-----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, Fghb0GEB7QpLn7fopjJLDZCXNatG7q2omy1PnLJIrFUeK5OifxUnoVxkV4cPcQET jMD2DEW6OtFiCiZpvqMIkA== 0000928385-99-002819.txt : 19990916 0000928385-99-002819.hdr.sgml : 19990916 ACCESSION NUMBER: 0000928385-99-002819 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990801 FILED AS OF DATE: 19990915 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEWBRIDGE NETWORKS CORP CENTRAL INDEX KEY: 0000827301 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 980077506 STATE OF INCORPORATION: A6 FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13316 FILM NUMBER: 99712074 BUSINESS ADDRESS: STREET 1: 600 MARCH ROAD PO BOX 13600 STREET 2: KANATA ONTARIO CANADA CITY: K2K 2E6 STATE: A6 BUSINESS PHONE: 6135913600 MAIL ADDRESS: STREET 1: 600 MARCH ROAD STREET 2: KANATA ONTARIO CANADA CITY: K2K 2E6 STATE: A6 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 1, 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 (I.R.S. Employer incorporation or organization) Identification No.) 600 March Road, Kanata, Ontario, Canada K2K 2E6 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (613) 591-3600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of Common Shares of the registrant outstanding as at September 10, 1999 was 180,875,551. (Exhibit index located on page 35) (Page 1 of 38) NEWBRIDGE NETWORKS CORPORATION TABLE OF CONTENTS
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Earnings and Retained Earnings -- Fiscal quarters ended August 1, 1999 and August 2, 1998................................ 3 Consolidated Balance Sheets -- August 1, 1999 and May 2, 1999................................... 4 Consolidated Statements of Cash Flows -- Fiscal quarters ended August 1, 1999 and August 2, 1998............................................... 5 Notes to the Consolidated Financial Statements................... 6-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 16-32 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................ 33 Item 5. Other Information................................................ 33 Item 6. Exhibits and Reports on Form 8-K................................. 33 SIGNATURES............................................................................ 34
(Page 2 of 38) PART I. FINANCIAL INFORMATION Item 1. Financial Statements NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (Canadian dollars, amounts in thousands except per share data) (Unaudited)
Fiscal quarter ended ---------------------- August 1, August 2, 1999 1998 -------- ---------- Sales $495,070 $426,056 Cost of sales 215,521 176,562 -------- -------- Gross margin 279,549 249,494 Expenses Selling, general and administrative 141,037 129,039 Research and development 67,621 67,156 Amortization of acquired intangibles 2,745 927 -------- -------- Income from operations 68,146 52,372 Interest income 7,345 6,611 Interest expense on long term obligations (6,059) (6,703) Net gain on investments (Note 8) 3,512 -- Other expenses (2,618) (1,506) -------- -------- Earnings before income taxes and non-controlling interest 70,326 50,774 Provision for income taxes 21,705 14,978 Non-controlling interest 1,335 276 -------- -------- Net earnings 47,286 35,520 Retained earnings, beginning of the period 928,991 749,830 -------- -------- Retained earnings, end of the period $976,277 $785,350 ======== ======== Earnings per share (Note 6) Basic $0.26 $0.20 Fully diluted $0.26 $0.20 Weighted average number of shares Basic 180,399 176,105 Fully diluted 180,399 176,105
See accompanying Notes to the Consolidated Financial Statements. (Page 3 of 38) NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED BALANCE SHEETS (Canadian dollars in thousands)
August 1, May 2, 1999 1999 ----------- ---------- (unaudited) Assets Cash and cash equivalents $ 432,459 $ 666,019 Marketable securities 198,283 213,675 Accounts receivable, net of provision for returns and doubtful accounts of $19,619 (May 2, 1999 - $16,217) 560,204 472,811 Inventories (Note 2) 271,373 210,286 Prepaid expenses 50,657 46,753 Other current assets 29,055 46,160 ---------- ---------- 1,542,031 1,655,704 Property, plant and equipment 463,242 455,483 Goodwill 38,939 40,022 Software development costs 37,809 35,909 Future tax benefits 52,569 59,999 Other assets (Note 4) 387,744 223,507 ---------- ---------- $2,522,334 $2,470,624 ========== ========== Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 178,333 $ 190,630 Accrued liabilities 187,622 201,361 Income taxes 85,488 16,853 Current portion of long term obligations 2,037 2,869 ---------- ---------- 453,480 411,713 Long term obligations 390,583 384,021 Future tax obligations 54,277 123,088 Non-controlling interest 24,348 22,583 ---------- ---------- 922,688 941,405 ---------- ---------- Common shares -- 180,596,954 outstanding (May 2, 1999 -- 180,104,582 outstanding) 589,956 572,990 Accumulated foreign currency translation adjustment 33,413 27,238 Retained earnings 976,277 928,991 ---------- ---------- 1,599,646 1,529,219 ---------- ---------- $2,522,334 $2,470,624 ========== ==========
See accompanying Notes to the Consolidated Financial Statements. (Page 4 of 38) NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Canadian dollars in thousands) (Unaudited)
Fiscal quarter ended ------------------------- August 1, August 2, 1999 1998 ---------- ---------- Operating activities Net earnings $ 47,286 $ 35,520 Adjustments for: Amortization 43,828 38,662 Future tax benefits and obligations (60,678) 14,313 Non-controlling interest 1,359 298 Foreign currency translation (4,377) 18,638 Other 3,761 (39) Cash effect of changes in: Accounts receivable (87,393) (2,656) Inventories (61,087) 7,669 Prepaid expenses and other current assets 13,201 (9,684) Accounts payable and accrued liabilities (26,036) (17,398) Income taxes 68,635 (15,186) --------- -------- (61,501) 70,137 --------- -------- Investing activities Sales (purchases) of marketable securities 15,392 (48,684) Additions to property, plant and equipment (42,347) (70,741) Capitalized software development costs (6,043) (5,242) Additions to other assets (168,045) (22,410) --------- -------- (201,043) (147,077) --------- -------- Financing activities Issue of common shares 16,375 18,945 Increase in long term obligations 9,978 16,765 Repayment of long term obligations (4,163) (5,462) --------- -------- 22,190 30,248 --------- -------- Decrease in cash and cash equivalents (240,354) (46,692) Effect of foreign currency translation on cash 6,794 8,096 --------- -------- (233,560) (38,596) Cash and cash equivalents, beginning of period 666,019 467,464 --------- -------- Cash and cash equivalents, end of period $ 432,459 $428,868 ========= ========
See accompanying Notes to the Consolidated Financial Statements. (Page 5 of 38) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 1. Basis of Presentation The accompanying unaudited interim consolidated financial statements of Newbridge Networks Corporation (the "Company") have been prepared in accordance with accounting principles generally accepted in Canada for interim financial information. These accounting principles are also generally accepted in the United States ("U.S. GAAP") in all material respects except for the method of calculation of earnings per share, as disclosed in Note 6. In the opinion of Management, the unaudited interim consolidated financial statements reflect all normal and recurring adjustments considered necessary for fair presentation. The results of operations for the first fiscal quarter ended August 1, 1999 are not necessarily indicative of the results to be expected for the fiscal year ending April 30, 2000. 2. Inventories
