-----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, IqavQLKjn7tvSPqGftmJ2l76254u+xTvgHsP2Qp6JL/BgVT8lnSFwahIAtwYxFzF luO/0D471mxA50LmJIj+hg== 0000928385-99-003025.txt : 19991018 0000928385-99-003025.hdr.sgml : 19991018 ACCESSION NUMBER: 0000928385-99-003025 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990502 FILED AS OF DATE: 19991008 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/A SEC ACT: SEC FILE NUMBER: 001-13316 FILM NUMBER: 99725887 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/A 1 FORM 10-K405/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Amendment No. 1) 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 (I.R.S. Employer Identification No.) incorporation or organization) 600 March Road, Kanata, Ontario, Canada K2K 2E6 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (613) 591-3600 Securities registered pursuant to Section 12(b) of the Act: Common Shares, no par value New York Stock Exchange (Title of class) (Name of each exchange on which registered) The common shares are also listed on The Toronto Stock Exchange in Canada. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At October 1, 1999 the aggregate market value of the voting stock held by non- affiliates of the registrant was approximately Cdn$5,159,613,000. The number of common shares of the registrant outstanding as at October 1, 1999 was 181,029,529. Newbridge Networks Corporation ("Newbridge" or the "Company") hereby amends Items 6, 7, 8 and 14 of its Annual Report on Form 10-K for the fiscal year ended May 2, 1999 (SEC File No. 1-13316) to read in their entirety as follows: 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 2
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 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 inclusion of certain asset impairments in restructuring costs, as disclosed in Note 14, 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 3 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 /(1)/ 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% ===== ===== ===== - ------------
(1) As disclosed in Note 14 to the Consolidated Financial Statements, certain asset impairments included in restructuring costs in accordance with accounting principles generally accepted in Canada ("Canadian GAAP") would be included in the calculation of gross margin under accounting principles generally accepted in the United States ("U.S. GAAP"). In accordance with U.S. GAAP, the calculation of gross margin would have included restructuring costs of $42,290,000 or 2.4% of sales for the year ended May 2, 1999 and restructuring costs of $67,583,000 or 4.2% of sales for the year ended April 30, 1998. Page 4 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 Company restructured its activities in the LAN business, including the former UB, in the third Page 5 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. 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 Page 6 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 7 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. For a discussion of the effect of U.S. GAAP on gross margins, refer to the "Restructuring Costs" section of this report. 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 to 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. 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 Page 8 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 fiscal 1999 based on current levels of committed customer, government and other funding relative to planned spending levels. Page 9 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 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 and the related costs incurred are as follows:
Sales and Product Costs Balance at Marketing Development Total Incurred May 2, 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 -- $15,022 Reduction in facilities 6,627 -- 6,627 -- 6,627 Other restructuring costs 1,653 171 1,824 -- 1,824 ------- ------- ------- -------- ----------- 22,875 598 23,473 -- $23,473 ------- ------- ------- ======== =========== 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 Page 10 related reserves, exceeded the estimated net realizable value of the underlying assets. Substantially all of the net book values of the inventory and property, plant and equipment affected by the restructuring programs have been reflected as asset impairment losses since the Company estimates that the proceeds of disposition of these assets will approximate the costs of disposal. These asset impairment losses will reduce amortization expense in fiscal 2000 by approximately $11,700,000. The Company anticipates that assets impaired as a result of the restructuring programs will be disposed of during fiscal 2000. The amounts included 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 137 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 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 fiscal 2000. The provision for other restructuring costs comprises certain consulting costs associated with establishing termination benefits for employees in addition to outplacement and counseling services as well as various other 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 during fiscal 1999. End of life program costs of $37,928,000 and the related costs incurred are as follows: Costs Balance at Total Incurred May 2, 1999 Asset impairment losses Accounts receivable $ 7,762 Inventory 22,928 ------- 30,690 Customer obligations 7,238 (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. The net carrying amount of inventory affected by the Layer 2 Switching End of Life program was reduced to $1,458,000 given demand for the affected products and the Company's estimated proceeds of disposition, net of the costs of disposal. This inventory was substantially disposed of during fiscal 1999. Page 11 Customer obligations related to the cost to the Company of acquiring products from third parties and providing them to customers in order to meet the Company's commitments with respect to providing certain network functionality. 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 for relocation of $6,532,000 and the related costs incurred are as follows:
Costs Balance at Total Incurred May 2, 1999 Provision for Asia Pacific Resources relocation Workforce terminations $3,407 $ (690) $2,717 Reduction in facilities 2,600 -- 2,600 Other relocation costs 525 (525) -- ------ ------- ------ $6,532 $(1,215) $5,317 ====== ======= ======
The provision for workforce terminations reflects the accrual of involuntary termination benefits for 27 employees. The provision for reduction in facilities comprises lease cancellation penalties associated with relocating facilities to Hong Kong and Malaysia. Other relocation costs consist of direct incremental costs associated with the relocation. The balance of the provision for Asia Pacific resources relocation is included in accrued liabilities at May 2, 1999. 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 decided to restructure its activities related to its local area network ("LAN") business. The restructuring plan involved the discontinuation of certain product lines, termination of employees, discontinuation of development activities associated with the former UB Networks and closure of former UB Networks facilities. The Company's restructuring plan created impairment losses on assets associated with the LAN business and liabilities associated with restructuring activities. Restructuring costs of $181,444,000 and the related costs incurred were as follows:
Costs Incurred Costs Incurred Balance at Total in Fiscal 1998 in Fiscal 1999 May 2, 1999 Asset impairment losses Accounts receivable $ 12,732 Inventory 54,851 Property, plant and equipment 11,936 Goodwill 57,125 Other current and non-current assets 5,162 -------- 141,806 -------- Provision for restructuring Reduction in work force 20,796 (19,614) (1,182) -- Reduction in facilities 4,753 (4,202) (551) -- Discontinued activities 13,577 (10,017) (3,560) -- Other restructuring costs 512 (512) -- -- -------- -------- -------------- ----------- 39,638 $(34,345) $(5,293) $ -- -------- ======== ============== =========== Restructuring costs $181,444 ========
Page 12 Asset impairment losses were recorded to the extent the net book value, including related reserves, exceeded the fair value of any assets associated with the Company's restructuring plan. The fair value was based on the estimated net realizable value of the underlying assets affected by the restructuring. The net carrying amount of inventory affected by the restructuring activities was reduced to $19,603,000 given demand for the affected products and the Company's estimate of the excess of proceeds on disposition over the costs of disposal. This inventory was substantially disposed of by the end of fiscal 1999. Substantially all of the net book value of the property, plant and equipment affected by the restructuring plan was reflected as an asset impairment loss since the Company estimated the proceeds of disposition of these assets would approximate the costs of disposal. Asset impairment losses associated with property, plant and equipment reduced amortization expense in fiscal 1999 by approximately $4,774,000. The property, plant and equipment impaired as a result of the restructuring program was substantially disposed of by the end of fiscal 1999. The acquisitions of UB Networks, acquired in January 1997, and Ouest Standard Telematique, acquired in August 1996, related to the Company increasing its direct presence and participation in the LAN business. The Company's decision to restructure its activities in the LAN business impaired the value of goodwill associated with these acquisitions. Accordingly, the Company included the full net book value of goodwill related to the acquisitions of UB Networks ($18,775,000) and Ouest Standard Telematique ($38,350,000) as restructuring costs. The provision for reduction in work force included severance, related medical and other benefits, relocation costs and other obligations to employees. The provision included termination benefits for 400 employees. The work force reductions were in substantially all functions and in all regions in which the Company operates. The work force reductions were completed in fiscal 1999. The provision for reduction in facilities comprised lease payments and fixed costs associated with plans to close sales, support and administrative facilities in the Americas, Europe and Asia Pacific geographic areas. Certain facilities closures planned as part of the restructuring plan formulated upon the acquisition of UB Networks were also part of the restructuring plan defined in November 1997. Facilities closures were completed in fiscal 1999. The provision for discontinued activities included costs associated with acquiring products from third parties and providing them to customers to fulfill prior