UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 2, 1999
Commission file number 1-13316
Newbridge Networks Corporation
(Exact name of registrant as specified in its charter)
Canada 98-0077506
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
600 March Road, Kanata, Ontario, Canada K2K 2E6
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number,
including area code: (613) 591-3600
Securities registered pursuant to Section 12(b) of the Act:
Common Shares, no par value New York Stock Exchange
(Title of class) (Name of each exchange on which registered)
The common shares are also listed on The Toronto Stock Exchange in Canada.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At June 17, 1999 the aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately Cdn$5,600,944,000. The number of
common shares of the registrant outstanding as at June 17, 1999 was 180,427,602.
Exhibit index begins on Page 85
Page 1 of 231
EXCHANGE RATES
Financial information herein is expressed in Canadian dollars ($ or Cdn$),
unless expressly stated in United States dollars (US$) or otherwise. The Company
maintains its financial data in Canadian dollars. The high and low exchange
rates (the highest and lowest rates at which Canadian dollars were sold), the
average exchange rate (the average of the exchange rates on the last day of each
month during the period), and the period end exchange rate of the Canadian
dollar in exchange for United States dollars in each of the five 12 month
periods ended May 2, 1999, as calculated from the exchange rates reported by the
Federal Reserve Bank of New York, are set forth below.
12 Month Period Ended
-----------------------------------------------------
May 2, April 30, April 30, April 30, April 30,
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
High US$0.6982 US$0.7317 US$0.7513 US$0.7527 US$0.7457
Low 0.6341 0.6832 0.7145 0.7224 0.7023
Average 0.6619 0.7099 0.7319 0.7345 0.7248
Period End 0.6860 0.6992 0.7158 0.7345 0.7355
On June 17, 1999, the noon buying rate in New York City for the Canadian dollar
as reported by the Federal Reserve Bank of New York was US$1.00 = Cdn$1.4610
(equivalent to US$0.6845 = Cdn$1.00).
____________________________________
The following trademarks are mentioned in this Report on Form 10-K:
Newbridge(R), MainStreetXpress(TM) and MainStreet(R) which are trademarks
of Newbridge Networks Corporation.
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NEWBRIDGE NETWORKS CORPORATION
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business
General....................................................... 4
Networking Industry........................................... 4
Business Strategy............................................. 6
Products...................................................... 7
Research and Product Development.............................. 8
Sales, Marketing and Distribution............................. 9
Customer Service and Support.................................. 10
Manufacturing................................................. 10
Competition................................................... 11
Government Regulation......................................... 11
Proprietary Rights............................................ 12
Employees..................................................... 12
Item 2. Properties..................................................... 12
Item 3. Legal Proceedings.............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............ 13
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters
Common Share Price Range and Dividends........................ 14
Cautionary Statement Regarding Forward-Looking Information.... 15
Certain Tax Considerations.................................... 20
Item 6. Selected Financial Data........................................ 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 41
Item 8. Financial Statements and Supplementary Data.................... 43
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................ 74
PART III
Item 10. Directors and Executive Officers of the Registrant............. 75
Item 11. Executive Compensation......................................... 78
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................ 78
Item 13. Certain Relationships and Related Transactions................. 79
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K....................................... 80
SIGNATURES............................................................... 83
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PART I
Item 1. BUSINESS
GENERAL
Newbridge Networks Corporation (the "Company" or "Newbridge") designs,
manufactures, markets and services networking solutions to customers in more
than 100 countries. Newbridge customers include the world's 350 largest service
providers and more than 10,000 corporations, government organizations and other
institutions. The Company was incorporated in June 1986 in Ontario under the
Canada Business Corporations Act.
NETWORKING INDUSTRY
Communications networks may be broadly categorized as local area networks (LANs)
and wide area networks (WANs). As the term suggests, LANs typically cover a
smaller geographic footprint, such as an office floor, a building, or an
enterprise campus, and normally serve the needs of a single corporate user.
WANs, on the other hand cover a broader geographic area in a hierarchical
fashion; for example, a metropolitan area network will connect to a pan-national
network which, in turn, links to a global WAN infrastructure.
Today's communications networks are experiencing unprecedented change, driven by
two principal factors: the Internet and convergence of data, voice and video
traffic. These changes require an overhaul to the existing global public
telecommunications infrastructure as discussed below.
The Internet
The Internet is changing the way we work and live. Internet traffic has been
growing at an exponential rate over the last number of years and this
extraordinary growth has forced service providers and Internet Service Providers
(ISPs) to build their network infrastructures at an unprecedented rate.
The growth in Internet traffic is being driven by a number of factors. As its
value as an information pool and communications/business resource continues to
increase, more and more individuals and companies are going on line.
Additionally, the growing use of the multimedia capabilities of the World Wide
Web has increased the amount of data that needs to be transmitted for the
typical Web page. Multimedia is defined as the combination of multiple media
forms of information. While formats vary and will continue to evolve, they
typically involve elements such as voice, text, graphics, image, video, and
audio. Combinations of these media provide powerful communications tools, but
they are not tolerant of the quality impairing delays associated with "best
effort" Internet protocol (IP) networks based on legacy router technology. Such
next-generation high-bandwidth applications are driving the need for networks
that deliver greater capacity and scalability, performance, quality, and
reliability.
Convergence of Data, Voice and Video Traffic
As the Internet continues to grow in terms of its capabilities, reach and
capacity, the amount of data traffic on the public telecommunications network,
or public switched telephone network (PSTN), as it is known as, now exceeds the
total amount of voice traffic in a growing number of countries throughout the
world. At current growth rates, this will be the case on a global basis
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within a few years. This phenomenon, together with the convergence of traffic
types encompassing combinations of voice, video and various forms of data into
multimedia communications packages, and the growth of voice over IP (VoIP),
voice over frame relay (VoFR), voice over asynchronous transfer mode (VoATM), is
leading network engineers with the service providers to plan and design so
called "next generation networks" (NGNs) to handle voice, data, and video
traffic over a single, unifying, broadband multiservice infrastructure.
This converged network infrastructure involves the migration from a highly
centralized, narrowband circuit-switched architecture to a distributed
architecture where the call control and advanced intelligent network (AIN)
functionality reside on intelligent call and service control servers. The
relatively inflexible narrowband circuit switches are being replaced by flexible
broadband packet/cell switches distributed throughout the network. This
transition will occur in stages, with long distance toll or tandem Class 4
switches being the first to migrate, followed by the local or end Class 5
switching centers.
Higher Capacity Backbones
Both traffic carrying requirements and capacity are increasing at every point in
the network hierarchy. Higher bandwidth traffic and capacity within LANs puts
greater capacity pressure on what has traditionally been the first point of
constriction or bottleneck within the public or wide area network, namely the
access portion of the network. New, broadband access technologies, such as cable
modems, various high speed digital subscriber loop technologies (such as ADSL
and SDSL) and broadband wireless access based on LMDS (local multipoint
distribution system) are breaking down the access or "last mile" roadblock.
This, in turn, is putting increasing pressure on the backbone or core of the
network. Where DS-3 (45 Mbit/s or millions of bits per second) connections were
considered adequate only a few years ago, many Internet backbones today are
constructed using OC-3 (155 Mbit/s) links, and these are moving quickly to OC-12
(622 Mbit/s) and OC-48 (2.4 Gbit/s or billions of bits per second) speeds.
Competitive Landscape for Service Providers
The networking industry has seen the birth and growth of a large number of new
service providers, particularly since the mainstream commercialization of the
Internet. The new generation, or "alternate" service providers - including
competitive local exchange service providers (CLECs), competitive access
providers (CAPs), Internet Service Providers (ISPs) and competitive long
distance service providers - coupled with deregulation throughout the industry,
have put increasing pressure on the established service providers. This
competitive challenge requires the established service providers to reduce costs
and optimize network resources, while the growing demand for new communications
services requires them to invest in new infrastructures.
In order to reconcile these conflicting needs, service providers are migrating
the current disparate array of networks and services offered from their networks
onto a single, unifying, broadband infrastructure. The scalability, flexibility,
and inherent quality of service (QoS) of asynchronous transfer mode (ATM)
switching technology make it well suited for multiple traffic types or services,
including delay-sensitive traffic such as real-time voice or video, enabling
service providers to launch new, higher margin, value-added services. At the
same time service providers can lower their up-front and operating costs and
improve the manageability of their overall network infrastructure by
consolidating their present disparate networks onto one ATM-based network.
Page 5
For example, real-world business case analyses related to the transition from a
narrowband circuit-switched architecture to a broadband packet/cell network
infrastructure estimate that the new solution represents less than half the cost
and one-tenth the space requirements of conventional circuit switches.
BUSINESS STRATEGY
The Company's business strategy is to provide comprehensive, fully managed, end-
to-end wide area networking solutions to service providers and corporate
customers based on a broad product family that cost effectively addresses their
constantly evolving communications requirements. Newbridge products are designed
in accordance with an "evergreen" architecture to provide customers with a
seamless migration and integration path across the entire product family. The
full product family is highly flexible and scalable to meet evolving customer
requirements. Products are software controlled and remotely manageable for ease
of use, efficiency and cost effectiveness. All Newbridge products are designed
to comply with industry standards throughout the world in order to deliver
optimal interoperability and performance in multiprotocol, multivendor networks.
The Company's architectural approach for broadband, multiservice WANs is
directed at providing solutions to issues facing service providers in the core,
edge and access points of the networks. At the core of the WAN, the Company's
strategy focuses on the accelerating deployment of a new core infrastructure
that is highly robust and scalable and capable of supporting various types and
classes of service including "business class" IP. The Company delivers ATM and
IP products for the core of the service provider network to collapse multiple
services onto a single platform. The Company's product strategy also encompasses
the access portion of the network. In addition to a multi-service access server
(MRAS) family of products, the Company provides various access solutions, with a
specific Product Group focussed on this high-end segment of the access market.
Particular areas of focus within broadband access include the relatively new and
rapidly evolving digital subscriber loop (DSL) and LMDS broadband wireless
markets. The Company's product strategy for broadband WANs enables service
providers to compete successfully in the face of increasing competition and
deregulation by reducing capital and operational costs associated with network
infrastructure and creating differentiated, business class service offerings by
delivering multiple services on a single network.
The Company also addresses the enterprise network market with various WAN and
WAN access products based on ATM and TDM technologies and supplements its
network solutions offerings through strategic alliances and other collaborative
undertakings.
The Company extends its business strategy through alliances and strong relations
with a family of over 20 Newbridge Affiliate companies. The Newbridge Affiliate
companies, in which Newbridge owns an equity stake, generally address markets
within the networking industry which are complementary to the Newbridge product
offering. Many of the Newbridge Affiliate companies are addressing opportunities
related to equipment and services for networks optimized for IP traffic. In
March 1996 Newbridge and Siemens formed an alliance encompassing common branding
under the MainStreetXpress banner and joint sales, marketing and customer
service activities.
PRODUCTS
Page 6
Newbridge has developed a broad family of digital networking products that are
effective in the core, edge and access portions of service provider or corporate
WANs. These products operate under a highly scalable, center-weighted network
and service management system, which is advantageous for large bandwidth-
intensive networks. Newbridge products employ a common architecture that allows
TDM, X.25, frame relay, ATM, SMDS and LAN internetworking to coexist within the
same network and provides a migration path from legacy narrowband to next
generation broadband networks.
The Newbridge family of ATM and IP products includes high performance core, edge
and access switches for service provider networks. Network operators can build
consolidated networks that deliver services for a variety of applications,
employing various forms of access technologies, managed by a single, end-to-end
network and service management system. This approach enables operators to reduce
infrastructure costs and create differentiated service offerings by provisioning
multiple services on a single, unifying, broadband, multiservice network.
The MainStreetXpress 36170 Multiservices Switch is a high capacity platform,
designed to scale from 800 Mbit per second to over 50 Gbit/s. The platform
supports a broad array of services, including native cell relay, frame relay,
circuit emulation for advanced private line services, LAN connectivity, managed
IP services, SMDS services, switched voice services, broadcast-quality video
services, broadband wireless access and other high-capacity access technologies
such as DSL. The modular architecture of the MainStreetXpress 36170 switch
enables network operators to expand from a single-shelf system to a large multi-
shelf system in an as-needed fashion. The high port density of the system
translates into competitive per-port pricing.
The Company's MainStreetXpress product line also includes the MainStreetXpress
36190 Core Services Switch, a high performance ATM backbone or core switch,
designed to scale beyond one terabit (trillion bits) per second, as well as the
MainStreetXpress 36150 Access Switch for premium video service, the
MainStreetXpress 36177 ATM Multiservices Access Switch, the MainStreetXpress
36030 and 36060 Modular LAN Service Units for LAN access and the
MainStreetXpress 36100 Access Concentrator.
TDM products from Newbridge, such as the 3600 and 3645 MainStreet Bandwidth
Managers, are market leading platforms in delivering private line services
throughout the world because of their wide range of voice and data interfaces,
adherence to the full range of domestic and international standards, quality and
reliability, end-to-end and remote network manageability, and flexibility for
seamless expansion and migration as networks grow and applications evolve.
Based on the 3600 MainStreet Bandwidth Manager, the 36120 MainStreet Packet
Transfer Engine frame relay system can be used to deploy frame relay or X.25
networks over a TDM circuit switched network infrastructure. This product
interworks with the Company's TDM and ATM systems for seamless end-to-end,
multiservice network solutions.
Newbridge also addresses the access market segment with products that enable
service providers to deploy multiple services and permit access to those
services for customers with multiple applications. These products include a
variety of WAN access devices for connecting remote and small sites and devices
to extend the network to the end points of both circuit and packet/cell switched
connections.
Page 7
Newbridge complements products providing connectivity with an extensive suite of
network and service management software products ranging from configuration and
alarm monitoring to interfaces to umbrella management systems and customer
service management systems. The MainStreetXpress 46020 Network Manager provides
unified management of Newbridge and third-party networks across multiple
technologies, including circuit switching, packet/cell switching, SMDS and X.25.
It features a rich, object-oriented graphical user interface (GUI) for efficient
user navigation, and a scalable client/server architecture to provide
simultaneous access for up to 128 operators and cost-effective management for
networks containing up to 5,000 nodes and 100,000 network paths.
Sales of networking products and related services accounted for 100% of the
Company's sales in fiscal 1999, fiscal 1998 and fiscal 1997.
RESEARCH AND PRODUCT DEVELOPMENT
The Company's research and product development activities apply the latest
technologies to the development of advanced functionality in networking hardware
and software. In its product development strategy, Newbridge employs an
"evergreen" approach in which new products and features are designed to
integrate seamlessly with existing products. This approach protects customers'
investment in their installed base of networking equipment. The Company's
research and development strategy also focuses on leveraging product
functionality developed for one market to deliver products addressing other
markets.
In addition to the ongoing evolution of product functionality, a significant
portion of the research and development effort is directed towards expanding the
breadth of network solutions for new value-added service capabilities and access
technologies. Major initiatives include development of higher and lower capacity
ATM multiservice switches and interfaces; development of broadband access
platforms, switches, forwarding engines, interfaces and services optimized for
IP traffic; and related network and service management software. In addition to
the Company's internal research and product development, the Newbridge
development strategy includes investments in affiliated companies developing
networking technology complementary to Newbridge.
The markets for Newbridge products are characterized by rapid technological
change. To maintain its leadership position in advanced networking technologies,
Newbridge is committed to research and development. The Company conducts the
majority of its research and development in a lower cost environment compared
with many competitors. Because of the Company's focus on and commitment to
research and development, coupled with the cost advantages, the Newbridge
strategy has been oriented towards in-house product development. This is in
contrast with some other networking vendors who devote proportionately fewer
resources to research and development and who have more often taken the approach
of obtaining technology and products through the acquisition of other companies.
Newbridge believes that its strategy results in a more cohesive product solution
set for delivering seamless end-to-end networking solutions.
Research and development project schedules for high technology products are
inherently difficult to predict, and there can be no assurance that the Company
will achieve its expected initial shipment dates of products in development.
Because timely availability of new and enhanced products is critical to the
success of the Company, delays in availability of these products, or lack of
market acceptance of such products, could adversely affect the Company.
Page 8
The Company's ability to anticipate changes in technology, industry standards
and communications service provider offerings, and to develop and introduce new
and enhanced products on a timely basis that are successful in the market, will
be a significant factor in the Company's competitive position and its prospects
for growth.
For additional discussion of the Company's research and development expenditures
in fiscal 1999, 1998 and 1997, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SALES, MARKETING AND DISTRIBUTION
Newbridge sells its products in more than 100 countries. The Company has
established direct sales forces throughout the world, as well as marketing and
distribution arrangements with service providers, original equipment
manufacturers (OEMs), distributors and dealers.
In March 1996, the Company formed an alliance with Siemens which includes common
branding under the MainStreetXpress name for broadband WAN products and joint
sales and marketing efforts. Siemens sells the Company's circuit switched
networking products, ATM products and network and service management products,
primarily to service providers in Europe, Latin America and Asia. Newbridge
products are also distributed throughout the world by AT&T Solutions, Alcatel
and other telecommunications equipment suppliers, as well as by global service
providers and consortia.
The Newbridge sales force in the United States and Canada sells directly to
service providers and other communications service providers. In the United
States, a portion of the direct sales force is focussed on established service
providers including interexchange service providers and Regional Bell Operating
Companies (RBOCs), such as SBC and Bell Atlantic. The other portion of the
direct sales force is dedicated to the emerging alternate service providers.
Newbridge also sells to Fortune 1000 sized companies and institutions,
predominantly through distributors.
The product line is sold throughout Europe, the Middle East and Africa by a
direct sales force as well as through OEMs and distributors. In Latin America
and the Asia Pacific region, networking products are sold primarily through
distributors, which are supported by local Newbridge sales and support offices.
In Latin America, the Company holds a majority equity interest in certain of its
distributors.
The Newbridge sales organization throughout the world receives support from
product line management and network solutions groups which provide product
strategy and consultation on industry trends and pricing, and which solicit
customer feedback for research and product development planning. The Company's
marketing activities are centrally coordinated and emphasize complete network
solutions for the service provider markets (established service providers and
new generation or alternate service providers) and the enterprise network
market.
The amount of sales, cost of sales and expenses, and operating contribution
attributable to the Company's geographically-based operating segments, the
amount of identifiable assets attributable to the Company's principal geographic
regions and the amount of export sales from the Company's operations in Canada
for each of the last three fiscal years are set forth in
Page 9
Note 20 to the Consolidated Financial Statements. For additional discussion of
the Company's geographic segments, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CUSTOMER SERVICE AND SUPPORT
Reliability, performance, up-time and average mean-time-to-repair are important
factors customers consider in developing long term relationships with potential
suppliers of networking systems. The increasing dependency of many domestic and
international customers upon information networks to run virtually all aspects
of their businesses has generated a demand for a very rapid service response
time. To satisfy this customer demand, the Company offers 24-hour Network
Technical Assistance Centers, complemented by the service support organizations
of the Company's distributors. Because of the remote diagnostic capabilities of
the Company's products, support engineers can immediately begin to diagnose and
solve field problems. When necessary, support engineers are dispatched from the
Company's sales and support offices or by third party technical support service
providers. The Company's standard product warranty covers defects in material
and workmanship and generally applies for 3 to 15 months after shipment.
MANUFACTURING
The principal steps in the manufacturing process are the purchase and management
of materials, assembly, testing and final inspection. Because Newbridge
manufactures and assembles the majority of its products, the Company maintains
direct control over production, quality and product availability. The Company
purchases parts and components for assembly of its products from a large number
of suppliers through a worldwide sourcing program. Although the Company single
sources certain components, no single supplier has accounted for more than 10%
of the Company's total purchases in any of the past three fiscal years.
Newbridge has established strong relationships with key vendors to reduce the
risk of significant shortages or delays relating to availability of materials.
Shortages or delays in the supply of components, however, could adversely affect
the Company's ability to meet scheduled product shipments in any particular
fiscal quarter, which could materially affect the Company's operating results.