August 1, May 2, 1999 1999 -------- -------- Finished goods $171,816 $118,251 Work in process 19,112 27,807 Raw materials 80,445 64,228 -------- -------- $271,373 $210,286 ======== ========
3. Goodwill
August 1, August 2, 1999 1998 -------- -------- Goodwill, beginning of the period $ 40,022 $ 72,719 Additions associated with acquisitions 275 -- Amortization (1,358) (827) Effect of foreign currency translation -- 346 --------- -------- Goodwill, end of the period $ 38,939 $ 72,238 ======== ======== Accumulated goodwill amortization $ 8,489 $ 11,925 ======== ========
(Page 6 of 38) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 4. Other Assets
August 1, May 2, 1999 1999 -------- -------- Long term investments Accounted for by the equity method $116,477 $ 29,236 Accounted for by the cost method 215,117 161,901 -------- -------- 331,594 191,137 Other Assets 56,150 32,370 -------- -------- $387,744 $223,507 ======== ========
Long term investments accounted for by the equity method represent investments in companies over which the Company has significant influence. Under the equity method, the carrying value of the investment includes the Company's proportionate share of earnings of the investee company since acquisition. Investee companies which are not subject to significant influence by the Company are accounted for by the cost method. In accordance with Canadian and U.S. GAAP, the carrying value of long term investments in common shares that are publicly traded or privately held are not adjusted to reflect increases in fair value but are adjusted to reflect non-temporary impairments in fair value. 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 at a total purchase price of US$60,200,000 (Cdn$90,813,000). The majority of the purchase price was assigned to goodwill (Cdn$30,549,000) and to the Company's option (Cdn$51,079,000) to increase its equity ownership position to 50% within the next year for US$10,000,000. The Company is accounting for its investment in TeraBridge using the equity method of accounting and is amortizing the goodwill acquired on a straight line basis over five years. The Company's holdings of 1,763,718 common shares of Juniper Networks Inc ("Juniper") (JNPR: NASDAQ) are included in the category long term investments accounted for by the cost method at a carrying value of $9,723,000. Juniper completed its initial public offering in June 1999 and filed a registration statement for a second public offering in September 1999. The Company agreed to sell 1,525,000 of its shares in Juniper as part of the second public offering. The Company's remaining 238,718 shares in Juniper have been included in an over allotment option granted to the underwriters. Based on the closing price for Juniper's common shares at September 10, 1999, the market value of the Company's investment is approximately $505,000,000. (Page 7 of 38) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 5. 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 foreign currency translation adjustment.
Fiscal quarter ended ----------------------- August 1, August 2, 1999 1998 ---------- ---------- Comprehensive income for the period: Net earnings $47,286 $35,520 Other comprehensive income: Foreign currency translation adjustment 6,175 23,981 ------- ------- Comprehensive income $53,461 $59,501 ======= =======
6. Earnings per Share Basic earnings per share has been calculated as net earnings for the period divided by the daily weighted average number of Common Shares outstanding during the fiscal quarter. Fully diluted earnings per share has been calculated as net earnings plus after tax imputed earnings on the cash which would have been received on the exercise of options, divided by the daily weighted average number of Common Shares and common share equivalents outstanding during the period. Under U.S. GAAP, basic earnings per share has been calculated as net earnings for the period divided by the daily weighted average number of Common Shares outstanding during the fiscal quarter, consistent with the calculation of basic earnings per share under accounting principles generally accepted in Canada. Diluted earnings per share is calculated using the treasury stock method. Earnings per share in U.S. dollars is disclosed for the convenience of the reader. The exchange rates used for translation are based on the average of the daily noon buying rates for Canadian dollars in U.S. dollars as reported by the Federal Reserve Bank of New York. The calculation of earnings per share under U.S. GAAP is as follows.
Fiscal quarter ended ---------------------- August 1, August 2, 1999 1998 --------- --------- Earnings per share Basic $ 0.26 $ 0.20 ======== ======== Diluted $ 0.26 $ 0.20 ======== ======== Earnings per share -- in U.S. dollars Basic $ 0.18 $ 0.14 ======== ======== Diluted $ 0.18 $ 0.14 ======== ======== Weighted average number of shares Basic 180,399 176,105 ======== ======== Diluted 182,500 178,419 ======== ========
(Page 8 of 38) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 7. Acquisition of Stanford Telecommunications Inc. 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's common shares. The CVR is expected to have a value of up to US$5 per share. 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 November. 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 of directors will be permitted to terminate the Agreement. 8. Net Gain on Investments
Fiscal quarter ended ------------------------ August 1, August 2, 1999 1998 --------- -------- Cambrian Systems Corporation $2,834 $ -- Other divestitures 678 -- ------- ------- $3,512 $ -- ======= =======
In December 1998, the Company sold its minority ownership position in Cambrian Systems Corporation ("Cambrian") to Nortel for cash proceeds of US$97,609,000 (Cdn$149,992,000). The proceeds included earn-out payments of US$3,870,000 (Cdn$5,689,000) received by the Company as a result of certain specified financial performance targets being met by Cambrian. The Company received the second of these earn-out payments in June 1999. Additional future potential earn-out payments of up to approximately US$19,000,000 will be received by the Company if certain specified financial performance targets are met by Cambrian. (Page 9 of 38) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 9. Restructuring Costs 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 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 related primarily to asset impairment losses attributable 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. The components of restructuring costs of $73,570,000 incurred in the fourth quarter of fiscal 1999 and the related spending to August 1, 1999 are as follows.