commitments related to certain discontinued product lines and activities. These activities were completed in fiscal 1999. The provision for other restructuring costs comprised certain consulting costs associated with workforce reductions including outplacement and counseling services for employees as well as various other direct incremental costs associated with the restructuring plan. In accordance with Canadian GAAP, impairments to accounts receivable and inventory attributable to restructuring activities have been included in restructuring costs. Under U.S. GAAP, impairments to accounts receivable and inventory attributable to restructuring activities would be included in the calculation of gross margin. In accordance with U.S. GAAP, the calculation of gross margin would have included restructuring costs of $42,290,000 for fiscal 1999 and restructuring costs of $67,583,000 for fiscal 1998. Page 13 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. Associated with this investment, the Company incurred $52,762,000 in purchased research and development in process expense ("PR&DIP") in fiscal 1998. As of the investment date, the research and development project in process was for the development of an ATM access switch designed to aggregate various speeds of voice and data traffic. The initial product release of the ATM access switch was approximately 65% complete as at the investment date. The market for ATM access switches was nascent at the time of investment. RadNet Ltd. expected to incur approximately $30,000,000 in research and development expenses to complete the ATM access switch project. The estimated costs to complete the project were related to software and hardware engineering personnel expenses, costs associated with equipment and facilities, and subcontracted research and development costs. Approximately 70% of these estimated costs were expected to be incurred over the 3 years following the acquisition. The ATM access switches were expected to be shipped to initial customers approximately nine months after the acquisition, and in volume fifteen months after the acquisition. The ATM access switch market is characterized by rapid technological change, frequent product introductions and evolving methods used by service providers and corporations in building and managing networks. For the ATM access switch market, the key risk identified at the time of acquisition was the time taken to introduce a fully featured product to the market relative to the competition. Delays in introducing a fully featured ATM access switch would result in a late introduction of the product to the market, which would result in a reduction in planned revenue. The Company was aware of many large customer opportunities at the time of the investment, but was also aware that delays in introducing the product would result in these same large customers diverting purchases to competing products. The appraisal method used to value the PR&DIP associated with the project was a discounted cash flow. The projected cash flow was calculated over a period of 6 years, and a risk adjusted discount factor of 19% was used. The discount factor was based on a risk adjusted weighted average cost of capital. Significant appraisal assumptions included growth in revenues for the ATM access switch to approximately $300,000,000 in fiscal 2003. Gross margin, expressed as a percentage of sales, was projected to be 77% on initial shipments, declining to 67% by fiscal 2001 and in subsequent years due to market maturation. Selling, general and administrative expenses were expected to be 47% of sales initially, declining to 20% due to economies of scale associated with the increase in sales volume. These projections were based on expense forecasts for the initial stages of product introduction, and industry averages thereafter. Research and development expenses were projected based on the project plan, including costs to correct errors and evolve new versions in the later stages of the planning horizon. The income tax rate for this Israeli-based initiative was assumed at 25%. 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. Page 14 During fiscal 1999, the Company decided to cease funding of RadNet's ATM access switch project and the Company's related sales efforts. During fiscal 1997, the Company incurred $96,940,000 in PR&DIP related to the acquisition of UB Networks, a manufacturer of LAN equipment based in Santa Clara, California. As of the acquisition date, the research and development project in process was for the development of high speed interface cards for its high capacity LAN switch called GeoLAN 500. The initial release of the interface cards were 70% to 80% complete as at the acquisition date. The project involved the development of interface protocols and speeds which existed in the LAN market, with a high number of network connections per interface card. The Company expected to incur approximately $38,000,000 in research and development expenses to complete the high speed interface cards for the GeoLAN 500. The estimated costs to complete the project were associated with software and hardware engineering personnel expenses, costs associated with equipment and facilities, and subcontracted research and development costs. Approximately 75% of these estimated costs were expected to be incurred over the 18 months following the acquisition. The interface cards were expected to be shipped to initial customers