The Company currently has its principal manufacturing, logistics and warehousing
facilities in Canada. The Company also has logistics and warehousing facilities
in the United States, Ireland, the United Kingdom, France, Hong Kong, and
Malaysia.
The Company schedules some production of its products based on internal sales
forecasts. The Company's manufacturing procedures are designed to assure rapid
response to customer orders, but may, in certain circumstances, create risk of
excess or inadequate inventory if orders do not match forecast. In the fourth
quarter of fiscal 1999, the Company's revenues were below Management's
expectations, predominantly due to the combination of orders for the Company's
product being skewed towards the end of the quarter, and inadequate inventory of
certain components. Because a substantial portion of customer orders are filled
within the fiscal quarter that they are received and because of the ability of
customers to revise or cancel orders and change delivery schedules without
significant penalty, Management believes that the Company's backlog as of any
given date is not necessarily indicative of actual revenues for any succeeding
period.
Page 10
COMPETITION
The market for the Company's products is characterized by rapid technological
change, convergence of technologies, mergers and acquisitions of service
providers and equipment suppliers, evolving standards, and regulatory
developments. Many of the Company's competitors and potential competitors have
greater financial, technological, manufacturing, marketing, and personnel
resources than the Company.
The Company's principal competitors include Cisco Systems, Lucent Technologies
and Nortel Networks, as well as traditional circuit switched equipment vendors
such as Tellabs.
Principal competitive factors are product line capabilities including
integration of multiple applications onto a single network, network management
capabilities, ability to offer complete end-to-end networking solutions,
scalability, price, reliability, adherence to standards, and market presence.
Certain competitors, including traditional telecommunications equipment vendors,
such as Ericsson, Fujitsu, Lucent Technologies and Nortel Networks have a very
large installed base in service provider and enterprise networks, some of which
can be upgraded to accommodate new technologies and features.
The networking industry recently has been consolidating through strategic
alliances, mergers and acquisitions thereby creating companies with larger
market shares, financial resources, customer bases, sales forces, product
offerings, research and development and marketing resources. Increasing
competition from larger competitors may adversely affect the Company's business,
particularly with respect to sales and service resources, networking equipment
pricing or vendor financing packages offered to potential customers.
GOVERNMENT REGULATION
The sale of networking products may be affected by governmental regulatory
policies, the imposition of service provider tariffs, and taxation of
telecommunications services, which may also affect the availability of high
capacity digital transmission lines. These policies are under continuous review
and are subject to change.
In the United States, regulatory policies are likely to have a significant
impact on the competitive environment in which the Company operates. The
Telecommunications Act of 1996 and associated regulatory developments is
affecting many regulatory restrictions in the telecommunications market.
Deregulation enables local exchange telephone service providers, RBOCs, long
distance service providers, and other communications service providers, as well
as cable television operators and electric utilities to compete with each other
in offering local and long distance voice and data communications services. In
addition, the RBOCs are now permitted to manufacture and sell telecommunications
equipment under certain conditions. Given the substantial resources and large
customer base of the RBOCs, Newbridge could face competition from these
companies should they satisfy these conditions and elect to manufacture
networking products.
The regulatory environment in the European Union continues to promote
competition for provision of communications services and to open markets for
telecommunications equipment vendors. Member states which have not already fully
liberalized their telecommunications markets by January 1, 1998 are required to
have in place the regulatory and licensing structures that will enable new
operators to enter their markets.
Page 11
Deregulation is resulting in mergers among the RBOCs and other major
telecommunications companies throughout the world. Although the impact of
mergers that have been announced or are in process cannot be predicted, greater
concentration in the market for telecommunications services could adversely
affect the market for networking products.
Government regulatory authorities have established regulations which, among
other things, set installation and equipment standards for private
telecommunications systems and require that all newly installed hardware be
registered and meet certain government standards. Management believes that the
Company currently complies with, and expects to be able to continue to comply
with these requirements.
PROPRIETARY RIGHTS
The name Newbridge, the Company's corporate logo, and MainStreet are registered
trademarks of the Company in approximately 50 countries. A number of the
Company's other trademarks and service marks are registered in Canada as well as
in various other jurisdictions. The Company also claims rights to a number of
unregistered trademarks, including MainStreetXpress, and other intellectual
property rights. The Company protects its trademarks, inventions, trade secrets,
and other proprietary rights by contract, trademark registration, patent
registration and appropriate trademark and copyright markings, as well as with
internal security. The Company licenses certain intellectual property rights
from third parties. Management believes that the Company's competitive success
will depend primarily on the innovative skills, technical competence and
marketing abilities of the Company's employees.
The Company has entered into technology licenses with other companies, and may
need to continue to do so in the future, because of the existence of the large
number of patents in the networking field, the rapid rate of issuance of new
patents, new standards that may be issued, or to obtain important technology.
Such licenses may impact the Company's operating results.
EMPLOYEES
As of May 2, 1999, the Company had 6,530 employees. None of the Company's
employees is represented by a collective bargaining agreement nor has the
Company ever experienced any work stoppage. Management believes the Company's
relations with its employees are good.
Item 2. PROPERTIES
The Company owns its corporate headquarters as well as facilities for reasearch
and development, sales and marketing in Kanata, Ontario. The Company also owns
facilities in Newport, Wales for sales, marketing, network services and
logistics and warehousing.
Newbridge leases other facilities in Kanata primarily used for manufacturing
from companies owned by Mr. Terence H. Matthews, Chairman of the Board and Chief
Executive Officer of the Company and its largest single shareholder. In addition
to Kanata, Ontario, the Company also leases logistics and warehouse space in
Rennes, France; Shannon, Ireland; Ogdensburg, New York; Hong Kong and Kuala
Lumpur, Malaysia.
The Company conducts research and development in leased facilities in Rennes,
France; metropolitan London, England; Herndon, Virginia; and Vancouver, British
Columbia. The Company also leases sales and support facilities throughout the
United States and Canada, and
Page 12
in over 40 locations throughout Europe, the Middle East and Africa, in over 25
locations in the Asia Pacific region, and over 10 locations in Latin America.
Item 3. LEGAL PROCEEDINGS
In the fourth quarter of fiscal 1998 the Company reached an agreement in
principle to settle the class action lawsuit which was filed in United States
District Court in Washington, D.C. during the fiscal year ended April 30, 1995.
The lawsuit purported to be a class action on behalf of a class of persons who
purchased securities of the Company between March 29 and August 1, 1994 and
alleged that the Company made false and misleading statements in violation of
United States securities law and common law. The Court entered an order and
final judgment approving the settlement and dismissing the lawsuit with
prejudice on October 23, 1998. The Company recorded the expense in connection
with the settlement of $2,642,000 in the fourth quarter of fiscal 1998
representing the direct costs incurred.
Lucent Technologies Inc. ("Lucent Technologies") filed a complaint during the
fiscal year ended April 30, 1998 in United States District Court in Delaware
against the Company and its United States subsidiary, Newbridge Networks Inc.
Lucent Technologies manufactures and sells telecommunications systems, software
and products, and is both a distributor of the Company's products and a
competitor of the Company. The Complaint alleges that the Company's manufacture
and sale, in the United States, of some of the standardized functions on the
Newbridge frame relay and ATM switch products, along with its ADPCM (adaptive
differential pulse code modulation) and card initialization implementations,
infringe certain United States patent rights claimed by Lucent Technologies. The
Complaint requests actual and trebled damages in an unspecified amount. Based
upon its present understanding of the laws in the United States and the facts,
the Company believes it has meritorious defenses to these claims. The Company
has filed an answer to the Complaint and is defending this action vigorously.
Because the outcome of the action is not certain at this time, no provision for
any liability that may result upon adjudication has been made in these
Consolidated Financial Statements.
From time to time, the Company receives notifications that it is or may be
infringing the intellectual property rights of third parties. There can be no
assurance that any such claims or potential claims will not require the Company
to enter into license agreements or result in protracted and costly litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonable terms.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 13
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
COMMON SHARE PRICE RANGE AND DIVIDENDS
Market Price
The Common Shares are listed for trading on the New York Stock Exchange in the
United States under the symbol NN and are listed for trading on The Toronto
Stock Exchange in Canada under the symbol NNC. The following table sets forth
the range of high and low sale prices for the Company's Common Shares during the
current fiscal year through June 17, 1999 and the fiscal years ended May 2, 1999
and April 30, 1998.
New York Toronto
Stock Exchange Stock Exchange
Price Range Price Range
------------------------ -----------------------
High Low High Low
---- --- ---- ---
Fiscal year 2000:
First quarter (through
June 17, 1999) US$38 US$25 /1/2/ Cdn$55.20 Cdn$37.65
Fiscal year 1999:
Fourth quarter US$39 /1/2/ US$23 /1/2/ Cdn$58.00 Cdn$35.55
Third quarter 39 /7/8/ 20 /5/16/ 60.50 31.55
Second quarter 24 /7/16/ 15 /7/16/ 37.75 23.85
First quarter 32 /3/4/ 20 /1/8/ 47.00 30.35
Fiscal year 1998:
Fourth quarter US$30 /7/16/ US$18 /15/16/ Cdn$43.20 Cdn$27.00
Third quarter 58 /7/8/ 25 /7/8/ 82.75 37.50
Second quarter 69 /3/8/ 42 /1/2/ 95.00 58.90
First quarter 52 /7/16/ 31 /1/2/ 72.20 43.80
At June 17, 1999 there were 1,206 shareholders of record of the Company.
Under the provisions of the Investment Canada Act, as amended (the "IC Act"),
the acquisition by non-Canadians, or by corporations in which non-Canadians have
a majority controlling interest, of control of a corporation incorporated in
Canada and carrying on business in Canada is subject to notification and may be
subject to review and approval in certain instances. Given the current value of
the gross assets of the Company, the IC Act requires a non-Canadian who makes an
investment to acquire control of the Company to file an application for review
and obtain an approval.
Page 14
Dividends
The Company has not paid cash dividends on its Common Shares, and it presently
intends to continue this policy for the foreseeable future in order to retain
earnings for the development of the Company's business.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The Company cautions that certain statements in this Report and in the Company's
other periodic reports filed pursuant to the United States Securities Exchange
Act of 1934, as amended (the "Exchange Act"), in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere, may be
forward-looking statements within the meaning of Section 21E of the Exchange
Act, the "safe harbor" for forward-looking statements enacted in the Private
Securities Litigation Reform Act of 1995. The forward-looking statements that
may be contained in the Company's reports under the Exchange Act and in other
oral or written statements made by the Company or by its authorized
representatives involve a number of risks and uncertainties. As a consequence,
actual results might differ materially from results forecast or suggested in
these forward-looking statements. Some of these risks and uncertainties are
identified in the discussion to follow. Additional information regarding these
factors and other important factors that could cause actual results to differ
materially may be referred to as part of particular forward-looking statements.
The forward-looking statements made by the Company or on its behalf are
qualified in their entirety by reference to the important factors discussed
below and to those that may be discussed as part of particular forward-looking
statements.
The Company cautions that the following important factors, among others, could
cause actual results for the fiscal year ending April 30, 2000 and for
subsequent financial reporting periods to differ materially from those forecast
or suggested in any forward-looking statement made by the Company or on its
behalf, in this Report or otherwise. A number of these important factors have
been discussed in this Annual Report on Form 10-K for the fiscal year ended May
2, 1999 and its quarterly reports on Form 10-Q as previously filed with the
United States Securities and Exchange Commission.
Potential Fluctuations in Quarterly Results and Growth Rate
A significant portion of the Company's sales are derived from products shipped
against orders received in each fiscal quarter and from products shipped against
firm purchase orders released in that fiscal quarter. As is prevalent in
emerging segments of the networking industry, a disproportionate amount of the
Company's shipments occur in the third month of each fiscal quarter. As a
result, the Company operates without significant backlog and schedules some
production and budgets expenses based on forecasts of sales, which are difficult
to predict. The Company's manufacturing procedures are designed to assure rapid
response to customer demand, but may, in certain circumstances, create risk of
excess or inadequate inventory if orders do not match forecast. Moreover,
shortages or delays in the supply of manufacturing components at acceptable
prices could adversely affect the Company's ability to meet scheduled product
shipments in any particular quarter, which could materially affect the Company's
operating results. Because a substantial portion of customer orders are filled
within the fiscal quarter of receipt, and because of the ability of customers to
revise or cancel orders and change delivery schedules without significant
penalty, quarter to quarter revenues and, to a greater degree, net earnings, may
be subject to greater variability. Quarterly operating results are consequently
difficult to predict, even towards the end of a given fiscal quarter. The
Page 15
Company's ability to meet financial expectations may be adversely affected if
the non-linear pattern of shipments from month to month continues.
In addition, the Company is subject to a degree of variation in quarterly sales
as a substantial portion of sales is derived from less mature markets outside of
North America and Western Europe. These markets can be more susceptible to
uncontrollable and changing factors including foreign currency exchange rates,
political or economic conditions in a specific country or region, trade
protection measures, government spending patterns, and other factors. In the
latter part of fiscal 1998, the Company's sales in the Asia Pacific region
declined. Sales in these less mature markets are also often subject to customer
financing, licensing or other import or foreign exchange controls, and other
pre-conditions that can result in requirements to ship orders only if all
components ordered are shipped at the same time ("ship-complete" requirements).
Delays in orders and the Company's ability to fulfill orders with ship-complete
requirements may cause quarter to quarter revenues and, to a greater degree, net
earnings, to be subject to greater variability and less predictability.
In recent fiscal periods, the Company has increased the proportion of revenue
derived from service providers. This market is characterized by large contracts,
although purchases against these contracts will vary from quarter to quarter.
Unforeseen delays in product deliveries or closing large sales, introductions of
new products by the Company or its competitors, seasonal or fiscal patterns of
customer capital expenditures or other conditions affecting the networking
industry in particular or the economy generally during any fiscal quarter could
cause quarterly revenue and, to a greater degree, net earnings, to vary greatly.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Manufacturing".
Technological Changes
The market for the Company's products is characterized by rapid technological
change, evolving industry standards, frequent product introductions and evolving
methods used by service providers and corporations in building and managing
networks. Such changes in the market for networking products may adversely
affect the Company's ability to sell its products. The Company's operating
results will depend in significant part upon its ability to maintain the
competitiveness of its product offerings while reducing unit manufacturing
costs. In fiscal 2000, the Company expects that the demand for networking
products will continue the trend toward ATM, IP, and other packet based
technologies and away from circuit switched networking products.
The Company cautions that its sales may grow at a slower rate in the future than
historical rates of sales growth. The growth of the Company's sales may be
subject to the rate at which service providers deploy service offerings based on
newer technologies such as ATM and IP. Although most network equipment suppliers
have introduced ATM-based product offerings and many service providers have
implemented or announced intentions to implement ATM, the degree of commercial
acceptance of ATM switching technology has not been determined. A key element of
the Company's business strategy is utilizing ATM technology in its network
solutions. Accordingly, the Company's future sales growth and results of
operations are dependent on continued growth and market acceptance of ATM
technology. In addition, quarter to quarter revenues may be subject to greater
variability due to longer sales cycles often associated with the adoption of new
technologies.
Page 16
The Company's ability to anticipate changes in technology, industry standards
and the evolution in methods of constructing and managing networks, and to
develop and introduce new and enhanced products on a timely basis that are
successful in the market, will be significant factors in the Company's
competitive position and its prospects for growth. Moreover, if technologies or
standards supported by the Company's products or service provider service
offerings based on the Company's products become obsolete or fail to gain
widespread commercial acceptance, the Company's business may be adversely
affected. As a result, Management believes that continued significant
expenditures for research and development will be required in the future.
Research and development project schedules for high technology products are
inherently difficult to predict, and there can be no assurance that the Company
will achieve its expected initial shipment dates of products in development.
Because timely availability of new and enhanced products is critical to the
success of the Company, delays in availability of these products, or lack of
market acceptance of such products, could adversely affect the Company. See
"Business".
Competition and Strategic Alliances
The market for the Company's products is also characterized by intense
competition. The Company competes for customers on the basis of product line
capabilities including integration of multiple applications onto a single
network, network and service management capabilities, ability to offer complete
end-to-end networking solutions, scalability, price, reliability, adherence to
standards, and market presence. An increase in competition could require
increased spending by the Company on research and development and sales and
marketing and may otherwise adversely affect the Company's business. Many of the
Company's competitors and potential competitors have greater financial,
technological, manufacturing, marketing, and personnel resources than the
Company.
The networking industry has been consolidating through mergers and acquisitions
thereby creating companies with larger market shares, financial resources,
customer bases, sales forces, product offerings, research and development and
marketing resources. These larger competitors typically have product lines that
address a broader spectrum of networking requirements, and have greater sales
and services resources to address the market for service providers. Increasing
competition from larger competitors may also adversely affect the Company's
business with respect to networking equipment pricing or vendor financing
packages offered to potential customers. Continued consolidation of the
networking industry could result in a strengthening of the Company's competitors
and may adversely affect the Company's competitive position. See "Business--
Competition".
The Company has an alliance with Siemens, formed to facilitate a coordinated
sales and marketing approach and reseller arrangements. There can be no
assurance that the alliance will lead to competitive products or marketing. In
addition, if this relationship fails to develop as planned, the Company's
business and operating results could be adversely affected.
Acquisitions
The Company's strategy includes acquisitions to enhance its business, diversify
its marketing and distribution, and supplement its product development.
Acquisitions involve numerous risks, including difficulties in the integration
of the operations, technologies and products of the acquired enterprises with
those of the Company, the diversion of management and financial resources to the
task of integration of the respective businesses, the entry into markets in
which
Page 17
Newbridge has limited direct prior experience and where competitors have
stronger market positions, and the potential loss of key employees of the
acquired enterprises. In view of these challenges, if the Company is unable to
integrate acquired enterprises efficiently and effectively, it may not obtain
the anticipated benefits of acquisitions, and its business and operating results
could be adversely affected. For example, the restructuring costs of
$181,444,000 incurred in fiscal 1998 were attributable largely to the operations
of Ungermann-Bass Networks, Inc. acquired in fiscal 1997. In addition,
acquisitions may affect financial results. For example, in fiscal 1998 the
Company acquired RadNet Ltd. and charged to net earnings $52,762,000 related to
the amortization of purchased research and development in process.
Dependence on Key Employees
The Company's success depends upon the continued contributions of its employees,
many of whom would be difficult to replace. Newbridge believes that its future
success will depend, in significant part, upon its ability to attract, retain
and motivate skilled and talented engineers, sales and marketing personnel, and
management. Competition for such personnel is intense. Failure to attract,
retain and motivate key employees could adversely affect the Company's business
and operating results.
In June 1998 the Company appointed a new President and Chief Operating Officer.
Over the year following the appointment there have been a number of additional
changes in senior management. There are risks inherent in any reorganization,
and the Company can give no assurances that these recent appointments will
ensure that the Company achieves its objectives.
Market Price Volatility of Common Shares
The Company's Common Shares have been subject to substantial market price
volatility, some of which has occurred when there have been variations between
the Company's actual or anticipated financial results and the published
expectations of investment analysts and in the aftermath of public announcements
by the Company and its competitors. In addition, the stock market has
experienced extreme price and volume fluctuations from time to time which have
affected the market price of many technology companies in particular and which
have often been unrelated to the operating performance of these companies. These
broad market fluctuations, as well as general economic and political conditions,
may adversely affect the market price of the Company's Common Shares. Because of
the Company's reliance on stock options as an incentive to its employees,
changes in the market price of the Company's Common Shares could adversely
affect the Company's ability to attract and retain key employees.
Regulation
The sale of networking products may be affected by government regulatory
policies, the imposition of service provider tariffs, and taxation of
telecommunications services, which may also affect the availability of high
capacity digital transmission lines. These policies are under continuous review
and are subject to change. In the United States, regulatory policies are likely
to have a significant impact on the competitive environment in which the Company
operates. The Telecommunications Act of 1996 and associated regulatory
developments is affecting many regulatory restrictions in the telecommunications
market. Deregulation is stimulating increasingly competitive offerings by
communications service providers. In addition, the RBOCs are now permitted to
manufacture and sell telecommunications equipment under certain conditions.
