violation or non-performance by the Tenant of any of its covenants and obligations under this Lease; (b) any damage to property while said property shall be in or about the Leased Premises including the systems, furnishings and amenities thereof, as a result of the negligence, misuse or wilful act of the Tenant, its express or implied invitees, licensees, agents, servants or employees; and (c) any injury to any invitee, licensee, agent, servant or employee of the Tenant, including death resulting at any time therefrom, occurring on or about the Leased Premises, the Property or the Lands; and this indemnity shall survive the expiry or sooner determination of this Lease. Page 149 7.10 DAMAGE BY TENANT That if the Building including the Leased Premises, the elevators, boilers, engines, pipes and other apparatus (or any of them) used for the purpose of heating, ventilating or air-conditioning the Building or operating the elevators, or if the water pipes, drainage pipes, electric lighting or other equipment of the Building or the roof or outside walls or other parts of the Building will not function properly or become damaged or destroyed through the negligence, carelessness or misuse of the Tenant, or of any of its invitees, licensees, agents, servants, employees, clients, customers or contractors, or through it or them in any way stopping up or injuring any heating, ventilating or air- conditioning apparatus, elevators, water pipes, drainage pipes or other equipment or parts of the Building, the expense of the necessary repairs, replacements or alterations shall be borne by the Tenant and paid forthwith on demand to the Landlord as Additional Rent. 7.11 TENANT INSURANCE (a) To maintain in force during currency of this Lease at the Tenant's expense insurance policies to cover the following: (i) comprehensive general liability insurance with limits of not less than Five Million Dollars ($5,000,000.00) (including bodily injury and property damage, tenant's legal liability, cross liability and contractual liability) to cover all responsibilities assumed by the Tenant with respect to the use or occupancy of and the business carried on, in or from the Leased Premises, in amounts acceptable to the Landlord; (ii) all risk insurance covering leasehold improvements made or installed by or on behalf of the Tenant in an amount equal to the full replacement value thereof; and (iii) any other insurance that the Landlord (or the Landlord's mortgagee, if any) may reasonably require from time to time in form and amounts and for insurance risks against which a prudent Tenant would protect itself; (b) That all Tenant's insurance required hereunder shall be with insurers and upon terms and conditions to which the Landlord has no reasonable objection. Copies of all policies, or certificates evidencing the insurance or its renewal shall be delivered to the Landlord at the Landlord's request; (c) That all policies of insurance to be maintained by the Tenant shall, in the case of general liability insurance, include the Landlord (and, where applicable, the Landlord's mortgagee) as additional insured and, in the case of all other insurance coverage, contain a waiver by the insurer and Tenant of any rights of subrogation or indemnity or any other claim Page 150 to which the insurer might otherwise be entitled against the Landlord (and mortgagee) or the agents or employees of the Landlord. All such insurance policies shall also contain a provision prohibiting the insurer from cancelling or altering the insurance coverage without first giving the Landlord thirty (30) days prior written notice thereof; (d) That if the Tenant fails to take out or maintain in force such insurance, the Landlord may take out the necessary insurance and pay the premium therefor and the Tenant shall pay to the Landlord the amount of such premium immediately on demand as Additional Rent; and (e) That if both the Landlord and the Tenant have claims to be indemnified under any such insurance, the indemnity shall be applied first to the settlement of the claim of the Landlord and the balance, if any, to the settlement of the claim of the Tenant. 7.12 NO ABATEMENT OF RENT That there shall be no abatement or reduction of rent and that the Landlord shall not be liable for any damage howsoever caused to property of the Tenant or of any person subject to the Tenant which is in or upon or being brought to or from the Leased Premises or the Building or for personal injury (including death) sustained in any manner by the Tenant or any person subject to the Tenant while the Tenant or any such person is on or upon entering or leaving the Leased Premises or Building unless such property damage or personal injury may have been attributable to fault or neglect on the part of the Landlord or of any person for whom the Landlord is at law responsible, and that the Tenant will indemnify and save harmless the Landlord from and against all claims and demands made against the Landlord by any person for or arising out of any such property damage or personal injury. 7.13 EXHIBITING PREMISES To permit the Landlord or its agents or servants to enter and show the Leased Premises, during normal business hours, to prospective purchasers of the Building and may after notice of termination of this Lease has been given or within the last six (6) months of the Term, enter and show the Leased Premises to prospective tenants and erect signs stating that the premises are "To Let". 7.14 SIGNS The Tenant shall not paint, display, inscribe or place any sign, symbol, notice or lettering of any kind anywhere outside the Leased Premises or within the Leased Premises so as to be visible from the outside of the Building or the common areas thereof with the exception only of an identification sign at the entrance to the Leased Premises (which sign shall be subject to the Landlord's written approval as to size, design and location) and the Tenant's name on the directory listing (if any) in the main lobby of the Building. Page 151 7.15 NAME OF BUILDING Not to refer to the Building by any name other than that designated from time to time by the Landlord and the Tenant shall use the name of the Building for the business address of the Tenant but for no other purpose. 7.16 KEEP TIDY The Tenant shall provide its own cleaning and janitorial services. At the end of each business day, the Tenant shall leave the Leased Premises in a tidy condition. 7.17 DELIVERIES The Tenant shall receive, ship, take delivery of and allow and require suppliers or others to deliver or take delivery of merchandise, supplies, fixtures, equipment, furnishings, wares or merchandise only through the loading entrance and other facilities provided for that purpose and at the times set by the Landlord. 7.18 NOTICE OF DAMAGE To notify the Landlord promptly of any damage to or defect in the Leased Premises or the Building or any part thereof including any electrical, plumbing, heating, ventilating, air-conditioning, water, sprinkler or gas systems or equipment, or the water pipes, gas pipes, telephone lines or electrical apparatus within or leading to the Leased Premises, and in case of fire to give immediate notice thereof to the Fire Department. 7.19 ALTERATIONS, ETC The Tenant will not make or erect in or to the Leased Premises any installations, alterations, additions or partitions or remove or change the location or style of any installations, alterations, equipment, outlets, piping or wiring relating to the electrical, plumbing, water, gas, air-conditioning, heating or ventilating systems without submitting drawings and specifications to the Landlord and obtaining the Landlord's prior written consent in each instance. The Tenant must further obtain the Landlord's prior written consent to any change or changes in such drawings and specifications submitted as aforesaid. The Tenant's request for such consent shall be in writing and accompanied by an adequate description of contemplated work and with appropriate working drawings and specifications thereof. The Landlord's cost of having its architects or engineers examine such drawings and specifications shall be payable by the Tenant. The Landlord may require that any and all work be performed by the Landlord's contractors or workmen or by contractors or workmen engaged by the Tenant but in each case only under written contract approved in writing by the Landlord and subject to all reasonable conditions which the Landlord may impose and subject to inspection by and reasonable supervision of the Landlord (including a Page 152 supervision fee to be paid by the Tenant to the Landlord equal to fifteen percent (15%) of the total cost of such work). The Landlord may at its option require that only the Landlord's contractors be engaged for any mechanical, electrical, plumbing, structural or sprinkler work to be done in the Leased Premises. Any work performed by or for the Tenant shall be performed by competent workmen whose labour union affiliations are not incompatible with those of any workmen who may be employed in the Building by the Landlord, its contractors or subcontractors. The cost of all such work and of all materials, labour and services involved therein and of all services, necessitated thereby shall be at the sole cost and expense of the Tenant and shall be completed in a good and workmanlike manner and with reasonable diligence in accordance with the description of the work approved by the Landlord. Any such alterations, additions, and fixtures shall, when made or installed, be and become the property of the Landlord without payment being made therefor; provided that upon the determination of this Lease the Landlord may at its option require the Tenant, or itself at the Tenant's expense, to remove the same and to restore the Leased Premises to the condition in which they were at the commencement of this Lease. 7.20 CONSTRUCTION LIENS The Tenant covenants that he will not suffer or permit during the Term hereof any construction or other liens for work, labour, services or material ordered by him or for the cost of which he may be in any way obligated to attach to the Leased Premises or the Building or the Land and that whenever and so often as any such liens shall attach or claims therefor shall be filed, the Tenant shall within twenty (20) days after the Tenant has notice of the claim for lien, procure the discharge thereof by payment or by giving security or in such manner as is or may be required or permitted by law. 7.21 SECURITY The Tenant will maintain on the Leased Premises sufficient moveable property to guarantee the payment of one (1) year's Annual Rent and Additional Rent. 7.22 HAZARDOUS SUBSTANCES (a) The Tenant shall not cause or permit any Hazardous Substances to be brought onto, created in, released or discharged from, placed or disposed of, at or near the Leased Premises, Building or Lands; (b) The Tenant shall not cause or permit to occur any violation of any federal, provincial, municipal or local law, ordinance, or regulation, now or hereinafter enacted (the "Laws"), relating to environmental conditions on, under, at, near or about the Leased Premises, Building or Lands, or relating to the Landlord, the Tenant or the Building, air, soil or ground water condition, including without limitation, the generation, storage or disposal of Hazardous Substances; Page 153 (c) For the purposes of this section, "Hazardous Substances" means any substance, or class of substance or mixture of substances which may be detrimental to the environment, plant or animal life, or human health and includes, without limitation, flammable, explosives, or radioactive materials, asbestos, polychlorinated biphenyls (PCBs), chemicals believed to cause cancer or reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic substances and related materials, petroleum and petroleum products, any substance that, if added to water, may degrade or alter or form part of a process of degradation or alteration of the quality or temperature of that water to the extent that it is detrimental to its use by man or by any animal, fish or plant, and substances declared to be hazardous or toxic under any law or regulation now or hereafter enacted or promulgated by any governmental authority having jurisdiction over the Landlord, the Tenant, the Leased Premises or the Building (the "Authorities"); (d) The Tenant shall, at its own expense, comply with the Laws; (e) The Tenant shall, at its own expense, make all submissions to, provide all information required by, and comply with all requirements of the Authorities under the Laws; (f) The Tenant shall indemnify, defend and hold harmless the Landlord, the Landlord's mortgagees, any manager of the building, and their respective officers, directors, beneficiaries, shareholders, partners, agents and employees, from all fines, suits, procedures, claims and actions of every kind, and all costs associated therewith (including legal fees on a solicitor and his own client basis and consultants' fees) arising out of or in any way connected with any deposit, spill, discharge, or other release of Hazardous Substances that occurs during the Term or any renewal or extension period, at or from the Leased Premises, or which arises at any time from the Tenant's use or occupancy of the Leased Premises, or from the Tenant's failure to provide all information, make all submissions, and take all steps required by this Section or by the Authorities; (g) Notwithstanding any other provision of this Lease, if the Tenant creates or brings to the Leased Premises any Hazardous Substances or if the conduct of the Tenant's business shall cause there to be any Hazardous Substances at or near the Leased Premises, or discharged or released on, under or about the Leased Premises, the building or the lands upon which the building is constructed, the air, soil or ground water, then, notwithstanding any rule of law to the contrary, such Hazardous Substances shall be and remain the sole and exclusive property of the Tenant and shall not become the property of the Landlord, notwithstanding the degree of affixation to the Premises of the Hazardous Substances or the goods containing the Hazardous Substances. This Page 154 affirmation of the Tenant's interest in the Hazardous Substances or the goods containing the Hazardous Substances shall not however prohibit the Landlord from dealing with such material as otherwise provided for in this Lease. 7.23 NUISANCE The Tenant shall not cause or maintain any nuisance in or about the Leased Premises, and shall keep the Leased Premises free of debris, rodents, vermin and anything of a dangerous noxious or offensive nature or which could create a fire hazard (through undue load on electrical circuits or otherwise) or undue vibration, heat or noise. 8.00 LANDLORD'S COVENANTS The Landlord further covenants with the Tenant: 8.01 QUIET ENJOYMENT The Landlord covenants with the Tenant that if the Tenant pays the Annual Rent, Additional Rent and all other sums reserved herein and observes and performs the covenants, conditions and agreements set out in this Lease, the Tenant shall and may peaceably possess and enjoy the Leased Premises during the Term without interruption or disturbance from the Landlord. 8.02 TAXES, ETC. To pay or cause to be paid all taxes and rates, municipal, parliamentary or otherwise, including, without limiting the generality of the foregoing, water rates with respect to the Lands, the Building or assessed against the Landlord in respect thereof, except those directly assessed or charged to or payable by the Tenant or assessed or charged with reference to the use or occupation of the Leased Premises and except as otherwise provided in this Lease. 8.03 HEATING AND AIR-CONDITIONING To provide for heating and air-conditioning so that when heat is reasonably required for the reasonable use of the Leased Premises the Landlord will furnish heat therefor up to a reasonable temperature and when the heating system is not in use and the Landlord considers that air-conditioning is reasonably required it will operate the air- conditioning systems in the Building. The said heating and air- conditioning systems will be maintained by the Landlord during normal business hours except during the making of repairs and should the Landlord make default in so doing, it shall not be liable for any indirect or consequential damages for personal discomfort or illness due to such default. The Landlord reserves the right to stop the services of the heating and/or air-conditioning equipment when necessary by reason of any accident or any repairs, alterations or improvements which, in the judgment of the Landlord, are desirable or necessary to be made until such repairs, alterations or improvements shall have been completed. The Landlord shall Page 155 have no further responsibility or liability for failure to supply the said heating and/or air-conditioning service when prevented from doing so, by strikes or by any cause beyond the Landlord's reasonable control or by orders or regulations by any body or authority having jurisdiction or by other reason of any failure of electrical current, steam or water or suitable power supply or inability upon the exercise of reasonable diligence to obtain such electrical current, steam or water for the operation of the heating or air-conditioning equipment. 8.04 REPAIR OF STRUCTURE To repair, replace and maintain the structural parts of the Building, and to perform such repairs, replacements and maintenance with reasonable dispatch, and in a good and workmanlike manner, at any time and from time to time, and notwithstanding anything contained herein to the contrary, the Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort occasioned thereby. 8.05 JANITORIAL SERVICES To provide janitorial and cleaning services to the common areas of the Building. The Landlord shall not be responsible for any act of omission or commission on the part of any person or persons employed to clean the Leased Premises or the Building. 8.06 DELAYS IN PROVISION OF SERVICES It is understood and agreed that whenever and to the extent that the Landlord shall be unable to fulfil, or shall be delayed or restricted in the fulfilment of any obligation hereunder in respect of the supply or provision of any service or utility or the doing of any work or the making of any repairs by reason of being unable to obtain the material, goods, equipment, service, utility or labour required to enable it to fulfil such obligation or by reason of any statute, law or order-in- council or any regulation or order passed or made pursuant thereto or by reason of the order or direction of any administrator, controller or board, or any governmental department or officer or other authority, or by reason of not being able to obtain any permission or authority required thereby, or by reason of any other cause beyond its control whether of the foregoing character or not, the Landlord shall be entitled to extend the time for fulfilment of such obligation by a time equal to the duration of such delay or restriction, and the Tenant shall not be entitled to compensation for any inconvenience, nuisance, discomfort, direct or indirect or consequential damage or damages thereby occasioned. 9.00 TENANT'S FIXTURES The Tenant may install its usual trade fixtures in the usual manner, provided such installation does not damage the structure of the Leased Premises or the Building and provided further that the Tenant shall have submitted detailed Page 156 plans and specifications for such trade fixtures to the Landlord and obtained its written consent thereto which consent shall not be unreasonably withheld. 9.01 REMOVAL OF TENANT'S FIXTURES Provided that the Tenant may remove his trade or tenant's fixtures; provided further, however, that all installations, alterations, additions, partitions, and fixtures other than trade or tenant's fixtures in or upon the Leased Premises, whether placed there by the Tenant or the Landlord, shall immediately upon such placement, be the Landlord's property without compensation therefor to the Tenant and, except as hereinafter mentioned in this paragraph shall not be removed from the Leased Premises by the Tenant at any time either during or after the term. Notwithstanding anything herein contained, the Landlord shall be under no obligation to repair or maintain the Tenant's installations, alterations, additions, partitions and fixtures or anything in the nature of a leasehold improvement made or installed by the Tenant or Landlord or third party; and further, notwithstanding anything herein contained, the Landlord shall have the right upon termination of this Lease by affluxion of time or otherwise or within six (6) months thereafter to require the Tenant to remove, or require the Tenant to pay to the Landlord the cost to remove, any installations, alterations, additions, partitions and fixtures or anything in the nature of a leasehold improvement made or installed by the Tenant, the Landlord or a third party, whether for the Tenant or a previous occupant, and make good any damage caused to the Leased Premises by such installation or removal. 10.00 DAMAGE OR DESTRUCTION OF LEASED PREMISES Provided that if during the continuation of this Lease, the Building or the Leased Premises are destroyed or damaged by any cause whatsoever, then the following provisions shall apply: 10.01 PARTIAL DAMAGE If damage shall occur to the Building or the Leased Premises so that all or part of the Leased Premises are rendered untenantable by damage from fire or other casualty which, in the reasonable opinion of the Landlord's architect, can be substantially repaired under applicable laws and governmental regulations within ninety (90) days from the date of such casualty (employing normal construction methods without overtime or other premium), the Landlord shall cause such damage to be repaired with all reasonable speed. 