approximately three months after the acquisition, and in volume nine months after the acquisition. The LAN market is characterized by rapid technological change, frequent product introductions and evolving methods used by corporations in building and managing networks. For the high speed interface development project, the key risk identified at the time of acquisition was the successful and timely completion of the development of custom ASICs (application specific integrated circuits). This project task was identified as a critical path item. Delays associated with the ASICs, or certain other project tasks, would result in a late introduction of the product to the market. Any late introduction of the interface cards would result in a reduction in planned revenue for the GeoLAN 500, and potentially for the entire product portfolio of the former UB Networks. The large majority of sales for the GeoLAN 500 were targeted at the installed base of customers of the former UB Networks organization, and therefore a delay in product introduction would result in a loss of credibility with these customers. The appraisal method used to value the PR&DIP associated with the project was a discounted cash flow. The projected cash flow was calculated over a period of 7 years and three months, and a risk adjusted discount factor of 26% was used. The discount factor was based on a risk adjusted weighted average cost of capital. Significant appraisal assumptions included growth in revenues for the GeoLAN 500 to over $300,000,000 in fiscal 2001, with declining revenues thereafter until revenues cease in fiscal year 2004. Gross margin, expressed as a percentage of sales, was projected to be 58% on initial shipments, improving to 65% eventually as the Company gained economies of scale and cost reductions. Similarly, selling, general and administrative expenses were expected to be 29% of sales initially, declining to 23%. These assumptions were based on historical information for major product initiatives in the LAN market. Research and development expenses were projected based on the project plan, including costs to correct errors and evolve new versions in the later stages of the planning horizon. Under U.S. GAAP, PR&DIP acquired by the Company on the acquisition of UB Networks was written off against net earnings upon acquisition. Under accounting principles generally accepted in Canada research and development in process acquired by the Company on the Page 15 acquisition of UB Networks was capitalized upon acquisition and disclosed on the Consolidated Balance Sheet at January 26, 1997. Upon review of the recoverability of the research and development in process, undertaken during the fourth quarter of the fiscal year ended April 30, 1997, the Company determined that the PR&DIP no longer met all the criteria for deferral and accordingly the balance was written off as a charge to earnings for the fourth fiscal quarter of fiscal 1997. The Company significantly altered product plans associated with the research and development project and concluded that recoverability could not be reasonably regarded as assured. In addition, Management determined that adequate resources may not be made available to complete the project associated with the PR&DIP, as originally defined. In October 1998, the Company decided to fully discontinue the sale and development of LAN products as part of the enhancement of the focus on the Company's dominant and more profitable products. 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 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 -- Other divestitures -- 6,528 -- West End Systems Corp. (33,521) -- -- 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. Page 17 In fiscal 1999, the Company recorded investment impairment write downs of $65,431,000 attributable to the financial performance of certain investee companies as well as deteriorating economic conditions in certain geographic regions. Investment impairment write downs in fiscal 1999 included $17,247,000 related to the carrying value of the Company's investment in a subsidiary company that developed packet voice technology and network access products. The Company also divested its ownership position in a Brazilian subsidiary and recognized a loss of $14,902,000 associated with the carrying value of its investment and related disposition costs. As a result of deteriorating economic conditions in Russia, the Company recognized a loss of $11,449,000 attributable to its investment in a joint venture in that country. The Company recorded investment impairments of $21,833,000 in fiscal 1999 as a result of the financial condition of seven investee companies. 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 in these investments. The Company establishes fair value of its long term investments in investee companies by referring to quoted market values or reviewing valuations implicit in recent private financing. The Company also utilizes a variety of valuation techniques which include assessing potential proceeds that could be expected to be received on a disposition of the Company's investment, discounting future cash flows expected to be received from holding the investment and reviewing recent acquisitions and divestitures of companies in the industry that are comparable to the investee company. 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. Page 18 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.