Given the substantial resources and large customer base of the RBOCs,
Page 18
Newbridge could face competition from these companies should they satisfy these
conditions and elect to manufacture networking products. Notwithstanding the
deregulatory process in the United States and elsewhere, government regulatory
authorities have established regulations which, among other things, set
installation and equipment standards for private telecommunications systems and
require that all newly installed hardware be registered and meet certain
government standards. Service providers also establish standards for
interconnection and integration of network equipment with public switched
telephone networks. Although the Company designs its products to comply with
international standards, to the extent those standards are changed or if the
Company is unable to manufacture standards compliant products on a cost
effective basis, the Company's business may be adversely affected. See
"Business -- Government Regulation" and "Networking Industry".
Proprietary Rights
The Company protects its trademarks, inventions, trade secrets, and other
proprietary rights by contract, trademark registration, patent registration and
appropriate trademark and copyright markings, as well as with internal security.
The Company licenses certain intellectual property rights from third parties.
There can be no assurance that the steps taken by the Company to protect its
intellectual property rights will be adequate to prevent misappropriation of its
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. In addition, some foreign countries do not have or enforce laws that
protect the Company's intellectual property rights to the same extent as do the
laws of the United States and Canada.
The Company is subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. From time to time
the Company has received claims of infringement of other parties' proprietary
rights, and has been sued by Lucent Technologies as described in "Legal
Proceedings". There can be no assurance that third parties will not assert
infringement claims in the future with respect to the Company's current or
future products or that any such claims will not require the Company to enter
into license agreements or result in protracted and costly litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonable terms.
Foreign Currency Exposure and Concentration of Credit Risk
Because substantial portions of the Company's sales, cost of sales and other
expenses are denominated in U.S. dollars and Pounds Sterling, the Company's
results of operations are subject to change based on fluctuations in the rates
of exchange of those currencies for the Canadian dollar. The Company uses
financial instruments, principally forward exchange contracts, in its management
of foreign currency exposures. Realized and unrealized gains and losses on
foreign exchange contracts are recognized and offset foreign exchange gains and
losses on the underlying net asset or net liability position. These contracts
primarily require the Company to purchase and sell certain foreign currencies
with or for Canadian dollars at contractual rates. Several major financial
institutions are counterparties to the Company's financial instruments. It is
Company practice to monitor the financial standing of the counterparties and
limit the amount of exposure to any one institution. The Company may be exposed
to a credit loss in the event of nonperformance by the counterparties to these
contracts. With respect to accounts receivable, concentration of credit risk is
limited due to the diverse areas covered by the Company's operations. The
Company has credit evaluation, approval and monitoring processes intended to
mitigate potential credit risks. Anticipated bad debt loss has
Page 19
been provided for in the allowance for doubtful accounts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Quantitative and Qualitative Disclosures About Market Risks".
Other Factors
The Company further cautions that the factors referred to above and those
referred to as part of particular forward-looking statements may not be
exhaustive, and that new risk factors emerge from time to time in its rapidly
changing business. The Company does not undertake to update any forward-looking
statements it may make or has made on its behalf to reflect changes in its
expectations or assumptions or the risks and uncertainties referred to.
CERTAIN TAX CONSIDERATIONS
The following discussion outlines Canadian and United States federal income tax
consequences of ownership of the Company's Common Shares that could be relevant
for persons who are not residents of Canada.
Gains on Disposition of Common Shares
Under the provisions of the 1980 Convention between Canada and the United States
with respect to Taxes on Income and on Capital, as amended by the 1983, 1984,
1995 and 1997 Protocols thereto (the "Convention"), United States corporations
or individual residents of the United States ("U.S. Shareholders") that do not,
and are not deemed to, use or hold the Common Shares in carrying on a business
in Canada ("Unconnected U.S. Shareholders") generally will not be subject to
Canadian federal income tax on any capital gain recognized upon the disposition
of their Common Shares, provided that the value of the Common Shares is not
derived principally from real property situated in Canada, as determined at the
time of their disposition. The Company is of the view that the Common Shares
currently do not derive their value principally from such real property.
For United States federal income tax purposes, an Unconnected U.S. Shareholder
generally will recognize a capital gain or loss on the disposition of Common
Shares in an amount equal to the difference between the amount realized upon the
disposition and the U.S. Shareholder's adjusted basis in the Common Shares.
Capital losses are deductible to the extent of capital gains and, in the case of
non-corporate U.S. Shareholders, may be used to offset up to US$3,000 of
ordinary income (US$1,500 in the case of married individuals filing separately).
Taxation of Dividends
Dividends paid to Unconnected U.S. Shareholders owning less than 10% of the
voting shares of the Company generally are subject to Canadian withholding tax
at the reduced rate of 15% under the Convention. In the case of a corporate
Unconnected U.S. Shareholder owning 10% or more of such shares, the withholding
tax rate generally is reduced to 5% under the Convention.
Unconnected U.S. Shareholders generally will treat the gross amount of dividends
paid by the Company, without reduction for Canadian withholding taxes, as
ordinary taxable income for United States federal income tax purposes. In
certain circumstances, however, Unconnected U.S. Shareholders may be eligible to
receive a foreign tax credit for such taxes and, in the case of a corporate
Unconnected U.S. Shareholder owning 10% or more of the voting shares of the
Company, for a portion of the Canadian taxes paid by the Company itself.
Dividends paid by the Company to United States corporations will not, however,
give rise to the dividends
Page 20
received deduction generally allowed those corporations under United States
federal income tax law.
Item 6. Selected Financial Data
The income statement data of the Company presented below for each of the five
fiscal years ended May 2, 1999 and the balance sheet data as at fiscal year end
dates in 1999, 1998, 1997, 1996 and 1995 have been derived from the audited
Consolidated Financial Statements of the Company that are included as part of
this Annual Report on Form 10-K and the Company's Annual Reports on Form 10-K
for the prior three fiscal years.
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report on Form 10-K.
Fiscal Year Ended
----------------------------------------------------------------
May 2, April 30, April 30, April 30, April 30,
1999 1998 1997 1996 1995
(Canadian dollars, in thousands, except per share data)
Income Statement Data:
Sales $1,790,705 $1,620,620 $1,376,727 $ 921,244 $ 800,523
Cost of sales 751,874 625,065 507,588 319,745 260,471
---------- ---------- ---------- ---------- ---------
Gross margin 1,038,831 995,555 869,139 601,499 540,052
Expenses
Selling, general and administrative 531,308 494,429 346,106 231,060 196,073
Research and development 264,421 258,879 155,330 97,205 66,066
Restructuring costs /(1)/ 118,030 181,444 -- -- --
Purchased research and
development in process /(2)/ -- 52,762 96,940 -- --
---------- ---------- ---------- ---------- ---------
Income from operations 125,072 8,041 270,763 273,234 277,913
Interest income, net 8,121 9,761 18,605 22,607 15,952
Net gain on investments /(3)/ 188,726 50,401 (1,564) 12,715 --
Other expenses (20,802) (12,889) (8,051) (3,443) (6,512)
---------- ---------- ---------- ---------- ---------
Earnings before income taxes
and non-controlling interest 301,117 55,314 279,753 305,113 287,353
Provision for income taxes 121,303 73,001 117,718 100,779 96,944
Non-controlling interest 653 631 5,118 1,470 2,019
---------- ---------- ---------- ---------- ---------
Net earnings (loss) /(4)/ $ 179,161 $ (18,318) $ 156,917 $ 202,864 $ 188,390
========== ========== ========== ========== =========
Earnings (loss) per share
Basic $ 1.01 $ (0.10) $ 0.92 $ 1.22 $ 1.16
Fully diluted $ 1.01 $ (0.10) $ 0.91 $ 1.19 $ 1.11
Weighted average number of shares
Basic 177,630 174,617 170,510 165,842 162,891
Fully diluted 177,630 174,617 184,595 179,665 175,823
Page 21
Fiscal Year Ended
---------------------------------------------------------------
May 2, April 30, April 30, April 30, April 30,
1999 1998 1997 1996 1995
(Canadian dollars, in thousands, except per share data)
Income Statement Data (continued):
U.S. GAAP /(5)/
Net earnings (loss) $179,161 $(18,318) $156,917 $202,864 $188,390
Earnings (loss) per share
Basic $1.01 $(0.10) $0.92 $1.22 $1.16
Diluted $0.99 $(0.10) $0.90 $1.19 $1.13
Diluted-- US US$0.66 US$(0.07) US$0.66 US$0.87 US$0.82
Weighted average number of shares
Basic 177,630 174,617 170,510 165,842 162,891
Diluted 180,376 174,617 174,525 170,990 166,646
May 2, April 30, April 30, April 30, April 30,
1999 1998 1997 1996 1995
(Canadian dollars in thousands)
Balance Sheet Data:
Working capital $1,243,991 $ 945,892 $ 638,392 $ 658,087 $ 491,888
Total assets 2,470,624 1,966,825 1,496,703 1,093,417 827,163
Short term debt (including current
portion of long term obligations) 2,869 4,136 7,353 2,302 2,562
Long term obligations 384,021 383,311 10,817 860 3,493
Shareholders' equity 1,529,219 1,233,620 1,126,499 902,686 674,645
- -----------
(1) See Note 14 to the Consolidated Financial Statements.
(2) See Note 15 to the Consolidated Financial Statements.
(3) See Note 16 to the Consolidated Financial Statements.
(4) Pro forma net earnings, which exclude net gain on investments and non-
recurring charges, relating primarily restructuring costs and purchased
research and development, for the periods presented are disclosed in the
"Net Earnings (Loss)" section of "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
(5) Financial information in this Annual Report on Form 10-K is presented in
accordance with accounting principles generally accepted in Canada
("Canadian GAAP"), which also conform in all material respects with
accounting principles generally accepted in the United States ("U.S.
GAAP"), except for the disclosure of certain cash equivalents on the
Consolidated Balance Sheets and investing activities on the Consolidated
Statements of Cash Flows, as disclosed in Note 2, the write off of
purchased research and development in process, as disclosed in Note 15, and
the method of calculation of earnings per share, as disclosed in Note 18.
Page 22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain parts of the following discussion and analysis may be forward-looking
statements that involve a number of risks and uncertainties. As a consequence,
actual results might differ materially from results forecast or suggested in any
forward-looking statements. See "Market for Registrant's Common Equity and
Related Stockholder Matters -- Cautionary Statement Regarding Forward-Looking
Information".
Results of Operations
The following table sets forth, for the fiscal years indicated, the percentage
of sales represented by certain items in the Company's Consolidated Statements
of Earnings.
Fiscal Year Ended
-----------------------------------
May 2, April 30, April 30,
1999 1998 1997
Sales 100.0% 100.0% 100.0%
Cost of sales 42.0 38.6 36.9
----- ----- -----
Gross margin 58.0 61.4 63.1
Expenses
Selling, general and administrative 29.7 30.5 25.1
Research and development 14.7 16.0 11.3
Restructuring costs 6.6 11.2 --
Purchased research and
development in process -- 3.2 7.0
----- ----- -----
Income from operations 7.0 0.5 19.7
Interest income, net 0.5 0.6 1.3
Net gain on investments 10.5 3.0 --
Other expenses (1.2) (0.7) (0.7)
----- ----- -----
Earnings before income taxes
and non-controlling interest 16.8 3.4 20.3
Provision for income taxes 6.8 4.5 8.5
Non-controlling interest 0.0 0.0 0.4
----- ----- -----
Net earnings (loss) 10.0% (1.1)% 11.4%
===== ===== =====
Page 23
Sales
Fiscal Year Ended
------------------------------------
May 2, April 30, April 30,
1999 1998 1997
(Canadian dollars in thousands)
Sales $1,790,705 $1,620,620 $1,376,727
========== ========== ==========
Increase over prior year 10% 18% 49%
Sales grew in fiscal 1999 compared to fiscal 1998 due to increased sales volume
of products based on packet technologies for wide area network applications (WAN
Packet products) offset in part by a decline in revenues from products based on
packet technologies for local area network applications (LAN Packet products).
Sales grew in fiscal 1998 compared to fiscal 1997 due to increased sales volume
of both WAN Packet and LAN Packet products, offset in part by a decline in sales
of circuit switched networking products.
The following table illustrates, for the periods indicated, the percentage of
sales that comprise each of the Company's major product lines.
Fiscal Year Ended
-------------------------------
May 2, April 30, April 30,
1999 1998 1997
WAN Packet products 59% 46% 33%
Circuit switched networking products 38 41 57
LAN Packet products 3 13 10
--- --- ---
100% 100% 100%
=== === ===
The following table illustrates, for the periods indicated, the annual sales
growth rates for each of the Company's major product lines.
Fiscal Year Ended
-------------------------------
May 2, April 30, April 30,
1999 1998 1997
WAN Packet 43% 62% 98%
Circuit switched networking 2 -15 20
LAN Packet -78 56 673
Growth in sales of WAN Packet products was predominantly the result of increased
acceptance and demand by service providers throughout the world for the
Company's asynchronous transfer mode (ATM) products.
Sales of circuit switched networking products have been and are expected to be
subject to potential declines and quarterly variability as customers throughout
the world increasingly adopt packet technologies.
LAN Packet product revenues declined in fiscal 1999 relative to fiscal 1998 as a
result of sharp decreases in revenue derived from products associated with the
former Ungermann-Bass Networks Inc. ("UB") organization, which the Company
acquired in January 1997. The
Page 24
Company restructured its activities in the LAN business, including the former
UB, in the third quarter of fiscal 1998 and instituted an end of life program in
the second quarter of fiscal 1999 to discontinue the sale and development of LAN
Layer 2 Switching products. In fiscal 1998 and in fiscal 1997 LAN Packet product
revenues increased, mainly as a result of the purchase of UB.
The Company expects the proportion of sales derived from WAN Packet products to
continue to increase relative to sales derived from circuit switched networking
products in fiscal 2000 when compared to fiscal 1999. Sales growth, however, may
be impeded due to longer sales cycles often associated with the adoption of
newer, less established technologies.
The Company sells its products to service providers for applications that
provide a range of value-added services, such as Virtual Private Networks
(VPNs), wide area network support and Internet access, and for resale to end
users. Deliveries to original equipment manufacturers (OEMs) for service
provider customers and deliveries under certain large contracts with service
providers contributed significantly to sales in fiscal 1999, fiscal 1998 and
fiscal 1997. Sales to Siemens AG and subsidiaries were generally under OEM
arrangements for resale to end users. Sales to service providers and enterprises
as a percentage of total sales and the proportion of sales to Siemens AG were as
follows.
Fiscal Year Ended
-------------------------------
May 2, April 30, April 30,
1999 1998 1997
Service providers 75% 69% 66%
Enterprises 25 31 34
--- --- ---
100% 100% 100%
=== === ===
Sales to Siemens A.G. 18% 16% 18%
=== === ===
The proportion of revenue derived from service providers in fiscal 1999
increased relative to fiscal 1998 due to the decline in revenues of former UB
Networks products, which largely serve enterprise customers. The proportion of
revenue derived from service providers in fiscal 1998 increased relative to
fiscal 1997 primarily as a result of increased acceptance and demand by service
providers for the Company's WAN Packet products.
The following table sets forth, for the periods indicated, the percentage of
consolidated sales derived by sales management in each of the principal
geographic regions in which the Company operates.
Fiscal Year Ended
------------------------------
May 2, April 30, April 30,
1999 1998 1997
Americas Region 51% 51% 49%
European Region 35% 31% 33%
Asia Pacific Region 14% 18% 18%
Sales increased in fiscal 1999 relative to fiscal 1998 in both the Americas
Region and the European Region, although sales decreased in the Asia Pacific
Region during the same period as a result of a downturn in economic activity in
that region. For additional geographic segment information, see Note 20 to the
Consolidated Financial Statements.
Page 25
Because substantial portions of the Company's sales, cost of sales and other
expenses are denominated in U.S. dollars and Pounds Sterling, the Company's
results of operations are subject to change based on fluctuations in the rates
of exchange of those currencies for the Canadian dollar. The decrease in
exchange rates of the Canadian dollar for the Pound Sterling and the U.S. dollar
during fiscal 1999, relative to exchange rates during fiscal 1998, resulted in a
6% or $91,248,000 positive variance in reported sales as compared to fiscal
1998. The decrease in exchange rates of the Canadian dollar for the Pound
Sterling and the U.S. dollar during fiscal 1998, relative to exchange rates
during fiscal 1997, resulted in a 7% or $95,736,000 positive variance in
reported sales as compared to fiscal 1997. As substantial portions of the
Company's cost of sales and other expenses are also incurred in U.S. dollars and
Pounds Sterling, the variations in rates of exchange did not result in a
material variance in net earnings for fiscal 1999, fiscal 1998 or fiscal 1997.
For information related to the Company's policies in its management of foreign
exchange exposures, see "Quantitative and Qualitative Disclosures About Market
Risk" and Note 10 to the Consolidated Financial Statements.
The Company derives a significant portion of its sales from products shipped
against orders received in each fiscal quarter and from products shipped against
firm purchase orders released in that fiscal quarter. As is prevalent in
emerging segments of the networking industry, a disproportionate amount of the
Company's shipments occur in the third month of each fiscal quarter. In
addition, customers have the ability to revise or cancel orders and change
delivery schedules without significant penalty. As a result, the Company
operates without significant backlog and schedules some production and budgets
expenses based on forecasts of sales, which are difficult to predict. Unforeseen
delays in product deliveries or closing large sales, introductions of new
products by the Company or its competitors, seasonal patterns of customer
capital expenditures or other conditions affecting the networking industry in
particular or the economy generally during any fiscal quarter could cause
quarterly revenue and, to a greater degree, net earnings, to vary greatly.
Quarterly operating results are consequently difficult to predict, even towards
the end of a given fiscal quarter.
The Company may become subject to sales fluctuations toward the end of calendar
1999 as the issue of Year 2000 date compliance may influence customer buying
patterns. Sales mix shifts may occur due to customers limiting their purchases
of networking equipment to products that they have already tested for Year 2000
Compliance within their networks, which would shift sales mix away from emerging
product offerings and software upgrades. Sales declines could result if
customers decide to delay expansion of their networks to after January 1, 2000.
The majority of the Company's current product offerings have Year 2000 Compliant
versions available and all emerging offerings are designed to be Year 2000
Compliant, so the Company does not anticipate significant sales fluctuations
associated with Year 2000 date compliance. The Company will have a better
indication of potential fluctuations in the second half of calendar 1999. Refer
to the "Year 2000 Date Compliance" section of this report for a summary of the
Company's program for ensuring that all of its products are Year 2000 date
compliant.
Page 26
Cost of Sales and Gross Margin
Fiscal Year Ended
-----------------------------------
May 2, April 30, April 30,
1999 1998 1997
(Canadian dollars in thousands)
Gross margin $1,038,831 $995,555 $869,139
========== ======== ========
As a percentage of sales 58% 61% 63%
Cost of sales consists of manufacturing costs, warranty expense and costs
associated with the provision of services. The gross margin as a percentage of
sales declined in fiscal 1999 relative to fiscal 1998 due to the continuing
shift in the mix of sales from higher gross margin circuit switched networking
products to lower margin WAN Packet products. In addition, the gross margin,
expressed as a percentage of sales, was negatively impacted by lower average
selling prices as the Company experienced increased competition on product
pricing, particularly in the market for products based on packet technologies.
The decline in the gross margin as a percentage of sales in fiscal 1998 relative
to fiscal 1997 was primarily the result of the decline in revenues from circuit
switched networking products, which carried gross margins above the average
gross margins earned on the Company's other products.
The impact on product pricing of increased competition, particularly in the
market for products based on packet technologies, may constrain the Company's
ability to maintain gross margins with reductions in per unit costs. As a
result, the gross margin as a percentage of sales may deteriorate in fiscal 2000
compared to fiscal 1999.