10.02 TOTAL DAMAGE If the Building or the Leased Premises are damaged to such an extent that the Leased Premises are rendered untenantable by damage from fire or other casualty which, in the reasonable opinion of the Landlord's architect, cannot be substantially repaired under applicable laws and governmental regulations within ninety (90) days from the date of such casualty (employing normal construction methods without overtime or other premium), then either the Page 157 Landlord or Tenant may elect to terminate this Lease as of the date of such casualty by written notice delivered to the other not more than ten (10) days after receipt of such architect's opinion (failing which the Landlord shall cause such damage to be repaired at its own expense with all reasonable speed). 10.03 OBLIGATION TO REPAIR The Landlord's obligation to repair as set forth in the preceding two paragraphs hereof is conditional upon the Landlord receiving adequate proceeds from policies of insurance maintained in respect of such casualties or, if such proceeds are not made available to the Landlord, the Landlord electing to obtain its own financing for such repairs. In the event that no such proceeds of insurance are available to the Landlord and if the Landlord elects not to obtain its own financing for such repairs, then the Landlord shall, by notice in writing to the Tenant delivered within ten (10) days after receipt of the opinion of the Landlord's architect, notify the Tenant that the Lease is terminated, which termination shall be effective as of the date of such casualty. In calculating the amount of insurance proceeds available, the Landlord will be deemed to have received the deductible portion of any insurance policy. 10.04 ABATEMENT OF RENT If the Landlord is required to repair the damage pursuant to the provisions hereof and does not elect to terminate the Lease, the Annual Rent and Additional Rent payable by the Tenant under this Lease shall be proportionately reduced to the extent that the Leased Premises are thereby rendered unusable by the Tenant in its business from the date of such casualty until completion by the Landlord of the repairs to the Leased Premises and the Building so that the Leased Premises are thereafter fully usable by the Tenant in its business. 10.05 DAMAGE TO 50% OF BUILDING Notwithstanding anything otherwise contained in this Lease, if fifty percent (50%) or more of the rentable area of the Building is damaged or destroyed and if, in the reasonable opinion of the Landlord's Architect, the said rentable area cannot be rebuilt or made fit for the purposes of the tenants thereof within ninety (90) days of the date of such casualty, the Landlord may, at its option, terminate this Lease by giving notice of termination to the Tenant within thirty (30) days of the date of such casualty and the Tenant shall, with reasonable dispatch and expedition, but in any event within sixty (60) days after delivery of the notice of termination, deliver up possession of the Leased Premises to the Landlord and the rent and other payments for which the Tenant is liable hereunder shall be apportioned and paid to the date possession is so delivered up. 10.06 COMPLETION OF REPAIR Page 158 Provided that, if, upon the completion by the Landlord of any repairs required as a result of any such destruction or damage, a dispute shall arise between the Landlord and the Tenant as to whether or not the Leased Premises have been made fit for the purposes of the Tenant under this Lease, the Landlord may, at its option, terminate this Lease by giving thirty (30) days notice to the Tenant and if such notice shall be given this Lease shall, at the expiration of such period, be at an end and the Tenant shall deliver up the Leased Premises to the Landlord or whom it may appoint and the Landlord may, on demand, recover the full rental hereby reserved computed from the date on which such repairs were completed up to the date on which the Tenant is required to vacate. 11.00 LIABILITY FOR DAMAGE TO PROPERTY In the absence of negligence or wilful act or default on the part of the Landlord, its servants, agents or workmen, the Landlord shall not be liable or responsible in any way for any loss, damage or injury to any person or for any loss of or damage to any property belonging to the Tenant, to employees of the Tenant or to any other person while such property is in the Leased Premises or in the Building or in or on the surrounding, Lands and buildings owned by the Landlord, the areaways, the parking garages, the parking areas, lawns, sidewalks, reflective pools, steps, platforms, corridors, stairways or elevators whether or not any such property has been entrusted to employees of the Landlord and without limiting the generality of the foregoing, the Landlord shall not be liable for any damage to any such property caused by theft or breakage or by steam, water, rain or snow which may leak into, issue or flow from any part of the Building or from the water, steam or drainage pipes or plumbing works of the Building or from any other place or quarter or for any damage caused by or attributable to the condition or arrangement of any electric or other wiring or for any damage caused by smoke or anything done or omitted by any other tenant in the Building or for any other loss whatsoever with respect to the Leased Premises, goods placed therein or any business carried on therein. 12.00 DEFAULT OF TENANT Provided and it is hereby expressly agreed that if and whenever the Annual Rent or Additional Rent hereby reserved or any part thereof shall not be paid on the day appointed for payment thereof, whether lawfully demanded or not, or in case of breach or non-observance or non- performance of any of the covenants, agreements, provisos, conditions or Rules and Regulations on the part of the Tenant to be kept, observed or performed, or in case the Leased Premises shall be vacated or remain unoccupied for fifteen (15) days or in case the Term shall be taken in execution or attachment for any cause whatever, then and in every such case, it shall be lawful for the Landlord thereafter to enter into and upon the Leased Premises or any part thereof in the name of the whole and the same to have again, repossess and enjoy as of its former estate, anything in this Lease contained to the contrary notwithstanding other than the proviso to this paragraph; PROVIDED that the Landlord shall not at any time have the right to re-enter and forfeit this Lease Page 159 by reason of the Tenant's default in the payment of the rent reserved by this Lease, unless and until the Landlord shall have given to the Tenant written notice setting forth the default complained of and the Tenant shall have the right during five (5) business days next following the date on such notice to cure any such default in payment of rent. In case without the written consent of the Landlord, the Leased Premises shall be used by any other person than the Tenant or for any other purpose than that for which the same were let or in case the Term or any of the goods and chattels of the Tenant shall be at any time seized in execution or attachment by any creditor of the Tenant or if the Tenant makes any bulk sale, then in any such case this lease shall, at the option of the Landlord, cease and determine and the Term shall immediately become forfeited and void in accordance with the provisions of Section 15, RIGHT OF TERMINATION, herein. 13.00 BANKRUPTCY Provided further that, in case without the written consent of the Landlord, the Leased Premises shall be used by any other person than the Tenant or for any other purposes than that for which the same were let or in case the Term or any of the goods and chattels of the Tenant shall be at any time seized in execution or attachment by any creditor of the Tenant or by the Tenant making any assignment for the benefit of creditors or any bulk sale or become bankrupt or insolvent or take the benefit of any act now or hereafter in force for bankrupt or insolvent debtors, or, if the Tenant is a corporation and any order shall be made for the winding up of the Tenant, or other termination of the corporate existence of the Tenant, then in any such case this Lease shall, at the option of the Landlord, cease and determine and the Term shall immediately become forfeited and void and the then current month's rent and the next ensuing three (3) months rent and in addition, all cash allowances, tenant inducement payments and the value of any other benefit paid to or conferred on the Tenant by or on behalf of the Landlord in connection with this Lease shall immediately become due and be paid and the Landlord may re-enter and take possession of the Leased Premises as though the Tenant or other occupant or occupants of the Leased Premises was or were holding over after the expiration of the Term without any right whatever. 14.00 RE-ENTRY BY LANDLORD - The Tenant further covenants and agrees that on the Landlord's becoming entitled to re-enter upon the Leased Premises under any of the provisions of this Lease, the Landlord, in addition to all other rights, shall have the right to enter the Leased Premises as the agent of the Tenant either by force or otherwise, without being liable for any prosecution therefor and to relet the Leased Premises as the agent of the Tenant, and to receive the rent therefor and as the agent of the Tenant, to take possession of any furniture or other property on the Leased Premises and to sell the same at public or private sale without notice and to apply the proceeds of such sale and any rent derived from reletting the Leased Premises upon account of the rent under this Lease, and the Tenant shall be liable to the Landlord for the deficiency, if any. Page 160 15.00 RIGHT OF TERMINATION The Tenant further covenants and agrees that on the Landlord becoming entitled to re-enter upon the Leased Premises under any of the provisions of this Lease, the Landlord, in addition to all other rights, shall have the right to determine forthwith this Lease and the Term by leaving upon the Leased Premises notice in writing of its intention so to do, and thereupon, rent shall be computed, apportioned and paid in full to the date of such determination of this Lease and any other payments for which the Tenant is liable under this Lease shall be paid and the Tenant shall immediately deliver up possession of the Leased Premises to the Landlord, and the Landlord may re-enter and take possession of the same without limiting the generality of the foregoing, in addition to any other rights the Landlord may have against the Tenant, in the event the Tenant wishes to terminate this Lease early, the Tenant shall be liable for the unamortized balance of the cost of the Leasehold Improvements, amortized over the Term of the Lease on a straight line basis. 16.00 DISTRESS The Tenant waives and renounces the benefit of any present or future statute taking away or limiting the Landlord's right of distress, and covenants and agrees that notwithstanding any such statute, none of the goods and chattels of the Tenant on the Leased Premises at any time during the Term shall be exempt from levy by distress for rent in arrears. In the event that the Tenant shall remove or permit the removal of any of its goods or chattels from the Leased Premises, the Landlord may within thirty (30) days thereafter and if the Tenant is in arrears of rent, seize such goods and chattels wherever the same may be found and may sell or otherwise dispose of the same as if they had actually been distrained upon the Leased Premises by the Landlord for arrears of rent. 17.00 NON-WAIVER No condoning, excusing or overlooking by the Landlord of any default, breach or non-observance by the Tenant at any time or times in respect of any covenant, proviso or condition herein contained shall operate as a waiver of the Landlord's rights hereunder in respect of any continuing or subsequent default, breach or non-observance, or so as to defeat or affect in any way the rights of the Landlord herein in respect of any such continuing or subsequent default or breach, and no waiver shall be inferred from or implied by anything done or omitted by the Landlord save only express waiver in writing. All rights and remedies of the Landlord in this Lease contained shall be cumulative and not alternative. 18.00 CHANGES TO BUILDING The Landlord hereby reserves the right at any time and from time to time to make changes in, additions to, subtractions from or rearrangements of the Building including, without limitation, all improvements at any time thereon, all entrances and exits thereto, and to grant, modify and terminate easements or Page 161 other agreements pertaining to the use and maintenance of all or parts of the Building and to make changes or additions to the pipes, conduits, utilities and other necessary building services in the Leased Premises which serve other premises, provided that prior to the commencement of the Term, the Landlord may alter or relocate the Leased Premises to the extent found necessary by the Landlord to accommodate changes in construction design or facilities including major alterations and relocations. The Landlord agrees that in performing such alterations, it shall do so in a manner so as to minimize any material interference with the Tenant's use and enjoyment of the Leased Premises. The Landlord shall also have the right during the Term at its reasonable expense to relocate the Leased Premises to an alternate location within the Building. 19.00 SEVERANCE OF LAND The Landlord shall have the right from time to time to sever (for purposes of sale, lease, mortgage, charge or otherwise) any part or parts of the Land or any buildings or improvements thereon, including the creation of rights-of-way, easements and parking arrangements which the Landlord deems necessary and the Tenant hereby consents to any such severance and agrees to execute, at no cost to the Landlord, any documents or consents which the Landlord may request for these purposes. If any part or parts of the Land or the buildings or improvements on the lands are so severed and are deemed by the Landlord to no longer form part of the property, such part or parts shall be excluded from the Lands and the property for the purposes of this Lease at the time designated by the Landlord and the Tenant shall when requested by the Landlord, execute, at no cost to the Landlord, a release of any interest in the Lands so excluded. 20.00 COSTS OF COLLECTION The Tenant shall pay, as Additional Rent, all costs, expenses and legal fees (on a solicitor and his client basis) that may be incurred or paid by or on behalf of the Landlord in enforcing the covenants and provisions of this Lease. 21.00 PROFITS AND REMEDIES BY LANDLORD In addition to all rights and remedies available to the Landlord under the provisions of this Lease or by statute or the general law in the event of any default by the Tenant of the provisions of this Lease: 21.01 PAYMENTS TO THIRD PARTIES The Landlord shall have the right at all times to remedy or attempt to remedy any default of the Tenant, and in so doing, may make any payments due or alleged to be due by the Tenant to third parties and may enter upon the Leased Premises to do any work or other things therein, and in any such event, all costs and expenses of the Landlord in remedying or attempting to remedy such default shall be payable by the Tenant to the Landlord forthwith upon demand as Additional Rent. Page 162 21.02 NON-PAYMENT OF ADDITIONAL RENT The Landlord shall have the same rights and remedies in the event of any non-payment by the Tenant of any amounts payable by the Tenant under any provision of this Lease and the parking agreement as in the case of non- payment of rent and may be recovered by the Landlord as rent by any and all remedies available to the Landlord for the recovery of rent in arrears. 21.03 INTEREST ON ARREARS The Landlord shall, if the Tenant shall fail to pay any Monthly Rent, Additional Rent or other amounts from time to time payable by it to the Landlord hereunder promptly when due, be entitled to interest on all such Annual Rent, Additional Rent and other amounts which are unpaid and overdue under this Lease and the parking agreement, such interest to be compounded monthly thereon and to be computed at a rate equal to six percent (6%) per annum in excess of the minimum lending rate to prime commercial borrowers from time to time charged by the Royal Bank of Canada or such other chartered bank as the Landlord may designate, from the date upon which such Monthly Rent, Additional Rent and other amounts was due until actual payment thereof. 22.00 NOTICE Any notice required or contemplated by any provisions of this Lease shall be given in writing, enclosed in a sealed envelope addressed, in the case of notice to the Landlord c/o Kanata Research Park Corporation, 555 Legget Drive, Suite 206, Kanata, Ontario, Canada, Canada K2K 2X3 and in the case of notice to the Tenant, to it at the Leased Premises and mailed by registered mail, postage prepaid or telefaxed. The time of giving of such notice shall be conclusively deemed to be, if mailed the third (3rd) business day after the day of such mailing, if telefaxed, the next business day following the date sent as evidenced by the sender's transmittal record. Such notice shall also be sufficiently given if and when the same shall be delivered, in the case of notice to the Landlord, to an executive officer of the Landlord, and in the case of notice to the Tenant, to him personally or to an executive officer, manager or a person who appears to be in charge, of the Tenant if the Tenant is a corporation. Such notice, if delivered, shall be conclusively deemed to have been given and received at the time of such delivery. If, in this Lease, two or more persons are named as Tenant, such notice shall also be sufficiently given if and when the same shall be delivered personally to any one of such persons. Provided that either party may, by notice to the other, from time to time, designate another address in Canada to which notices mailed more than ten (10) days thereafter shall be addressed. The word "notice" in this paragraph shall include any request, demand, direction, or statement in this Lease provided or permitted to be given by the Landlord to the Tenant or by the Tenant to the Landlord. 23.00 SUBORDINATION, POSTPONEMENT, ATTORNMENT Page 163 The Tenant shall promptly upon the written request of the Landlord, enter into an agreement: (a) subordinating the Term and the rights of the Tenant hereunder to any mortgage, charge, ground lease, trust deed or debenture present or future and all renewals, modifications, replacements or extensions thereof, which may affect the Leased Premises, the Property, the Lands or the Building; (b) agreeing that the Term hereof shall be subsequent in priority to any such mortgage, charge, ground lease, trust deed or debenture; provided that the Tenant's obligations under this paragraph shall be conditional upon any such mortgagee or secured party entering into a non- disturbance agreement with the Tenant under which the Tenant's continued possession of the Leased Premises is ensured notwithstanding any act taken by the mortgagee or secured party. 23.01 TENANT'S RIGHT TO POSSESSION Notwithstanding any postponement or subordination referred to herein, the Tenant acknowledges that its obligations under this Lease shall remain in full force and effect notwithstanding any action at any time taken by a mortgagee, chargee or ground lessor to enforce the security of any mortgage charge, ground lease, trust deed or debenture; provided, however, that any postponement or subordination given hereunder shall reserve to the Tenant the right to continue in possession of the Leased Premises under the terms of this Lease so long as the Tenant shall not be in default hereunder. 23.02 ATTORNMENT BY TENANT The Tenant, whenever requested by any mortgagee (including any trustee under a deed of trust and mortgage), chargee or ground lessor, shall attorn to such mortgagee, chargee or ground lessor as a tenant upon all the terms of this Lease. 24.00 CERTIFICATE The Tenant agrees that he will at any time and from time to time upon not less than five (5) days' prior notice execute and deliver to the Landlord or any mortgagee of the Lands (including a deed of trust and mortgage) a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the modifications and that the same is in full force and effect as modified), the amount of the Annual Rental then being paid hereunder, the dates to which the same, by instalments or otherwise, and other charges hereunder have been paid, and whether or not there is any existing default on the part of the Landlord of which the Tenant has notice. 25.00 REGISTRATION Page 164 The Tenant covenants and agrees with the Landlord that the Tenant will not register this Lease in this form in any Registry Office or the Land Titles Office. If the Tenant desires to make a registration for the purposes only of giving notice of this Lease, then the parties hereto shall contemporaneously with the execution of this Lease execute a short form thereof solely for the purpose of supporting an application for registration of notice thereof. 26.00 PLANNING ACT Where applicable, this Lease shall be subject to the condition that it is effective only if The Planning Act, 1983, as amended is complied with. Pending such compliance the Term and any renewal thereof shall be deemed to be for a total period of one (1) year less than the maximum lease Term permitted by law without such compliance. 