Sales and Product Incurred to Balance at Marketing Development Total Aug 1, 1999 Aug 1, 1999 ------- ------- -------- ----------- ----------- 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 (7,765) 7,257 Reduction in facilities 6,627 -- 6,627 (2,815) 3,812 Other restructuring costs 1,653 171 1,824 (658) 1,166 ------- ------- -------- ------ ------- 22,875 598 23,473 (11,238) 12,235 ======== ======= ======== ======== ======= Restructuring costs $32,625 $40,945 $ 73,570 ======= ======= ========
Asset impairment losses relate to assets affected by the Company's restructuring plan that could not be deployed within the streamlined organizations or elsewhere within the Company. Impairment losses were recorded to the extent the net book value of these assets, including related reserves, exceeded the estimated net realizable value of the underlying assets. The provision for restructuring is reflected in accrued liabilities at August 1, 1999 and May 2, 1999. The provision for the reduction in work force included severance, related medical and other benefits, and other obligations to employees. The provision included termination benefits for approximately 200 employees. The work force reductions occurred in Japan, Russia and various other countries. The Company anticipates that these work force reductions will be substantially completed by the end of the second quarter of fiscal 2000. (Page 10 of 38) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) The provision for the reduction in facilities comprised 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 by the end of the second quarter of fiscal 2000. The provision for other restructuring costs comprised 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. The Layer 2 Switching End of Life program created impairment losses associated with certain assets deployed in this business and obligations related to fulfilling previous customer commitments. The program was completed at the end of fiscal 1999. End of life program costs of $37,928,000 incurred in the second quarter of fiscal 1999 comprised the following.
Total ------- Asset impairment losses Accounts receivable $ 7,762 Inventory 22,928 ------- 30,690 Customer obligations 7,238 ------- Layer 2 Switching End of Life program costs $37,928 =======
Impairment losses related to accounts receivable and inventory were recorded to the extent that the net book value of these assets, including related reserves, exceeded their fair value. The fair value was based on the estimated net realizable value of the underlying assets. 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 reflected the accrual of involuntary termination benefits, lease cancellation penalties and other direct costs associated with the transition. As at August 1, 1999, $2,831,000 of these costs had been incurred including costs of $1,616,000 incurred in the first quarter of fiscal 2000. Additional costs of approximately $9,000,000 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. In the first quarter of fiscal 2000, $1,542,000 of these costs were incurred and have been included in selling, general and administrative expenses on the Consolidated Statement of Earnings. These additional costs were not significant in fiscal 1999. The Asia Pacific Resources Relocation program is expected to be substantially completed by the end of the third quarter of fiscal 2000. (Page 11 of 38) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 10. Supplementary Measure of Net Earnings and Earnings Per Share Management uses supplementary measures of net earnings and earnings per share to evaluate the financial performance of the Company. These supplementary measures are consistent with the net earnings and earnings per share disclosed in these Consolidated Financial Statements except for the impact of items related to acquisitions, divestitures and non-recurring gains and charges. The supplementary measures of net earnings and earnings per share are as follows:
Fiscal quarter ended --------------------- August 1, August 2, 1999 1998 -------- -------- Net earnings $ 47,286 $ 35,520 Add back: Amortization of acquired intangibles 2,745 927 Net gain on investments (3,512) -- Net tax impact 1,185 -- -------- -------- Supplementary measure of net earnings $ 47,704 $ 36,447 ======== ======== Supplementary measure of earnings per share Canadian GAAP Basic $ 0.26 $ 0.20 ======== ======== Fully diluted $ 0.26 $ 0.20 ======== ======== Weighted average number of shares Basic 180,399 176,105 ======== ======== Fully diluted 180,399 176,105 ======== ======== U.S. GAAP -- in U.S. dollars Basic $ 0.18 $ 0.14 ======== ======== Diluted $ 0.18 $ 0.14 ======== ======== Weighted average number of shares Basic 180,399 176,105 ======== ======== Diluted 182,500 178,419 ======== ========
(Page 12 of 38) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 11. 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.