Selling, General and Administrative Expenses
Fiscal Year Ended
---------------------------------
May 2, April 30, April 30,
1999 1998 1997
(Canadian dollars in thousands)
Selling, general and administrative expenses $531,308 $494,429 $346,106
======== ======== ========
As a percentage of sales 30% 31% 25%
Increase over prior year 7% 43% 50%
Selling, general and administrative expenses increased in fiscal 1999 relative
fiscal 1998 principally as a result of increased remuneration costs associated
with salary increases and the addition of sales, marketing and technical support
personnel. Other increases in fiscal 1999 relative to fiscal 1998 included
amortization costs associated with upgrading information technology
infrastructure, and increased marketing costs related to the introduction of new
products and expanded advertising programs.
Page 27
The decrease in selling, general and administrative expenses as a percentage of
sales in fiscal 1999 relative to fiscal 1998 resulted from the lower percentage
increase in expenditures as compared to the larger percentage increase in
revenues over the same period. Management anticipates that selling, general and
administrative expenses as a percentage of sales will continue to decline in
fiscal 2000 relative to fiscal 1999.
The increase in selling, general and administrative expenses as a percentage of
sales in fiscal 1998 over fiscal 1997 reflects the higher cost structure of
companies acquired during fiscal 1997 and the impact of sequential sales
declines in the first three quarters of fiscal 1998.
Research and Development
Fiscal Year Ended
--------------------------------
May 2, April 30, April 30,
1999 1998 1997
(Canadian dollars in thousands)
Gross research and development expenditures $339,844 $305,357 $195,229
Investment tax credits 37,846 34,971 26,400
Customer, government and other funding 30,013 5,507 9,484
Net deferral (amortization) of
software development costs 7,564 6,000 4,015
-------- -------- --------
Net research and development expenses $264,421 $258,879 $155,330
======== ======== ========
Gross expenditures as a percentage of sales 19% 19% 14%
Increase in gross expenditures over prior year 11% 56% 49%
Recoveries as a percentage of gross expenditures 22% 15% 20%
Net research and development
expenses as a percentage of sales 15% 16% 11%
Increase in net expenditures over prior year 2% 67% 60%
Research and development expenditures consist primarily of software and hardware
engineering personnel expenses, costs associated with equipment and facilities,
and subcontracted research and development costs. The sequential increases in
gross research and development expenditures in fiscal 1999 and fiscal 1998
reflect spending on the development of higher and lower capacity ATM switches
and interfaces, development of switches, forwarding engines, interfaces and
services for IP traffic, and related network management and service software.
The majority of the increase resulted from salary increases for engineering
staff and increased amortization associated with capital deployed in research
and development.
Recoveries increased as a percentage of gross expenditures in fiscal 1999
compared to fiscal 1998 due to an increase in customer, government and other
funding. The increase in customer, government and other funding is mainly as a
result of funding secured for the Company's broadband wireless access product
initiative, as described in Note 13 to the Consolidated Financial Statements.
Management expects the level of recoveries, as a percentage of gross research
and development expenditures, in fiscal 2000 to approximate or exceed the level
in
Page 28
fiscal 1999 based on current levels of committed customer, government and other
funding relative to planned spending levels.
Recoveries decreased as a percentage of gross expenditures in fiscal 1998
compared to fiscal 1997 due to declines in investment tax credits and in
customer, government and other funding as a proportion of gross research and
development expenditures.
The markets for the Company's products are characterized by continuing
technological change. The Company plans to increase gross research and
development expenditures in fiscal 2000 relative to fiscal 1999 to address the
requirements of service providers as they invest in new infrastructures to meet
the challenges of growing demand for new communications services and increased
competition.
Restructuring Costs
Restructuring costs are comprised of the following.
Fiscal Year Ended
------------------------------
May 2, April 30, April 30,
1999 1998 1997
Restructuring programs, April 1999 $ 73,570 $ -- $ --
Layer 2 Switching End of Life 37,928 -- --
Asia Pacific Resources Relocation 6,532 -- --
LAN business restructuring, November 1997 -- 181,444 --
-------- -------- --------
$118,030 $181,444 $ --
======== ======== ========
In April 1999, the Company decided to streamline the operations of regional
sales and support organizations as well as its marketing and product development
organizations. The restructuring costs associated with the sales, support and
marketing organizations ("Sales and Marketing") consisted primarily of costs
related to workforce and facilities reductions, as the Company has announced a
reduction in the number of locations in which it will have a physical presence
in favour of distributors in certain markets, and subcontractors for certain
functions. Restructuring costs associated with product development relate
primarily to asset impairment losses related to the capping, discontinuation or
divestiture of the development of certain products, and the centralization of
development laboratories to make the development process more efficient.
Restructuring costs of $73,570,000 comprise the following:
Sales and Product
Marketing Development Total
Asset impairment losses
Inventory $ 2,606 $ 8,994 $11,600
Property, plant and equipment 6,576 29,104 35,680
Other current and non-current assets 568 2,249 2,817
------- ------- -------
9,750 40,347 50,097
------- ------- -------
Provision for restructuring
Reduction in work force 14,595 427 15,022
Reduction in facilities 6,627 -- 6,627
Other restructuring costs 1,653 171 1,824
------- ------- -------
22,875 598 23,473
------- ------- -------
Restructuring costs $32,625 $40,945 $73,570
======= ======= =======
Page 29
All of the amounts listed in the provision for restructuring are reflected in
accrued liabilities as at May 2, 1999.
The provision for the reduction in work force includes severance, related
medical and other benefits, and other obligations to employees. The provision
includes termination benefits for approximately 200 employees. The work force
reductions will occur in Japan, Russia and various other countries. The Company
anticipates that these work force reductions will be substantially completed in
the first half of fiscal 2000.
The provision for the reduction in facilities comprises primarily lease payments
and fixed costs associated with the closure of sales, support and administrative
facilities in Europe, Japan and the United States. The Company expects to
complete these facilities closures in the first half of fiscal 2000.
The provision for other restructuring costs comprises professional fees and
other various direct incremental costs associated with the restructuring plan.
In October 1998, the Company decided to discontinue the sale and development of
local area network (LAN) Layer 2 Switching products as part of the enhancement
of the focus on the Company's dominant and more profitable products. This
program, substantially complete at the end of fiscal 1999, created impairment
losses associated with certain assets deployed in this business and obligations
related to fulfilling previous customer commitments.
In October 1998, the Company commenced relocating certain employees and
activities that support the Asia Pacific region from Kanata, Ontario to Hong
Kong and Malaysia in order to provide more efficient and cost effective services
to customers in that region. The charge of $6,532,000 incurred in October 1998
reflects the accrual of involuntary termination benefits, lease cancellation
penalties and other direct costs associated with the transition. As at May 2,
1999, $1,215,000 of these costs had been incurred. Additional costs related to
the transfer of personnel and equipment, the recruitment of new staff and the
expansion of facilities in Hong Kong are being expensed as incurred. These
additional costs, estimated at $9,000,000, were not significant in fiscal 1999
with the majority of the costs to be incurred during the first two quarters of
fiscal 2000.
In November 1997, the Company restructured its activities relating to its LAN
business. The restructuring plan involved the formation of an alliance with a
company strongly positioned in the LAN business, and the reduction of the
Company's direct participation, and related costs, in the LAN business. In
repositioning the way in which the Company addressed the LAN market, the
restructuring plan created impairment losses on certain assets associated with
the LAN business and liabilities associated with restructuring activities.
Accordingly, the Company recognized restructuring costs of $181,444,000 in the
third quarter of fiscal 1998. The restructuring plan is completed.
Purchased Research and Development In Process
In November 1997, the Company acquired a 49.9% equity interest in RadNet Ltd.,
an Israeli developer and manufacturer of access switches for ATM networks, for
cash consideration of $53,676,000. The majority of the purchase price
($52,762,000) was allocated to purchased research and development in process.
Under accounting principles generally accepted in Canada, the
Page 30
purchased research and development in process was amortized on a straight line
basis over its estimated useful life of six months. Accordingly, the Company
recorded amortization of $52,762,000 in fiscal 1998.
The Company capitalized purchased research and development in process of
$96,940,000 in fiscal 1997 related to the acquisition of UB Networks. The
Company reviewed the recoverability of the purchased research and development in
process during the fourth quarter of the fiscal 1997, and determined that it no
longer met all the criteria for deferral, which resulted in the balance being
written off as a charge to net earnings.
Interest and Other Expenses
Fiscal Year Ended
---------------------------------
May 2, April 30, April 30,
1999 1998 1997
(Canadian dollars in thousands)
Interest income $34,248 $11,581 $19,956
Interest expense on long term obligations 26,127 1,820 1,351
Other expenses 20,802 10,448 9,615
Interest income earned in fiscal 1999 increased as compared to fiscal 1998 due
to an increase in the average cash position maintained by the Company. The
primary contributors to the increase in the cash position were proceeds received
from the sale of long term investments and proceeds from the issuance of Senior
Notes in April 1998. Interest income earned in fiscal 1998 decreased as compared
to fiscal 1997 due to declines in the cash position maintained by the Company
and due to declines in interest rates earned on investments. Interest expense on
long term obligations increased in fiscal 1999 relative to fiscal 1998 and
fiscal 1997 primarily due to the issuance of US$225,000,000 in Senior Notes in
April 1998. Other expenses increased in fiscal 1999 relative to fiscal 1998 and
fiscal 1997 primarily as a result of the Company's equity share of its affiliate
companies losses.
Page 31
Net Gain on Investments
Fiscal Year Ended
---------------------------------
May 2, April 30, April 30,
1999 1998 1997
(Canadian dollars in thousands)
Cambrian Systems Corporation $131,748 $ -- $ --
Advanced Computer Communications 128,336 -- --
Vienna Systems Corporation 15,846 -- --
Tundra Semiconductor Corporation 11,748 -- --
Broadband Networks Inc. -- 47,960 --
West End Systems Corp. (33,521) -- --
Other divestitures -- 6,528 --
Investment impairment write downs (65,431) (4,087) (1,564)
-------- ------- -------
$188,726 $50,401 $(1,564)
======== ======= =======
In December 1998, the Company sold its minority ownership position in Cambrian
Systems Corporation ("Cambrian") to Northern Telecom Limited ("Nortel") for cash
proceeds of US$95,674,000 (Cdn$147,158,000). The proceeds include an earn-out
payment of US$1,935,000 (Cdn$2,855,000) received by the Company as a result of
certain specified financial performance targets being met by Cambrian. The
proceeds exclude future potential earn-out payments of approximately
US$21,000,000 which will be received by the Company if certain specified
financial performance targets are met by Cambrian.
In October 1998, the Company completed the sale of its majority ownership
position in Advanced Computer Communications ("ACC") to Telefonaktiebolaget LM
Ericsson for cash proceeds of US$167,319,000 (Cdn$258,308,000). ACC's results of
operations were consolidated with the Company's results for the first six months
of fiscal 1999 ended November 1, 1998. The results of operations and the
financial position of ACC were not significant relative to the Company's
consolidated results of operations and financial position for all periods
presented.
In December 1998, the Company sold its minority ownership position in Vienna
Systems Corporation to Nokia Corporation for cash proceeds of $39,716,000.
In February 1999, the Company sold a portion of its minority ownership position
in Tundra Semiconductor Corporation for cash proceeds of $19,498,000 as part of
an initial and secondary share offering by Tundra.
In January 1998, the Company sold its minority interest in Broadband Networks
Inc. to Nortel for proceeds of $66,672,000. The proceeds received included cash
of $23,775,000 and Nortel shares valued at $42,897,000.
On February 10, 1999 West End Systems Corp., a manufacturer of access and
transmission products for the communications and cable television industries,
filed an assignment in bankruptcy under the Canadian Bankruptcy and Insolvency
Act. As a result, the Company recorded losses related to the Company's minority
ownership position in West End Systems Corp. and unsecured trade accounts
outstanding.
The Company evaluates, on an ongoing basis, the value of its long term
investments considering the evolution of the market segments of investee
companies, any impact of
Page 32
deteriorating economic conditions in various countries, and any other specific
information which indicates impairment of value of these investments. In fiscal
1999, the financial performance of certain investee companies as well as
deteriorating economic conditions in Brazil and Russia led to investment
impairment write downs of $65,431,000.
Income Taxes
Fiscal Year Ended
-------------------------------
May 2, April 30, April 30,
1999 1998 1997
Income tax rate 40% 132% 42%
Income tax rate excluding
non-recurring gains and charges 30% 30% 31%
The income tax rates for fiscal 1999, fiscal 1998 and fiscal 1997 differ from
the income tax rates, excluding non-recurring gains and charges, due to limits
on the deductibility of certain elements of restructuring costs recorded in
fiscal 1999 and fiscal 1998 and purchased research and development in process
recorded in fiscal 1998 and fiscal 1997. The composite rates of income tax,
excluding non-recurring gains and charges, for fiscal 1999, 1998 and 1997 were
reduced from the statutory rate primarily as a result of the application of
certain deductions related to manufacturing and processing activities and to
research and development expenditures in Canada. Future changes in the composite
rates of income tax will be primarily due to the relative profitability of
operations and the national tax policies in each of the various countries in
which the Company operates. Management believes that the composite rate of
income tax, excluding non-recurring gains and charges, will remain lower than
the statutory rate because of the deductibility related to manufacturing and
processing activities and research and development expenditures in Canada as
well as other tax planning measures undertaken by the Company. See Note 17 to
the Consolidated Financial Statements.
Non-Controlling Interest
The non-controlling interests' share of net earnings in fiscal 1999, fiscal 1998
and fiscal 1997 represented less than 1% of the Company's sales in fiscal 1999,
fiscal 1998 and fiscal 1997. The non-controlling interests' share of net
earnings in fiscal 1997 of $5,118,000 related primarily to profits from the
operations of Transistemas S.A., an Argentine systems integrator of networking
products. As at May 2, 1999 there are non-controlling interests in three of the
Company's subsidiaries. All three of these subsidiaries are systems integrators
of networking products in Latin America.
Page 33
Net Earnings (Loss)
Fiscal Year Ended
-------------------------------
May 2, April 30, April 30,
1999 1998 1997
(Canadian dollars in thousands)
Net earnings (loss) $ 179,161 $(18,318) $156,917
Non-recurring gains and charges
Restructuring costs 118,030 181,444 --
Purchased research and
development in process -- 52,762 96,940
Settlement of litigation/(1)/ -- 2,642 --
Net gain on investments (188,726) (50,401) 1,564
Provision for income taxes on
non-recurring gains and charges 53,329 767 --
--------- -------- --------
Pro forma net earnings, excluding
non-recurring gains and charges $ 161,794 $168,896 $255,421
========= ======== ========
Pro forma net earnings, excluding non-recurring
gains and charges, as a percent of sales 9% 10% 19%
Pro forma net earnings, excluding non-recurring
gains and charges, per share
Canadian GAAP
Basic $ 0.91 $ 0.97 $ 1.50
Fully diluted $ 0.91 $ 0.97 $ 1.45
U.S. GAAP
Basic $ 0.91 $ 0.97 $ 1.50
Diluted $ 0.90 $ 0.95 $ 1.46
Diluted - US US$ 0.59 US$ 0.68 US$ 1.07
(1) Included within selling, general and administrative expenses on the
Consolidated Statement of Earnings.
Page 34
A reconciliation of the major components of the change in net earnings, as
compared to the prior fiscal year, for each of the fiscal years reported is as
follows.
Fiscal Year Ended
-------------------------------
May 2, April 30, April 30,
1999 1998 1997
(Canadian dollars in thousands)
Gross margin from sales increase $104,484 $153,972 $297,394
(Decrease) in product gross margins
as a percentage of sales (61,208) (27,556) (29,754)
(Increase) in operating expenses (45,063) (249,230) (173,171)
(Increase) in interest and other expenses, net (11,994) (9,677) (10,174)
Decrease (increase) in income taxes on
pro forma net earnings 4,260 45,484 (21,136)
(Increase) decrease in non-controlling interest (22) 4,487 (3,648)
-------- -------- --------
(Decrease) increase in pro forma net earnings (9,543) (82,520) 59,511
Change in non-recurring gains and charges,
net of income taxes 207,022 (92,715) (105,458)
-------- --------
Increase (decrease) in net earnings 197,479 (175,235) (45,947)
Net earnings (loss) in prior year (18,318) 156,917 202,864
-------- -------- --------
Net earnings (loss) $179,161 $(18,318) $156,917
======== ======== ========
Reconciliation of Financial Results to United States Accounting Principles
The Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP"). These
principles are also generally accepted in the United States ("U.S. GAAP") in all
material respects except for the disclosure of certain cash equivalents on the
Consolidated Balance Sheets and investing activities on the Consolidated
Statements of Cash Flows, as disclosed in Note 2, the write off of purchased in
process research and development, as disclosed in Note 15, and the method of
calculation of earnings per share, as disclosed in Note 18. Other than the
accounting treatment associated with any future acquisitions or mergers, the
Company expects that the differences in future years will not be significant.
Page 35
Financial Condition
During the fiscal year ended May 2, 1999 working capital increased from
$945,892,000 to $1,243,991,000. As at May 2, 1999 the Company had $879,694,000
of cash and cash equivalents, which represented an increase of $380,416,000
during fiscal 1999. The most significant contributing item to the increase in
cash and cash equivalents in fiscal 1999 was proceeds from the sale of long term
investments, which amounted to $456,966,000 (see Note 16 to the Consolidated
Financial Statements). A summary of the major cash flow components by activity
is as follows.
May 2, April 30, April 30,
1999 1998 1997
(Canadian dollars in thousands)
Net earnings (loss) $179,161 $(18,318) $ 156,917
Add back items not affecting cash
Non recurring (gains) and charges (73,551) 183,805 96,940
Amortization and other non-cash charges 235,062 158,474 118,096
(Increase) decrease in working capital,
excluding cash and cash equivalents (121,688) (222,436) (148,579)
Cash flow from operating activities 218,984 101,525 223,374
-------- --------- ---------
Additions to property, plant and equipment (213,903) (276,778) (131,641)
Proceeds on sale of long term investments 456,966 66,672 --
Long term investments and other (184,882) (199,581) (267,960)
Cash flow from investing activities 58,181 (409,687) (399,601)
--------
Proceeds from stock option exercises 112,293 89,430 54,096
Net increase (decrease) in long term debt 2,533 366,312 (5,218)
-------- --------- ---------
Cash flow from financing activities 114,826 455,742 48,878
-------- --------- ---------
Impact of foreign currency translation
and cash from acquisitions (11,575) 17,794 5,504
-------- --------- ---------
Net cash flow during the period $380,416 $ 165,374 $(121,845)
======== ========= =========
Principal components of the Company's working capital are accounts receivable,
inventory, and accounts payable. Management believes that the payment terms and
conditions extended to the Company's customers, arrangements with the Company's
suppliers, and the levels of inventory the Company carries relative to its
levels of sales are consistent with practices generally prevailing in the
networking industry. Accounts receivable, as a proportion of revenue, remained
consistent in fiscal 1999 as compared to fiscal 1998. Inventory turns improved
during the year from 3.2 times in fiscal 1998 to 3.6 times in fiscal 1999.
In April 1998 the Company issued US$225,000,000 Senior Notes due April 2003
bearing a coupon rate of 6.51%. The Senior Notes require semi-annual payments of
interest only, with the principal due at maturity. The Company's obligation
under the Senior Notes can be satisfied at any time prior to maturity subject to
a make whole provision. The Senior Notes are unsecured.
In January 1998 the Company entered into and received $50,000,000 under a long
term loan agreement. The loan agreement includes a term loan portion and a
demand loan portion, both
Page 36
due January 2003. The term loan bears interest at the fixed rate of 5.46% and
the demand loan bears interest at a floating rate equal to the one month's
bankers' acceptance rate. The term loan requires semi-annual payments of
interest only, with the principal due at maturity. The Company's obligation
under the term loan can be satisfied at any time prior to maturity subject to a
make whole provision. The term loan is secured by 654,220 Nortel shares. The
demand loan, which is unsecured, requires monthly payments of interest only,
with the principal due at maturity.
Existing short term bank credit facilities consist of operating lines of credit
with certain banks in the aggregate amount of $156,258,000, primarily with banks
in Canada, the United Kingdom, the United States and Chile. At May 2, 1999
$5,881,000 was being utilized under these credit facilities, primarily
attributed to non-wholly owned subsidiary Coasin S.A.