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
(1) Included within selling, general and administrative expenses on the Consolidated Statement of Earnings. Page 19 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 inclusion of certain asset impairments in restructuring costs, as disclosed in Note 14, 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 20 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 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 Page 21 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 22 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. 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 Page 23 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. 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 Page 24 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 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. Page 25 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 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 26 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 14, 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 27 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 28 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 29 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 30 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 31 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 inclusion of certain asset impairments in restructuring costs, as disclosed in Note 14, 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 32 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 33 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 34 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 35 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 36 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 37 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 38 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 39 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 40 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 41 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 42 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 43 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 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 and the related costs incurred are as follows:
Sales and Product Costs Balance at Marketing Development Total Incurred May 2, 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 -- $15,022 Reduction in facilities 6,627 -- 6,627 -- 6,627 Other restructuring costs 1,653 171 1,824 -- 1,824 ------- ------- ------- -------- ----------- 22,875 598 23,473 -- $23,473 ------- ------- ------- ======== =========== 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. Substantially all of the net book values of the inventory and property, plant and equipment affected by the restructuring programs have been reflected as asset impairment losses since the Company estimates that the proceeds of disposition of these assets will approximate the costs Page 44 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) of disposal. These asset impairment losses will reduce amortization expense in fiscal 2000 by approximately $11,700,000. The Company anticipates that assets impaired as a result of the restructuring programs will be disposed of during fiscal 2000. The amounts included 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 137 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 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 fiscal 2000. The provision for other restructuring costs comprises certain consulting costs associated with establishing termination benefits for employees in addition to outplacement and counseling services as well as various other 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 during fiscal 1999. End of life program costs of $37,928,000 and the related costs incurred are as follows:
Costs Balance at Total Incurred May 2, 1999 Asset impairment losses Accounts receivable $ 7,762 Inventory 22,928 ------- 30,690 Customer obligations 7,238 (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. The net carrying amount of inventory affected by the Layer 2 Switching End of Life program was reduced to $1,458,000 given demand for the affected products and the Company's estimated proceeds of disposition, net of the costs of disposal. This inventory was substantially disposed of during fiscal 1999. Customer obligations related to the cost to the Company of acquiring products from third parties and providing them to customers in order to meet the Company's commitments with respect to providing certain network functionality. Page 45 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 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 for relocation of $6,532,000 and the related costs incurred are as follows:
Costs Balance at Total Incurred May 2, 1999 Provision for Asia Pacific Resources relocation Workforce terminations $3,407 $ (690) $2,717 Reduction in facilities 2,600 -- 2,600 Other relocation costs 525 (525) -- ------ ------- ------ $6,532 $(1,215) $5,317 ====== ======= ======
The provision for workforce terminations reflects the accrual of involuntary termination benefits for 27 employees. The provision for reduction in facilities comprises lease cancellation penalties associated with relocating facilities to Hong Kong and Malaysia. Other relocation costs consist of direct incremental costs associated with the relocation. The balance of the provision for Asia Pacific resources relocation is included in accrued liabilities at May 2, 1999. 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 decided to restructure its activities related to its local area network ("LAN") business. The restructuring plan involved the discontinuation of certain product lines, termination of employees, discontinuation of development activities associated with the former UB Networks and closure of former UB Networks facilities. The Company's restructuring plan created impairment losses on assets associated with the LAN business and liabilities associated with restructuring activities. Restructuring costs of $181,444,000 and the related costs incurred were as follows:
Costs Incurred Costs Incurred Balance at Total in Fiscal 1998 in Fiscal 1999 May 2, 1999 Asset impairment losses Accounts receivable $ 12,732 Inventory 54,851 Property, plant and equipment 11,936 Goodwill 57,125 Other current and non-current assets 5,162 -------- 141,806 -------- Provision for restructuring Reduction in work force 20,796 (19,614) (1,182) -- Reduction in facilities 4,753 (4,202) (551) -- Discontinued activities 13,577 (10,017) (3,560) -- Other restructuring costs 512 (512) -- -- -------- -------- -------------- ----------- 39,638 $(34,345) $(5,293) $-- -------- ======== ============== =========== Restructuring costs $181,444 ========
Page 46 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) Asset impairment losses were recorded to the extent the net book value, including related reserves, exceeded the fair value of any assets associated with the Company's restructuring plan. The fair value was based on the estimated net realizable value of the underlying assets affected by the restructuring. The net carrying amount of inventory affected by the restructuring activities was reduced to $19,603,000 given demand for the affected products and the Company's estimate of the excess of proceeds on disposition over the costs of disposal. This inventory was substantially disposed of by the end of fiscal 1999. Substantially all of the net book value of the property, plant and equipment affected by the restructuring plan was reflected as an asset impairment loss since the Company estimated the proceeds of disposition of these assets would approximate the costs of disposal. Asset impairment losses associated with property, plant and equipment reduced amortization expense in fiscal 1999 by approximately $4,774,000. The property, plant and equipment impaired as a result of the restructuring program was substantially disposed of by the end of fiscal 1999. The acquisitions of UB Networks, acquired in January 1997, and Ouest Standard Telematique, acquired in August 1996, related to the Company increasing its direct presence and participation in the LAN business. The Company's decision to restructure its activities in the LAN business impaired the value of goodwill associated with these acquisitions. Accordingly, the Company included the full net book value of goodwill related to the acquisitions of UB Networks ($18,775,000) and Ouest Standard Telematique ($38,350,000) as restructuring costs. The provision for reduction in work force included severance, related medical and other benefits, relocation costs and other obligations to employees. The provision included termination benefits for 400 employees. The work force reductions were in substantially all functions and in all regions in which the Company operates. The work force reductions were completed in fiscal 1999. The provision for reduction in facilities comprised lease payments and fixed costs associated with plans to close sales, support and administrative facilities in the Americas, Europe and Asia Pacific geographic areas. Certain facilities closures planned as part of the restructuring plan formulated upon the acquisition of UB Networks were also part of the restructuring plan defined in November 1997. Facilities closures were completed in fiscal 1999. The provision for discontinued activities included costs associated with acquiring products from third parties and providing them to customers to fulfill prior commitments related to certain discontinued product lines and activities. These activities were completed in fiscal 1999. The provision for other restructuring costs comprised certain consulting costs associated with workforce reductions including outplacement and counseling services for employees as well as various other direct incremental costs associated with the restructuring plan. In accordance with Canadian GAAP, impairments to accounts receivable and inventory attributable to restructuring activities have been included in restructuring costs. Under U.S. GAAP, impairments to accounts receivable and inventory attributable to restructuring activities would be included in the calculation of gross margin. In accordance with U.S. GAAP, the calculation of gross margin would have included restructuring costs of $42,290,000 for fiscal 1999 and restructuring costs of $67,583,000 for fiscal 1998. Page 47 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. Associated with this investment, the Company incurred $52,762,000 in purchased research and development in process expense ("PR&DIP") in fiscal 1998. As of the investment date, the research and development project in process was for the development of an ATM access switch designed to aggregate various speeds of voice and data traffic. The initial product release of the ATM access switch was approximately 65% complete as at the investment date. The market for ATM access switches was nascent at the time of investment. RadNet Ltd. expected to incur approximately $30,000,000 in research and development expenses to complete the ATM access switch project. The estimated costs to complete the project were related to software and hardware engineering personnel expenses, costs associated with equipment and facilities, and subcontracted research and development costs. Approximately 70% of these estimated costs were expected to be incurred over the 3 years following the acquisition. The ATM access switches were expected to be shipped to initial customers approximately nine months after the acquisition, and in volume fifteen months after the acquisition. The ATM access switch market is characterized by rapid technological change, frequent product introductions and evolving methods used by service providers and corporations in building