Fiscal quarter ended ----------------------- August 1, August 2, 1999 1998 ----------- ---------- North and South America Sales $ 208,289 $ 180,578 Cost of sales and expenses 126,028 105,361 --------- --------- Operating contribution 82,261 75,217 --------- --------- Europe, Middle East and Africa Sales $ 187,281 $ 128,195 Cost of sales and expenses 90,936 73,209 --------- --------- Operating contribution 96,345 54,986 --------- --------- Asia Pacific Sales $ 52,634 $ 62,777 Cost of sales and expenses 25,528 37,597 --------- --------- Operating contribution 27,106 25,180 --------- --------- Corporate Sales $ 46,866 $ 54,506 Cost of sales and expenses 181,687 156,590 --------- --------- Operating contribution (134,821) (102,084) --------- --------- Total Sales $ 495,070 $ 426,056 Cost of sales and expenses 424,179 372,757 --------- --------- Operating contribution 70,891 53,299 Amortization of acquired intangibles 2,745 927 --------- --------- Income from operations 68,146 52,372 Net gain on investments 3,512 -- Net interest and other expenses (1,332) (1,598) Provision for income taxes (21,705) (14,978) Non-controlling interest (1,335) (276) --------- --------- Net earnings $ 47,286 $ 35,520 ========= =========
(Page 13 of 38) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 12. Litigation 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. 13. 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. (Page 14 of 38) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 14. Subsequent Event On August 25, 1999 the Company announced that it had agreed to acquire Northchurch Communications ("Northchurch") and TimeStep Corporation ("TimeStep") for total consideration of approximately $350,000,000. The net purchase price to the Company, excluding incentive compensation to participating employees of Northchurch and TimeStep, is approximately $225,000,000. The Company will account for the acquisitions under the purchase method of accounting and will record the incentive compensation as operating expenses in the periods earned. Northchurch is a developer of Internet Protocol (IP) edge routers for service providers and is headquartered in Andover, Massachusetts. Timestep provides encryption solutions for secure virtual private networks to service providers and large enterprises. TimeStep is headquartered in Kanata, Ontario. The Company expects to complete the transactions in the second quarter of fiscal 2000. 15. Recent Accounting Pronouncements 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 is 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. Under this new standard, investing and financing activities that do not require the use of cash or cash equivalents are excluded from the Statement of Cash Flows but disclosed elsewhere in the consolidated financial statements. The Company has adopted CICA Handbook -- Accounting Section 1540 for all periods presented in these Consolidated Financial Statements. (Page 15 of 38) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain parts of the following discussion and analysis may be forward-looking statements that involve a number of risks and uncertainties. As a consequence, actual results might differ materially from results forecast or suggested in any forward-looking statements. See "Market for Registrant's Common Equity and Related Stockholder Matters -- Cautionary Statement Regarding Forward-Looking Information" in the Company's Annual Report on Form 10-K, which is incorporated by reference herein. 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 at a total purchase price of US$60,200,000 (Cdn$90,813,000). The majority of the purchase price was assigned to goodwill (Cdn$30,549,000) and to the Company's option (Cdn$51,079,000) to increase its equity ownership position to 50% within the next year for US$10,000,000. The Company is accounting for its investment in TeraBridge using the equity method of accounting and is amortizing the goodwill acquired on a straight line basis over five years. 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's common shares. The CVR is expected to have a value of up to US$5 per share. For the purpose of the STII 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 November. 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 of directors will be permitted to terminate the Agreement. On August 25, 1999 the Company announced that it had agreed to acquire Northchurch Communications ("Northchurch") and TimeStep Corporation ("TimeStep") for total consideration of approximately $350,000,000. The net purchase price to the Company, excluding incentive compensation to participating employees of Northchurch and TimeStep, is approximately $225,000,000. The Company will account for the acquisitions under the purchase method of accounting and will record the incentive compensation as operating expenses in the periods earned. Northchurch is a developer of Internet Protocol (IP) edge routers for service providers and is headquartered in Andover, Massachusetts. Timestep provides encryption solutions for secure virtual private networks to service providers and large enterprises. TimeStep is headquartered in Kanata, Ontario. The Company expects to complete the transactions in the second quarter of fiscal 2000. (Page 16 of 38) Results of Operations The following table sets forth, for the periods indicated, the percentage of sales represented by certain items in the Company's Consolidated Statements of Earnings.
Fiscal quarter ended ---------------------- Aug 1, Aug 2, 1999 1998 ------- ------- Sales 100.0% 100.0% Cost of sales 43.5 41.4 ------- ------- Gross margin 56.5 58.6 Expenses Selling, general and administrative 28.5 30.3 Research and development 13.7 15.8 Amortization of acquired intangibles 0.5 0.2 ------- ------- Income from operations 13.8 12.3 Interest income, net 0.3 (0.0) Net gain on investments 0.7 0.0 Other expenses (0.6) (0.4) ------- ------- Earnings before income taxes and non-controlling interest 14.2 11.9 Provision for income taxes 4.4 3.5 Non-controlling interest 0.2 0.1 ------- ------- Net earnings 9.6% 8.3% ======= =======
Sales
Fiscal quarter ended ----------------------------- Aug 1, Aug 2, % 1999 1998 Increase -------- -------- -------- (Canadian dollars in thousands) Sales $495,070 $426,056 16% ======== ========
The increase in sales in the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999 was principally due to an increase in sales of products based on packet technologies for wide area network applications (WAN Packet products), partially offset by declines in revenues from circuit switched networking products and products based on packet technologies for local area network applications (LAN Packet products). Sales for the first quarter of fiscal 2000 of $495,070,000 represented a 8% increase compared to sales of $457,115,000 for the fourth quarter of fiscal 1999. The increase was principally the result of an increase in sales of the Company's WAN Packet products. (Page 17 of 38) The following table illustrates, for the periods indicated, the percentage of sales that comprise each of the Company's major product lines.
Fiscal quarter ended --------------------- Aug 1, Aug 2, 1999 1998 ------- ------- WAN Packet 72% 52% Circuit switched networking 28 43 LAN Packet -- 5 ------- ------- 100% 100% ======= =======
Sales of WAN Packet products grew approximately 61% in the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999 and approximately 14% compared to the fourth quarter of fiscal 1999. 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 in the first quarter of fiscal 2000 declined approximately 25% relative to sales in the first quarter of fiscal 1999 and were at approximately the same levels as sales in the fourth quarter of fiscal 1999. Sales of these 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. The Company did not have sales of LAN Packet products in the first quarter of fiscal 2000 because the Company instituted a program in the second quarter of fiscal 1999 to discontinue the sale and development of LAN Layer 2 Switching products. Throughout fiscal 1998 and fiscal 1999 the Company experienced sharp decreases in revenue derived from products associated with the former Ungermann- Bass Networks Inc. ("UB") organization, which the Company acquired in January 1997. The Company previously restructured its activities in the LAN business, including the former UB, in the third quarter of fiscal 1998. 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. 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. Sales to service providers and enterprises as a percentage of total sales were as follows.