27.00 TRANSFER BY LANDLORD In the event of a sale, transfer or lease by the Landlord of the Building, the Lands or a portion thereof containing the Leased Premises or the assignment by the Landlord of this Lease or any interest of the Landlord hereunder, the Landlord shall, without further written agreement, to the extent that such purchaser, transferee or lessee has become bound by the covenants and obligations of the Landlord hereunder, be freed, released and relieved of all liability or obligations under this Lease incurred or arising after the date of such sale, transfer or lease. 28.00 NO ADVERTISING OF LEASED PREMISES The Tenant shall not print, publish, post, display or broadcast any notice or advertisement to the effect that the whole or any part of the Leased Premises are for rent, and it shall not permit any broker or other person to do so without the consent in writing of the Landlord. 29.00 TIME OF ESSENCE Time shall be of the essence of this Lease. 30.00 LAWS OF ONTARIO This Lease shall be deemed to have been made in and shall be construed in accordance with the Laws of the Province of Ontario. Page 165 31.00 SEVERABILITY OF COVENANTS The Landlord and the Tenant agree that all of the provisions of this Lease are to be construed as covenants and agreements as though the words importing such covenants and agreements were used in each separate paragraph hereof. Should any provision or provisions of this Lease be illegal or not enforceable it or they shall be considered separate and severable from the Lease and its remaining provisions shall remain in force and be binding upon the parties hereto as though the said provision or provisions had never been included. 32.00 HEADINGS The captions appearing in the margin or the headings contained in this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease or of any provision hereof. 33.00 SCHEDULES The following Schedules attached hereto form part of this Lease: Schedules: 34.00 LEASE ENTIRE AGREEMENT The Tenant acknowledges that there are no covenants, representations, warranties, agreements or conditions expressed or implied, collateral or otherwise forming part of or in any way affecting or relating to this Lease save as expressly set out in this Lease and that this Lease constitutes the entire agreement between the Landlord and the Tenant and may not be modified except as herein explicitly provided or except by subsequent agreement in writing of equal formality hereto executed by the Landlord and the Tenant. 35.00 INTERPRETATION IN THIS INDENTURE: (a) "herein", "hereof", "hereby", "hereunder", "hereto", "hereinafter", and similar expressions refer to this indenture and not to any particular paragraph, section or other portion thereof, unless there is something in the subject matter or context inconsistent therewith. (b) "business day(s)" means any of the days from Monday to Friday of each week inclusive unless such day is a statutory holiday or public holiday. (c) "normal business hours" means the hours from 8:00 a.m. to 6:00 p.m. on business days. 36.00 SUCCESSORS Page 166 This indenture and everything herein contained shall enure to the benefit of and be binding upon the respective heirs, executors, administrators, permitted successors and assigns, of the Tenant and other legal representatives as the case may be, of each and every of the parties hereto, and every reference herein to any party hereto shall include the heirs, executors, administrators, permitted successors, assigns and other legal representatives of such party, and where there is more than one tenant or there is a female party or a corporation, the provisions hereof shall be read with all grammatical and gender changes thereby rendered necessary and all covenants shall be deemed joint and several. Page 167 37.00 JOINT AND SEVERAL COVENANT If more than one person executes this Lease as Tenant, each such person shall be bound jointly and severally with the other(s), waiving the benefit of division and discussion, for the fulfilment of all of the obligations of Tenant hereunder. IN WITNESS WHEREOF the parties hereto have hereunto affixed their corporate seals duly attested to by the hands of their proper signing officers authorized in that behalf. SIGNED, SEALED AND DELIVERED ) in the presence of: ) KANATA RESEARCH PARK ) CORPORATION ) ) ) ) ) Per:_________________________________________ ) Name: ) Title: c/s ) I have the authority to bind the corporation. ) ) NEWBRIDGE NETWORKS ) CORPORATION (Carrying on ) Business as Newbridge ) Learning Services) ) ) ) ______________________ ) Per:_________________________________________ Witness ) Name: ) Title: c/s ) ) ______________________ ) Per:_________________________________________ Witness ) Name: ) Title: ) ) I/We have the authority to bind the ) corporation. Page 168 SCHEDULE "A" ------------ LEGAL DESCRIPTION ----------------- FIRSTLY: Parcel 2-1, Section 4M-642, Part of Block 2, Plan 4M-642, in the City of Kanata, Regional Municipality of Ottawa Carleton, designated as Parts 1 and 2 on Plan 4R-13076. (PIN 04517-0740) SECONDLY: Part of Parcel 8-1, Section March-4 being part of the Northwest half of Lot 8, Concession 4, City of Kanata (formerly Township of March) Regional Municipality of Ottawa Carleton, designated as Parts 3 and 4 on Plan 4R-13076. (Part of PIN 04517-0747) THIRDLY: Part of Parcel 8-1, Section March-4 being part of the Northwest half of Lot 8, Concession 4, City of Kanata (formerly Township of March) Regional Municipality of Ottawa Carleton, designated as Part 5 on Plan 4R- 13076. (Part of PIN 04517-0617) Page 169 SCHEDULE "B ----------- FLOOR PLAN ---------- Page 170 SCHEDULE "C" ------------ RULES AND REGULATIONS --------------------- The Tenant and its invitees and employees shall observe the following rules and regulations (as added to, amended or modified from time to time by the Landlord). 1. The sidewalks, entrances, elevators, stairways, passageways, shipping areas and corridors of the Building shall not be obstructed or used for any other purpose by the Tenant than for ingress and egress to and from the Leased Premises; the Tenant shall not place or allow to be placed in such areas or facilities any waste paper, garbage, refuse or anything that shall tend to make them appear unclean or untidy. 2. The Tenant and its employees shall use washrooms only for the purpose for which they were designed and nothing shall be placed in toilets that might cause them to block. 3. Between peak periods, the elevators will be used for transporting passengers only and during these periods no large parcels or items of equipment will be permitted on the elevators. Peak periods are between 8 a.m. and 10 a.m. in the morning, between 12 noon and 2 p.m. in the afternoon and between 4 p.m. and 6 p.m. in the evening. 4. The Tenant shall make arrangements with the Landlord ahead of time when elevators are to be used for carrying freight or furniture, etc.. Elevators must not be used for this purpose until the Landlord has given its consent and the elevator cabs have been properly protected. 5. The Landlord's janitors shall be permitted prompt access to the Leased Premises for the purpose of cleaning the office areas thereof. 6. The Tenant shall not make any noise which might disturb other tenants and no animals or bicycles or other vehicles shall be brought into the Leased Premises or the Building. 7. The Leased Premises shall not be used as overnight sleeping accommodation, for public sales nor for entertaining purposes. 8. The Tenant shall make arrangements with the Landlord ahead of time if any public meeting is to be held in the Leased Premises and the meeting shall not be held until the Landlord's written consent is obtained. 9. The Tenant shall make arrangements with the Landlord ahead of time to install any business machines, electric appliances, etc. and these installations will not be made until the Landlord's consent is obtained. 10. Windows will not be left open so as to admit rain or snow. 11. The Tenant will not alter any existing locks nor will any additional locks or similar devices be attached to any door or window. Page 171 12. Keys or other devices which are made available to the Tenant for the purpose of providing access to the exterior doors of the Building shall not be duplicated and shall be returned to the Landlord immediately upon termination of the Lease. 13. All adjustments to mechanical equipment such as thermostats, radiators, diffusers, etc. shall be made by the Landlord's staff and no one else. 14. If the Tenant wishes to install any drapes or blinds in any of the windows on the exterior of the Building or on any window of the Leased Premises facing the interior of the Building, the Landlord's prior written consent must be obtained and further the drapes or blinds installed must conform to a uniform colour which the Landlord may at its absolute discretion establish. 15. The Tenant shall not place anything next to or have displayed in the windows of the Leased Premises facing into the common areas so as to visible therein, without the prior written consent of the Landlord. 16. No admittance by the Tenant or its agents is permitted on the roof or equipment rooms of the Building. 17. It shall be the responsibility of the Tenant to prevent any person from throwing objects out of windows or into the ducts or stairwells of the Building, and the Tenant shall pay for any cost, damage or injury resulting from any such acts. 18. The Tenant shall provide adequate receptacles for garbage, refuse and waste paper and all such garbage, refuse and waste paper shall be placed in such containers. The Leased Premises shall be kept in a tidy, healthy and clean condition. 19. The Tenant shall not bring upon the Leased Premises any safes, heavy equipment, motors or any other thing which might overload floors or damage the Leased Premises or the Building. 20. The Landlord may require that all persons entering and leaving the Building at any time other than normal business hours satisfactorily identify themselves and register in books kept for the purpose, and may prevent any person from entering the Leased Premises unless provided with a key thereto and a pass or other authorization from the Tenant in a form satisfactory to the Landlord, and may prevent any person removing any goods therefrom without written authorization. 21. The Tenant shall not use or keep inflammable materials in the Leased Premises. 22. The Landlord shall not be responsible for any theft, loss or damage to vehicles parked therein whatsoever, or for any injury to the Tenant or others in or on the parking facilities whether or not parking charges are imposed. Page 172 23. The Landlord shall have the right to establish rules and regulations governing the use of the parking facilities from time to time and the Tenant hereby agrees to observe and abide by all such rules and regulations. 24. All moving of the Tenant's chattels and trade fixtures and other fixtures from or to the Leased Premises shall be performed after business hours and shall be supervised by the Landlord, its agents or a security guard all at the Tenant's expense. 25. Smoking is prohibited in all common areas of the Building. The foregoing rules and regulations, as from time to time amended, are not necessarily of uniform application, but subject to 7.02 may be waived in whole or in part in respect of other tenants without affecting their enforceability with respect to the Tenant or the Leased Premises. There is no obligation on the Landlord to enforce the rules and regulations, and the Landlord shall not be liable by reason of their non-enforcement. Page 173 SCHEDULE "D" ------------ PARKING ------- 1. During the Term the Landlord hereby agrees to allow the Tenant to park One (1) vehicle per Three Hundred and Twenty-Three (323) rentable square feet of Leased Premises, in the parking facilities located on the Lands ("parking facilities"). In the event the Landlord constructs a parking structure on the Lands, the Tenant shall then be called upon to pay for parking. 2. The Landlord shall not be responsible for any theft, loss or damage to the Tenant's vehicles whatsoever, or for injury to the Tenant or others in the parking facilities. 3. The Landlord shall have the right to establish rules and regulations governing the use of the parking facilities from time to time and the Tenant hereby agrees to observe and abide by all such rules and regulations. Page 174 SCHEDULE "E" ------------ OPTION TO RENEW --------------- 1. Provided the Tenant is in good standing, during the Term has not been in substantial default under this Lease and has not assigned this Lease or sublet all or a portion of the Leased Premises, the Tenant shall have and is hereby granted an option to renew this Lease for a further term of five (5) years provided that in order to exercise this option, the Tenant shall be required to give to the Landlord notice of the exercise of such option in writing not less than six (6) months prior to the date of expiry of the initial Term. 2. Any renewal pursuant to this proviso shall be on the same terms and conditions contained in this Lease except: (a) there shall be no additional right of renewal and no Leasehold Improvements; (b) the Annual Rent payable by the Tenant for such renewal period shall be as agreed upon by the Landlord and Tenant and shall in no event be less than the Annual Rent paid during the last year of the Term; such agreement to be reached not later than three (3) months prior to the expiry of the original Term. Failing such agreement, this option shall be null and void and of no further force and effect. Page 175 SCHEDULE "F" ------------ LEASEHOLD IMPROVEMENTS ---------------------- The Landlord shall, at its sole cost and expense, construct on behalf of the Tenant and install on a turnkey basis to building standards up to a maximum value equal to Twelve dollars ($12.00) per rentable square foot of Leased Premises with the Tenant paying the overrun, if any, those leasehold improvements agreed upon by both Landlord and Tenant as chosen from the Landlord's samples. The turnkey cost shall include the Landlord's administrative costs which relate to the work. The Tenant shall be required to provide to the Landlord a complete set of approved construction drawings and specifications for the Leased Premises six (6) weeks prior to commencement of the Term, failing which rent shall still commence on the commencement date of the Term. Page 176 SCHEDULE "G" ------------ ADDITIONAL TERMS ---------------- The Landlord warrants that any installation of unitized movable walls within the Leased Premises by the Tenant during the Lease Term shall be permitted to be removed by the Tenant upon lease termination and the Tenant shall repair any and all damage caused to the Leased Premises and or Building as a result of the unitized movable walls' installation and or removal. Page 177 DATED THE 15TH DAY OF MARCH, 1999. - -------------------------------------------------------------------------------- BETWEEN: KANATA RESEARCH PARK CORPORATION OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION (Carrying on Business as Newbridge Learning Services) OF THE SECOND PART - -------------------------------------------------------------------------------- L E A S E - -------------------------------------------------------------------------------- Page 178 Prepared by: Linda A. Desjardins Date Edited: July 28, 1999 KANATA RESEARCH PARK CORPORATION AND NEWBRIDGE NETWORKS CORPORATION (Carrying On Business As Newbridge Learning Services) 1.00 LEASED PREMISES....................................................... 1 1.01 ADDITIONAL DEFINITIONS................................................ 1 2.00 TERM.................................................................. 2 2.01 INABILITY TO GIVE OCCUPANCY........................................... 2 2.02 EARLY OCCUPANCY....................................................... 2 2.03 OVERHOLDING........................................................... 2 3.00 RENT - Basic Rent..................................................... 2 3.01 MONTHLY RENTAL........................................................ 3 3.02 ADDITIONAL RENT....................................................... 3 3.03 ESTIMATED ADDITIONAL RENTALS.......................................... 3 3.04 DEFICIENCY OF ADDITIONAL RENT......................................... 3 3.05 EXCESS OF ADDITIONAL RENTAL INSTALLMENTS.............................. 3 3.06 PRO-RATING OF ADDITIONAL RENT......................................... 4 3.07 PREPAYMENT OF ADDITIONAL RENT......................................... 4 3.08 DISPUTE AS TO AMOUNT OF ADDITIONAL RENT............................... 4 3.09 POST-DATED CHEQUES.................................................... 4 3.10 ADVANCE RENTAL........................................................ 4 3.11 MANNER AND PLACE OF PAYMENT OF RENT................................... 4 3.12 DEFAULT............................................................... 5 3.13 ACCRUAL OF RENT....................................................... 5 3.14 NET LEASE............................................................. 5 4.00 TENANT'S BUSINESS TAX................................................. 5 4.01 LANDLORD'S BUSINESS TAX............................................... 6 4.02 TAX ON TENANT'S LEASEHOLD IMPROVEMENTS................................ 6 4.03 PROPERTY TAX.......................................................... 6 4.04 ALLOCATION OF TAX..................................................... 7 4.05 SEPARATE SCHOOL TAXES................................................. 7 4.06 TAX APPEAL............................................................ 7 4.07 CAPITAL TAX........................................................... 7 5.00 OPERATING COSTS....................................................... 7 5.01 ALLOCATION OF OPERATING COSTS......................................... 8 5.02 FULL OCCUPANCY........................................................ 9 5.03 USE OF ELECTRICITY.................................................... 9 5.04 METERS................................................................ 9 6.00 ASSIGNING OR SUBLETTING............................................... 9 6.01 REQUEST TO ASSIGN OR SUBLET........................................... 10 6.02 LANDLORD'S RIGHT TO CANCEL............................................ 10 6.03 ASSIGNMENT AGREEMENT.................................................. 10 6.04 CONSENT NOT TO RELEASE TENANT......................................... 10 6.05 CHANGE IN CORPORATE CONTROL........................................... 10 6.06 NOTICE OF CHANGE OF CONTROL........................................... 11 Page 179 6.07 COST OF CONSENT....................................................... 11 7.00 TENANT'S COVENANTS.................................................... 11 7.01 TENANT REPAIRS........................................................ 11 7.02 RULES AND REGULATIONS................................................. 12 7.03 USE OF PREMISES....................................................... 12 7.04 INCREASE IN INSURANCE PREMIUMS........................................ 12 7.05 CANCELLATION OF INSURANCE............................................. 12 7.06 OBSERVANCE OF LAW..................................................... 12 7.07 WASTE AND OVERLOADING OF FLOORS....................................... 13 7.08 INSPECTION............................................................ 13 7.09 INDEMNITY TO LANDLORD................................................. 13 7.10 DAMAGE BY TENANT...................................................... 14 7.11 TENANT INSURANCE...................................................... 14 7.12 NO ABATEMENT OF RENT.................................................. 15 7.13 EXHIBITING PREMISES................................................... 15 7.14 SIGNS................................................................. 15 7.15 NAME OF BUILDING...................................................... 16 7.16 KEEP TIDY............................................................. 16 7.17 DELIVERIES............................................................ 16 7.18 NOTICE OF DAMAGE...................................................... 16 7.19 ALTERATIONS, ETC...................................................... 16 7.20 CONSTRUCTION LIENS.................................................... 17 7.21 SECURITY.............................................................. 17 7.22 HAZARDOUS SUBSTANCES.................................................. 17 7.23 NUISANCE.............................................................. 18 8.00 LANDLORD'S COVENANTS.................................................. 19 8.01 QUIET ENJOYMENT....................................................... 19 8.02 TAXES, ETC............................................................ 19 8.03 HEATING AND AIR-CONDITIONING.......................................... 19 8.04 REPAIR OF STRUCTURE................................................... 19 8.05 JANITORIAL SERVICES................................................... 20 8.06 DELAYS IN PROVISION OF SERVICES....................................... 20 9.00 TENANT'S FIXTURES..................................................... 20 9.01 REMOVAL OF TENANT'S FIXTURES.......................................... 20 10.00 DAMAGE OR DESTRUCTION OF LEASED PREMISES............................. 21 10.01 PARTIAL DAMAGE....................................................... 21 10.02 TOTAL DAMAGE......................................................... 21 10.03 OBLIGATION TO REPAIR................................................. 21 10.04 ABATEMENT OF RENT.................................................... 21 10.06 COMPLETION OF REPAIR................................................. 