During fiscal 1999 and fiscal 1998 the Company generated cash proceeds of
$456,966,000 and $66,672,000, respectively, on the sale of equity positions in
the following companies. Details of each transaction are described in Note 16 to
the Consolidated Financial Statements.
May 2, April 30, April 30,
1999 1998 1997
(Canadian dollars in thousands)
Advanced Computer Communications $258,308 $ -- $ --
Cambrian Systems Corporation 147,158 -- --
Vienna Systems Corporation 39,716 -- --
Tundra Semiconductor Corporation 19,498 -- --
Broadband Networks Inc. -- 66,672 --
Less: escrow provisions (7,714) -- --
-------- -------- -----
Proceeds on sale of long term investments $456,966 $66,672 $ --
======== ======== =====
Capital expenditures for fiscal 1999 of $213,903,000 declined as compared to
those of fiscal 1998 ($276,778,000) because there was no major facilities
expansion cost incurred during fiscal 1999. Capital expenditures for fiscal 1998
exceeded those of fiscal 1997 as the Company invested in new facilities in
Canada, in land in the metropolitan area of Washington, D.C., in research and
development and manufacturing equipment and in information systems. Management
anticipates that the level of capital expenditures for fiscal 2000 will be
approximately consistent with the level of capital expenditures incurred in
fiscal 1999. The Company may also increase its current investments in associated
companies. The Company intends to fund capital expenditures and investments with
existing cash and cash expected to be generated from operations during fiscal
2000, supplemented as appropriate by divestitures or the issuance of shares or
debt. In addition, the Company may use a portion of its cash resources to extend
or enhance its business and diversify its marketing and distribution channels
through acquisitions of or investments in businesses, products or technologies
or through the formation of strategic partnerships with other companies.
Management believes that the Company's liquidity in the form of existing cash
resources, its credit facilities, as well as cash generated from operations and
financing activities, will prove adequate to meet its operating and capital
expenditure requirements through the end of fiscal 2000 and into the foreseeable
future.
Management believes that inflation did not have a material effect on operations
during the fiscal year ended May 2, 1999.
Page 37
Recent Developments
In May 1999, the Company completed its investment in TeraBridge Technologies
Corporation ("Terabridge"), which specializes in delivering intelligent call and
service control products to service providers and is headquartered in Gurnee,
Illinois. The Company acquired a 19% equity ownership position for US$60,000,000
(Cdn$90,511,000) and has an option to increase its equity ownership position to
50% for US$10,000,000.
In June 1999, the Company announced a definitive agreement to acquire Stanford
Telecommunications Inc. ("STII") (STII: NASDAQ), a leading supplier of broadband
wireless technology and products. The net purchase price of the acquisition is
estimated at US$280,000,000 (Cdn$ 411,740,000) which represents the gross
purchase price of approximately US$490,000,000 (Cdn$720,545,000) net of proceeds
from the divestiture of divisions of STII that are unrelated to the Company's
core business. The boards of directors of the Company and STII have approved an
agreement and plan of merger, subject to conditions including approval by STII's
stockholders, whereby the Company will acquire all of the outstanding shares of
common stock of STII in a tax-free, stock-for-stock exchange. Under the
agreement STII stockholders will receive for each share of common stock US$30 in
the Company stock plus a contingent value right (CVR) which will give them a
participation in the proceeds on the sale of other operations above a minimum
amount. This participation will also be payable in the form of the Company
common shares. The CVR is expected to have a value of up to US$5 per share.
Year 2000 Date Compliance
The Company acknowledges the Year 2000 transition as a serious business issue
and is committed to addressing the challenge of becoming Year 2000 date
compliant. The Company's program ("Year 2000 Date Compliance"), established in
May 1997, addresses compliance both externally, to our customers, suppliers, and
other associates, and internally for the Company's systems and procedures. The
program continues to receive sponsorship and support from the highest levels of
the Company's Management and regular progress meetings are conducted, including
formal quarterly reports to a senior management committee. Despite the extensive
efforts dedicated to the program, there can be no assurance that all Year 2000
Date Compliance activities will be completed before problems associated with the
Year 2000 transition potentially occur.
Various formal messages for conveying Year 2000 Date Compliance information to
customers and other external parties have been developed for Company products.
. Year 2000 Date Compliance Statement to Customers and Definition of Terms,
which indicates how the Company interprets Year 2000 Date Compliance;
. The Year 2000 Date Compliance Requirements Specification, which sets forth
evaluation of products for Year 2000 Date Compliance;
. Year 2000 Date Compliance Product List, which lists the Year 2000 Date
Compliance characterization for the majority of the Company's products and
releases, including many "discontinued" product offerings.
Page 38
The Company has completed the evaluation of its major product offerings. The
majority of products have been classified as either Compliant, having Compliant
versions currently available or are Date Compliance Not Applicable. The majority
of older or "discontinued" product offerings have been reviewed, with certain
offerings found to be Non-Compliant, and others that will not be evaluated for
Year 2000 Date Compliance. All the formal messages and Year 2000 Date Compliance
Additional Notes are available on the Company's worldwide web site at
http://www.newbridge.com/year2000/.
The Company recognizes that customers view the Year 2000 rollover as a sensitive
time for their networks and are looking for reassurance that their organizations
will continue to receive service support during this time. It is the Company's
intent to fulfill our contractual obligations to customers during this period.
Throughout the Year 2000 and the following leap year rollovers the three
regional Newbridge Technical Assistance Centers will be operating under the
normal practice of 24 hour, 365 days a year service coverage, including
readiness to address Year 2000 issues. The Company will also ensure staffing
during the rollover period of its Strategic Network Services and Network Design
groups during the rollover period as a component of the Year 2000 Date
Compliance Contingency Planning process. The Company is investigating the
various means by which technical information is disseminated to customers to
ensure the most effective delivery of Year 2000 bulletins during the transition
period. Formal messages from the Company's service organizations to customers
and other external parties are available on the Company's worldwide web site at
http://www.newbridge.com/year2000/.
The internal compliance element of Year 2000 Date Compliance includes the
distribution of responsibility among fourteen "Program Areas" of which each of
the Company's operating groups is represented by at least one. Each group is
responsible for eight main activities that address the exposure of their Program
Areas, as follows.
i) Awareness - Inform all employees and ensure awareness of Year
2000 Date Compliance issues and how they affect the employees,
their customers and their suppliers. This includes ensuring
support and dedication to the program throughout the Company.
ii) Inventory - Take stock of all information technology (IT) systems
and equipment and non-IT systems and equipment in use by the
Company potentially affected by Year 2000 Date Compliance.
iii) Impact Analysis - Assess the significance of each item in the
inventory in order to prioritize investigation and testing
activities.
iv) Investigation and Testing - Examine items recorded during the
inventory stage to determine their state of compliance based on
the priority set during the impact analysis stage. This step
includes requesting product information from suppliers and the
formal testing of systems and equipment under controlled
conditions.
v) Remedial Activities - After analyzing the compliance status of an
item, determine remedial action, if any, to be taken should an
item be found to be non-compliant. Actions include fixing
errors, following a path to make the item compliant, or
complete replacement with a compliant alternative.
vi) Implementation/Adoption - Once compliance status has been reached
the item is made available for use.
Page 39
vii) Critical Supplier Assessment - Identify, analyze and assess the
Year 2000 readiness of critical suppliers of products and
services. Actions include judging assurances that equipment
supplied is date compliant, the supplier is also diligently
undertaking a Year 2000 readiness plan with respect to its own
internal systems to minimize the risk of supply disruptions and
that contingency planning activities are active. To assist with
and to standardize this task, a formal Year 2000 Date
Compliance Supplier Assessment process is being used of which
one part is the use of formal readiness questionnaires. The
Company's supplier assessment initiatives commenced in April
1998 with a mass mailing to over 11,500 vendors from which the
Critical Supplier list was originally built. Further targeted
mailings and vendor contacts have since been adopted. The
Company has not yet obtained adequate assurances from suppliers
with respect to their Year 2000 readiness because a significant
number (nearly 40% as at end of May, 1999) of questionnaires
sent to critical suppliers have not generated a response. The
Company will use alternate suppliers in the event that the
supplier does not provide satisfactory answers.
viii) Contingency Planning - Identify, review and address methods by
which the potential of Year 2000 related risks can be further
mitigated before they occur. Identify, review and address the
criteria for invoking a contingency plan. Identify, review and
address the steps which may be necessary to cope with actual
operational problems including, as an integral part, increases
in service and support resources. To assist with and to
standardize this task, a formal Year 2000 Date Compliance
Contingency Planning process is being used following a business
function review and Year 2000 risk exposure assessment. An
essential part of this process is the formulation of Crisis
Communications Plans for Year 2000 scenarios.
The Company believes that PC desktop and Unix hardware environments are
substantially compliant. Repeatable automated inventory and remediation
procedures are used to monitor, install and maintain compliance. Adoption of
compliant versions of wide area network equipment is completed and compliance of
office-based local area networks and telephony is proceeding as planned in
accordance with office relocations and infrastructure reinforcement initiatives.
The Company believes that compliance of all business-critical systems has been
substantially completed. To meet changing business requirements the Company
continues to re-evaluate applications that are scheduled for retirement prior to
the Year 2000 rollover and, in some cases, is ensuring their compliance as a
part of ongoing risk mitigation.
The Company's efforts to ensure awareness are on-going throughout the program,
disseminated via the Company's internal web site and through various print
media, which recently included a brochure "The Year 2000 Problem and You"
attached to employee pay stubs.
The costs incurred for Year 2000 Date Compliance are financed internally by the
operating groups within the framework of their operating budgets have not had a
material impact on the Company's financial results (operating expenses as a
percentage of sales, for example). Incremental spending on the Year 2000 Date
Compliance issue is limited to specific program costs which are outside of the
normal course of business and are necessitated purely as a result of Year 2000
date compliance. Incremental spending incurred in fiscal periods reported to
date and projected to be spent in fiscal 2000 associated with the Year 2000
transition represent less than 1% of the Company's revenues and expected
revenues. There can be no assurance that
Page 40
these costs will not be greater than anticipated, however, as the Company
progresses through its program and greater certainty regarding costs,
particularly related to remediation and contingency plans for identified risks,
will be possible.
The Company is still assessing the potential impact of Year 2000 Date Compliance
on its suppliers and customers and currently cannot fully determine the effect
on its operations and financial condition if key suppliers or customers do not
adequately prepare for Year 2000 Date Compliance transition on a timely basis.
Failure of critical suppliers or customers to address the issue on a timely
basis could result in material financial risk to the Company. As a result, the
Company is actively undertaking Year 2000 Date Compliance contingency planning
as an integral part of the overall program, including service and support
requirements for its customers over the Year 2000 rollover period.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company conducts business in several major international currencies through
its worldwide operations. The Company uses financial instruments, principally
forward exchange contracts, in its management of foreign currency exposures. The
Company does not enter into forward exchange contracts for trading purposes. The
Company's management of foreign currency exposures is based upon estimates of
the net asset or net liability position of various currencies, and to the extent
that these estimates are over or understated during periods of currency
volatility, the Company could experience unanticipated currency gains or losses.
Realized and unrealized gains and losses on foreign exchange contracts are
recognized and offset foreign exchange gains and losses on the underlying net
asset or net liability position. The net foreign currency gains and losses, if
any, are recognized in the Consolidated Statements of Earnings as "Other income
(expense)".
The forward exchange contracts primarily require the Company to purchase and
sell certain foreign currencies with or for Canadian dollars at contractual
rates. The table that follows presents a summary of the value of forward
exchange rate contracts outstanding at May 2, 1999 for each currency in which
the Company has hedged a foreign currency exposure. The term of all forward
exchange contracts outstanding at May 2, 1999 was less than one year. The values
shown are the Canadian dollar values of the agreed upon amounts for each foreign
currency that will be delivered to a third party on the agreed upon date.
Page 41
Average
Currency Contract Rate Value
(Canadian dollars
in thousands)
Forward contracts to sell foreign currencies for Canadian Dollars:
Euro 1.6131 $ 86,531
Japanese Yen 0.0125 27,491
British Pound 2.4380 22,430
Singapore Dollar 0.8744 6,630
--------
143,082
--------
Forward contracts to sell Canadian Dollars for foreign currencies:
Euro 1.5902 48,977
U.S. Dollar 1.4900 54,534
British Pound 2.3593 32,558
Singapore Dollar 0.8853 1,328
--------
137,397
--------
Forward contracts to sell foreign currencies for other foreign currencies:
U.S. Dollar for British Pound 1.6116 42,817
British Pound for U.S. Dollar 1.6079 19,935
Euro for U.S. Dollar 1.0574 12,441
Euro for British Pound 0.6804 4,434
All other foreign currency contracts 2,922
--------
82,549
--------
Total forward exchange contracts outstanding at May 2, 1999 $363,028
========
The unrealized gains or losses on these contracts represent hedges of foreign
exchange gains and losses on the Company's underlying net asset or net liability
position of the various currencies. As a result, Management does not expect
future gains or losses on these contracts to have a material impact on the
Company's financial results.
The Company maintains an investment portfolio consisting of debt securities of
various issuers, types and maturities. The securities that are classified as
held to maturity are recorded on the balance sheet at amortized cost. Due to the
average maturities and conservative nature of the investment portfolio, a sudden
change in interest rates would not have a material effect on the value of the
portfolio.
In January 1998 the Company entered into a Forward Share Price Hedge Agreement
with a major bank in order to fix the value of 545,976 Northern Telecom Limited
(Nortel) shares pledged as security against a term loan. In January 1999 the
Company amended the Forward Share Price Hedge Agreement in order to fix the
value of a further 108,244 Nortel shares. The terms of the amended Share Price
Hedge Agreement provide the Company with the option of delivering 654,220 Nortel
shares in January 2003 for proceeds of $51,613,000, or the present value of
$51,613,000, if terminated prior to January 2003, or delivering the cash
equivalent of the market value of 654,220 Nortel shares at January 2003 or at
the date of early termination.
In April 1998 the Company issued US$225,000,000 Senior Notes due April 2003
bearing a coupon rate of 6.51%. Prior to the closing of the Senior Notes the
Company entered into a swap transaction with a major bank under which the
effective coupon rate on US$200,000,000 of the Senior Notes was fixed at 6.678%.
Page 42
In January 1998 the Company entered into and received $50,000,000 under a loan
agreement which includes a term loan portion and a demand loan portion. The term
loan bears interest at a fixed rate of 5.46% and the demand loan bears interest
at a floating rate equal to one month's bankers acceptance rate. The demand loan
portion of the loan agreement was approximately $15,000,000 at May 2, 1999.
Item 8. Financial Statements and Supplementary Data
The following financial statements and supplementary data are filed as part of
this Annual Report on Form 10-K:
Financial Statements
Auditors' Report to the Shareholders
Consolidated Statements of Earnings and Retained Earnings
for the years ended May 2, 1999, April 30, 1998 and 1997
Consolidated Balance Sheets as at May 2, 1999 and April 30, 1998
Consolidated Statements of Cash Flows for the
years ended May 2, 1999, April 30, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the
years ended May 2, 1999, April 30, 1998 and 1997
Notes to the Consolidated Financial Statements
Selected Quarterly Financial Data (unaudited)
Page 43
AUDITORS' REPORT
To the Shareholders of Newbridge Networks Corporation:
We have audited the consolidated balance sheets of Newbridge Networks
Corporation as at May 2, 1999 and April 30, 1998 and the consolidated statements
of earnings, shareholders' equity and cash flows for the years ended May 2,
1999, April 30, 1998 and April 30, 1997. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at May 2, 1999 and
April 30, 1998 and the results of its operations and the changes in its
financial position for the years ended May 2, 1999, April 30, 1998 and April 30,
1997 in accordance with accounting principles generally accepted in Canada
which, except as disclosed in Note 2, Note 15 and Note 18 to the consolidated
financial statements, also conform in all material respects with accounting
principles generally accepted in the United States.
/s/ Deloitte and Touche LLP
Chartered Accountants
Ottawa, Canada
June 1, 1999, except Note 23
which is as of June 22, 1999
Page 44
NEWBRIDGE NETWORKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Canadian dollars, amounts in thousands except per share data)
Years Ended
---------------------------------
May 2, April 30, April 30,
1999 1998 1997
Sales $1,790,705 $1,620,620 $1,376,727
Cost of sales 751,874 625,065 507,588
---------- ---------- ----------
Gross margin 1,038,831 995,555 869,139
Expenses
Selling, general and administrative 531,308 494,429 346,106
Research and development (Note 13) 264,421 258,879 155,330
Restructuring costs (Note 14) 118,030 181,444 --
Purchased research and
development in process (Note 15) -- 52,762 96,940
---------- ---------- ----------
Income from operations 125,072 8,041 270,763
Interest income 34,248 11,581 19,956
Interest expense on long term obligations (26,127) (1,820) (1,351)
Net gain on investments (Note 16) 188,726 50,401 (1,564)
Other expenses (20,802) (12,889) (8,051)
---------- ---------- ----------
Earnings before income taxes
and non-controlling interest 301,117 55,314 279,753
Provision for income taxes (Note 17) 121,303 73,001 117,718
Non-controlling interest 653 631 5,118
---------- ---------- ----------
Net earnings (loss) $ 179,161 $ (18,318) $ 156,917
========== ========== ==========
Earnings (loss) per share (Note 18)
Basic $ 1.01 $ (0.10) $ 0.92
Fully diluted $ 1.01 $ (0.10) $ 0.91
Weighted average number of shares
Basic 177,630 174,617 170,510
Fully diluted 177,630 174,617 184,595
See accompanying Notes to the Consolidated Financial Statements.
Page 45
NEWBRIDGE NETWORKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Canadian dollars in thousands)
May 2, April 30,
1999 1998
Assets
Cash and cash equivalents (Note 2) $ 879,694 $ 499,278
Accounts receivable, net of provision for returns and
doubtful accounts of $16,217 (April 30, 1998 - $13,067) 472,811 428,527
Inventories (Note 3) 210,286 196,285
Prepaid expenses 46,753 32,728
Other current assets 46,160 44,872
---------- ----------
1,655,704 1,201,690
Property, plant and equipment (Note 4) 455,483 450,735
Goodwill (Note 5) 40,022 72,719
Software development costs (Note 6) 35,909 28,299
Future tax benefits (Note 17) 59,999 50,443
Other assets (Note 7) 223,507 162,939
---------- ----------
$2,470,624 $1,966,825
========== ==========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 190,630 $ 127,040
Accrued liabilities 201,361 118,771
Income taxes 16,853 5,851
Current portion of long term obligations 2,869 4,136
---------- ----------
411,713 255,798
Long term obligations (Note 9) 384,021 383,311
Future tax obligations (Note 17) 123,088 71,197
Non-controlling interest 22,583 22,899
---------- ----------
941,405 733,205
---------- ----------
Share capital (Note 11)
Common shares - 180,104,582 outstanding
(April 30, 1998 - 175,686,083 outstanding) 572,990 456,510
Accumulated foreign currency translation adjustment 27,238 27,280
Retained earnings 928,991 749,830
---------- ----------
1,529,219 1,233,620
---------- ----------
$2,470,624 $1,966,825
========== ==========
See accompanying Notes to the Consolidated Financial Statements.