Fiscal quarter ended --------------------- Aug 1, Aug 2, 1999 1998 ------- ------- Service providers 80% 71% Enterprises 20 29 ------- ------- 100% 100% ======= ======= Sales to Siemens A.G. 17% 14% ======= =======
The proportion of revenue derived from service providers in the first quarter of fiscal 2000 increased relative to the comparable period of fiscal 1999 due to continued declines in sales of the Company's LAN Packet products which largely serve enterprise customers. Deliveries to original equipment manufacturers (OEMs) for service provider customers and deliveries under certain large contracts with service providers contributed significantly to sales in the first quarter of fiscal 2000 and fiscal 1999. Sales to Siemens A.G. and subsidiaries were generally under OEM arrangements for resale to end users. (Page 18 of 38) 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. For additional geographic segment information, see Note 11 to the Consolidated Financial Statements.
Fiscal quarter ended -------------------- Aug 1, Aug 2, 1999 1998 ------- ------- Americas Region 51% 53% European Region 38 32 Asia Pacific Region 11 15 ------- ------- 100% 100% ------- -------
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 increase in exchange rates of the Canadian dollar for the Pound Sterling and the U.S. dollar during the first quarter of fiscal 2000, relative to exchange rates during the first quarter of fiscal 1999, resulted in no material variance in reported sales, gross margin or income from operations. 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 be subject to sales fluctuations toward the end of calendar 1999 as customer buying patterns may be influenced by the issue of Year 2000 date compliance. 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. Discussion of the Company's program for ensuring that all of its products are Year 2000 date compliant is outlined in the "Year 2000 Date Compliance" section of this report. (Page 19 of 38) Cost of Sales and Gross Margin
Fiscal quarter ended --------------------- Aug 1, Aug 2, 1999 1998 --------- -------- (Canadian dollars in thousands) Gross margin $279,549 $249,494 ======== ======== As % of sales 56% 59%
Cost of sales consists of manufacturing costs, warranty expense and costs associated with the provision of services. The gross margin as a percentage of sales declined in the first quarter of fiscal 2000 relative to the first quarter of fiscal 1999 due to the decline in revenues from the Company's circuit switched networking products which carry gross margins above the average gross margins earned on the Company's other products and due to lower average selling prices for products based on packet technologies as a result of increased competition on product pricing and increased sales into broadband access applications. Selling, General and Administrative Expenses
Fiscal quarter ended -------------------------------- Aug 1, Aug 2, % 1999 1998 Increase ---------- --------- --------- (Canadian dollars in thousands) Selling, general and and administrative $141,037 $129,039 9% ======== ======== As % of sales 28% 30%
Selling, general and administrative expenses increased in the first quarter of fiscal 2000 relative to the first quarter of fiscal 1999 principally as a result of increased remuneration costs associated with salary increases and sales commissions, increased spending on marketing programs related to the introduction of new products, and amortization costs associated with upgrading the Company's information technology infrastructure. These costs were partially offset by the impact of initiatives in the fourth quarter of fiscal 1999 to streamline regional sales and support organizations. The decrease in selling, general and administrative expenses as a percentage of sales in the first quarter of fiscal 2000 over the first quarter of fiscal 1999 is a result of 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 decline in fiscal 2000 relative to fiscal 1999. (Page 20 of 38) Research and Development
Fiscal quarter ended ------------------------------ Aug 1, Aug 2, % 1999 1998 Increase ------- ------- --------- (Canadian dollars in thousands) Gross research and development expenditures $84,140 $83,746 0% Investment tax credits (9,029) (9,112) (1)% Customer, government and other funding (5,590) (5,614) (0)% Net deferral of software development costs (1,900) (1,864) 2% ------- ------- Net research and development expenses $67,621 $67,156 1% ======= ======= Gross expenditures as a % of sales 17% 20% Recoveries as a % of gross expenditures 20% 20% Net expenses as a % of sales 14% 16%
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. Gross research and development spending was essentially flat in the first quarter of fiscal 2000 as compared to the first quarter of fiscal 1999 as increased costs associated with salary increases for engineering staff were offset by a reduction in amortization and overhead costs generated through restructuring programs initiated in the fourth quarter of fiscal 1999. Recoveries as a percentage of gross expenditures in the first quarter of fiscal 2000 were comparable to recoveries in the first quarter fiscal 1999. Management expects the level of recoveries in fiscal 2000, as a percentage of gross expenditures, to approximate or exceed the level in fiscal 1999 based on current levels of committed customer, government and other funding relative to planned spending levels. 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. (Page 21 of 38) Amortization of Acquired Intangibles
Fiscal quarter ended ------------------------- Aug 1, Aug 2, % 1999 1998 Increase ------- ------- --------- (Canadian dollars in thousands) Amortization of acquired intangibles $2,745 $ 927 196% ====== ====== As % of sales 1% 0%
Amortization of acquired intangibles in the first quarter of fiscal 2000 and fiscal 1999 is attributable to the amortization of capitalized goodwill related to the Company's acquisitions of subsidiaries and equity accounted long term investments. The increase in amortization of acquired intangibles in the first quarter of fiscal 2000 relative to the first quarter of fiscal 1999 is a result of the Company's investment in TeraBridge Technologies Corporation ("TeraBridge") completed in May 1999. Based on the recent acquisitions of TeraBridge, Stanford Communications Inc., Northchurch Communications Inc. and TimeStep Corporation completed or to be completed in fiscal 2000, Management expects that amortization of acquired intangibles as a percentage of sales will increase in fiscal 2000 relative to fiscal 1999. Restructuring Costs 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 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 related primarily to asset impairment losses attributable 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 incurred in the fourth quarter of fiscal 1999 comprised the following.