22 10.05 DAMAGE TO 50% OF BUILDING............................................ 22 11.00 LIABILITY FOR DAMAGE TO PROPERTY..................................... 22 12.00 DEFAULT OF TENANT.................................................... 22 13.00 BANKRUPTCY........................................................... 23 14.00 RE-ENTRY BY LANDLORD................................................. 23 15.00 RIGHT OF TERMINATION................................................. 24 16.00 DISTRESS............................................................. 24 17.00 NON-WAIVER........................................................... 24 18.00 CHANGES TO BUILDING.................................................. 24 19.00 SEVERANCE OF LAND.................................................... 25 20.00 COSTS OF COLLECTION.................................................. 25 21.00 PROFITS AND REMEDIES BY LANDLORD..................................... 25 21.01 PAYMENTS TO THIRD PARTIES............................................ 25 21.02 NON-PAYMENT OF ADDITIONAL RENT....................................... 25 21.03 INTEREST ON ARREARS.................................................. 26 22.00 NOTICE............................................................... 26 23.00 SUBORDINATION, POSTPONEMENT, ATTORNMENT.............................. 26 23.01 TENANT'S RIGHT TO POSSESSION......................................... 27 23.02 ATTORNMENT BY TENANT................................................. 27 24.00 CERTIFICATE.......................................................... 27 25.00 REGISTRATION......................................................... 27 Page 180 26.00 PLANNING ACT......................................................... 27 27.00 TRANSFER BY LANDLORD................................................. 27 28.00 NO ADVERTISING OF LEASED PREMISES.................................... 28 29.00 TIME OF ESSENCE...................................................... 28 30.00 LAWS OF ONTARIO...................................................... 28 31.00 SEVERABILITY OF COVENANTS............................................ 28 32.00 HEADINGS............................................................. 28 33.00 SCHEDULES............................................................ 28 34.00 LEASE ENTIRE AGREEMENT............................................... 28 35.00 INTERPRETATION....................................................... 29 36.00 SUCCESSORS........................................................... 29 37.00 JOINT AND SEVERAL COVENANT........................................... 30 SCHEDULE "A"............................................................... 31 - ----------- SCHEDULE "B"............................................................... 32 - ----------- SCHEDULE "C"............................................................... 33 - ----------- SCHEDULE "D"............................................................... 36 - ----------- SCHEDULE "E"............................................................... 37 - ----------- SCHEDULE "F"............................................................... 38 - ----------- SCHEDULE "G"............................................................... 39 - ----------- Page 181 EX-10.31 9 EXHIBIT 10.31 EXHIBIT 10.31 Page 182 THIS INDENTURE made this 15/th/ day of March, 1999. BETWEEN: KANATA RESEARCH PARK CORPORATION (Hereinafter called the "Landlord") OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION (Hereinafter called the "Tenant") OF THE SECOND PART WITNESSETH that in consideration of the rents, covenants, conditions and agreements herein contained, the Landlord and the Tenant covenant and agree as follows: 1.00 LEASED PREMISES The Landlord hereby leases to the Tenant all those premises consisting of One Thousand One Hundred & Fifty One point Three (1,151.3) certified rentable square feet of space on the Tenth (10th) floor (herein called the "Leased Premises") of the building known municipally as 555 Legget Drive, Tower "A" (herein called the "Building") in the City of Kanata which said building is erected on the lands (herein called the "Lands") described in Schedule "A" annexed hereto. The Leased Premises are more particularly outlined on the floor plan annexed hereto and marked Schedule "B". 1.01 ADDITIONAL DEFINITIONS For the purposes of this Lease and any additions or amendments thereto: (a) "Improvements" means all improvements located on the Lands, including the Building, the parking lot or structure servicing the Building and other facilities and physical structures which are for the exclusive use of occupants of the Building; (b) "Common Areas" means at any time those portions of the Lands and Building not leased or designated for lease to tenants but provided to be used in common by (or by the sublesses, agents, employees, Page 182 customers or licensees of) the Landlord, Tenant and other tenants of the Building, whether or not they are open to general public and shall include any fixtures, chattels, systems, decor, signs, facilities or landscaping contained in those areas or maintained or used in connection with them, and shall be deemed to include the city sidewalks adjacent to the Lands and any pedestrian walkway system (either above or below ground), park, or other public facility in respect of which the Landlord is from time to time subject to obligations arising from the Lands and Building. (c) "Tenant's Proportionate Share" means percent point Ninety One percent (.91%) provided the said percentage may be varied based on the actual area of the Leased Premises as certified by the Landlord. 2.00 TERM To have and to hold the Leased Premises for and during the Term, (hereinafter called the "Term") of Five (5) years to be computed from the 1st day of March, 1999 or from the date the Tenant takes occupancy of the Leased Premises, whichever is sooner, and from thenceforth next ensuing and fully to be completed and ended on the last day of February, 2004. 2.01 INABILITY TO GIVE OCCUPANCY It is hereby agreed that if the Landlord is unable to deliver vacant possession of the Leased Premises on the date of commencement of the Term by reason of the Leased Premises or the Building being uncompleted or by reason of any previous tenant or occupant overholding (but not by reason of circumstances beyond the Landlord's control or by reason of the failure of the Tenant to complete Tenant's Work herein or by reason of the Tenant failing on or before the date occurring six (6) weeks prior to the commencement of the Term herein to supply all necessary approvals and specifications which the Landlord requires in order to complete the Leasehold Improvements herein,) the Landlord shall diligently exercise all of its rights to obtain completion and vacant possession of the Leased Premises and the rent payable hereunder shall abate at a rental per day equal to 1/365th of the Annual Rent payable until such completion or vacant possession is obtained but the Landlord shall not be liable to the Tenant for damages of any nature whatsoever and this Lease shall continue in full force and effect subject only to the abatement of rent as aforesaid. 2.02 EARLY OCCUPANCY If the Tenant occupies the Leased Premises prior to the commencement of the Term, then during the period up to the date of commencement the Tenant shall be a tenant of the Landlord subject to all the covenants, conditions and agreements set out in this Lease and at a rental per day equal to 1/365th of the Annual Rent and Additional Rent and such rental shall be paid on or before the commencement of the Term. Page 183 2.03 OVERHOLDING If the Tenant shall continue to occupy the Leased Premises after the expiration of this Lease with or without the consent of the Landlord and without any further written agreement, the Tenant shall be a monthly tenant at a rent equivalent to 150% of the Monthly Rent and Additional Rent hereby reserved and subject to all the terms and conditions herein set out except as to length of tenancy. 3.00 RENT - Basic Rent In each year during the Term of this Lease the Tenant covenants and agrees to pay without any set-off or deduction whatsoever, to the Landlord, as rent for the Leased Premises, and for the non-exclusive use of the common areas of the Building on which the Leased Premises is located (which common area allocation shall be 12% of the area of the Leased Premises), the following:
Rental Rate Per For Leased Year Sq. Foot Per Annum Premises For Common Area Total Per Annum - ---------------------- ------------------------------- ------------------ -------------------- ------------------ 1-5 $14.00 $14,390.60 $1,727.60 $16,118.20
herein called "Annual Rent". The Annual Rent will be adjusted proportionately for any lease year which is other than twelve months. 3.01 MONTHLY RENTAL The Annual Rent shall be payable in equal monthly installments (hereinafter called the "Monthly Rent") in advance on the first day of each calendar month during the Term. If the Term commences on any day other than the first (1st) or ends on any day other than the last of a calendar month, rent for the fraction of a month at the commencement and at the end of the Term shall be prorated at a rate per day equal to 1/365th of the Annual Rent payable. The Annual Rent and the Monthly Rent may be varied based on the actual area of the Leased Premises as certified by the Landlord. 3.02 ADDITIONAL RENT The Tenant covenants to pay as additional rent all sums to be paid to the Landlord hereunder including, without limiting the generality of the foregoing, all tax on the Tenant's leasehold improvements, Goods and Services Tax and the Tenant's Proportionate Share of the Tax, Capital Tax, Landlord's Business Tax and Operating Costs (herein called "Additional Rent"). 3.03 ESTIMATED ADDITIONAL RENTALS Page 184 During the Term, the Tenant shall pay to the Landlord monthly in advance on the 1st day of each and every month during the Term, one-twelfth (1/12) of the amount of such annual Additional Rent as reasonably estimated by the Landlord to be due from the Tenant. Such estimates may be adjusted from time to time and re-adjusted by the Landlord and the Tenant shall pay to the Landlord monthly installments of Additional Rent according to such estimates, as so adjusted. 3.04 DEFICIENCY OF ADDITIONAL RENT If the aggregate amount of such estimated Additional Rent payments made by the Tenant in any year should be less than the Additional Rent due for such year, then the Tenant shall pay to the Landlord as Additional Rent within ten (10) days of receipt of notice thereof from the Landlord the amount of such deficiency. 3.05 EXCESS OF ADDITIONAL RENTAL INSTALLMENTS If the aggregate amount of such Additional Rent payments made by the Tenant in any year of the Term should be greater than the Additional Rent due for such year, then should the Tenant not be otherwise in default hereunder, the amount of such excess will be applied by the Landlord to the next succeeding installments of such Additional Rent due hereunder; and if there be any such excess for the last year of the Term, the amount thereof will be refunded by the Landlord to the Tenant within thirty (30) days after the completion of the Landlord's year-end review provided the Tenant is not otherwise in default under the terms of the Lease. 3.06 PRO-RATING OF ADDITIONAL RENT If only part of any calendar year is included within the Term the amount of the Additional Rent payable by the Tenant for such partial year shall be prorated and shall be based upon the estimates made by the Landlord and upon a final determination of such Additional Rent, the amount remaining unpaid at the termination of this Lease shall, notwithstanding such termination, be adjusted and paid within a reasonable time thereafter. 3.07 PREPAYMENT OF ADDITIONAL RENT Notwithstanding the foregoing, if the Landlord is required to pay any amount, which it is entitled to collect from the tenants of the Building, more frequently than provided for in this Lease or if the Landlord is required to prepay any such amount, the Tenant shall pay to the Landlord its portion of such amount calculated in accordance with this Lease, forthwith upon demand. 3.08 DISPUTE AS TO AMOUNT OF ADDITIONAL RENT In the event of any dispute by the Tenant as to the amount of any Additional Rent claimed by the Landlord or the amount of the Tenant's Proportionate Page 185 Share thereof, the opinion of the Landlord's auditors shall be conclusive and binding as to the amount thereof for any period to which the opinion relates. 3.09 POST-DATED CHEQUES The Tenant shall, on or before the commencement of each and every Lease Year of the Term, including the first Lease Year, deliver to the Landlord a series of post-dated cheques, one for each month of the Lease Year, drawn for an amount equal to the amount of Monthly Rent and the Additional Rent (as estimated by the Landlord) payable in each month of such Lease Year, provided that the first such payment is to include also any pro-rated Monthly Rent and Additional Rent for the period from the date of the commencement of the Term to the first day of the first full calendar month in the Term, provided further that the obligation in the first Lease Year shall be adjusted to take into account all advance rental paid hereunder. 3.10 ADVANCE RENTAL The Landlord hereby acknowledges receipt from the Tenant of the sum of Five Thousand Three Hundred & Eighty Nine Dollars and Eighty Cents ($5,389.50) inclusive of G.S.T. to be held without interest and applied against the first and last months' Monthly Rent and Additional Rent. 3.11 MANNER AND PLACE OF PAYMENT OF RENT All rent shall, until further written notice is received from the Landlord, be paid by the Tenant without any prior demand therefor to Kanata Research Park Corporation, at par in the City of Kanata at the principal office of, Kanata Research Park Corporation, 555 Legget Drive, Suite 206, Kanata, Ontario, Canada K2K 2X3, or at such other place in Canada as Kanata Research Park Corporation may designate in writing from time to time and shall be payable in lawful money of Canada. The Landlord agrees that payments made to Kanata Research Park Corporation pursuant to this Lease shall be deemed to be payments made to the Landlord and the Tenant shall not be required to see to the application thereof. 3.12 DEFAULT Any sums received by the Landlord from or for the account of the Tenant when the Tenant is in default hereunder may be applied at the Landlord's option to the satisfaction, in whole or part, of any of the obligations of the Tenant then due hereunder in such manner as the Landlord sees fit, and regardless of any designation or instructions of the Tenant to the contrary. 3.13 ACCRUAL OF RENT Rent shall be considered as annual and accruing from day to day, and where it becomes necessary for any reason to calculate such rent for an irregular period of less than one (1) year an appropriate apportionment and adjustment shall be made. Where the calculation of any Additional Rent is not made until Page 186 After the termination of this Lease, the obligation of the Tenant to pay such Additional Rent shall survive the termination of this Lease and such amounts shall be payable by the Tenant upon demand by the Landlord. 3.14 NET LEASE The Tenant acknowledges and agrees that it is intended that this Lease shall be a completely carefree net lease for the Landlord and that the Landlord shall not be responsible during the Term for any costs, charges, expenses or outlays of any nature whatsoever arising from or relating to the Leased Premises, whether foreseen or unforeseen and whether or not within the contemplation of the parties at the commencement of the Term except as shall be otherwise expressly provided for in this Lease and other than Income Tax due by the Landlord, the Tenant shall be responsible for any business transfer tax, value added tax, multi-stage sales tax, goods and services tax or any other tax or levy on rental income that may be charged, levied or assessed by any government or other applicable taxing authority against the Landlord whether known as a goods and services tax or any other name ("Goods and Services Tax"). 4.00 TENANT'S BUSINESS TAX In each and every year during the Term the Tenant covenants to pay and discharge prior to the same becoming due and payable all taxes, rates, duties and assessments and other charges that may be levied, rated, charged or assessed against or in respect of the Tenant's or other occupant's use and occupancy of the Leased Premises or in respect of the Tenant's or other occupant's leasehold improvements, equipment, machinery, trade fixtures and facilities situate or installed on or in the Leased Premises and every tax and licence fee in respect of any and every business carried on in the Leased Premises or in respect of the use or occupancy thereof by the Tenant (and any and every subtenant, licensee or occupant thereof) whether such taxes, rates, duties, assessments and licence fees are charged by any municipal, parliamentary, school or other body during the term hereby demised. The Tenant will indemnify and keep indemnified the Landlord from and against payment of all loss, costs, charges and expenses occasioned by, or arising from any and all such taxes, rates, duties, assessments, licence fees, and any and all taxes which may in future be levied or charged in lieu of such taxes; and any such loss, costs, charges and expenses suffered by the Landlord may be collected by the Landlord as rent with all rights of distress and otherwise as reserved to the Landlord in respect of rent in arrears. The Tenant further covenants and agrees that upon written request of the Landlord, the Tenant will promptly deliver to the Landlord for inspection receipts for payment of all such taxes, rates, duties, assessments, licence fees and other charges in respect of all improvements, equipment and facilities of the Tenant on or in the Leased Premises or in respect of any business carried on in the Leased Premises which were due and payable up to one (1) month prior to such request. 4.01 LANDLORD'S BUSINESS TAX Page 187 In the event that there are any taxes, rates, duties, assessments or charges levied, rated, charged or assessed against the Landlord by any municipal or other governmental authority with respect to the Landlord's use or occupancy of any part of the Building or the Land which the Tenant is entitled to use in common with other persons or with respect to any other part of the Building which the Landlord uses or occupies for the purpose of supplying services to the Leased Premises (such taxes, rates, duties, assessments or charges hereinafter called the "Landlord's Business Tax"), then it is agreed that in addition to all other sums, the Tenant is required to pay pursuant to this Lease, the Tenant shall pay to the Landlord as Additional Rent, the Tenant's Proportionate Share of such Landlord's Business Tax. 4.02 TAX ON TENANT'S LEASEHOLD IMPROVEMENTS The Tenant shall pay to the Landlord as Additional Rent, in respect of each applicable tax year, an amount equal to that portion of the Tax for such tax year, as determined by the Landlord, which may reasonably be regarded as being attributable to the fixtures, improvements, installations, alterations, additions and equipment from time to time made, erected or installed by or on behalf of the Tenant in the Leased Premises. 4.03 PROPERTY TAX "Tax" in this Lease means an amount equivalent to all taxes, rates, duties, levies and assessments whatsoever levied, rated, charged or assessed by any municipal, parliamentary, educational, school or other governmental authority charged upon the Building, the Lands, the property and all improvements now or hereafter appurtenant thereto or upon the Landlord on account thereof including all taxes, rates, duties, levies and assessments for local improvements and including any tax which has been attracted by the Tenant's leasehold improvements and equipment and for which the Tenant is responsible hereunder and excluding any portion of Tax payable solely by any other tenant and excluding any Tax charged against or applicable to the other office buildings constructed on the Lands and the parking spaces (excluding visitor parking) applicable to such buildings and excluding such taxes as corporate income, capital gains, profits or excess profits, taxes assessed upon the income of the Landlord, and shall also include any and all taxes which may in future be levied in lieu of Tax as hereinbefore defined. 4.04 ALLOCATION OF TAX If the Tax or any portion thereof that may be payable by the Tenant by reason of this Lease, depends upon an assessment or an approximation of an assessment which has not been made by the taxing authority or authorities having jurisdiction, the Landlord shall determine the same; any such determination made by the Landlord shall be binding upon the Tenant unless shown to be unreasonable or erroneous in some substantial respect. The Landlord shall have the right from time to time to reasonably allocate and Page 188 re-allocate Taxes not charged separately to the various buildings (including the Building) and the parking garages located on the Lands. 