Page 46
NEWBRIDGE NETWORKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian dollars in thousands)
Years Ended
----------------------------------
May 2, April 30, April 30,
1999 1998 1997
Operating activities
Net earnings (loss) $ 179,161 $ (18,318) $ 156,917
Items not affecting cash
Amortization 182,547 125,429 82,987
Future tax benefits and obligations 46,698 27,158 22,989
Non-controlling interest 674 (1,390) 5,118
Restructuring costs 118,030 181,444 --
Purchased research and development in process -- 52,762 96,940
Net gain on investments (191,581) (50,401) 1,564
Other 5,143 7,277 5,438
Cash effect of changes in:
Accounts receivable (99,291) (32,931) (87,976)
Inventories (70,724) (86,288) (20,767)
Prepaid expenses and other current assets (16,832) (13,004) (13,668)
Accounts payable and accrued liabilities 49,893 (50,766) (34,615)
Income taxes 15,266 (39,447) 8,447
--------- --------- ---------
218,984 101,525 223,374
--------- --------- ---------
Investing activities
Additions to property, plant and equipment (213,903) (276,778) (131,641)
Proceeds on sale of long term investments (Note 16) 456,966 66,672 --
Acquisitions of subsidiaries, excluding
cash acquired -- (58,936) (220,645)
Capitalized software development costs (20,801) (16,069) (12,457)
Additions to other assets (164,081) (124,576) (34,858)
--------- --------- ---------
58,181 (409,687) (399,601)
--------- --------- ---------
Financing activities
Issue of common shares 112,293 89,430 54,096
Increase in long term obligations 44,671 378,628 1,515
Repayment of long term obligations (42,138) (12,316) (6,733)
--------- --------- ---------
114,826 455,742 48,878
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 391,991 147,580 (127,349)
Effect of foreign currency translation on cash (11,575) 15,919 (2,585)
Cash from acquisition of subsidiaries -- 1,875 8,089
--------- --------- ---------
380,416 165,374 (121,845)
Cash and cash equivalents, beginning of the year 499,278 333,904 455,749
--------- --------- ---------
Cash and cash equivalents, end of the year $ 879,694 $ 499,278 $ 333,904
========= ========= =========
See accompanying Notes to the Consolidated Financial Statements.
Page 47
NEWBRIDGE NETWORKS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Canadian dollars in thousands)
Accumulated
Common Shares Foreign Retained Shareholders'
---------------------
Number Amount Currency Earnings Equity
At April 30, 1996 168,676,280 290,170 1,285 611,231 902,686
Exercise of employees' and
directors' options 3,182,704 54,096 54,096
Income tax benefit related
to stock options 7,122 7,122
Effect of foreign currency translation 5,678 5,678
Net earnings 156,917 156,917
----------- ------- ----- ------- ---------
At April 30, 1997 171,858,984 351,388 6,963 768,148 1,126,499
Exercise of employees' and
directors' options 3,827,099 89,430 89,430
Income tax benefit related
to stock options 15,692 15,692
Effect of foreign currency translation 20,317 20,317
Net loss (18,318) (18,318)
----------- ------- ------ ------- ---------
At April 30, 1998 175,686,083 456,510 27,280 749,830 1,233,620
Exercise of employees' and
directors' options 4,418,499 112,293 112,293
Income tax benefit related
to stock options 4,187 4,187
Effect of foreign currency translation (42) (42)
Net earnings 179,161 179,161
----------- -------- -------- -------- ----------
At May 2, 1999 180,104,582 $572,990 $27,238 $928,991 $1,529,219
=========== ======== ======== ======== ==========
See accompanying Notes to the Consolidated Financial Statements.
Page 48
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
1. Significant Accounting Policies
The Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP"). These
principles are also generally accepted in the United States ("U.S. GAAP") in all
material respects except for the disclosure of certain cash equivalents on the
Consolidated Balance Sheets and investing activities on the Consolidated
Statements of Cash Flows, as disclosed in Note 2, the write off of purchased in
process research and development, as disclosed in Note 15, and the method of
calculation of earnings per share, as disclosed in Note 18.
Basis of Consolidation
The Consolidated Financial Statements include the accounts of the Company and
its subsidiaries. Investments in companies in which the Company has significant
influence are accounted for by the equity method. Investments in which the
Company does not control or have significant influence over the investee are
accounted for by the cost method.
Fiscal Year
In fiscal 1998 and years prior the Company's fiscal quarters were 13 weeks long
and closed on a Sunday, except the fourth quarter which closed on April 30.
Commencing in fiscal 1999 the Company adopted the policy of closing its fiscal
years on the Sunday closest to April 30. Accordingly, fiscal 1999 was 52 weeks
long with interim fiscal quarters closing on a Sunday and 13 weeks long.
Occasionally fiscal years will be 53 weeks long, the first occurrence of which
will be for the fiscal year ending May 2, 2004.
Revenue Recognition and Warranties
Revenue from product sales is generally recorded on shipment provided that no
significant obligations remain, with a provision for estimated returns recorded
at that time. In addition, a provision for potential warranty claims is provided
for at the time of sale, based on warranty terms and prior claims experience.
Service revenue is recognized when the service is performed, or, in the case of
maintenance contracts, is recognized as costs are incurred to secure and fulfill
the contract.
Government Incentives and Investment Tax Credits
Government incentives and investment tax credits are recorded as a reduction of
the expense or the cost of the asset acquired to which the incentive applies.
The benefits are recognized when the Company has complied with the terms and
conditions of the approved grant program or the applicable tax legislation.
Software Development Costs
Certain applications and systems software development costs are capitalized once
technical feasibility has been established for the product, the Company has
identified a market for the product and intends to market the developed product.
No other development costs are capitalized. Such capitalized costs are amortized
over the expected life of the related product.
Page 49
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
Inventories
Finished goods are valued at the lower of cost (first in, first out) and net
realizable value. Work in process and raw materials are valued at the lower of
cost and replacement cost.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Buildings and equipment are
generally amortized on a declining balance basis at rates calculated to amortize
the cost of the assets over their estimated useful lives. Leasehold improvements
are amortized using a straight line basis over the term of the lease.
Goodwill
Goodwill is stated at the difference between the Company's cost of the
investments less its proportionate share of the fair value of the net assets of
the subsidiaries. Goodwill is amortized on a straight line basis over the
estimated useful life of the goodwill, generally between ten and twenty years.
The recoverability of such costs is reviewed on an ongoing basis.
Foreign Currency Translation
The Consolidated Financial Statements are prepared using Canadian dollars. All
operations whose principal economic activities are undertaken in currencies
other than Canadian dollars have been determined to be self-sustaining.
The assets and liabilities of non-Canadian operations are translated at fiscal
year end exchange rates and the resulting unrealized exchange gains or losses
are accumulated as a separate component of shareholders' equity described in the
Consolidated Balance Sheets as "Accumulated foreign currency translation
adjustment". The statements of earnings of such operations are translated at
exchange rates prevailing during the fiscal year.
Other monetary assets and liabilities, which are denominated in currencies
foreign to the local currency of any one operation, are translated to the local
currency at fiscal year end exchange rates, and transactions included in
earnings are translated at rates prevailing during the fiscal year. Exchange
gains and losses resulting from the translation of these amounts are included in
the Consolidated Statements of Earnings.
Use of Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates that affect the
reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as at the
date of the Consolidated Financial Statements and the reported amounts of sales
and expenses during the reporting periods presented. Actual results could differ
from the estimates made by Management.
Page 50
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 130,
"Reporting Comprehensive Income". SFAS 130 establishes standards for reporting
comprehensive income and its components in the financial statements. The Company
has adopted SFAS 130.
In June 1998, FASB issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS 133 requires all derivatives to be recorded on the
balance sheet at fair value. SFAS 133 is effective for fiscal years beginning
after June 15, 2000. The Company is in the process of evaluating the impact of
the reporting requirements of SFAS 133.
CICA Handbook - Accounting Section 1540, Cash Flow Statements, which replaces
existing Section 1540 Statement of Changes in Financial Position was issued in
June 1998 and is effective for fiscal years beginning after July 31, 1998. The
impact of this standard will be the disclosure of purchases, maturities and
sales of marketable securities as an investing activity on the Statement of Cash
Flows, in a manner consistent with U.S. GAAP, as is described in Note 2 to these
financial statements. Under this new standard, investing and financing
activities that do not require the use of cash or cash equivalents will be
excluded from the Statement of Cash Flows. However, these activities will be
disclosed elsewhere in the consolidated financial statements. The Company will
adopt this standard in the first quarter of fiscal 2000.
2. Cash and Cash Equivalents
Components of cash and cash equivalents are:
May 2, 1999 April 30, 1998
------------------- -------------------
Amortized Market Amortized Market
Cost Value Cost Value
Cash $666,019 $666,019 $467,464 $467,464
Held to maturity marketable securities
Maturing within one year:
Corporate debt securities 213,675 213,683 22,447 22,447
Available for sale marketable securities
Equity securities -- -- 9,367 9,367
--------- -------- -------- --------
$879,694 $879,702 $499,278 $499,278
========= ======== ======== ========
Held to maturity marketable securities are investments with original maturities
of three months or more. Available for sale securities are common shares of
publicly traded companies, which have certain resale restrictions, principally
acquired upon the Company's disposition of its
minority interest in Broadband Networks Inc. Under U.S. GAAP held to maturity
and available for sale marketable securities would be disclosed as a separate
caption on the Consolidated Balance Sheets.
Held to maturity marketable securities are carried at amortized cost. The
unrealized gains and losses are not included in the Consolidated Statements of
Earnings as these gains and losses are unlikely to be realized due to the
Company's intent to hold the underlying securities to maturity. During fiscal
1999 there were no realized gains or losses and unrealized gains of
Page 51
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
$70,000 and unrealized losses of $62,000 on held to maturity securities. During
fiscal 1998 there were no realized or unrealized gains or losses on held to
maturity securities. Available for sale securities are carried at the lower of
cost and market. During fiscal 1999 the Company incurred $707,000 of realized
losses and in fiscal 1998 the Company realized gains of $573,000 from available
for sale securities.
If the Consolidated Statements of Cash Flows were prepared under U.S. GAAP,
purchases, maturities and sales of marketable securities would be disclosed as
an investing activity.
Disclosure in the Consolidated Statements of Cash Flows prepared under U.S. GAAP
would be as follows.
Years Ended
-----------------------------------
May 2, April 30, April 30,
1999 1998 1997
Investing activities in short
term marketable securities:
Held to maturity securities
Maturities $ 287,723 $ 185,958 $ 508,890
Purchases (478,951) (72,126) (475,092)
--------- --------- ---------
(191,228) 113,832 33,798
Available for sale securities
Sales 9,367 569 --
Purchases -- (9,317) --
--------- --------- ---------
(181,861) 105,084 33,798
Investing activities, as reported 58,181 (409,687) (399,601)
--------- --------- ---------
Investing activities, U.S. GAAP $(123,680) $(304,603) $(365,803)
========= ========= =========
Increase (decrease) in cash and
cash equivalents, as reported $ 380,416 $ 165,374 $(121,845)
Investing activities in short
term marketable securities (181,861) 105,084 33,798
--------- --------- ---------
Increase (decrease) in cash and
cash equivalents, U.S. GAAP $ 198,555 $ 270,458 $ (88,047)
========= ========= =========
3. Inventories
May 2, April 30,
1999 1998
Finished goods $118,251 $129,850
Work in process 27,807 18,178
Raw materials 64,228 48,257
-------- --------
$210,286 $196,285
======== ========
Page 52
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
4. Property, Plant and Equipment
Amortization May 2, April 30,
Rate 1999 1998
Land -- $ 16,118 $ 14,763
Buildings 2.5%--5% 92,390 88,189
Equipment 10%--50% 803,399 705,744
Furniture and fixtures 10%--33% 43,878 45,067
Leasehold improvements Lease term 27,530 27,797
------- -------
983,315 881,560
Accumulated amortization (527,832) (430,825)
------- -------
$ 455,483 $ 450,735
======= =======
Capital leases included above $ 2,683 $ 6,606
======= =======
Years Ended
--------------------------------
May 2, April 30, April 30,
1999 1998 1997
Amortization on property,
plant and equipment $163,097 $ 112,175 $ 73,364
======== ========= =========
Amortization on property, plant and
equipment under capital leases $ 1,384 $ 2,035 $ 1,523
======== ========= =========
5. Goodwill
May 2, April 30,
1999 1998
Goodwill, beginning of the year $ 72,719 $ 125,565
Additions associated with investments -- 15,377
Amortization (2,752) (5,683)
Divestitures (29,945) (1,232)
LAN business restructuring (Note 14) -- (61,308)
--------- ---------
Goodwill, end of the year $ 40,022 $ 72,719
========= =========
Accumulated goodwill amortization $ 7,131 $ 11,098
========= =========
Page 53
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
6. Software Development Costs
May 2, April 30,
1999 1998
Balance, beginning of the year $ 28,299 $22,299
Amount capitalized 20,755 15,627
Amortization (13,145) (9,627)
-------- -------
Balance, end of the year $ 35,909 $28,299
======== =======
7. Other Assets
May 2, April 30,
1999 1998
Long term investments
Accounted for by the equity method $ 29,236 $ 30,163
Accounted for by the cost method 161,901 103,980
-------- --------
191,137 134,143
Other assets 32,370 28,796
-------- --------
$223,507 $162,939
======== ========
8. Bank Credit Facilities
At May 2, 1999 short term bank credit facilities consisted of operating lines of
credit in the aggregate amount of $156,258,000, primarily with banks in Canada,
the United Kingdom, the United States, and Chile. At May 2, 1999 $5,881,000 was
being utilized under these credit facilities, primarily attributed to non-wholly
owned Chilean subsidiary Coasin S.A. The Company's primary facility with a
Canadian bank in the amount of $100,000,000 is unsecured. Certain of the other
bank facilities are secured by the accounts receivable and other assets of the
borrowing subsidiary. The Company complies with all covenants and restrictions
contained in the credit facilities agreements.
Page 54
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
9. Long Term Obligations
May 2, April 30,
1999 1998
6.51% Senior Notes, due 2003 $330,602 $322,098
Loan agreement, due 2003 50,000 50,000
Term loans 3,150 11,033
Capital lease obligations 3,138 4,316
-------- --------
386,890 387,447
Current portion of long term obligations (2,869) (4,136)
-------- --------
Long term obligations $384,021 $383,311
======== ========
In April 1998 the Company issued US$225,000,000 Senior Notes due April 2003
bearing a coupon rate of 6.51%. Costs associated with the issue totaled
US$1,303,000. Prior to the closing of the Senior Notes the Company entered into
a swap transaction with a major bank under which the effective coupon rate on
US$200,000,000 of the Senior Notes was fixed at 6.678%. The Senior Notes require
semi-annual payments of interest only, with the principal due at maturity. The
Company's obligation under the Senior Notes can be satisfied at any time prior
to maturity subject to a make whole provision. The Senior Notes are unsecured.
The Company complies with all covenants and restrictions contained in the Senior
Notes. The fair value of Senior Notes at May 2, 1999 is estimated at
US$226,369,000
In January 1998 the Company entered into and received $50,000,000 under a loan
agreement that includes a term loan portion and a demand loan portion, both due
January 2003. The term loan bears interest at the fixed rate of 5.46% and the
demand loan bears interest at a floating rate equal to the one month's bankers'
acceptance rate. The term loan requires semi-annual payments of interest only,
with the principal due at maturity. The Company's obligation under the term loan
can be satisfied at any time prior to maturity subject to a make whole
provision. The demand loan requires monthly payments of interest only, with the
principal due at maturity. The term loan is secured by 654,220 Northern Telecom
Limited (Nortel) shares. The demand loan is unsecured. The Company complies with
all covenants and restrictions contained in the long term loan agreement. The
fair value of the term loan at May 2, 1999 is estimated at $48,510,000.
Page 55
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
Future payments under long term obligations and operating leases at May 2, 1999
are as follows.
Principal Amount Minimum
on Mortgages Capital Lease Operating
and Term Loans Payments Leases
Fiscal 2000 $ 1,630 $1,335 $ 37,516
Fiscal 2001 433 1,663 24,869
Fiscal 2002 3,171 302 19,153
Fiscal 2003 378,144 9 15,403
Fiscal 2004 150 -- 14,079
Thereafter 224 -- 75,523
-------- ------ --------
$383,752 3,309 $186,543
======== ========
Less imputed interest (171)
------
$3,138
======
Interest paid on capital leases was $456,000 (fiscal 1998 -- $401,000; fiscal
1997 -- $266,000).
10. Financial Instruments and Concentration of Credit Risk
The Company uses financial instruments, principally forward exchange contracts,
in its management of foreign currency exposures. Realized and unrealized gains
and losses on foreign exchange contracts are recognized and offset foreign
exchange gains and losses on the underlying net asset or net liability position.
These contracts primarily require the Company to purchase and sell certain
foreign currencies with or for Canadian dollars at contractual rates. At May 2,
1999 the Company had $363,028,000 in outstanding foreign exchange contracts
(April 30, 1998 - $170,084,000).
In January 1998 the Company entered into a Forward Share Price Hedge Agreement
with a major bank in order to fix the value of the Nortel shares pledged as
security against a term loan (see Note 9). In January 1999 the Company amended
the Forward Share Price Hedge Agreement in order to fix the value of a further
108,244 Nortel shares. The terms of the amended Forward Share Price Hedge
Agreement provide the Company with the option of delivering 654,220 Nortel
shares in January 2003 for proceeds of $51,613,000 or the present value of
$51,613,000 if terminated prior to January 2003, or delivering the cash
equivalent of the market value of 654,220 Nortel shares at January 2003 or at
the date of early termination.
Several major financial institutions are counterparties to the Company's
financial instruments. It is Company practice to monitor the financial standing
of the counterparties and limit the amount of exposure to any one institution.
The Company may be exposed to a credit loss in the event of nonperformance by
the counterparties to these contracts, but does not anticipate such
nonperformance.
Page 56
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
With respect to accounts receivable, concentration of credit risk is limited due
to the diverse areas covered by the Company's operations. The Company has credit
evaluation, approval and monitoring processes intended to mitigate potential
credit risks. Anticipated bad debt loss and product returns have been provided
for in the allowance for returns and doubtful accounts. Net additions to the
provision for returns and doubtful accounts (fiscal 1999 -- $3,150,000; fiscal
1998 -- $2,495,000) primarily relate to estimates for products to be returned
and have been charged to sales. The carrying amounts for cash, marketable
securities, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of the short maturity of these instruments.
11. Share Capital
Authorized
An unlimited number of Common Shares.
An unlimited number of participating preferred shares, ranking in priority upon
distribution of assets over Common Shares, may be issued in series with
additional provisions as fixed by the Board of Directors.
Employee Stock Option Plans
The Company has established the Newbridge Networks Corporation Consolidated Key
Employee Stock Option Plan (the "Plan") applicable to full-time employees,
directors and consultants of the Company and its subsidiaries. The options under
the Plan are granted at the then-current fair market value of the Common Shares
of the Company and generally may be exercised in equal proportions during the
years following the first, second, third and fourth anniversary of the date of
grant, and expire on the fifth anniversary or upon termination of employment.
Options granted under the Plan prior to August 1, 1996 generally may be
exercised in equal proportions during the years following the first, second and
third anniversary of the date of grant, and expire on the fourth anniversary or
upon termination of employment. In addition to the number of options outstanding
as at May 2, 1999, the aggregate number of options which may be granted under
the Plan was 6,624,514.
Page 57
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
Activity in the stock option plan is summarized below.