and managing networks. For the ATM access switch market, the key risk identified at the time of acquisition was the time taken to introduce a fully featured product to the market relative to the competition. Delays in introducing a fully featured ATM access switch would result in a late introduction of the product to the market, which would result in a reduction in planned revenue. The Company was aware of many large customer opportunities at the time of the investment, but was also aware that delays in introducing the product would result in these same large customers diverting purchases to competing products. The appraisal method used to value the PR&DIP associated with the project was a discounted cash flow. The projected cash flow was calculated over a period of 6 years, and a risk adjusted discount factor of 19% was used. The discount factor was based on a risk adjusted weighted average cost of capital. Significant appraisal assumptions included growth in revenues for the ATM access switch to approximately $300,000,000 in fiscal 2003. Gross margin, expressed as a percentage of sales, was projected to be 77% on initial shipments, declining to 67% by fiscal 2001 and in subsequent years due to market maturation. Selling, general and administrative expenses were expected to be 47% of sales initially, declining to 20% due to economies of scale associated with the increase in sales volume. These projections were based on expense forecasts for the initial stages of product introduction, and industry averages thereafter. Research and development expenses were projected based on the project plan, including costs to correct errors and evolve new versions in the later stages of the planning horizon. The income tax rate for this Israeli-based initiative was assumed at 25%. 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) 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. During fiscal 1999, the Company decided to cease funding of RadNet's ATM access switch project and the Company's related sales efforts. During fiscal 1997, the Company incurred $96,940,000 in PR&DIP related to the acquisition of UB Networks, a manufacturer of LAN equipment based in Santa Clara, California. As of the acquisition date, the research and development project in process was for the development of high speed interface cards for its high capacity LAN switch called GeoLAN 500. The initial release of the interface cards were 70% to 80% complete as at the acquisition date. The project involved the development of interface protocols and speeds which existed in the LAN market, with a high number of network connections per interface card. The Company expected to incur approximately $38,000,000 in research and development expenses to complete the high speed interface cards for the GeoLAN 500. The estimated costs to complete the project were associated with software and hardware engineering personnel expenses, costs associated with equipment and facilities, and subcontracted research and development costs. Approximately 75% of these estimated costs were expected to be incurred over the 18 months following the acquisition. The interface cards were expected to be shipped to initial customers approximately three months after the acquisition, and in volume nine months after the acquisition. The LAN market is characterized by rapid technological change, frequent product introductions and evolving methods used by corporations in building and managing networks. For the high speed interface development project, the key risk identified at the time of acquisition was the successful and timely completion of the development of custom ASICs (application specific integrated circuits). This project task was identified as a critical path item. Delays associated with the ASICs, or certain other project tasks, would result in a late introduction of the product to the market. Any late introduction of the interface cards would result in a reduction in planned revenue for the GeoLAN 500, and potentially for the entire product portfolio of the former UB Networks. The large majority of sales for the GeoLAN 500 were targeted at the installed base of customers of the former UB Networks organization, and therefore a delay in product introduction would result in a loss of credibility with these customers. The appraisal method used to value the PR&DIP associated with the project was a discounted cash flow. The projected cash flow was calculated over a period of 7 years and three months, and a risk adjusted discount factor of 26% was used. The discount factor was based on a risk adjusted weighted average cost of capital. 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) Significant appraisal assumptions included growth in revenues for the GeoLAN 500 to over $300,000,000 in fiscal 2001, with declining revenues thereafter until revenues cease in fiscal year 2004. Gross margin, expressed as a percentage of sales, was projected to be 58% on initial shipments, improving to 65% eventually as the Company gained economies of scale and cost reductions. Similarly, selling, general and administrative expenses were expected to be 29% of sales initially, declining to 23%. These assumptions were based on historical information for major product initiatives in the LAN market. Research and development expenses were projected based on the project plan, including costs to correct errors and evolve new versions in the later stages of the planning horizon. Under U.S. GAAP, PR&DIP acquired by the Company on the acquisition of UB Networks was written off against net earnings upon acquisition. Under accounting principles generally accepted in Canada research and development in process acquired by the Company on the acquisition of UB Networks was capitalized upon acquisition and disclosed on the Consolidated Balance Sheet at January 26, 1997. Upon review of the recoverability of the research and development in process, undertaken during the fourth quarter of the fiscal year ended April 30, 1997, the Company determined that the PR&DIP no longer met all the criteria for deferral and accordingly the balance was written off as a charge to earnings for the fourth fiscal quarter of fiscal 1997. The Company significantly altered product plans associated with the research and development project and concluded that recoverability could not be reasonably regarded as assured. In addition, Management determined that adequate resources may not be made available to complete the project associated with the PR&DIP, as originally defined. In October 1998, the Company decided to fully discontinue the sale and development of LAN products as part of the enhancement of the focus on the Company's dominant and more profitable products. 