4.05 SEPARATE SCHOOL TAXES If the Tenant or any subtenant or licensee of the Tenant or any occupant of the Leased Premises shall elect to have the Leased Premises or any part thereof assessed for separate school taxes, the Tenant shall pay to the Landlord, as additional rent, as soon as the amount of the separate school taxes is ascertained, any amount by which the amount of separate school taxes exceeds the amount which would have been payable for Tax had such election not been made and if the Tenant or any subtenant or licensee of the Tenant shall elect to have the Leased Premises or any part thereof assessed for separate school taxes as aforesaid and if such separate school taxes are less than the taxes which would have been payable for school taxes had such election not been made, then and in that event, the Tenant shall be entitled to deduct from the rent for the first month of the year following which such taxes were payable, the amount by which the separate school taxes were less than the amount which would have been payable for school taxes in the year prior to such month. 4.06 TAX APPEAL Any expense incurred by the Landlord in obtaining or attempting to obtain a reduction in the amount of the Tax or the assessment upon which the Tax may be based, shall be added to and included in the amount of the Tax and if the Tenant shall have paid its Proportionate Share of the Tax and the Landlord shall thereafter receive a refund of any portion of the Tax, the Landlord shall make an appropriate refund to the Tenant. 4.07 CAPITAL TAX "Capital Tax" means the tax or excise imposed or capable of being imposed upon the Landlord by any government authority having jurisdiction which is measured or based in whole or in part upon the taxable capital employed by the Landlord, which said taxable capital shall be deemed to be the cost to the Landlord of said Building and Lands computed as if the amount of such tax were that amount due if the Building and the Lands were the only property of the Landlord, the Landlord was entitled to no capital deduction, investment allowance or any other deduction whatsoever. For the purpose of this paragraph the Term "investment allowance" and "capital deduction" shall be defined by reference to the applicable taxing statute. 5.00 OPERATING COSTS "Operating Costs" in this Lease means the total charges, expenses, costs, fees, rentals, disbursements or outlays incurred, accrued, paid, payable or attributable whether by the Landlord or others on behalf of the Landlord for complete repair, maintenance, operation, cleaning and management of the Building, Lands and all the improvements thereon and the components of Page 189 each of them (herein collectively called the "Property") such as are in keeping with maintaining the standard of a first class commercial Property so as to give it high character and distinction; and including, without limiting the generality of the foregoing, the cost of all repairs and replacements required for such operation and maintenance, the cost of maintaining and repairing the heating, air-conditioning, ventilating and mechanical systems and equipment in the Building, the cost of operating and maintaining any elevators, (including the cost of service contracts); the costs of providing hot and cold water; the costs of providing electricity not otherwise chargeable to tenants; the costs of all fuel, gas and steam used in heating, ventilating and air-conditioning; the cost of energy conservation devices or equipment; the cost of snow removal; landscape maintenance including the cost of replacing any landscaping on the Lands; the cost of window cleaning; the cost of insurance premiums for fire, casualty, liability, rental and any other insurance coverage maintained by the Landlord in connection with the Property; telephone and other utility costs; the amount paid or payable for all salaries, wages and benefits and other payments paid to or on behalf of persons engaged in the cleaning, supervision, maintenance and repair of the Property (including wages of the on site Property Manager); the cost of accounting services necessary to prepare the statements and opinions for the tenants and to compute the rents and other charges payable by the tenants of the Building; the cost of porters, guards and other protection services; the cost of providing security services; the cost of garbage or refuse removal from the Building not otherwise chargeable to tenants; the cost of repair and maintenance of the roadways, curbs, paving, walkways, pools, landscaping, lighting and other common facilities and outside areas; cost of services provided for the common use of the tenants; building management fees or an administrative fee (not exceeding the going rate charged by trust companies or first class building Management Companies for building management in the Regional Municipality of Ottawa- Carleton for similar buildings); the cost of service contracts with independent contractors and all other expenses, paid or payable by the Landlord in connection with the operation of the Property, but such Operating Costs shall not include any interest on any debt or capital; retirement of any debt; any amounts directly chargeable by the Landlord to any tenant or tenants of the Building and the cost of any repairs paid for by insurance proceeds or for which the Landlord was reimbursed by insurance proceeds. 5.01 ALLOCATION OF OPERATING COSTS In determining the Operating Costs attributable to the Building, the Landlord shall have the right from time to time to reasonably allocate and re-allocate such Operating Costs which represent operating costs incurred for facilities or services shared by the Building and such other buildings as are owned or operated by the Landlord and which are not charged or allocated separately against the Building and any such other building or buildings. Any such determination made by the Landlord shall be binding upon the Tenant unless shown to be unreasonable or erroneous in some substantive respect. The Tenant shall have the right to reasonable access to the books and records of Page 190 the Landlord to conduct an examination and to ascertain whether allocations of Operating Costs made by the Landlord have been made reasonably. 5.02 FULL OCCUPANCY If in any year the Building has not been fully occupied for the whole year, the amount of the Operating Costs for such year may be adjusted by the Landlord, acting reasonably, to an amount which reflects what the amount of the Operating Costs would be if the Building had been fully occupied for the whole year. 5.03 USE OF ELECTRICITY The Tenant's use of electricity in the Leased Premises shall be for the operation of office lighting and business machines, such as typewriters, desktop computers and other small office machines and shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the Leased Premises. In order to ensure that such capacity is not exceeded and to avert possible adverse effect upon the Building's electrical service, the Tenant shall not, without the Landlord's prior written consent in each instance, connect any additional fixtures, appliances or equipment (other than normal office electrical fixtures, lamps, typewriters and similar small office machines) to the Building's electric distribution system or make any alteration or addition to the electrical system of the Leased Premises existing at the commencement of the Term. If the Landlord grants such consent, the cost of all additional risers and other equipment required therefor shall be paid as Additional Rent by the Tenant to the Landlord upon demand. As a condition to granting such consent, the Landlord may require the Tenant to agree to pay an increase in the Additional Rent for Operating Costs by an amount which will reasonably reflect the increased cost of the Landlord of the additional electrical services to be furnished to the Leased Premises by the Landlord. 5.04 METERS The Tenant covenants to pay for the cost of any additional metering which may be required by the Landlord to be installed in the Building for the purpose of determining the amount of electricity consumed by the Tenant in the Leased Premises. 6.00 ASSIGNING OR SUBLETTING The Tenant covenants that it will not assign or sublet the Leased Premises or any part thereof without the prior written consent of the Landlord, which consent shall not be unreasonably withheld save and except in the event of any of the following, in which case the Landlord may arbitrarily withhold its consent: (a) an assignment or sublet of the whole of the Leased Premises, the terms of which have a net present value that are less or more than the Page 191 net present value of the terms of the Lease (not including the value of initial leasehold improvements, leasing commissions or inducements of any kind under the Lease) and in the latter event if the Landlord consents to such assigned or sublet the Tenant shall pay the increased value to the Landlord as Additional Rent.; (b) a sublet of a part of the Leased Premises; (c) where the assignee or subtenant is then a tenant of the Landlord at the Building and the Landlord has or will have during the next following six (6) months, vacant space for rent in the Building. 6.01 REQUEST TO ASSIGN OR SUBLET If the Tenant requests the Landlord's consent to an assignment of this Lease or to a subletting of the whole or any part of the Leased Premises, the Tenant shall submit to the Landlord the name and address of the proposed assignee or subtenant together with a copy of an offer or agreement to assign or sublet or the sublease or assignment and such additional information as to the nature of its business and its financial responsibility and standing (including financial statements) as the Landlord may reasonably require ("required information"). 6.02 LANDLORD'S RIGHT TO CANCEL Upon receipt of such request and the required information from the Tenant, the Landlord shall have the right, exercisable in writing within thirty (30) days after such receipt, to cancel and terminate this Lease if the request is to assign this Lease or to sublet all of the Leased Premises, or, if the request is to sublet a portion of the Leased Premises only, to cancel and terminate this Lease with respect to such portion, in each case as of the date set forth in the Landlord's notice of exercise of right ("Landlord's notice of termination"), which shall be neither less than sixty (60) days nor more than one hundred and twenty (120) days following the delivery of the Landlord's notice of termination. If the Landlord shall exercise such right, the Tenant shall surrender possession of the entire Leased Premises or the portion which is the subject of the right, as the case may be, on the date set forth in the Landlord's notice of termination in accordance with the provisions of this Lease relating to the surrender of the Leased Premises at the expiration of the Term. If this Lease shall be cancelled as to a portion of the Leased Premises only, the rent payable by the Tenant under this Lease shall be abated proportionately. In the event that the Landlord shall not exercise the right to cancel this Lease, then the Landlord's consent to any such request to assign or sublet shall not be unreasonably withheld. 6.03 ASSIGNMENT AGREEMENT The Landlord's consent to any assignment may be conditional upon the assignee entering into an assignment in form and content satisfactory to the Landlord, to perform, observe and keep each and every covenant, condition Page 192 and agreement in this Lease on the part of the Tenant to be performed, observed and kept including the payment of rent and all other sums and payments agreed to be paid or payable under this Lease on the days and times and in the manner specified. 6.04 CONSENT NOT TO RELEASE TENANT In no event shall any assignment or subletting to which the Landlord may have consented release or relieve the Tenant from his obligations fully to perform all the terms, covenants and conditions of this Lease to be performed. 6.05 CHANGE IN CORPORATE CONTROL If the Tenant is a corporation or if this Lease, with the written consent of the Landlord, is assigned to a corporation, and if at any time during the Term any part or all of the corporate shares or voting rights of shareholders shall be transferred by sale, assignment, bequest, inheritance, trust, operation of law or other disposition, or treasury shares be issued, so as to result in a change in the control of such corporation by the person or persons now owning a majority of the corporate shares thereof, the Landlord may terminate this Lease at any time after such change in control by giving the Tenant thirty (30) days prior written notice of such termination. The Tenant shall, at the request of the Landlord, make available to the Landlord for inspection or copying, or both, all books and records of the Tenant which, alone or with other data, show the applicability or inapplicability of this paragraph. If any stockholder or shareholder of the Tenant shall, after the request of the Landlord so to do, fail or refuse to furnish forthwith to the Landlord any data verified by the affidavit of such stockholder or shareholder or other credible person, which data, alone or with other data show the applicability or inapplicability of this paragraph, the Landlord may terminate this Lease by giving the Tenant thirty (30) days' prior written notice of such termination. 6.06 NOTICE OF CHANGE OF CONTROL Where there is a change in corporate control of the Tenant, the Tenant shall forthwith so advise the Landlord in writing. 6.07 COST OF CONSENT The Tenant further agrees that prior to any consent for assignment, subletting or change in control being effective and binding upon the Landlord, the Tenant shall pay on demand the Landlord's reasonable costs (including the Landlord's own administrative costs) incurred in connection with the Tenant's request for such consent. 7.00 TENANT'S COVENANTS The Tenant further covenants with the Landlord as follows: 7.01 TENANT REPAIRS Page 193 To repair, maintain and keep the Leased Premises and all trade fixtures and improvements therein in good and substantial repair subject only to defects in construction of the structural members of the Building, reasonable wear and tear and damage by fire, lightning and tempest or other casualty against which the Landlord is insured (herein collectively referred to as "Tenant Repair Exceptions"); and that the Landlord may enter and view state of repair and that the Tenant will repair according to notice in writing, except for Tenant Repair Exceptions and that the Tenant will leave the Leased Premises in good repair, except for Tenant Repair Exceptions. Notwithstanding anything hereinbefore contained, the Landlord may in any event make repairs to the Leased Premises without notice if such repairs are, in the Landlord's opinion, necessary for the protection of the Building and the Tenant covenants and agrees with the Landlord that if the Landlord exercises any such option to repair, the Tenant will pay to the Landlord together with the next instalment of Monthly Rent which shall become due after the exercise of such option all sums which the Landlord shall have expended in making such repairs and that such sums, if not so paid within such time, shall be recoverable from the Tenant as rent in arrears. Provided further that in the event that the Landlord from time to time makes any repairs as hereinbefore provided, the Tenant shall not be deemed to have been relieved from the obligation to repair and leave the Leased Premises in a good state of repair. 7.02 RULES AND REGULATIONS That the Tenant and his employees and all persons visiting or doing business with him on the Leased Premises shall be bound by and shall observe rules and regulations annexed hereto or as may hereafter be reasonably set by the Landlord of which notice in writing shall be given to the Tenant and upon such notice being delivered all such rules and regulations shall be deemed to be incorporated into and form part of this Lease. 7.03 USE OF PREMISES The Leased Premises shall be used only for office purposes. 7.04 INCREASE IN INSURANCE PREMIUMS That it will not keep, use, sell or offer for sale in or upon the Leased Premises any article which may be prohibited by any insurance policy in force from time to time covering the Building including any regulations made by any fire insurance underwriters applicable to such policies. In the event the Tenant's occupancy or conduct or business in, or on the Leased Premises, whether or not the Landlord has consented to the same, results in any increase in premiums for the insurance carried from time to time by the Landlord with respect to the Building, the Tenant shall pay any such increase in premiums as Additional Rent within ten (10) days after bills for such additional premiums shall be rendered by the Landlord. In determining whether increased premiums are a result of the Tenant's use or occupancy of the Leased Premises, a schedule issued by the organization computing the insurance rate Page 194 on the Building showing the various components of such rate, shall be conclusive evidence of the several items and charges which make up such rate. The Tenant shall promptly comply with all reasonable requirements of the insurance authority or of any insurer now or hereafter in effect relating to the Leased Premises. 7.05 CANCELLATION OF INSURANCE If any policy of insurance upon the Building or any part thereof or upon the Lands or any part thereof shall be cancelled or rendered voidable by the insurer by reason of any act, omission or occupation of the Leased Premises or any part thereof by the Tenant, any assignee or subtenant of the Tenant or by anyone permitted by the Tenant to be upon the Leased Premises, and the Tenant, after receipt of notice from the Landlord, shall have failed to immediately reinstate such insurance policies or avoid cancellation of such insurance policies, the Landlord may at its option determine this Lease forthwith by leaving upon the Leased Premises notice in writing of its intention so to do and thereupon rent and any other payments for which the Tenant is liable under this Lease shall be apportioned and paid in full to the date of such determination and the Tenant shall immediately deliver up possession of the Leased Premises to the Landlord and the Landlord may re-enter and take possession of the same or the Landlord shall pay any increased cost of such insurance and the Tenant shall pay as Additional Rent, on demand, the amount by which the premiums for such insurance are so increased. 7.06 OBSERVANCE OF LAW To comply promptly at its own expense with all provisions of law including without limitation, federal and provincial legislative enactments, building by-laws, and any other governmental or municipal regulations which relate to the partitioning, equipment, operation and use of the Leased Premises, and to the making of any repairs, replacements, alterations, additions, changes, substitutions or improvements of or to the Leased Premises. And to comply with all police, fire and sanitary regulations imposed by any federal, provincial or municipal authorities or made by fire insurance underwriters, and to observe and obey all governmental and municipal regulations and other requirements governing the conduct of any business conducted in the Leased Premises. Provided that in default of the Tenant so complying the Landlord may at its option where possible comply with any such requirement and the cost of such compliance shall be payable on demand by the Tenant to the Landlord as Additional Rent. 7.07 WASTE AND OVERLOADING OF FLOORS Not to do or suffer any waste or damage, disfiguration or injury to the Leased Premises or the fixtures and equipment thereof or permit or suffer any overloading of the floors thereof; and not to place therein any safe, heavy business machine or other heavy thing without first obtaining the consent in writing of the Landlord; and not to use or permit to be used any part of the Leased Premises for any dangerous, noxious or offensive trade or business Page 195 and not to cause or permit any nuisance in, at or on the Leased Premises; and without the prior consent in writing of the Landlord, the Tenant will not bring onto or use in the Leased Premises or permit any person subject to the Tenant to bring onto or use on the Leased Premises any fuel or combustible material for heating, lighting or cooking nor will it allow onto the Leased Premises any stove, burner, kettle, apparatus or appliance for utilizing the same and the Tenant will not purchase, acquire or use electrical current or gas for consumption on the Leased Premises except from such supplier thereof as shall have been approved in writing by the Landlord. 7.08 INSPECTION To permit the Landlord, its servants or agents to enter upon the Leased Premises at any time and from time to time for the purpose of inspection and of making repairs, alterations or improvements to the Leased Premises or to the Building and the Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort occasioned thereby. The Landlord, its servants or agents may at any time and from time to time enter upon the Leased Premises to remove any article or remedy any condition which, in the opinion of the Landlord, reasonably arrived at, would be likely to lead to cancellation of any policy of insurance and such entry by the Landlord shall not be deemed to be a re-entry. The Tenant shall, upon written request of the Landlord, produce audited Financial Statements of the Tenant, which statements shall include a Balance Sheet, Income Statement, Statement of Retained Earnings, Statement of Source and Application of Funds. 