Sales and Product Marketing Development Total --------- ----------- ------- (Canadian dollars in thousands) 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 22 of 38) Asset impairment losses relate to assets affected by the Company's restructuring plan that could not be deployed within the streamlined organizations or elsewhere within the Company. Impairment losses were recorded to the extent the net book value of these assets (including related reserves) exceeded the estimated net realizable value of the underlying assets. The provision for restructuring is reflected in accrued liabilities at August 1, 1999 and May 2, 1999. The provision for the reduction in work force included severance, related medical and other benefits, and other obligations to employees. The provision included termination benefits for approximately 200 employees. The work force reductions occurred in Japan, Russia and various other countries. The Company anticipates that these work force reductions will be substantially completed by the end of the second quarter of fiscal 2000. The provision for the reduction in facilities comprised 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 by the end of the second quarter of fiscal 2000. The provision for other restructuring costs comprised 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. The Layer 2 Switching End of Life program created impairment losses associated with certain assets deployed in this business and obligations related to fulfilling previous customer commitments. The program was completed at the end of fiscal 1999. End of life program costs of $37,928,000 incurred in the second quarter of fiscal 1999 comprised the following.
Total ------- Asset impairment losses Accounts receivable $ 7,762 Inventory 22,928 ------- 30,690 Customer obligations 7,238 ------- Layer 2 Switching End of Life program costs $37,928 =======
Impairment losses related to accounts receivable and inventory were recorded to the extent that the net book value of these assets (including related reserves) exceeded their fair value. The fair value was based on the estimated net realizable value of the underlying assets. 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 reflected the accrual of involuntary termination benefits, lease cancellation penalties and other direct costs associated with the transition. As at August 1, 1999, $2,831,000 of these costs had been incurred including costs of $1,616,000 incurred in the first quarter of fiscal 2000. Additional costs of approximately $9,000,000 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. In the first quarter of fiscal 2000, $1,542,000 of these costs were incurred and have been included in selling, general and administrative expenses on the Consolidated Statement of Earnings. These additional costs were not significant in fiscal 1999. The Asia Pacific Resources Relocation program is expected to be substantially completed by the end of the third quarter of fiscal 2000. (Page 23 of 38)
Interest and Other Expenses Fiscal quarter ended ----------------------------- Aug 1, Aug 2, % 1999 1998 Increase -------- ------- -------- (Canadian dollars in thousands) Interest income $ 7,345 $ 6,611 11% Interest expense on long term obligations (6,059) (6,703) (10)% Other expenses (2,618) (1,506) 74%
Interest income for the first quarter of fiscal 2000 exceeded interest income for the first quarter of fiscal 1999 due to an increase in the average cash position maintained by the Company. This increase was principally the result of proceeds received from the sale of the Company's equity interests in certain associated companies during the second and third quarters of fiscal 1999. Other expenses represented less than 1% of sales in the first quarters of fiscal 2000 and fiscal 1999. Net Gain on Investments
Fiscal quarter ended ------------------------ Aug 1, Aug 2, 1999 1998 -------- -------- (Canadian dollars in thousands) Cambrian Systems Corporation $ 2,834 $ -- Other divestitures 678 -- -------- -------- $ 3,512 $ -- ======== ========
In December 1998, the Company sold its minority ownership position in Cambrian Systems Corporation ("Cambrian") to Nortel for cash proceeds of US$97,609,000 (Cdn$149,992,000). The proceeds included earn-out payments of US$3,870,000 (Cdn$5,689,000) received by the Company as a result of certain specified financial performance targets being met by Cambrian. The Company received the second of these earn-out payments in June 1999. Additional future potential earn-out payments of up to approximately US$19,000,000 will be received by the Company if certain specified financial performance targets are met by Cambrian. (Page 24 of 38) Income Taxes
Fiscal quarter ended -------------------- Aug 1, Aug 2, 1999 1998 ------ ------ Income tax rate 31% 30% Income tax rate, excluding amortization of acquired intangibles and net gain on investments 30% 30%
The income tax rate for the first quarter of fiscal 2000 varies from the rate for the first quarter of fiscal 1999 due to the effect of income taxes on amortization of acquired intangibles and net gains on investments. Excluding the impact of these items, the income tax rates reported in the first quarters of fiscal 2000 and fiscal 1999 are consistent. The composite rates of income tax have been reduced from the statutory rates primarily as a result of the application of certain deductions related to manufacturing and processing activities and to research and development expenditures in Canada. Future changes in the composite rates of income tax will be primarily due to the relative profitability of operations and the national tax policies in each of the various countries in which the Company operates. Management believes that the composite rate of income tax will remain lower than the statutory rate because of the availability of deductions related to manufacturing and processing activities and research and development expenditures in Canada as well as other tax planning measures undertaken by the Company. Non-Controlling Interest The non-controlling interests' share of net earnings in the first quarters of fiscal 2000 and fiscal 1999 represented less than 1% of the Company's sales in those quarters. The non-controlling interests' share of net earnings in the first quarters of fiscal 2000 and fiscal 1999 related to profits from the operations of the Company's non-wholly owned subsidiaries in Latin America. These subsidiaries are systems integrators of networking products. (Page 25 of 38) Supplementary Measure of Net Earnings and Earnings Per Share Management uses supplementary measures of net earnings and earnings per share to evaluate the financial performance of the Company. These supplementary measures are consistent with the net earnings and earnings per share disclosed in the Consolidated Financial Statements except for the exclusion of the impact of the amortization of acquired intangibles, the net gain on investments and other non- recurring gains and charges. The supplementary measures of net earnings and earnings per share for the first quarters of fiscal 2000 and fiscal 1999 are as follows:
Fiscal quarter ended --------------------- Aug 1, Aug 2, 1999 1998 -------- -------- Net earnings $47,286 $35,520 Add back: Amortization of acquired intangibles 2,745 927 Net gain on investments (3,512) -- Net tax impact 1,185 -- ------- ------- Supplementary measure of net earnings $47,704 $36,447 ======= ======= Supplementary measure of net earnings, as a percent of sales 10% 9% ======= ======= Supplementary measure of earnings per share Canadian GAAP Basic $ 0.26 $ 0.20 ======= ======= Fully diluted $ 0.26 $ 0.20 ======= ======= U.S. GAAP Basic $ 0.26 $ 0.20 ======= ======= Diluted $ 0.26 $ 0.20 ======= ======= Diluted -- in U.S. dollars US$0.18 US$0.14 ======= =======
(Page 26 of 38) Net Earnings A reconciliation of the major components of the change in net earnings for the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999 and the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998 is as follows.