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) 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 -- Other divestitures -- 6,528 -- West End Systems Corp. (33,521) -- -- 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. 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) In fiscal 1999, the Company recorded investment impairment write downs of $65,431,000 attributable to the financial performance of certain investee companies as well as deteriorating economic conditions in certain geographic regions. Investment impairment write downs in fiscal 1999 included $17,247,000 related to the carrying value of the Company's investment in a subsidiary company that developed packet voice technology and network access products. The Company also divested its ownership position in a Brazilian subsidiary and recognized a loss of $14,902,000 associated with the carrying value of its investment and related disposition costs. As a result of deteriorating economic conditions in Russia, the Company recognized a loss of $11,449,000 attributable to its investment in a joint venture in that country. The Company recorded investment impairments of $21,833,000 in fiscal 1999 as a result of the financial condition of seven investee companies. 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 in these investments. The Company establishes fair value of its long term investments in investee companies by referring to quoted market values or reviewing valuations implicit in recent private financing. The Company also utilizes a variety of valuation techniques which include assessing potential proceeds that could be expected to be received on a disposition of the Company's investment, discounting future cash flows expected to be received from holding the investment and reviewing recent acquisitions and divestitures of companies in the industry that are comparable to the investee company. 17. Income Taxes The components of the provision for income taxes are as follows: Years Ended ------------------------------ May 2, April 30, 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 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)
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 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) 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 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) 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. 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 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 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) 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 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) 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 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) 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 1,901 ---------- ---------- ---------- $ 182,547 $ 125,429 $ 82,987 ========== ========== ==========
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) 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 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) 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. The matter is scheduled for trial in October 1999. 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 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) 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 61 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) 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. Page 62 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The Company hereby amends section (C) of Item 14 of its Annual Report on Form 10-K by amendment of the following exhibits: 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. The Company hereby files as an exhibit to this Annual Report on Form 10-K/A (Amendment No.1) for fiscal year ended May 2, 1999 the following: 23 Consent of Independent Accountants. Page 63 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment to its Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. NEWBRIDGE NETWORKS CORPORATION Date: October 1, 1999 By: /s/ Terence H. Matthews ----------------------------- Chairman of the Board of Directors and Chief Executive Officer Date: October 1, 1999 By: /s/ Kenneth B. Wigglesworth ----------------------------- Kenneth B. Wigglesworth, Executive Vice President, Finance and Chief Financial Officer Page 64 EX-11.1 2 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 ======== ======== ======== ======== ======== ======== ========
EX-11.2 3 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 ======== ======== ======== ======== ======== ======== ========
EX-23 4 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, 333-30777, 333- 86669, 333-86671, and 333-86683) of our report dated June 1, 1999, except Note 23 which is as of June 22, 1999, included herein, on our audit of the consolidated financial statements of the Company, which are included in this Amendment dated October 1, 1999 to its Annual Report on Form 10-K, as included in Item 8 herein. /s/ Deloitte and Touche LLP Deloitte & Touche Chartered Accountants October 1, 1999 Ottawa, Canada -----END PRIVACY-ENHANCED MESSAGE-----