7.09 INDEMNITY TO LANDLORD To promptly indemnify and save harmless the Landlord for any and all liabilities, damages, costs, claims, suits or actions of any nature or kind including the full cost to the Landlord in resisting or defending the same to which the Landlord shall or may become liable or suffer arising out of or by reason of: (a) any breach, violation or non-performance by the Tenant of any of its covenants and obligations under this Lease; (b) any damage to property while said property shall be in or about the Leased Premises including the systems, furnishings and amenities thereof, as a result of the negligence, misuse or wilful act of the Tenant, its express or implied invitees, licensees, agents, servants or employees; and (c) any injury to any invitee, licensee, agent, servant or employee of the Tenant, including death resulting at any time therefrom, occurring on or about the Leased Premises, the Property or the Lands; and this indemnity shall survive the expiry or sooner determination of this Lease. Page 196 7.10 DAMAGE BY TENANT That if the Building including the Leased Premises, the elevators, boilers, engines, pipes and other apparatus (or any of them) used for the purpose of heating, ventilating or air-conditioning the Building or operating the elevators, or if the water pipes, drainage pipes, electric lighting or other equipment of the Building or the roof or outside walls or other parts of the Building will not function properly or become damaged or destroyed through the negligence, carelessness or misuse of the Tenant, or of any of its invitees, licensees, agents, servants, employees, clients, customers or contractors, or through it or them in any way stopping up or injuring any heating, ventilating or air- conditioning apparatus, elevators, water pipes, drainage pipes or other equipment or parts of the Building, the expense of the necessary repairs, replacements or alterations shall be borne by the Tenant and paid forthwith on demand to the Landlord as Additional Rent. 7.11 TENANT INSURANCE (a) To maintain in force during currency of this Lease at the Tenant's expense insurance policies to cover the following: (i) comprehensive general liability insurance with limits of not less than Five Million Dollars ($5,000,000.00) (including bodily injury and property damage, tenant's legal liability, cross liability and contractual liability) to cover all responsibilities assumed by the Tenant with respect to the use or occupancy of and the business carried on, in or from the Leased Premises, in amounts acceptable to the Landlord; (ii) all risk insurance covering leasehold improvements made or installed by or on behalf of the Tenant in an amount equal to the full replacement value thereof; and (iii) any other insurance that the Landlord (or the Landlord's mortgagee, if any) may reasonably require from time to time in form and amounts and for insurance risks against which a prudent Tenant would protect itself; (b) That all Tenant's insurance required hereunder shall be with insurers and upon terms and conditions to which the Landlord has no reasonable objection. Copies of all policies, or certificates evidencing the insurance or its renewal shall be delivered to the Landlord at the Landlord's request; (c) That all policies of insurance to be maintained by the Tenant shall, in the case of general liability insurance, include the Landlord (and, where applicable, the Landlord's mortgagee) as additional insured and, in the case of all other insurance coverage, contain a waiver by the insurer and Tenant of any rights of subrogation or indemnity or any other claim Page 197 to which the insurer might otherwise be entitled against the Landlord (and mortgagee) or the agents or employees of the Landlord. All such insurance policies shall also contain a provision prohibiting the insurer from cancelling or altering the insurance coverage without first giving the Landlord thirty (30) days prior written notice thereof; (d) That if the Tenant fails to take out or maintain in force such insurance, the Landlord may take out the necessary insurance and pay the premium therefor and the Tenant shall pay to the Landlord the amount of such premium immediately on demand as Additional Rent; and (e) That if both the Landlord and the Tenant have claims to be indemnified under any such insurance, the indemnity shall be applied first to the settlement of the claim of the Landlord and the balance, if any, to the settlement of the claim of the Tenant. 7.12 NO ABATEMENT OF RENT That there shall be no abatement or reduction of rent and that the Landlord shall not be liable for any damage howsoever caused to property of the Tenant or of any person subject to the Tenant which is in or upon or being brought to or from the Leased Premises or the Building or for personal injury (including death) sustained in any manner by the Tenant or any person subject to the Tenant while the Tenant or any such person is on or upon entering or leaving the Leased Premises or Building unless such property damage or personal injury may have been attributable to fault or neglect on the part of the Landlord or of any person for whom the Landlord is at law responsible, and that the Tenant will indemnify and save harmless the Landlord from and against all claims and demands made against the Landlord by any person for or arising out of any such property damage or personal injury. 7.13 EXHIBITING PREMISES To permit the Landlord or its agents or servants to enter and show the Leased Premises, during normal business hours, to prospective purchasers of the Building and may after notice of termination of this Lease has been given or within the last six (6) months of the Term, enter and show the Leased Premises to prospective tenants and erect signs stating that the premises are "To Let". Page 198 7.14 SIGNS The Tenant shall not paint, display, inscribe or place any sign, symbol, notice or lettering of any kind anywhere outside the Leased Premises or within the Leased Premises so as to be visible from the outside of the Building or the common areas thereof with the exception only of an identification sign at the entrance to the Leased Premises (which sign shall be subject to the Landlord's written approval as to size, design and location) and the Tenant's name on the directory listing (if any) in the main lobby of the Building. 7.15 NAME OF BUILDING Not to refer to the Building by any name other than that designated from time to time by the Landlord and the Tenant shall use the name of the Building for the business address of the Tenant but for no other purpose. 7.16 KEEP TIDY The Tenant shall provide its own cleaning and janitorial services. At the end of each business day, the Tenant shall leave the Leased Premises in a tidy condition. 7.17 DELIVERIES The Tenant shall receive, ship, take delivery of and allow and require suppliers or others to deliver or take delivery of merchandise, supplies, fixtures, equipment, furnishings, wares or merchandise only through the loading entrance and other facilities provided for that purpose and at the times set by the Landlord. 7.18 NOTICE OF DAMAGE To notify the Landlord promptly of any damage to or defect in the Leased Premises or the Building or any part thereof including any electrical, plumbing, heating, ventilating, air-conditioning, water, sprinkler or gas systems or equipment, or the water pipes, gas pipes, telephone lines or electrical apparatus within or leading to the Leased Premises, and in case of fire to give immediate notice thereof to the Fire Department. 7.19 ALTERATIONS, ETC The Tenant will not make or erect in or to the Leased Premises any installations, alterations, additions or partitions or remove or change the location or style of any installations, alterations, equipment, outlets, piping or wiring relating to the electrical, plumbing, water, gas, air-conditioning, heating or ventilating systems without submitting drawings and specifications to the Landlord and obtaining the Landlord's prior written consent in each instance. The Tenant must further obtain the Landlord's prior written consent to any change or changes in such drawings and specifications submitted as aforesaid. The Tenant's request for such consent shall be in writing and Page 199 accompanied by an adequate description of contemplated work and with appropriate working drawings and specifications thereof. The Landlord's cost of having its architects or engineers examine such drawings and specifications shall be payable by the Tenant. The Landlord may require that any and all work be performed by the Landlord's contractors or workmen or by contractors or workmen engaged by the Tenant but in each case only under written contract approved in writing by the Landlord and subject to all reasonable conditions which the Landlord may impose and subject to inspection by and reasonable supervision of the Landlord (including a supervision fee to be paid by the Tenant to the Landlord equal to fifteen percent (15%) of the total cost of such work). The Landlord may at its option require that only the Landlord's contractors be engaged for any mechanical, electrical, plumbing, structural or sprinkler work to be done in the Leased Premises. Any work performed by or for the Tenant shall be performed by competent workmen whose labour union affiliations are not incompatible with those of any workmen who may be employed in the Building by the Landlord, its contractors or subcontractors. The cost of all such work and of all materials, labour and services involved therein and of all services, necessitated thereby shall be at the sole cost and expense of the Tenant and shall be completed in a good and workmanlike manner and with reasonable diligence in accordance with the description of the work approved by the Landlord. Any such alterations, additions, and fixtures shall, when made or installed, be and become the property of the Landlord without payment being made therefor; provided that upon the determination of this Lease the Landlord may at its option require the Tenant, or itself at the Tenant's expense, to remove the same and to restore the Leased Premises to the condition in which they were at the commencement of this Lease. 7.20 CONSTRUCTION LIENS The Tenant covenants that he will not suffer or permit during the Term hereof any construction or other liens for work, labour, services or material ordered by him or for the cost of which he may be in any way obligated to attach to the Leased Premises or the Building or the Land and that whenever and so often as any such liens shall attach or claims therefor shall be filed, the Tenant shall within twenty (20) days after the Tenant has notice of the claim for lien, procure the discharge thereof by payment or by giving security or in such manner as is or may be required or permitted by law. 7.21 SECURITY The Tenant will maintain on the Leased Premises sufficient moveable property to guarantee the payment of one (1) year's Annual Rent and Additional Rent. 7.22 HAZARDOUS SUBSTANCES (a) The Tenant shall not cause or permit any Hazardous Substances to be brought onto, created in, released or discharged from, placed or disposed of, at or near the Leased Premises, Building or Lands; Page 200 (b) The Tenant shall not cause or permit to occur any violation of any federal, provincial, municipal or local law, ordinance, or regulation, now or hereinafter enacted (the "Laws"), relating to environmental conditions on, under, at, near or about the Leased Premises, Building or Lands, or relating to the Landlord, the Tenant or the Building, air, soil or ground water condition, including without limitation, the generation, storage or disposal of Hazardous Substances; (c) For the purposes of this section, "Hazardous Substances" means any substance, or class of substance or mixture of substances which may be detrimental to the environment, plant or animal life, or human health and includes, without limitation, flammable, explosives, or radioactive materials, asbestos, polychlorinated biphenyls (PCBs), chemicals believed to cause cancer or reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic substances and related materials, petroleum and petroleum products, any substance that, if added to water, may degrade or alter or form part of a process of degradation or alteration of the quality or temperature of that water to the extent that it is detrimental to its use by man or by any animal, fish or plant, and substances declared to be hazardous or toxic under any law or regulation now or hereafter enacted or promulgated by any governmental authority having jurisdiction over the Landlord, the Tenant, the Leased Premises or the Building (the "Authorities"); (d) The Tenant shall, at its own expense, comply with the Laws; (e) The Tenant shall, at its own expense, make all submissions to, provide all information required by, and comply with all requirements of the Authorities under the Laws; (f) The Tenant shall indemnify, defend and hold harmless the Landlord, the Landlord's mortgagees, any manager of the building, and their respective officers, directors, beneficiaries, shareholders, partners, agents and employees, from all fines, suits, procedures, claims and actions of every kind, and all costs associated therewith (including legal fees on a solicitor and his own client basis and consultants' fees) arising out of or in any way connected with any deposit, spill, discharge, or other release of Hazardous Substances that occurs during the Term or any renewal or extension period, at or from the Leased Premises, or which arises at any time from the Tenant's use or occupancy of the Leased Premises, or from the Tenant's failure to provide all information, make all submissions, and take all steps required by this Section or by the Authorities; (g) Notwithstanding any other provision of this Lease, if the Tenant creates or brings to the Leased Premises any Hazardous Substances or if the conduct of the Tenant's business shall cause Page 201 there to be any Hazardous Substances at or near the Leased Premises, or discharged or released on, under or about the Leased Premises, the building or the lands upon which the building is constructed, the air, soil or ground water, then, notwithstanding any rule of law to the contrary, such Hazardous Substances shall be and remain the sole and exclusive property of the Tenant and shall not become the property of the Landlord, notwithstanding the degree of affixation to the Premises of the Hazardous Substances or the goods containing the Hazardous Substances. This affirmation of the Tenant's interest in the Hazardous Substances or the goods containing the Hazardous Substances shall not however prohibit the Landlord from dealing with such material as otherwise provided for in this Lease. 7.23 NUISANCE The Tenant shall not cause or maintain any nuisance in or about the Leased Premises, and shall keep the Leased Premises free of debris, rodents, vermin and anything of a dangerous noxious or offensive nature or which could create a fire hazard (through undue load on electrical circuits or otherwise) or undue vibration, heat or noise. 8.00 LANDLORD'S COVENANTS The Landlord further covenants with the Tenant: 8.01 QUIET ENJOYMENT The Landlord covenants with the Tenant that if the Tenant pays the Annual Rent, Additional Rent and all other sums reserved herein and observes and performs the covenants, conditions and agreements set out in this Lease, the Tenant shall and may peaceably possess and enjoy the Leased Premises during the Term without interruption or disturbance from the Landlord. 8.02 TAXES, ETC. To pay or cause to be paid all taxes and rates, municipal, parliamentary or otherwise, including, without limiting the generality of the foregoing, water rates with respect to the Lands, the Building or assessed against the Landlord in respect thereof, except those directly assessed or charged to or payable by the Tenant or assessed or charged with reference to the use or occupation of the Leased Premises and except as otherwise provided in this Lease. 8.03 HEATING AND AIR-CONDITIONING To provide for heating and air-conditioning so that when heat is reasonably required for the reasonable use of the Leased Premises the Landlord will furnish heat therefor up to a reasonable temperature and when the heating system is not in use and the Landlord considers that air-conditioning is reasonably required it will operate the air- conditioning systems in the Building. Page 202 The said heating and air-conditioning systems will be maintained by the Landlord during normal business hours except during the making of repairs and should the Landlord make default in so doing, it shall not be liable for any indirect or consequential damages for personal discomfort or illness due to such default. The Landlord reserves the right to stop the services of the heating and/or air-conditioning equipment when necessary by reason of any accident or any repairs, alterations or improvements which, in the judgment of the Landlord, are desirable or necessary to be made until such repairs, alterations or improvements shall have been completed. The Landlord shall have no further responsibility or liability for failure to supply the said heating and/or air-conditioning service when prevented from doing so, by strikes or by any cause beyond the Landlord's reasonable control or by orders or regulations by any body or authority having jurisdiction or by other reason of any failure of electrical current, steam or water or suitable power supply or inability upon the exercise of reasonable diligence to obtain such electrical current, steam or water for the operation of the heating or air- conditioning equipment. 8.04 REPAIR OF STRUCTURE To repair, replace and maintain the structural parts of the Building, and to perform such repairs, replacements and maintenance with reasonable dispatch, and in a good and workmanlike manner, at any time and from time to time, and notwithstanding anything contained herein to the contrary, the Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort occasioned thereby. 8.05 JANITORIAL SERVICES To provide janitorial and cleaning services to the common areas of the Building. The Landlord shall not be responsible for any act of omission or commission on the part of any person or persons employed to clean the Leased Premises or the Building. 8.06 DELAYS IN PROVISION OF SERVICES It is understood and agreed that whenever and to the extent that the Landlord shall be unable to fulfil, or shall be delayed or restricted in the fulfilment of any obligation hereunder in respect of the supply or provision of any service or utility or the doing of any work or the making of any repairs by reason of being unable to obtain the material, goods, equipment, service, utility or labour required to enable it to fulfil such obligation or by reason of any statute, law or order-in- council or any regulation or order passed or made pursuant thereto or by reason of the order or direction of any administrator, controller or board, or any governmental department or officer or other authority, or by reason of not being able to obtain any permission or authority required thereby, or by reason of any other cause beyond its control whether of the foregoing character or not, the Landlord shall be entitled to extend the time for fulfilment of such obligation by a time equal to the duration of such delay or restriction, and the Tenant shall not be entitled to compensation for any inconvenience, Page 203 nuisance, discomfort, direct or indirect or consequential damage or damages thereby occasioned. 9.00 TENANT'S FIXTURES The Tenant may install its usual trade fixtures in the usual manner, provided such installation does not damage the structure of the Leased Premises or the Building and provided further that the Tenant shall have submitted detailed plans and specifications for such trade fixtures to the Landlord and obtained its written consent thereto which consent shall not be unreasonably withheld. 9.01 REMOVAL OF TENANT'S FIXTURES Provided that the Tenant may remove his trade or tenant's fixtures; provided further, however, that all installations, alterations, additions, partitions, and fixtures other than trade or tenant's fixtures in or upon the Leased Premises, whether placed there by the Tenant or the Landlord, shall immediately upon such placement, be the Landlord's property without compensation therefor to the Tenant and, except as hereinafter mentioned in this paragraph shall not be removed from the Leased Premises by the Tenant at any time either during or after the term. Notwithstanding anything herein contained, the Landlord shall be under no obligation to repair or maintain the Tenant's installations, alterations, additions, partitions and fixtures or anything in the nature of a leasehold improvement made or installed by the Tenant or Landlord or third party; and further, notwithstanding anything herein contained, the Landlord shall have the right upon termination of this Lease by affluxion of time or otherwise or within six (6) months thereafter to require the Tenant to remove, or require the Tenant to pay to the Landlord the cost to remove, any installations, alterations, additions, partitions and fixtures or anything in the nature of a leasehold improvement made or installed by the Tenant, the Landlord or a third party, whether for the Tenant or a previous occupant, and make good any damage caused to the Leased Premises by such installation or removal. 10.00 DAMAGE OR DESTRUCTION OF LEASED PREMISES Provided that if during the continuation of this Lease, the Building or the Leased Premises are destroyed or damaged by any cause whatsoever, then the following provisions shall apply: 10.01 PARTIAL DAMAGE If damage shall occur to the Building or the Leased Premises so that all or part of the Leased Premises are rendered untenantable by damage from fire or other casualty which, in the reasonable opinion of the Landlord's architect, can be substantially repaired under applicable laws and governmental regulations within ninety (90) days from the date of such casualty (employing normal construction methods without overtime or other premium), the Landlord shall cause such damage to be repaired with all reasonable speed. Page 204 10.02 TOTAL DAMAGE If the Building or the Leased Premises are damaged to such an extent that the Leased Premises are rendered untenantable by damage from fire or other casualty which, in the reasonable opinion of the Landlord's architect, cannot be substantially repaired under applicable laws and governmental regulations within ninety (90) days from the date of such casualty (employing normal construction methods without overtime or other premium), then either the Landlord or Tenant may elect to terminate this Lease as of the date of such casualty by written notice delivered to the other not more than ten (10) days after receipt of such architect's opinion (failing which the Landlord shall cause such damage to be repaired at its own expense with all reasonable speed). 