Fiscal quarter ended ---------------------- Aug 1, Aug 2, 1999 1998 --------- -------- Gross margin from sales increase (decrease) $ 40,414 $ (5,472) (Decrease) in product gross margins as a percentage of sales (10,359) (19,042) (Increase) in operating expenses (12,463) (12,655) Decrease (increase) in net interest and other expenses 266 (4,268) (Increase) decrease in income taxes on supplementary net earnings (5,542) 12,056 (Increase) in non-controlling interest (1,059) (643) -------- -------- Increase (decrease) in supplementary net earnings 11,257 (30,024) Change in amortization of intangibles and net gain on investments, net of income taxes 509 1,190 -------- -------- Increase (decrease) in net earnings 11,766 (28,834) Net earnings in comparable period of prior year 35,520 64,354 -------- -------- Net earnings $ 47,286 $ 35,520 ======== ========
(Page 27 of 38) Financial Condition During the first quarter of fiscal 2000 ended August 1, 1999, working capital decreased from $1,243,991,000 to $1,088,551,000. As at August 1, 1999 the Company had $630,742,000 in cash, cash equivalents and marketable securities which represented a decrease of $248,952,000 during the first three months of fiscal 2000. The decrease was primarily attributable to the Company's investment in certain associated companies (see Note 4 to the Consolidated Financial Statements). A summary of major cash flow components by activity is as follows.
Fiscal quarter ended ----------------------- Aug 1, Aug 2, 1999 1998 --------- --------- Net earnings $ 47,286 $ 35,520 Add back items not affecting cash Amortization and other non-cash charges (16,107) 71,872 (Increase) decrease in working capital, excluding cash and cash equivalents (92,680) (37,255) --------- --------- Cash flow from operating activities (61,501) 70,137 --------- --------- Sales (purchases) of marketable securities 15,392 (48,684) Additions to property, plant and equipment (42,347) (70,741) Additions to long term investments and other (174,088) (27,652) --------- --------- Cash flow from investing activities (201,043) (147,077) --------- --------- Proceeds from stock option exercises 16,375 18,945 Net increase (decrease) in long term obligations 5,815 11,303 --------- --------- Cash flow from financing activities 22,190 30,248 --------- --------- Impact of foreign currency translation on cash 6,794 8,096 --------- --------- Net cash flow during the period $(233,560) $ (38,596) ========= =========
Principal components of the Company's working capital are accounts receivable, inventory, and accounts payable. Accounts receivable as a proportion of revenue increased during the first quarter of fiscal 2000 due to the increase in the proportion of the accounts receivable balance represented by sales under extended credit terms. Inventory levels increased by $61,087,000 in the first quarter of fiscal 2000 as a result of efforts to improve the Company's ability to meet customer demand for WAN packet products. Management believes that the payment terms and conditions extended to the Company's customers, arrangements with the Company's suppliers, and the levels of inventory the Company carries relative to its levels of sales are consistent with practices generally prevailing in the networking industry. Existing short term bank credit facilities consist of operating lines of credit with certain banks in the aggregate amount of $162,155,000, primarily with banks in Canada, the United Kingdom, the United States, Chile and Brazil. At August 1, 1999, $43,839,000 was being utilized under these credit facilities. In May 1999, the Company completed its investment in TeraBridge Technologies Corporation for a total purchase price of US$60,200,000 (Cdn$90,813,000). In June 1999, the Company announced a definitive agreement to acquire Stanford Telecommunications Inc. ("STII"). The Company plans to issue common shares to finance the acquisition and will sell off STII divisions that are not related to STII's broadband wireless operations. After completion of the STII transactions the Company expects an increase in cash and cash equivalents of (Page 28 of 38) approximately $350,000,000. In August 1999, the Company announced its intention to acquire Northchurch Communications and TimeStep Corporation for total cash consideration of approximately $350,000,000. The Company expects approximately $150,000,000 of the total cash consideration to be disbursed in fiscal 2000. The Company intends to divest of its shares held in Juniper Networks Inc. ("Juniper") during fiscal 2000. Based on the closing price for Juniper's common shares at September 10, 1999 the market value of the Company's investment is approximately $505,000,000, which would generate after tax proceeds to the Company of approximately $330,000,000. 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. 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. 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 (including products from the former UB Networks, OST and Castleton (Page 29 of 38) companies) have been reviewed, with certain offerings found to be Non-Compliant, and others that will not be evaluated for Year 2000 Date Compliance. Certain Year 2000 Date Compliance product Interoperability Tests have been conducted, a report on these together with all the formal product related messages and Year 2000 Date Compliance Additional Notes are available on the Company's worldwide web site at http://www.newbridge.com/year2000/product_info.html. 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 Service Organization shift schedules will operate on overlapping eight-hour cycles to ensure continuity of event management. Specialized network restoration techniques and tools are in development, these will be invoked under the guidance of the Third Level Support (3LS) and design organizations. The Company has identified and is working with a selected sample of our Asia Pacific customers to be on-site and electronically linked into their networks and believes that these steps will provide a clear indication of events to come and enable the Company to observe and learn from them. The Company continues to make plans for the various means by which technical information is to be 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/service_planning.html. 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 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. (Page 30 of 38) 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. 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 28% compared as at end of August 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 that 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. Nearly 80% of Contingency Plans have been completed or are in the final draft stage. Those that are completed include, but are not limited to, Manufacturing Operations, Logistics and Finance together with the Facilities infrastructures for the Corporate Kanata campus, the three regional headquarters locations and Newbridge Technical Assistance Center locations. All supplementary internal on-site and on-call rollover staffing requirements have been numerated and competitive compensation strategies approved. 