Option Price
--------------------------
Weighted
Options Low High Average
Options outstanding April 30, 1996 13,123,704 $ 4.73 $43.74 $22.73
Granted during fiscal 1997 7,098,800 $30.18 $46.33 $38.89
Cancelled and expired (785,073) $ 4.76 $44.31 $25.74
Exercised (3,182,704) $ 4.73 $34.23 $17.23
----------
Options outstanding April 30, 1997 16,254,727 $19.47 $46.33 $30.72
Granted during fiscal 1998 9,817,645 $38.86 $64.96 $44.75
Cancelled and expired (1,779,070) $19.63 $64.31 $42.46
Exercised (3,827,099) $19.47 $43.74 $23.92
----------
Options outstanding April 30, 1998 20,466,203 $19.47 $64.96 $37.70
Granted during fiscal 1999 8,841,475 $24.65 $42.80 $35.21
Cancelled and expired (2,054,355) $19.63 $64.31 $40.14
Exercised (4,418,499) $19.47 $55.92 $25.79
----------
Options outstanding May 2, 1999 22,834,824 $19.47 $64.96 $38.82
==========
Options outstanding April 30, 1998
Vested 5,979,342 $19.47 $46.33 $28.26
Unvested 14,486,861 $19.47 $64.96 $41.59
----------
20,466,203 $19.47 $64.96 $37.70
==========
Options outstanding by range:
$19.47 to $30.00 4,341,730
$30.01 to $45.00 11,845,623
$45.00 to $64.96 4,278,850
----------
20,466,203
==========
Weighted average remaining
contractual life 3.32 years
==========
Options outstanding May 2, 1999
Vested 5,863,481 $19.47 $64.96 $37.89
Unvested 16,971,343 $24.65 $64.96 $39.14
----------
22,834,824 $19.47 $64.96 $38.82
==========
Options outstanding by range:
$19.47 to $30.00 2,542,777
$30.01 to $45.00 16,474,522
$45.00 to $64.96 3,817,525
----------
22,834,824
==========
Weighted average remaining
contractual life 3.48 years
==========
Page 58
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
Stock Based Compensation
The Company applies APB 25 and related interpretations in accounting for its
Consolidated Key Employee Stock Option Plan. Accordingly, no compensation
expense has been recognized for its stock based compensation plan. Had
compensation costs for the Company's Consolidated Key Employee Stock Option Plan
been determined based on the fair value at the grant date for awards under the
Plan, consistent with the methodology prescribed under SFAS 123, the Company's
net earnings (loss) and earnings (loss) per share would have been decreased to
the following pro forma amounts.
Years Ended
---------------------------------
May 2, April 30, April 30,
1999 1998 1997
Net earnings (loss), as reported $179,161 $(18,318) $156,917
Estimated stock based compensation costs (90,102) (75,164) (35,085)
-------- -------- --------
Pro forma net earnings (loss) $ 89,059 $(93,482) $121,832
======== ======== ========
Basic pro forma earnings (loss) per share $ 0.50 $ (0.54) $ 0.71
======== ======== ========
Fully diluted pro forma
earnings (loss) per share $ 0.50 $ (0.54) $ 0.71
======== ======== ========
The weighted average fair value of all options granted during fiscal 1999, 1998
and 1997 was estimated as of the date of grant using the Black-Scholes option
pricing model with the following and weighted average results and assumptions.
Years Ended
-------------------------------
May 2, April 30, April 30,
1999 1998 1997
Weighted average fair value of
of options issued $19.91 $25.32 $18.65
Expected option life, in years 4.5 4.5 4.3
Volatility 65.57% 63.98% 50.18%
Risk free interest rate 4.9% 5.9% 6.4%
Dividend yield nil nil nil
The Black-Scholes model used by the Company to calculate option values, as well
as other currently accepted option valuation models, were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require highly subjective assumptions, including future stock
price volatility and expected time until exercise, which greatly affect the
calculated values. Accordingly, Management believes that this model does not
necessarily provide a reliable single measure of the fair value of the Company's
stock option awards.
Page 59
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
Employee Share Purchase Plan
The Company's Employee Stock Purchase Plan ("ESPP"), was effective June 1, 1999
and allows eligible employees to authorize payroll deductions up to 10% of their
salary to purchase Common Shares of the Company at a price of 85% of the then
current stock price (as defined in the ESPP). Employees purchasing shares under
the ESPP must hold the shares for a minimum of one year. The Company has
reserved 500,000 Common Shares for issuance under the ESPP.
12. Comprehensive Income
The Company has adopted the United States Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income. This statement requires disclosure of Comprehensive Income, which
includes reported net earnings adjusted for other comprehensive income. Other
comprehensive income includes items that cause changes in shareholders' equity
but are not related to share capital or net earnings which, for the Company,
comprises only the foreign currency translation adjustment.
Years Ended
--------------------------------
May 2, April 30, April 30,
1999 1998 1997
Net earnings (loss) $179,161 $(18,318) $156,917
Other comprehensive income:
Foreign currency translation
adjustment (42) 20,317 5,678
-------- -------- --------
Comprehensive income $179,119 $ 1,999 $162,595
======== ======== ========
13. Research and Development
During the year, the Company recorded Canadian Investment Tax Credits of
$37,846,000 (fiscal 1998 -- $34,971,000; fiscal 1997 -- $26,400,000) as a
reduction of research and development expenses.
The Company recorded government and customer funding during the year of
$29,234,000 (fiscal 1998 -- $5,507,000; fiscal 1997 -- $9,484,000) as a
reduction in research and development expenses included in the consolidated
statements of earnings. Funding from the government of the province of British
Columbia amounted to $10,000,000 during the year and is contingently repayable
over a period not to exceed ten years. Repayment of the funding is based on a
percentage of sales of products developed in British Columbia and a percentage
of sales of products sold in British Columbia. Any funding not repaid at the end
of the ten year period would be forgiven. The Company also recorded funding of
$17,540,000 during the year related to eligible research and development
expenditures of its broadband wireless program. Royalties are due to the funding
companies based on a percentage of sales of products developed under the
program. The funding companies own the intellectual property rights for products
developed under the program. The Company has an option to acquire those rights
under certain terms and conditions. As part of the arrangements, Newbridge has
provided
licencing of certain technologies to the funding companies including
Asynchronous Transfer Mode ("ATM") switch software and related technology.
Page 60
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
14. Restructuring Costs
Restructuring costs are comprised of the following.
Years Ended
------------------------------
May 2, April 30, April 30,
1999 1998 1997
Restructuring programs, April 1999 $ 73,570 $ -- $ --
Layer 2 Switching End of Life 37,928 -- --
Asia Pacific Resources Relocation 6,532 -- --
LAN business restructuring, November 1997 -- 181,444 --
-------- --------- ---------
$118,030 $181,444 $ --
======== ========= =========
In April 1999, the Company decided to streamline the operations of regional
sales and support organizations as well as its marketing and product development
organizations. The restructuring costs associated with the sales, support and
marketing organizations ("Sales and Marketing") consisted primarily of costs
related to workforce and facilities reductions, as the Company has announced a
reduction in the number of locations in which it will have a physical presence
in favour of distributors in certain markets, and subcontractors for certain
functions. Restructuring costs associated with product development relate
primarily to asset impairment losses related to the capping, discontinuation or
divestiture of the development of certain products, and the centralization of
development laboratories to make the development process more efficient.
Restructuring costs of $73,570,000 comprised the following:
Sales and Product
Marketing Development Total
Asset impairment losses
Inventory $ 2,606 $ 8,994 $11,600
Property, plant and equipment 6,576 29,104 35,680
Other current and non-current assets 568 2,249 2,817
------- ------- -------
9,750 40,347 50,097
------- ------- -------
Provision for restructuring
Reduction in work force 14,595 427 15,022
Reduction in facilities 6,627 -- 6,627
Other restructuring costs 1,653 171 1,824
------- ------- -------
22,875 598 23,473
------- ------- -------
Restructuring costs $32,625 $40,945 $73,570
======= ======= =======
All of the amounts listed in the provision for restructuring are reflected in
accrued liabilities as at May 2, 1999.
Page 61
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
The provision for the reduction in work force includes severance, related
medical and other benefits, and other obligations to employees. The provision
includes termination benefits for approximately 200 employees. The work force
reductions will occur in Japan, Russia and various other countries. The Company
anticipates that these work force reductions will be substantially completed in
the first half of fiscal 2000.
The provision for the reduction in facilities comprises primarily lease payments
and fixed costs associated with the closure of sales, support and administrative
facilities in Europe, Japan and the United States. The Company expects to
complete these facilities closures in the first half of fiscal 2000.
The provision for other restructuring costs comprises professional fees and
other various direct incremental costs associated with the restructuring plan.
In October 1998, the Company decided to discontinue the sale and development of
local area network (LAN) Layer 2 Switching products as part of the enhancement
of the focus on the Company's dominant and more profitable products. This
program, which was completed during the fiscal 1999, created impairment losses
of $30,690,000 associated with certain assets deployed in this business and
obligations related to fulfilling previous customer commitments of $7,238,000,
all of which was incurred prior to the end of fiscal 1999.
In October 1998, the Company commenced relocating certain employees and
activities that support the Asia Pacific region from Kanata, Ontario to Hong
Kong and Malaysia in order to provide more efficient and cost effective services
to customers in that region. The charge of $6,532,000 incurred in October 1998
reflects the accrual of involuntary termination benefits, lease cancellation
penalties and other direct costs associated with the transition. As at May 2,
1999, $1,215,000 of these costs had been incurred. Additional costs related to
the transfer of personnel and equipment, the recruitment of new staff and the
expansion of facilities in Hong Kong are not included in the Asia Pacific
Resources Relocation charge and are being expensed as incurred. These additional
costs are estimated at $9,000,000, with the majority of the costs to be incurred
during the first two quarters of fiscal 2000.
In November 1997, the Company restructured its activities relating to its LAN
business. The restructuring plan involved the formation of an alliance with a
company strongly positioned in the LAN business, and the reduction of the
Company's direct participation, and related costs, in the LAN business. In
repositioning the way in which the Company addressed the LAN market, the
restructuring plan created impairment losses on certain assets associated with
the LAN business and liabilities associated with restructuring activities.
Accordingly, the Company recognized restructuring costs of $181,444,000 in the
third quarter of fiscal 1998. The provision recorded for this restructuring plan
in November 1997, predominantly related to reductions in the Company's
workforce, was $39,638,000. During fiscal 1998, $34,345,000 of these
expenditures were incurred with the remaining $5,293,000 incurred in fiscal
1999. The restructuring plan has been completed.
Page 62
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
15. Purchased Research and Development In Process
In November 1997, the Company acquired a 49.9% equity interest in RadNet Ltd.,
an Israeli developer and manufacturer of access switches for ATM networks, for
cash consideration of $53,676,000. The majority of the purchase price
($52,762,000) was allocated to purchased research and development in process.
The amount allocated to purchased research and development in process was
determined through valuation techniques common in the high technology industry.
Under accounting principles generally accepted in Canada, the purchased research
and development in process was amortized on a straight line basis over its
estimated useful life of six months. Under U.S. GAAP, purchased research and
development in process acquired by the Company was written off at the time of
acquisition.
16. Net Gain on Investments
Fiscal Year Ended
-------------------------------
May 2, April 30, April 30,
1999 1998 1997
(Canadian dollars in thousands)
Cambrian Systems Corporation $131,748 $ -- $ --
Advanced Computer Communications 128,336 -- --
Vienna Systems Corporation 15,846 -- --
Tundra Semiconductor Corporation 11,748 -- --
Broadband Networks Inc. -- 47,960 --
West End Systems Corp. (33,521) -- --
Other divestitures -- 6,528 --
Investment impairment write downs (65,431) (4,087) (1,564)
-------- ------- -------
$188,726 $50,401 $(1,564)
======== ======= =======
In December 1998, the Company sold its minority ownership position in Cambrian
Systems Corporation ("Cambrian") to Nortel for cash proceeds of US$95,674,000
(Cdn$147,158,000). The proceeds include an earn-out payment of US$1,935,000
(Cdn$2,855,000) received by the Company as a result of certain specified
financial performance targets being met by Cambrian. The proceeds exclude future
potential earn-out payments of approximately US$21,000,000 which will be
received by the Company if certain specified financial performance targets are
met by Cambrian.
In October 1998, the Company completed the sale of its majority ownership
position in Advanced Computer Communications ("ACC") to Telefonaktiebolaget LM
Ericsson for cash proceeds of US$167,319,000 (Cdn$258,308,000). ACC's results of
operations were consolidated with the Company's results for the first six months
of fiscal 1999 ended November 1, 1998. The results of operations and the
financial position of ACC were not significant relative to the Company's
consolidated results of operations and financial position for all periods
presented.
In December 1998, the Company sold its minority ownership position in Vienna
Systems Corporation to Nokia Corporation for cash proceeds of $39,716,000.
Page 63
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
In February 1999, the Company sold a portion of its minority ownership position
in Tundra Semiconductor Corporation for cash proceeds of $19,498,000 as part of
an initial and secondary share offering by Tundra.
In January 1998, the Company sold its minority interest in Broadband Networks
Inc. to Nortel for proceeds of $66,672,000. The proceeds received included cash
of $23,775,000 and Nortel shares valued at $42,897,000.
On February 10, 1999 West End Systems Corp., a manufacturer of access and
transmission products for the communications and cable television industries,
filed an assignment in bankruptcy under the Canadian Bankruptcy and Insolvency
Act. As a result, the Company recorded losses related to its minority ownership
position in West End Systems Corp. and unsecured trade accounts outstanding.
The Company evaluates, on an ongoing basis, the value of its long term
investments considering the evolution of the market segments of investee
companies, any impact of deteriorating economic conditions in various countries,
and any other specific information which indicates impairment of value of these
investments. In fiscal 1999, the financial performance of certain investee
companies as well as deteriorating economic conditions in Brazil and Russia led
to investment impairment write downs of $65,431,000.
17. Income Taxes
The components of the provision for income taxes are as follows:
Years Ended
------------------------------
May 2, April30, April 30,
1999 1998 1997
Current $ 78,968 $45,843 $ 94,729
Future 42,335 27,158 22,989
-------- ------- --------
$121,303 $73,001 $117,718
======== ======= ========
The provision for income taxes reported differs from the amount computed by
applying the Canadian statutory rate to income before income taxes for the
following reasons.
Years Ended
---------------------------------
May 2, April 30, April 30,
1999 1998 1997
Earnings before income taxes
Domestic $280,968 $ 222,597 $182,745
Foreign 20,149 (167,283) 97,009
-------- -------- --------
$301,117 $ 55,314 $279,754
======== ========= ========
Statutory income tax rate (Canada) 43.5% 43.5% 43.5%
======== ========= ========
Page 64
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
Years Ended
---------------------------------
May 2, April 30, April 30,
1999 1998 1997
Expected provision for income tax $130,986 $ 24,062 $121,693
Canadian rate adjustment for research
and development activities (4,236) (6,166) (5,062)
Canadian rate adjustment for
manufacturing and processing activities (13,075) (19,032) (15,625)
Loss carryforwards utilized -- -- (7,262)
Foreign tax differential (21,428) (13,865) (39,539)
Purchased research and
development in process -- 22,952 42,169
Recognition of goodwill devaluation -- 26,677 --
Non-deductible reserves and surtaxes 29,056 38,373 21,344
-------- -------- --------
Reported income tax provision $121,303 $ 73,001 $117,718
======== ======== ========
The components of the annual temporary differences giving rise to the related
future tax provision are as follows:
Years Ended
-------------------------------
May 2, April 30, April 30,
1999 1998 1997
Tax depreciation in excess of
accounting amortization $ 1,864 $ 7,163 $ 4,530
Accounting provisions not deductible (5,715) 6,804 3,570
Research and development expenses
deducted for tax purposes in excess
of accounting (677) 677 2,530
Restructuring charges 46,443 10,909 13,127
Losses available to offset future
income taxes and other 420 1,605 (768)
------- ------- -------
Future income tax expense $42,335 $27,158 $22,989
======= ======= =======
Page 65
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
The components of the future tax benefit (obligation) classified by the source
of temporary differences that gave rise to the benefit (obligation) are as
follows:
Future Tax Benefit Future Tax Obligation
------------------- -----------------------
May 2, April 30, May 2, April 30,
1999 1998 1999 1998
Accounting depreciation in excess
of (less than) tax depreciation $ 5,064 $13,853 $ (38,636) $(45,561)
Accounting provisions not deductible 13,845 22,409 (93) (14,372)
Research and development expenses
deducted for tax purposes less
than (in excess of) accounting -- -- (11,007) (11,684)
Provisions related to restructuring
charges 41,090 21,412 -- --
Divestitures -- -- (73,352) --
Other -- -- -- 420
Valuation allowance -- (7,231) -- --
------- ------- --------- --------
$59,999 $50,443 $(123,088) $(71,197)
======= ======= ========= ========
The Company recorded a future tax benefit for net operating loss carryovers
associated with certain acquisitions. These losses will expire at various dates
through the year 2012. The components of the future tax benefit (obligation)
classified by the source of timing difference that gave rise to the credit are
not materially different from the temporary differences as calculated under the
application of U.S. GAAP.
At May 2, 1999, the Company had available investment tax credits of
approximately $53,106,000 for the reduction of future years' Canadian federal
income tax liability. These credits, which are subject to customary review
procedures by Revenue Canada, expire during the years 2007 to 2009. Of this
amount $10,913,000 has been applied to reduce the future tax obligation. No
recognition has been given in these financial statements to the potential tax
benefits associated with the remaining balance of investment tax credits. Under
U.S. GAAP the remaining balance of investment tax credits would be disclosed,
offset by a valuation allowance.
Page 66
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
18. Earnings (Loss) per Share
Basic earnings (loss) per share has been calculated on the basis of net earnings
(loss) for the period divided by the daily weighted average number of Common
Shares outstanding during the fiscal year.
The calculation of fully diluted earnings per share assumes that, if a dilutive
effect is produced, all outstanding options had been exercised at the later of
the beginning of the fiscal period and the option issue date, and includes an
allowance for imputed earnings of $28,943,000 (fiscal 1998 -- $18,521,000;
fiscal 1997 -- $11,589,000) derived from the investment of funds which would
have been received at an after tax rate of 3.5% (fiscal 1998 -- 3.0%; fiscal
1997 -- 3.1%).
Under U.S. GAAP, basic earnings per share has been calculated as net earnings
for the period divided by the daily weighted average number of Common Shares
outstanding during the period, consistent with the calculation of basic earnings
per share under accounting principles generally accepted in Canada. Diluted
earnings per share is calculated using the treasury stock method. Earnings per
share in U.S. dollars is disclosed for the convenience of the reader. The
exchange rates used for translation are based on the average of the daily noon
buying rates for Canadian dollars in U.S. dollars as reported by the Federal
Reserve Bank of New York. The calculation of earnings per share under U.S. GAAP
is as follows.
Years Ended
-------------------------------
May 2, April 30, April 30,
1999 1998 1997
Net earnings (loss) per share
Basic $ 1.01 $ (0.10) $ 0.92
Diluted $ 0.99 $ (0.10) $ 0.90
Net earnings (loss) per share - in U.S. dollars
Basic $ 0.67 $ (0.07) $ 0.68
Diluted $ 0.66 $ (0.07) $ 0.66
Weighted average number of shares
Basic 177,630 174,617 170,510
Net effect of dilutive stock options 2,746 -- 4,015
-------- -------- --------
Diluted 180,376 174,617 174,525
======== ======== ========
Page 67
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
19. Related Party Transactions
The Company leases facilities in Canada from companies controlled by Terence H.
Matthews, Chairman of the Board of Directors, Chief Executive Officer and the
largest shareholder of the Company, under terms and conditions reflecting
prevailing market conditions at the time the leases were entered into.
Approximately 355,000 square feet has been leased for various terms expiring
between September 1999 and February 2004 at rates between $9.25 and $14.00 per
square foot (approximately $3,505,000 per year). The Company also purchased
$878,000 of services from these companies throughout fiscal 1999 (fiscal 1998 --
$1,053,000). During the fiscal year ended May 2, 1999 the Company purchased
approximately $5,287,000 (fiscal 1998 -- $2,533,000) of equipment and services
under usual terms and conditions from a corporation in which the Company has no
equity interest, but which is controlled by Terence H. Matthews.
The Company accounts for its equity interests in certain associated companies
using the equity method of accounting. The Company is represented on the Boards
of Directors of these companies. During the fiscal year ended May 2, 1999, the
Company paid $1,729,000 for research and development services from these
associated companies under usual trade terms and conditions (fiscal 1998 --
$2,448,000). The Company also purchased $18,220,000 of equipment and software
under usual trade terms and conditions, generally for resale (fiscal 1998 --
$10,126,000) and sold $21,533,000 of equipment and software to these companies
under usual trade terms and conditions, generally for resale (fiscal 1998 --
$13,846,000).