10.03 OBLIGATION TO REPAIR The Landlord's obligation to repair as set forth in the preceding two paragraphs hereof is conditional upon the Landlord receiving adequate proceeds from policies of insurance maintained in respect of such casualties or, if such proceeds are not made available to the Landlord, the Landlord electing to obtain its own financing for such repairs. In the event that no such proceeds of insurance are available to the Landlord and if the Landlord elects not to obtain its own financing for such repairs, then the Landlord shall, by notice in writing to the Tenant delivered within ten (10) days after receipt of the opinion of the Landlord's architect, notify the Tenant that the Lease is terminated, which termination shall be effective as of the date of such casualty. In calculating the amount of insurance proceeds available, the Landlord will be deemed to have received the deductible portion of any insurance policy. 10.04 ABATEMENT OF RENT If the Landlord is required to repair the damage pursuant to the provisions hereof and does not elect to terminate the Lease, the Annual Rent and Additional Rent payable by the Tenant under this Lease shall be proportionately reduced to the extent that the Leased Premises are thereby rendered unusable by the Tenant in its business from the date of such casualty until completion by the Landlord of the repairs to the Leased Premises and the Building so that the Leased Premises are thereafter fully usable by the Tenant in its business. 10.05 DAMAGE TO 50% OF BUILDING Notwithstanding anything otherwise contained in this Lease, if fifty percent (50%) or more of the rentable area of the Building is damaged or destroyed and if, in the reasonable opinion of the Landlord's Architect, the said rentable area cannot be rebuilt or made fit for the purposes of the tenants thereof within ninety (90) days of the date of such casualty, the Landlord may, at its option, terminate this Lease by giving notice of termination to the Tenant within thirty (30) days of the date of such casualty and the Tenant shall, with reasonable dispatch and expedition, but in any event within sixty (60) days Page 205 after delivery of the notice of termination, deliver up possession of the Leased Premises to the Landlord and the rent and other payments for which the Tenant is liable hereunder shall be apportioned and paid to the date possession is so delivered up. 10.06 COMPLETION OF REPAIR Provided that, if, upon the completion by the Landlord of any repairs required as a result of any such destruction or damage, a dispute shall arise between the Landlord and the Tenant as to whether or not the Leased Premises have been made fit for the purposes of the Tenant under this Lease, the Landlord may, at its option, terminate this Lease by giving thirty (30) days notice to the Tenant and if such notice shall be given this Lease shall, at the expiration of such period, be at an end and the Tenant shall deliver up the Leased Premises to the Landlord or whom it may appoint and the Landlord may, on demand, recover the full rental hereby reserved computed from the date on which such repairs were completed up to the date on which the Tenant is required to vacate. 11.00 LIABILITY FOR DAMAGE TO PROPERTY In the absence of negligence or wilful act or default on the part of the Landlord, its servants, agents or workmen, the Landlord shall not be liable or responsible in any way for any loss, damage or injury to any person or for any loss of or damage to any property belonging to the Tenant, to employees of the Tenant or to any other person while such property is in the Leased Premises or in the Building or in or on the surrounding, Lands and buildings owned by the Landlord, the areaways, the parking garages, the parking areas, lawns, sidewalks, reflective pools, steps, platforms, corridors, stairways or elevators whether or not any such property has been entrusted to employees of the Landlord and without limiting the generality of the foregoing, the Landlord shall not be liable for any damage to any such property caused by theft or breakage or by steam, water, rain or snow which may leak into, issue or flow from any part of the Building or from the water, steam or drainage pipes or plumbing works of the Building or from any other place or quarter or for any damage caused by or attributable to the condition or arrangement of any electric or other wiring or for any damage caused by smoke or anything done or omitted by any other tenant in the Building or for any other loss whatsoever with respect to the Leased Premises, goods placed therein or any business carried on therein. Page 206 12.00 DEFAULT OF TENANT Provided and it is hereby expressly agreed that if and whenever the Annual Rent or Additional Rent hereby reserved or any part thereof shall not be paid on the day appointed for payment thereof, whether lawfully demanded or not, or in case of breach or non-observance or non- performance of any of the covenants, agreements, provisos, conditions or Rules and Regulations on the part of the Tenant to be kept, observed or performed, or in case the Leased Premises shall be vacated or remain unoccupied for fifteen (15) days or in case the Term shall be taken in execution or attachment for any cause whatever, then and in every such case, it shall be lawful for the Landlord thereafter to enter into and upon the Leased Premises or any part thereof in the name of the whole and the same to have again, repossess and enjoy as of its former estate, anything in this Lease contained to the contrary notwithstanding other than the proviso to this paragraph; PROVIDED that the Landlord shall not at any time have the right to re-enter and forfeit this Lease by reason of the Tenant's default in the payment of the rent reserved by this Lease, unless and until the Landlord shall have given to the Tenant written notice setting forth the default complained of and the Tenant shall have the right during five (5) business days next following the date on such notice to cure any such default in payment of rent. In case without the written consent of the Landlord, the Leased Premises shall be used by any other person than the Tenant or for any other purpose than that for which the same were let or in case the Term or any of the goods and chattels of the Tenant shall be at any time seized in execution or attachment by any creditor of the Tenant or if the Tenant makes any bulk sale, then in any such case this lease shall, at the option of the Landlord, cease and determine and the Term shall immediately become forfeited and void in accordance with the provisions of Section 15, RIGHT OF TERMINATION, herein. 13.00 BANKRUPTCY Provided further that, in case without the written consent of the Landlord, the Leased Premises shall be used by any other person than the Tenant or for any other purposes than that for which the same were let or in case the Term or any of the goods and chattels of the Tenant shall be at any time seized in execution or attachment by any creditor of the Tenant or by the Tenant making any assignment for the benefit of creditors or any bulk sale or become bankrupt or insolvent or take the benefit of any act now or hereafter in force for bankrupt or insolvent debtors, or, if the Tenant is a corporation and any order shall be made for the winding up of the Tenant, or other termination of the corporate existence of the Tenant, then in any such case this Lease shall, at the option of the Landlord, cease and determine and the Term shall immediately become forfeited and void and the then current month's rent and the next ensuing three (3) months rent and in addition, all cash allowances, tenant inducement payments and the value of any other benefit paid to or conferred on the Tenant by or on behalf of the Landlord in connection with this Lease shall immediately become due and be paid and the Landlord may re-enter and take possession of the Leased Premises as though the Tenant or Page 207 other occupant or occupants of the Leased Premises was or were holding over after the expiration of the Term without any right whatever. 14.00 RE-ENTRY BY LANDLORD The Tenant further covenants and agrees that on the Landlord's becoming entitled to re-enter upon the Leased Premises under any of the provisions of this Lease, the Landlord, in addition to all other rights, shall have the right to enter the Leased Premises as the agent of the Tenant either by force or otherwise, without being liable for any prosecution therefor and to relet the Leased Premises as the agent of the Tenant, and to receive the rent therefor and as the agent of the Tenant, to take possession of any furniture or other property on the Leased Premises and to sell the same at public or private sale without notice and to apply the proceeds of such sale and any rent derived from reletting the Leased Premises upon account of the rent under this Lease, and the Tenant shall be liable to the Landlord for the deficiency, if any. 15.00 RIGHT OF TERMINATION The Tenant further covenants and agrees that on the Landlord becoming entitled to re-enter upon the Leased Premises under any of the provisions of this Lease, the Landlord, in addition to all other rights, shall have the right to determine forthwith this Lease and the Term by leaving upon the Leased Premises notice in writing of its intention so to do, and thereupon, rent shall be computed, apportioned and paid in full to the date of such determination of this Lease and any other payments for which the Tenant is liable under this Lease shall be paid and the Tenant shall immediately deliver up possession of the Leased Premises to the Landlord, and the Landlord may re-enter and take possession of the same without limiting the generality of the foregoing, in addition to any other rights the Landlord may have against the Tenant, in the event the Tenant wishes to terminate this Lease early, the Tenant shall be liable for the unamortized balance of the cost of the Leasehold Improvements, amortized over the Term of the Lease on a straight line basis. 16.00 DISTRESS The Tenant waives and renounces the benefit of any present or future statute taking away or limiting the Landlord's right of distress, and covenants and agrees that notwithstanding any such statute, none of the goods and chattels of the Tenant on the Leased Premises at any time during the Term shall be exempt from levy by distress for rent in arrears. In the event that the Tenant shall remove or permit the removal of any of its goods or chattels from the Leased Premises, the Landlord may within thirty (30) days thereafter and if the Tenant is in arrears of rent, seize such goods and chattels wherever the same may be found and may sell or otherwise dispose of the same as if they had actually been distrained upon the Leased Premises by the Landlord for arrears of rent. 17.00 NON-WAIVER Page 208 No condoning, excusing or overlooking by the Landlord of any default, breach or non-observance by the Tenant at any time or times in respect of any covenant, proviso or condition herein contained shall operate as a waiver of the Landlord's rights hereunder in respect of any continuing or subsequent default, breach or non-observance, or so as to defeat or affect in any way the rights of the Landlord herein in respect of any such continuing or subsequent default or breach, and no waiver shall be inferred from or implied by anything done or omitted by the Landlord save only express waiver in writing. All rights and remedies of the Landlord in this Lease contained shall be cumulative and not alternative. 18.00 CHANGES TO BUILDING The Landlord hereby reserves the right at any time and from time to time to make changes in, additions to, subtractions from or rearrangements of the Building including, without limitation, all improvements at any time thereon, all entrances and exits thereto, and to grant, modify and terminate easements or other agreements pertaining to the use and maintenance of all or parts of the Building and to make changes or additions to the pipes, conduits, utilities and other necessary building services in the Leased Premises which serve other premises, provided that prior to the commencement of the Term, the Landlord may alter or relocate the Leased Premises to the extent found necessary by the Landlord to accommodate changes in construction design or facilities including major alterations and relocations. The Landlord agrees that in performing such alterations, it shall do so in a manner so as to minimize any material interference with the Tenant's use and enjoyment of the Leased Premises. The Landlord shall also have the right during the Term at its reasonable expense to relocate the Leased Premises to an alternate location within the Building. 19.00 SEVERANCE OF LAND The Landlord shall have the right from time to time to sever (for purposes of sale, lease, mortgage, charge or otherwise) any part or parts of the Land or any buildings or improvements thereon, including the creation of rights-of-way, easements and parking arrangements which the Landlord deems necessary and the Tenant hereby consents to any such severance and agrees to execute, at no cost to the Landlord, any documents or consents which the Landlord may request for these purposes. If any part or parts of the Land or the buildings or improvements on the lands are so severed and are deemed by the Landlord to no longer form part of the property, such part or parts shall be excluded from the Lands and the property for the purposes of this Lease at the time designated by the Landlord and the Tenant shall when requested by the Landlord, execute, at no cost to the Landlord, a release of any interest in the Lands so excluded. 20.00 COSTS OF COLLECTION Page 209 The Tenant shall pay, as Additional Rent, all costs, expenses and legal fees (on a solicitor and his client basis) that may be incurred or paid by or on behalf of the Landlord in enforcing the covenants and provisions of this Lease. 21.00 PROFITS AND REMEDIES BY LANDLORD In addition to all rights and remedies available to the Landlord under the provisions of this Lease or by statute or the general law in the event of any default by the Tenant of the provisions of this Lease: 21.01 PAYMENTS TO THIRD PARTIES The Landlord shall have the right at all times to remedy or attempt to remedy any default of the Tenant, and in so doing, may make any payments due or alleged to be due by the Tenant to third parties and may enter upon the Leased Premises to do any work or other things therein, and in any such event, all costs and expenses of the Landlord in remedying or attempting to remedy such default shall be payable by the Tenant to the Landlord forthwith upon demand as Additional Rent. 21.02 NON-PAYMENT OF ADDITIONAL RENT The Landlord shall have the same rights and remedies in the event of any non-payment by the Tenant of any amounts payable by the Tenant under any provision of this Lease and the parking agreement as in the case of non- payment of rent and may be recovered by the Landlord as rent by any and all remedies available to the Landlord for the recovery of rent in arrears. 21.03 INTEREST ON ARREARS The Landlord shall, if the Tenant shall fail to pay any Monthly Rent, Additional Rent or other amounts from time to time payable by it to the Landlord hereunder promptly when due, be entitled to interest on all such Annual Rent, Additional Rent and other amounts which are unpaid and overdue under this Lease and the parking agreement, such interest to be compounded monthly thereon and to be computed at a rate equal to six percent (6%) per annum in excess of the minimum lending rate to prime commercial borrowers from time to time charged by the Royal Bank of Canada or such other chartered bank as the Landlord may designate, from the date upon which such Monthly Rent, Additional Rent and other amounts was due until actual payment thereof. 22.00 NOTICE Any notice required or contemplated by any provisions of this Lease shall be given in writing, enclosed in a sealed envelope addressed, in the case of notice to the Landlord c/o Kanata Research Park Corporation, 555 Legget Drive, Suite 206, Kanata, Ontario, Canada, Canada K2K 2X3 and in the case of notice to the Tenant, to it at the Leased Premises and mailed by registered mail, postage prepaid or telefaxed. The time of giving of such notice shall be conclusively deemed to be, if mailed the third (3rd) business day after the day Page 210 of such mailing, if telefaxed, the next business day following the date sent as evidenced by the sender's transmittal record. Such notice shall also be sufficiently given if and when the same shall be delivered, in the case of notice to the Landlord, to an executive officer of the Landlord, and in the case of notice to the Tenant, to him personally or to an executive officer, manager or a person who appears to be in charge, of the Tenant if the Tenant is a corporation. Such notice, if delivered, shall be conclusively deemed to have been given and received at the time of such delivery. If, in this Lease, two or more persons are named as Tenant, such notice shall also be sufficiently given if and when the same shall be delivered personally to any one of such persons. Provided that either party may, by notice to the other, from time to time, designate another address in Canada to which notices mailed more than ten (10) days thereafter shall be addressed. The word "notice" in this paragraph shall include any request, demand, direction, or statement in this Lease provided or permitted to be given by the Landlord to the Tenant or by the Tenant to the Landlord. 23.00 SUBORDINATION, POSTPONEMENT, ATTORNMENT The Tenant shall promptly upon the written request of the Landlord, enter into an agreement: (a) subordinating the Term and the rights of the Tenant hereunder to any mortgage, charge, ground lease, trust deed or debenture present or future and all renewals, modifications, replacements or extensions thereof, which may affect the Leased Premises, the Property, the Lands or the Building; (b) agreeing that the Term hereof shall be subsequent in priority to any such mortgage, charge, ground lease, trust deed or debenture; provided that the Tenant's obligations under this paragraph shall be conditional upon any such mortgagee or secured party entering into a non- disturbance agreement with the Tenant under which the Tenant's continued possession of the Leased Premises is ensured notwithstanding any act taken by the mortgagee or secured party. 23.01 TENANT'S RIGHT TO POSSESSION Notwithstanding any postponement or subordination referred to herein, the Tenant acknowledges that its obligations under this Lease shall remain in full force and effect notwithstanding any action at any time taken by a mortgagee, chargee or ground lessor to enforce the security of any mortgage charge, ground lease, trust deed or debenture; provided, however, that any postponement or subordination given hereunder shall reserve to the Tenant the right to continue in possession of the Leased Premises under the terms of this Lease so long as the Tenant shall not be in default hereunder. 23.02 ATTORNMENT BY TENANT Page 211 The Tenant, whenever requested by any mortgagee (including any trustee under a deed of trust and mortgage), chargee or ground lessor, shall attorn to such mortgagee, chargee or ground lessor as a tenant upon all the terms of this Lease. 24.00 CERTIFICATE The Tenant agrees that he will at any time and from time to time upon not less than five (5) days' prior notice execute and deliver to the Landlord or any mortgagee of the Lands (including a deed of trust and mortgage) a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the modifications and that the same is in full force and effect as modified), the amount of the Annual Rental then being paid hereunder, the dates to which the same, by instalments or otherwise, and other charges hereunder have been paid, and whether or not there is any existing default on the part of the Landlord of which the Tenant has notice. 25.00 REGISTRATION The Tenant covenants and agrees with the Landlord that the Tenant will not register this Lease in this form in any Registry Office or the Land Titles Office. If the Tenant desires to make a registration for the purposes only of giving notice of this Lease, then the parties hereto shall contemporaneously with the execution of this Lease execute a short form thereof solely for the purpose of supporting an application for registration of notice thereof. 26.00 PLANNING ACT Where applicable, this Lease shall be subject to the condition that it is effective only if The Planning Act, 1983, as amended is complied with. Pending such compliance the Term and any renewal thereof shall be deemed to be for a total period of one (1) year less than the maximum lease Term permitted by law without such compliance. 