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 (Page 31 of 38) 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. 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. 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 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. (Page 32 of 38) PART II. OTHER INFORMATION Item 1. Legal Proceedings Lucent Technologies Inc. ("Lucent Technologies") filed a complaint during the fiscal year ended April 30, 1998 in United States District Court in Delaware against the Company and its United States subsidiary, Newbridge Networks Inc. Lucent Technologies manufactures and sells telecommunications systems, software and products, and is both a distributor of the Company's products and a competitor of the Company. The complaint alleges that the Company's manufacture and sale in the United States of Newbridge frame relay and ATM (asynchronous transfer mode) switch products infringe certain United States patent rights claimed by Lucent Technologies, and requests actual and trebled damages in an unspecified amount. Based upon its present understanding of the laws in the United States and the facts, the Company believes it has meritorious defenses to these claims. The Company has filed an answer to the complaint, as well as a counterclaim alleging unfair competition by Lucent Technologies, and intends to defend this action vigorously. 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 5. Other Information The "Cautionary Statement Regarding Forward-Looking Information" contained in "Market for Registrant's Common Equity and Related Stockholder Matters" in the Company's Annual Report on Form 10-K for the fiscal year ended May 2, 1999 is incorporated herein by reference and made a part hereof. Item 6. Exhibits and Reports on Form 8-K a) Exhibits Exhibit 11.1 Computation of earnings per share under accounting principles generally accepted in Canada. Exhibit 11.2 Computation of earnings per share under accounting principles generally accepted in the United States. Exhibit 27 Financial data schedule (Page 33 of 38) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEWBRIDGE NETWORKS CORPORATION (Registrant) Date: September 10, 1999 By: /s/ Terence H. Matthews ------------------------ Terence H. Matthews, Chairman of the Board of Directors and Chief Executive Officer Date: September 10, 1999 By: /s/ Kenneth B. Wigglesworth ---------------------------- Kenneth B. Wigglesworth, Executive Vice President, Finance, Chief Financial Officer (Page 34 of 38) EXHIBIT INDEX Page No. --------
11.1 Computation of earnings per share under accounting principles generally accepted in Canada.......................................... 36 11.2 Computation of earnings per share under accounting principles generally accepted in the United States............................... 37 27 Financial data schedule.............................. 38
(Page 35 of 38) EX-11.1 2 EXHIBIT 11.1 EXHIBIT 11.1 NEWBRIDGE NETWORKS CORPORATION COMPUTATION OF EARNINGS PER SHARE (Accounting principles generally accepted in Canada) (Canadian dollars, amounts in thousands except per share data) (Unaudited)
Fiscal quarters ended --------------------- Aug 1, Aug 2, 1999 1998 -------- -------- Basic earnings per share Net earnings $ 47,286 $ 35,520 ======== ======== Common Shares outstanding at the beginning of the period 180,105 175,686 Weighted average number of Common Shares issued during the period 294 419 -------- -------- Weighted average number of Common Shares outstanding during the period 180,399 176,105 ======== ======== Basic earnings per share $ 0.26 $ 0.20 ======== ======== Fully diluted earnings per share Earnings before imputed earnings $ 47,286 $ 35,520 After tax imputed earnings from the investment of funds received through dilution -- -- -------- -------- Adjusted net earnings $ 47,286 $ 35,520 ======== ======== Weighted average number of Common Shares outstanding during the period 180,399 176,105 Weighted average common share equivalents based on conversion of outstanding stock options -- -- -------- -------- Weighted average number of Common Shares and equivalents outstanding during the period 180,399 176,105 ======== ======== Fully diluted earnings per share $ 0.26 $ 0.20 ======== ======== 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 $ 0.6787 $ 0.6817 Basic earnings per share, in U.S. dollars $ 0.18 $ 0.14 ======== ======== Fully diluted earnings per share, in U.S. dollars $ 0.18 $ 0.14 ======== ========
(Page 36 of 38) EX-11.2 3 EXHIBIT 11.2 EXHIBIT 11.2 NEWBRIDGE NETWORKS CORPORATION COMPUTATION OF EARNINGS PER SHARE (Accounting principles generally accepted in the United States) (Canadian dollars, amounts in thousands except per share data) (Unaudited)
Fiscal quarters ended --------------------- Aug 1, Aug 2, 1999 1998 -------- -------- Earnings per share (U.S. GAAP - Basic) Net earnings $ 47,286 $ 35,520 ======== ======== Weighted average number of Common Shares outstanding during the period 180,399 176,105 ======== ======== Earnings per share (U.S. GAAP) $ 0.26 $ 0.20 ======== ======== Earnings per share (U.S. GAAP- Diluted) Net earnings $ 47,286 $ 35,520 ======== ======== Weighted average number of Common Shares outstanding during the period 180,399 176,105 Net effect of dilutive stock options based on the treasury stock method 2,101 2,314 -------- -------- Weighted average number of Common Shares and equivalents outstanding during the period 182,500 178,419 ======== ======== Earnings per share (U.S. GAAP) $ 0.26 $ 0.20 ======== ======== 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 $ 0.6787 $ 0.6817 Earnings per share (U.S. GAAP) - Basic, in U.S. dollars $ 0.18 $ 0.14 ======== ======== Earnings per share (U.S. GAAP) - Diluted, in U.S. dollars $ 0.18 $ 0.14 ======== ========
(Page 37 of 38) EX-27 4 EXHIBIT 27
5 This schedule contains summary financial information extracted from the consolidated statement of earnings, consolidated balance sheet and consolidated statement of cash flows included in the Company's Form 10-Q for the fiscal quarter ending August 1, 1999, and is qualified in its entirety by reference to such financil statements. 1,000 Canadian 3-MOS APR-30-2000 MAY-03-1999 AUG-01-1999 0.6787 432,459 198,283 579,823 19,619 271,373 1,542,031 1,028,707 565,465 2,522,334 453,480 0 0 0 589,956 1,009,690 2,522,334 495,070 495,070 215,521 426,924 2,618 0 6,059 70,326 21,705 47,286 0 0 0 47,286 0.26 0.26
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