27.00 TRANSFER BY LANDLORD In the event of a sale, transfer or lease by the Landlord of the Building, the Lands or a portion thereof containing the Leased Premises or the assignment by the Landlord of this Lease or any interest of the Landlord hereunder, the Landlord shall, without further written agreement, to the extent that such purchaser, transferee or lessee has become bound by the covenants and obligations of the Landlord hereunder, be freed, released and relieved of all liability or obligations under this Lease incurred or arising after the date of such sale, transfer or lease. 28.00 NO ADVERTISING OF LEASED PREMISES The Tenant shall not print, publish, post, display or broadcast any notice or advertisement to the effect that the whole or any part of the Leased Premises Page 212 are for rent, and it shall not permit any broker or other person to do so without the consent in writing of the Landlord. 29.00 TIME OF ESSENCE Time shall be of the essence of this Lease. 30.00 LAWS OF ONTARIO This Lease shall be deemed to have been made in and shall be construed in accordance with the Laws of the Province of Ontario. 31.00 SEVERABILITY OF COVENANTS The Landlord and the Tenant agree that all of the provisions of this Lease are to be construed as covenants and agreements as though the words importing such covenants and agreements were used in each separate paragraph hereof. Should any provision or provisions of this Lease be illegal or not enforceable it or they shall be considered separate and severable from the Lease and its remaining provisions shall remain in force and be binding upon the parties hereto as though the said provision or provisions had never been included. 32.00 HEADINGS The captions appearing in the margin or the headings contained in this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease or of any provision hereof. 33.00 SCHEDULES The following Schedules attached hereto form part of this Lease: Schedules: 34.00 LEASE ENTIRE AGREEMENT The Tenant acknowledges that there are no covenants, representations, warranties, agreements or conditions expressed or implied, collateral or otherwise forming part of or in any way affecting or relating to this Lease save as expressly set out in this Lease and that this Lease constitutes the entire agreement between the Landlord and the Tenant and may not be modified except as herein explicitly provided or except by subsequent agreement in writing of equal formality hereto executed by the Landlord and the Tenant. 35.00 INTERPRETATION IN THIS INDENTURE: Page 213 (a) "herein", "hereof", "hereby", "hereunder", "hereto", "hereinafter", and similar expressions refer to this indenture and not to any particular paragraph, section or other portion thereof, unless there is something in the subject matter or context inconsistent therewith. (b) "business day(s)" means any of the days from Monday to Friday of each week inclusive unless such day is a statutory holiday or public holiday. (c) "normal business hours" means the hours from 8:00 a.m. to 6:00 p.m. on business days. 36.00 SUCCESSORS This indenture and everything herein contained shall enure to the benefit of and be binding upon the respective heirs, executors, administrators, permitted successors and assigns, of the Tenant and other legal representatives as the case may be, of each and every of the parties hereto, and every reference herein to any party hereto shall include the heirs, executors, administrators, permitted successors, assigns and other legal representatives of such party, and where there is more than one tenant or there is a female party or a corporation, the provisions hereof shall be read with all grammatical and gender changes thereby rendered necessary and all covenants shall be deemed joint and several. Page 214 37.00 JOINT AND SEVERAL COVENANT If more than one person executes this Lease as Tenant, each such person shall be bound jointly and severally with the other(s), waiving the benefit of division and discussion, for the fulfilment of all of the obligations of Tenant hereunder. IN WITNESS WHEREOF the parties hereto have hereunto affixed their corporate seals duly attested to by the hands of their proper signing officers authorized in that behalf. SIGNED, SEALED AND DELIVERED ) in the presence of: ) KANATA RESEARCH PARK ) CORPORATION ) ) ) ) ) Per:_______________________________________ ) Name: ) Title: c/s ) I have the authority to bind the corporation. ) ) NEWBRIDGE NETWORKS ) CORPORATION ) ) ) _____________________________ ) Per:_______________________________________ Witness ) Name: ) Title: c/s ) ) ) _____________________________ ) Per:_______________________________________ Witness ) Name: ) Title: c/s ) ) I/We have the authority to bind the ) Corporation Page 215 SCHEDULE "A" ------------ LEGAL DESCRIPTION ----------------- FIRSTLY: Parcel 2-1, Section 4M-642, Part of Block 2, Plan 4M-642, in the City of Kanata, Regional Municipality of Ottawa Carleton, designated as Parts 1 and 2 on Plan 4R-13076. (PIN 04517-0740) SECONDLY: Part of Parcel 8-1, Section March-4 being part of the Northwest half of Lot 8, Concession 4, City of Kanata (formerly Township of March) Regional Municipality of Ottawa Carleton, designated as Parts 3 and 4 on Plan 4R-13076. (Part of PIN 04517-0747) THIRDLY: Part of Parcel 8-1, Section March-4 being part of the Northwest half of Lot 8, Concession 4, City of Kanata (formerly Township of March) Regional Municipality of Ottawa Carleton, designated as Part 5 on Plan 4R- 13076. (Part of PIN 04517-0617) Page 216 SCHEDULE "B ----------- FLOOR PLAN ---------- Page 217 SCHEDULE "C" ------------ RULES AND REGULATIONS --------------------- The Tenant and its invitees and employees shall observe the following rules and regulations (as added to, amended or modified from time to time by the Landlord). 1. The sidewalks, entrances, elevators, stairways, passageways, shipping areas and corridors of the Building shall not be obstructed or used for any other purpose by the Tenant than for ingress and egress to and from the Leased Premises; the Tenant shall not place or allow to be placed in such areas or facilities any waste paper, garbage, refuse or anything that shall tend to make them appear unclean or untidy. 2. The Tenant and its employees shall use washrooms only for the purpose for which they were designed and nothing shall be placed in toilets that might cause them to block. 3. Between peak periods, the elevators will be used for transporting passengers only and during these periods no large parcels or items of equipment will be permitted on the elevators. Peak periods are between 8 a.m. and 10 a.m. in the morning, between 12 noon and 2 p.m. in the afternoon and between 4 p.m. and 6 p.m. in the evening. 4. The Tenant shall make arrangements with the Landlord ahead of time when elevators are to be used for carrying freight or furniture, etc.. Elevators must not be used for this purpose until the Landlord has given its consent and the elevator cabs have been properly protected. 5. The Landlord's janitors shall be permitted prompt access to the Leased Premises for the purpose of cleaning the office areas thereof. 6. The Tenant shall not make any noise which might disturb other tenants and no animals or bicycles or other vehicles shall be brought into the Leased Premises or the Building. 7. The Leased Premises shall not be used as overnight sleeping accommodation, for public sales nor for entertaining purposes. 8. The Tenant shall make arrangements with the Landlord ahead of time if any public meeting is to be held in the Leased Premises and the meeting shall not be held until the Landlord's written consent is obtained. 9. The Tenant shall make arrangements with the Landlord ahead of time to install any business machines, electric appliances, etc. and these installations will not be made until the Landlord's consent is obtained. 10. Windows will not be left open so as to admit rain or snow. 11. The Tenant will not alter any existing locks nor will any additional locks or similar devices be attached to any door or window. Page 218 12. Keys or other devices which are made available to the Tenant for the purpose of providing access to the exterior doors of the Building shall not be duplicated and shall be returned to the Landlord immediately upon termination of the Lease. 13. All adjustments to mechanical equipment such as thermostats, radiators, diffusers, etc. shall be made by the Landlord's staff and no one else. 14. If the Tenant wishes to install any drapes or blinds in any of the windows on the exterior of the Building or on any window of the Leased Premises facing the interior of the Building, the Landlord's prior written consent must be obtained and further the drapes or blinds installed must conform to a uniform colour which the Landlord may at its absolute discretion establish. 15. The Tenant shall not place anything next to or have displayed in the windows of the Leased Premises facing into the common areas so as to visible therein, without the prior written consent of the Landlord. 16. No admittance by the Tenant or its agents is permitted on the roof or equipment rooms of the Building. 17. It shall be the responsibility of the Tenant to prevent any person from throwing objects out of windows or into the ducts or stairwells of the Building, and the Tenant shall pay for any cost, damage or injury resulting from any such acts. 18. The Tenant shall provide adequate receptacles for garbage, refuse and waste paper and all such garbage, refuse and waste paper shall be placed in such containers. The Leased Premises shall be kept in a tidy, healthy and clean condition. 19. The Tenant shall not bring upon the Leased Premises any safes, heavy equipment, motors or any other thing which might overload floors or damage the Leased Premises or the Building. 20. The Landlord may require that all persons entering and leaving the Building at any time other than normal business hours satisfactorily identify themselves and register in books kept for the purpose, and may prevent any person from entering the Leased Premises unless provided with a key thereto and a pass or other authorization from the Tenant in a form satisfactory to the Landlord, and may prevent any person removing any goods therefrom without written authorization. 21. The Tenant shall not use or keep inflammable materials in the Leased Premises. 22. The Landlord shall not be responsible for any theft, loss or damage to vehicles parked therein whatsoever, or for any injury to the Tenant or others in or on the parking facilities whether or not parking charges are imposed. Page 219 23. The Landlord shall have the right to establish rules and regulations governing the use of the parking facilities from time to time and the Tenant hereby agrees to observe and abide by all such rules and regulations. 24. All moving of the Tenant's chattels and trade fixtures and other fixtures from or to the Leased Premises shall be performed after business hours and shall be supervised by the Landlord, its agents or a security guard all at the Tenant's expense. 25. Smoking is prohibited in all common areas of the Building. The foregoing rules and regulations, as from time to time amended, are not necessarily of uniform application, but subject to 7.02 may be waived in whole or in part in respect of other tenants without affecting their enforceability with respect to the Tenant or the Leased Premises. There is no obligation on the Landlord to enforce the rules and regulations, and the Landlord shall not be liable by reason of their non-enforcement. Page 220 SCHEDULE "D" ------------ PARKING ------- 1. During the Term the Landlord hereby agrees to allow the Tenant to park One (1) vehicle per Three Hundred and Twenty-Three (323) rentable square feet of Leased Premises, in the parking facilities located on the Lands ("parking facilities"). In the event the Landlord constructs a parking structure on the Lands, the Tenant shall then be called upon to pay for parking. 2. The Landlord shall not be responsible for any theft, loss or damage to the Tenant's vehicles whatsoever, or for injury to the Tenant or others in the parking facilities. 3. The Landlord shall have the right to establish rules and regulations governing the use of the parking facilities from time to time and the Tenant hereby agrees to observe and abide by all such rules and regulations. Page 221 SCHEDULE "E" ------------ OPTION TO RENEW --------------- 1. Provided the Tenant is in good standing, during the Term has not been in substantial default under this Lease and has not assigned this Lease or sublet all or a portion of the Leased Premises, the Tenant shall have and is hereby granted an option to renew this Lease for a further term of five (5) years provided that in order to exercise this option, the Tenant shall be required to give to the Landlord notice of the exercise of such option in writing not less than six (6) months prior to the date of expiry of the initial Term. 2. Any renewal pursuant to this proviso shall be on the same terms and conditions contained in this Lease except: (a) there shall be no additional right of renewal and no Leasehold Improvements; (b) the Annual Rent payable by the Tenant for such renewal period shall be as agreed upon by the Landlord and Tenant and shall in no event be less than the Annual Rent paid during the last year of the Term; such agreement to be reached not later than three (3) months prior to the expiry of the original Term. Failing such agreement, this option shall be null and void and of no further force and effect. Page 222 SCHEDULE "F" ------------ LEASEHOLD IMPROVEMENTS ---------------------- The Landlord shall, at its sole cost and expense, supply and install the following leasehold improvements: . ESD flooring throughout the premises . suite entrance door with sidelights Page 223 SCHEDULE "G" ADDITIONAL TERMS AND CONDITIONS During the Term of this Lease the Landlord hereby agrees to allow the Tenant to install four (4) gravity mount antennas on the rooftop of the building. The Tenant shall install the antennas in accordance with all specifications and requirements of the Landlord (as further described in Schedule "H" attached hereto, which includes compliance with the Landlord's Engineer as also noted in Schedule "H"). The Tenant shall, at its own expense, maintain the antennas during the Term and remove same at the conclusion of the Term or earlier termination of the Lease. The Tenant shall pay for any additional costs incurred by the Landlord in repairing or maintaining the rooftop of the Building as a result of the installation, existence and/or removal of the antennas. The Tenant shall obtain the required approval for the operation of said antennas from the Department of Communication and/or the Canadian Radio-Television and Telecommunications Commission and all other applicable regulatory licensing or building authorities. Page 224 SCHEDULE "H" SPECIFICATIONS AND REQUIREMENTS FOR GRAVITY MOUNT ANTENNAS Page 225 EX-11.1 10 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)
for the fiscal quarter ended for the fiscal year ended ---------------------------- ------------------------- Aug 2, Nov 1, Jan 31, May 2, May 2, Apr 30, Apr 30, 1998 1998 1999 1999 1999 1998 1997 ---- ---- ---- ---- ---- ---- ---- Basic earnings (loss) per share Net earnings (loss) $ 35,520 $ 53,314 $120,119 $(29,792) $179,161 $(18,318) $156,917 ======== ======== ======== ======== ======== ======== ======== Common Shares outstanding at the beginning of the period 175,686 176,558 176,877 178,579 175,686 171,859 168,676 Weighted average number of Common Shares issued during the period 419 208 719 1,526 1,944 2,758 1,834 -------- -------- -------- -------- -------- -------- -------- Weighted average number of Common Shares outstanding during the period 176,105 176,766 177,596 180,105 177,630 174,617 170,510 ======== ======== ======== ======== ======== ======== ======== Basic earnings (loss) per share $ 0.20 $ 0.30 $ 0.68 $ (0.17) $ 1.01 $ (0.10) $ 0.92 ======== ======== ======== ======== ======== ======== ======== Fully diluted earnings (loss) per share Earnings (loss) before imputed earnings $ 35,520 $ 53,314 $120,119 $(29,792) $179,161 $(18,318) $156,917 After tax imputed earnings from the investment of funds received through dilution 6,817 -- 7,353 -- -- -- 11,589 -------- -------- -------- -------- -------- -------- -------- Adjusted net earnings (loss) $ 42,337 $ 53,314 $127,472 $(29,792) $179,161 $(18,318) $168,506 ======== ======== ======== ======== ======== ======== ======== Weighted average number of Common Shares outstanding during the period 176,105 176,766 177,596 180,105 177,630 174,617 170,510 Weighted average common share equivalents based on conversion of outstanding stock options 20,645 -- 22,355 -- -- -- 14,085 -------- -------- -------- -------- -------- -------- -------- Weighted average number of Common Shares and equivalents outstanding during the period 196,750 176,766 199,951 180,105 177,630 174,617 184,595 ======== ======== ======== ======== ======== ======== ======== Fully diluted earnings (loss) per share $ 0.20 $ 0.30 $ 0.64 $ (0.17) $ 1.01 $ (0.10) $ 0.91 ======== ======== ======== ======== ======== ======== ======== 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 $ 0.6817 $ 0.6520 $ 0.6515 $ 0.6660 $ 0.6629 $ 0.7116 $ 0.7344 Basic earnings (loss) per share, in U.S. dollars $ 0.14 $ 0.20 $ 0.44 $ (0.11) $ 0.67 $ (0.07) $ 0.68 Fully diluted earnings (loss) per share, in U.S. dollars $ 0.14 $ 0.20 $ 0.42 $ (0.11) $ 0.67 $ (0.07) $ 0.67
Page 227 EX-11.2 11 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)
for the fiscal quarter ended for the fiscal year ended ---------------------------- ------------------------- Aug 2, Nov 1, Jan 31, May 2, May 2, Apr 30, Apr 30, 1998 1998 1999 1999 1999 1998 1997 ---- ---- ---- ---- ---- ---- ---- Earnings (loss) per share (U.S. GAAP - Basic) Net earnings (loss) $ 35,520 $ 53,314 $120,119 $(29,792) $179,161 $(18,318) $156,917 ======== ======== ======== ======== ======== ======== ======== Weighted average number of Common Shares outstanding during the period 176,105 176,766 177,596 180,105 177,630 174,617 170,510 ======== ======== ======== ======== ======== ======== ======== Earnings (loss) per share (U.S. GAAP) $ 0.20 $ 0.30 $ 0.68 $ (0.17) $ 1.01 $ (0.10) $ 0.92 ======== ======== ======== ======== ======== ======== ======== Earnings (loss) per share (U.S. GAAP - Diluted) Net earnings (loss) $ 35,520 $ 53,314 $120,119 $(29,792) $179,161 $(18,318) $156,917 ======== ======== ======== ======== ======== ======== ======== Weighted average number of Common Shares outstanding during the period 176,105 176,766 177,596 180,105 177,630 174,617 170,510 Net effect of dilutive stock options and warrants, based on the treasury stock method 2,314 -- 4,434 -- 2,746 -- 4,015 -------- -------- -------- -------- -------- -------- -------- Weighted average number of Common Shares outstanding during the Period, as adjusted 178,419 176,766 182,030 180,105 180,376 174,617 174,525 ======= ======== ======== ======== ======== ======== ======== Earnings (loss) per share (U.S. GAAP) $ 0.20 $ 0.30 $ 0.66 $ (0.17) $ 0.99 $ (0.10) $ 0.90 ======== ======== ======== ======== ======== ======== ======== 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 $ 0.6520 $ 0.6515 $ 0.6660 $ 0.6629 $ 0.7116 $ 0.7344 Basic earnings (loss) per share, in U.S. dollars $ 0.14 $ 0.20 $ 0.44 $ (0.11) $ 0.67 $ (0.07) $ 0.68 Diluted earnings (loss) per share, in U.S. dollars $ 0.14 $ 0.20 $ 0.43 $ (0.11) $ 0.66 $ (0.07) $ 0.66
Page 228 EX-21 12 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF NEWBRIDGE NETWORKS CORPORATION The names of certain other subsidiaries, which considered in the aggregate would not constitute a significant subsidiary, have been omitted. Jurisdiction Name of of Incorporation Subsidiary or Organization - ---------- --------------- Newbridge Networks Inc. Delaware Newbridge Networks Limited England and Wales Newbridge Networks Services SL United Kingdom Newbridge Networks (Asia) Limited Hong Kong Transistemas S.A. Argentina Newbridge Networks Telecomunicacoes Ltda. Brazil Newbridge Networks de Mexico, S.A. de C.V. Mexico Newbridge Networks S.A. France Newbridge Networks (Middle East) WLL Bahrain Nihon Newbridge Networks Corporation Japan Newbridge Networks (Australia) Pty. Ltd Australia Newbridge Networks Korea Ltd. Korea Newbridge Networks Venezuela, S.A. Venezuela Newbridge Networks GmbH Germany Newbridge Networks Ireland Ireland Newbridge Networks (Pty) Ltd South Africa Newbridge (Barbados) Corporation Barbados Newbridge Networks S.p.A. Italy Newbridge Networks GmbH (Austria) Austria Coasin Chile S.A. Chile Acacia Limited Barbados Newbridge Networks (APL) L. BHD Malaysia Newbridge Networks SDN. BHD. Malaysia Newbridge Networks A/S Denmark Newbridge Networks AB Sweden Newbridge Networks S.L. Spain Newbridge Networks Benelux S.A. Belgium Newbridge Networks B.V. Netherlands Page 229 EX-23 13 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Newbridge Networks Corporation (the "Company") on Form S-8 (File Nos. 33-51538, 33-55964, 33-68710, 33-78276, 33-89624, 33-97472, 333-2446, and 333-30777) of our report dated June 1, 1999 and June 22, 1999, included herein, on our audit of the consolidated financial statements of the Company, which are included in this Annual Report on Form 10-K dated June 17, 1999, as included in Item 8 herein. /s/ Deloitte and Touche LLP Deloitte & Touche Chartered Accountants June 22, 1999 Ottawa, Canada Page 230 EX-27 14 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-K FOR THE FISCAL YEAR ENDED MAY 2, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. CAN$ 1,000 12-MOS MAY-02-1999 MAY-01-1998 MAY-02-1999 0.6629 666,019 213,675 489,028 16,217 210,286 1,655,704 983,315 527,832 2,470,624 411,713 384,021 0 0 572,990 956,229 2,470,624 1,790,705 1,790,705 751,874 1,665,633 20,802 0 26,127 301,117 121,303 179,161 0 0 0 179,161 1.01 1.01
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