The Company accounts for its equity interests in certain associated companies
using the cost method of accounting. The Company is generally represented on the
Boards of Directors of these companies. During the fiscal year ended May 2, 1999
the Company paid $1,556,000 for research and development services from these
associated companies under usual trade terms and conditions (fiscal 1998 --
$48,000). The Company also purchased $8,294,000 of equipment and software under
usual trade terms and conditions, generally for resale (fiscal 1998 --
$7,226,000). The Company sold $10,035,000 of equipment and software to these
associated companies under usual trade terms and conditions, generally for
resale (fiscal 1998 -- $6,100,000). The Company has guaranteed $14,498,000 of
obligations of certain of these associated companies.
The Company pays a net royalty between 2% and 10%, depending on the level of
cumulative royalties paid, on all sales of products developed as a result of
subcontracted research and development previously performed under agreements
between the Company and corporations controlled by three directors of the
Company. Royalty payments under these agreements were $564,000 (fiscal 1998 --
$294,000).
Page 68
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
20. Business Segment Information
The Company designs, manufactures, markets and services networking solutions to
customers in more than 100 countries. Management organizes the Company into four
principal operating segments for making operating decisions and assessing
performance. The four operating segments comprise three sales and support
organizations (North and South America, Europe Middle East and Africa, and Asia
Pacific) and one Corporate resources group which develops and manufactures
products, provides marketing and operational support and makes strategic
investments. Revenues generated by the Corporate group are predominantly derived
from the consolidation of non-wholly owned subsidiaries. Cost of sales for the
three sales and support organizations is stated at the cost to manufacture and
does not include any markups.
Years Ended
--------------------------------------
May 2, April 30, April 30,
1999 1998 1997
North and South America
Sales $ 765,183 $ 649,388 $ 561,784
Cost of sales and expenses 414,240 365,494 299,408
---------- ---------- ----------
Operating contribution 350,943 283,894 262,376
---------- ---------- ----------
Europe, Middle East and Africa
Sales $ 614,842 $ 511,444 $ 444,885
Cost of sales and expenses 311,025 258,676 214,439
---------- ---------- ----------
Operating contribution 303,817 252,768 230,446
---------- ---------- ----------
Asia Pacific
Sales $ 234,424 $ 273,581 $ 231,625
Cost of sales and expenses 124,518 127,712 96,323
---------- ---------- ----------
Operating contribution 109,906 145,869 135,302
---------- ---------- ----------
Corporate
Sales $ 176,256 $ 186,207 $ 126,433
Cost of sales and expenses 697,820 626,491 386,854
---------- ---------- ----------
Operating contribution (521,564) (440,284) (260,421)
---------- ---------- ----------
Total
Sales $1,790,705 $1,620,620 $1,376,727
Cost of sales and expenses 1,547,603 1,378,373 1,009,024
---------- ---------- ----------
Operating contribution 243,102 242,247 367,703
Restructuring costs (118,030) (181,444) --
Purchased research
and development in process -- (52,762) (96,940)
---------- ---------- ----------
Income from operations 125,072 8,041 270,763
Non-operating income 176,045 47,273 8,990
Provision for income taxes (121,303) (73,001) (117,718)
Non-controlling interest (653) (631) (5,118)
---------- ---------- ----------
Net earnings (loss) $ 179,161 $ (18,318) $ 156,917
========== ========== ==========
Page 69
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
The Company manages its assets by geographic region, rather than through the
operating segments. Decision making and performance assessment with regard to
assets is done on a geographic basis because the operating segments may share
assets and accountability by operating segment would be less readily
determinable.
Years Ended
----------------------------------
May 2, April 30, April 30,
1999 1998 1997
Identifiable Assets
Canada $1,290,601 $ 685,315 $ 405,126
United States 444,356 480,148 397,808
Europe 414,487 499,361 370,875
Asia Pacific 187,486 183,507 218,015
Latin America 133,694 118,494 104,879
---------- ---------- ----------
$2,470,624 $1,966,825 $1,496,703
========== ========== ==========
Years Ended
----------------------------------
May 2, April 30, April 30,
1999 1998 1997
Capital Expenditure
Canada $ 143,590 $ 176,276 $ 81,678
United States 30,903 57,877 26,723
Europe 25,494 31,579 18,115
Asia Pacific 5,875 6,861 3,081
Latin America 8,041 4,185 2,044
---------- ---------- ----------
$ 213,903 $ 276,778 $ 131,641
========== ========== ==========
Years Ended
----------------------------------
May 2, April 30, April 30,
1999 1998 1997
Amortization
Canada $ 110,863 $ 74,070 $ 54,271
United States 31,097 23,558 17,381
Europe 29,487 20,810 8,338
Asia Pacific 5,966 3,955 1,096
Latin America 5,134 3,036 1,902
---------- ---------- ----------
$ 182,547 $ 125,429 $ 82,987
========== ========== ==========
Page 70
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
Export sales from operations in Canada (excluding inter-subsidiary sales) were
as follows.
Years Ended
------------------------------
May 2, April 30, April 30,
1999 1998 1997
Latin America $152,210 $171,245 $169,377
Asia Pacific 7,786 48,010 49,166
-------- -------- --------
$159,996 $219,255 $218,543
======== ======== ========
Sales to Siemens A.G. and subsidiaries, generally under OEM arrangements for
resale to end users, were 18% of sales for fiscal 1999, 16% of total sales for
fiscal 1998 and were 18% of total sales in fiscal 1997.
The following table illustrates, for the periods indicated, the percentage of
sales that comprise each of the Company's major product lines.
Fiscal Year Ended
-----------------------------------
May 2, April 30, April 30,
1999 1998 1997
WAN Packet products 59% 46% 33%
Circuit switched networking products 38 41 57
LAN Packet products 3 13 10
---- ---- ----
100% 100% 100%
==== ==== ====
21. Litigation
In the fourth quarter of fiscal 1998 the Company reached an agreement in
principle to settle the class action lawsuit which was filed in United States
District Court in Washington, D.C. during the fiscal year ended April 30, 1995.
The lawsuit purported to be a class action on behalf of a class of persons who
purchased securities of the Company between March 29 and August 1, 1994 and
alleged that the Company made false and misleading statements in violation of
United States securities law and common law. The Court entered an order and
final judgement approving the settlement and dismissing the lawsuit with
prejudice in October 1998. The Company recorded the expense in connection with
the settlement of $2,642,000 in the fourth quarter of fiscal 1998, which
represents the direct costs incurred.
Lucent Technologies Inc. ("Lucent Technologies") filed a complaint during the
fiscal year ended April 30, 1998 in United States District Court in Delaware
against the Company and its United States subsidiary, Newbridge Networks Inc.
Lucent Technologies manufactures and sells telecommunications systems, software
and products, and is both a distributor of the Company's products and a
competitor of the Company. The Complaint alleges that the Company's manufacture
and sale, in the United States, of some of the standardized functions on the
Newbridge frame relay and ATM switch products, along with its ADPCM (adaptive
Page 71
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
differential pulse code modulation) and card initialization implementations,
infringe certain United States patent rights claimed by Lucent Technologies.
The Complaint requests actual and trebled damages in an unspecified amount.
Based upon its present understanding of the laws in the United States and the
facts, the Company believes it has meritorious defenses to these claims. The
Company has filed an answer to the Complaint and is defending this action
vigorously. Because the outcome of the action is not certain at this time, no
provision for any liability that may result upon adjudication has been made in
these Consolidated Financial Statements.
22. Uncertainty Due to the Year 2000 Issue
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information that
uses year 2000 dates is processed. In addition, similar problems may arise in
some systems that use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure that could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
23. Subsequent Events
In May 1999, the Company completed its investment in TeraBridge Technologies
Corporation ("Terabridge"), which specializes in delivering intelligent call and
service control products to service providers and is headquartered in Gurnee,
Illinois. The Company acquired a 19% equity ownership position for US$60,000,000
(Cdn$90,511,000) and has an option to increase its equity ownership position to
50% for US$10,000,000.
In June 1999, the Company announced a definitive agreement to acquire Stanford
Telecommunications Inc. ("STII") (STII: NASDAQ), a leading supplier of broadband
wireless technology and products. The net purchase price of the acquisition is
estimated at US$280,000,000 (Cdn$ 411,740,000) which represents the gross
purchase price of approximately US$490,000,000 (Cdn$720,545,000) net of proceeds
from the divestiture of divisions of STII that are unrelated to the Company's
core business. The boards of directors of the Company and STII have approved an
agreement and plan of merger, subject to conditions including approval by STII's
stockholders, whereby the Company will acquire all of the outstanding shares of
common stock of STII in a tax-free, stock-for-stock exchange. Under the
agreement STII stockholders will receive for each share of common stock US$30 in
the Company stock plus a contingent value right (CVR) which will give them a
participation in the proceeds on the sale of other operations above a minimum
amount. This participation will also be payable in the form of the Company
common shares. The CVR is expected to have a value of up to US$5 per share.
Page 72
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 2, 1999, April 30, 1998 and April 30, 1997
(Canadian dollars, tabular amounts in thousands except per share data)
For the purpose of this transaction, the value of a Newbridge common share shall
equal the ten-day average closing price on the New York Stock Exchange, ending
on the fifth trading day immediately preceding STII's stockholder vote, expected
in October. If the Newbridge stock price, pursuant to this calculation, is below
US$24 and the Company does not exercise its right to adjust the exchange ratio,
STII's board will be permitted to terminate the Agreement.
Page 73
SELECTED QUARTERLY FINANCIAL DATA
The quarterly financial data for the fiscal years ended May 2, 1999 and April
30, 1998 are derived from unaudited consolidated financial statements of the
Company which include, in the opinion of Management, all normal and recurring
adjustments considered necessary for a fair statement of results for such
periods. The selected quarterly financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-K.
Fiscal 1998 Quarters Ended Fiscal 1999 Quarters Ended
-------------------------------------- -----------------------------------
Aug 3, Nov 2, Feb 1, Apr 30, Aug 2, Nov 1, Jan 31, May 2,
1997 1997 1998 1998 1998 1998 1999 1999
---- ---- ---- ---- ---- ---- ---- ----
(Canadian dollars, amounts in thousands except per share data)
Sales $434,738 $432,169 $ 358,520 $395,193 $426,056 $456,781 $450,753 $457,115
Gross margin 274,008 272,368 213,707 235,472 274,008 267,457 262,791 259,089
Net earnings (loss)/(1)/ 64,354 57,993 (144,283) 3,618 35,520 53,314 120,119 (29,792)
Earnings (loss) per share
Basic $ 0.37 $ 0.33 $ 0.82 $ 0.02 $ 0.20 $ 0.30 $ 0.68 $ (0.17)
Fully diluted $ 0.36 $ 0.33 $ 0.82 $ 0.02 $ 0.20 $ 0.30 $ 0.64 $ (0.17)
Weighted average number of shares
Basic 172,964 174,733 175,376 175,598 176,105 176,766 177,596 180,105
Fully diluted 189,082 174,733 175,376 175,598 176,105 176,766 199,951 180,105
U.S. GAAP
Net earnings (loss)/(1)/ $ 64,354 $ 57,993 $(170,664) $ 29,999 $ 35,520 $ 53,314 $120,119 $(29,792)
Earnings (loss) per share/(2)/
Basic $ 0.37 $ 0.33 $ (0.97) $ 0.17 $ 0.20 $ 0.30 $ 0.68 $ (0.17)
Diluted $ 0.36 $ 0.32 $ (0.97) $ 0.17 $ 0.20 $ 0.30 $ 0.66 $ (0.17)
Diluted - US$ US$ 0.26 US$ 0.23 US$ (0.68) US$ 0.12 US$ 0.14 US$ 0.20 US$ 0.43 US$ (0.11)
Weighted average number of shares
Basic 172,964 174,733 175,376 175,598 176,105 176,766 177,596 180,105
Diluted 179,821 182,728 175,376 175,598 176,105 176,766 182,030 180,105
_____________
(1) Includes non-recurring gains and charges. See Notes 14, 15 and 16 to the
Consolidated Financial Statements.
(2) See Note 18 to the Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Page 74
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company and their ages at June 17,
1999 are:
Name and Municipality of Residence Age Position
- ---------------------------------- --- --------
Terence H. Matthews 56 Chairman of the Board, Chief Executive
Kanata, Ontario, Canada Officer and Director
Peter D. Charbonneau 45 Vice Chairman of the Board
Ottawa, Ontario, Canada and Director
Alan G. Lutz 53 President, Chief Operating Officer
McLean, Virginia, USA and Director
James D. Arseneault 39 Executive Vice President Internetworking
Woodlawn, Ontario, Canada Products Group
Satjiv S. Chahil 49 Executive Vice President, Marketing
Los Altos, California, USA
Pearse J. Flynn 36 Executive Vice President and General
Graystones, Kirkmalcolm, Scotland Manager, European Region
Roger K.Y. Fung 46 Executive Vice President and General
Happy Valley, Hong Kong Manager, Asia Pacific Region
Giulio M. Gianturco 43 Executive Vice President and General
Sudbury, Massachusetts, USA Manager, Americas Region
Brian M. Jervis 48 Executive Vice President, Switching
Almonte, Ontario, Canada Product Group
Conrad W. Lewis 46 Executive Vice President, Access
Stittsville, Ontario, Canada Products Group
Dr. Donald Mills 65 Corporate Vice President, Administration
Kanata, Ontario, Canada and Director
Peter A. Nadeau 43 Corporate Vice President and
Ottawa, Ontario, Canada General Counsel
Kenneth B. Wigglesworth 35 Executive Vice President, Finance and
Kanata, Ontario, Canada Chief Financial Officer
All of the above mentioned executive officers, with the exception of Alan G.
Lutz, Satjiv S. Chahil, Pearse J. Flynn, Giulio M. Gianturco, and Brian M.
Jervis, have been employed by the Company in various capacities during the past
five years.
Alan G. Lutz joined the Company in June 1998 as President, Chief Operating
Officer and a Director of the Company. Prior to joining the Company, Mr. Lutz
was Senior Vice President and Group General Manager, Communication Products
Group for Compaq Computer, a worldwide information technology company and
supplier of personal computers, since
Page 75
November 1996. He served as Executive Vice President, Unisys Corporation and
President, Computer Systems Group from May 1994 to October 1996.
Satjiv S. Chahil joined Newbridge in February 1999 as Executive Vice President,
Marketing. Prior to joining the Company, Mr. Chahil was President of Chahil.com,
a marketing consulting organization based in California's Silicon Valley, since
May 1997. From August 1992 to April 1997 Mr. Chahil was an executive at Apple
Computer Inc., a leading personal computer company, and most recently was
Corporate Senior Vice President responsible for Worldwide Marketing and
Corporate Communications. Mr. Chahil also has extensive experience in global
sales and marketing roles at IBM and Xerox.
Pearse J. Flynn joined the Company in February 1999 as Executive Vice President,
European Region. Prior to joining the Company, from June 1987 to January 1999,
Mr. Flynn served in various capacities at Compaq Computer Corporation, a leading
information technology company and supplier of personal computers. Most
recently, Mr. Flynn held the position Vice President, Worldwide Channel
Services.
Giulio M. Gianturco joined the Company in November 1998 as Executive Vice
President and General Manager, Americas Region. Prior to joining the Company,
from January 1998 to November 1998, Mr. Gianturco served as President, Digital
Networks Products Group at Cabletron Systems, a supplier of LAN and WAN
equipment. From June 1995 to January 1998 he served in various capacities at
Digital Equipment Corporation ("DEC"), a worldwide information technology
company, most recently as Vice President - Americas. From November 1991 until
joining DEC, Mr. Gianturco served as National Channel Manager at AT&T, a nation
wide service provider in the USA, in their Global Business Communications unit.
Brian M. Jervis joined Newbridge in November 1998 as Executive Vice President,
Switching Products Group. During the five years prior to joining the Company Mr.
Jervis served in various capacities at Northern Telecom Limited, most recently
as Senior Vice President and General Manager of Magellan Passport/DPN (Data
Packet Networks).
Name and Municipality of Residence Age Position
- ---------------------------------- --- --------
Dr. Denzil J. Doyle 67 Director
Kanata, Ontario, Canada
Alan D. Horn 47 Director
Toronto, Ontario, Canada
Trevor G. Jones 60 Director
Willowdale, Ontario, Canada
Graham C. C. Miller 68 Director
Cotuit, Massachusetts, USA
Kent H. E. Plumley 62 Director
Kanata, Ontario, Canada
Dr. John C. J. Thynne 67 Director
London, England
Page 76
Terence H. Matthews founded the Company in June 1986 and has served as Chairman
of the Board, Chief Executive Officer and a Director of the Company since that
time. From the inception of the Company to June 1993 Mr. Matthews also served as
President. Mr. Matthews also serves as Chairman of the Board of Directors for
Crosskeys Systems Corporation and Tundra Semiconductor Corporation.
Peter D. Charbonneau has been Vice Chairman of the Board of the Company since
June 1998 and a Director of the Company since December 1996. Mr. Charbonneau was
President and Chief Operating Officer of the Company from December 1996 to June
1998. From January 1987 to December 1996, Mr. Charbonneau held a variety of
positions with the Company, most recently as Executive Vice President and Chief
Financial Officer. Mr. Charbonneau is also a director of Crosskeys Systems
Corporation.
Dr. Denzil J. Doyle has been a Director of the Company since September 1987. Dr.
Doyle has been Chairman of Capital Alliance Ventures Inc., a venture capital
company specializing in investments in high technology companies since November
1995, and President of Doyletech Corporation, a consulting corporation
specializing in new business ventures, since November 1982. He is also a
director of International Datacasting Corporation, a manufacturer of satellite
data broadcasting equipment. Dr. Doyle is a member of the Employee Compensation
Committee and the Directors' Affairs Committee of the Board of Directors of the
Company.
Alan D. Horn has been a Director of the Company since July 1991. Mr. Horn has
been Vice President, Finance and Chief Financial Officer of Rogers
Communications Inc., a communications company, since October 1996. From April
1990 to October 1996 he was President and Chief Operating Officer of Rogers
Telecommunications Limited, an investment holding company. He is Chairman of the
Audit Committee and a member of the Directors' Affairs Committee of the Board of
Directors of the Company.
Trevor G. Jones has been a Director of the Company since June 1991. Mr. Jones
has been President of JWA Associates, a business consulting company, since April
1991. Mr. Jones is Chairman of the Directors' Affairs Committee and a member of
the Audit Committee of the Board of Directors of the Company.
Graham C. C. Miller has been a Director of the Company since September 1987. Mr.
Miller is Chairman Emeritus of LTX Corporation, a manufacturer of semiconductor
testing equipment, was Chairman of the Board of Directors from 1976 through to
1998, and was President and Chief Executive Officer until February 1994. He is a
member of the Audit Committee and the Directors' Affairs Committee of the Board
of Directors of the Company.
Dr. Donald Mills has been Corporate Vice President, Administration of the
Company since April 1989. Dr. Mills has been a Director of the Company since
September 1988.
Kent H. E. Plumley has been a Director of the Company since June 1986. Mr.
Plumley has been a partner of Osler, Hoskin & Harcourt, Barristers & Solicitors,
since May 1990. Mr. Plumley is the Chairman of the Employee Compensation
Committee of the Board of Directors of the Company.
Dr. John C. J. Thynne has been a Director of the Company since April 1992. Dr.
Thynne has been Managing Director of Camrose Consultancy Services since January
1991. Dr. Thynne is a member of the Audit Committee and Employee Compensation
Committee of the Board of Directors of the Company.
Page 77
All directors of the Company hold office until the next annual meeting of
shareholders or until the election and qualification of their successors.
Executive officers of the Company are appointed by and serve at the discretion
of the Board of Directors.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to
Exhibit 99 to this Annual Report on Form 10-K, "Statement of Executive
Compensation" as set forth in the form of the Company's proxy circular for the
annual and special meeting of shareholders to be held on September 23, 1999.
Such incorporation by reference shall not be deemed to specifically incorporate
by reference the information contained under the sub-captions "Report on
Executive Compensation" and "Performance Graph".
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the ownership of
the Company's Common Shares as at June 17, 1999 (i) by each person known by the
Company to own beneficially more than 5% of the Company's Common Shares, (ii) by
each of the Company's directors and (iii) by all directors and executive
officers of the Company as a group. The information as to beneficial ownership
is presented in accordance with the rules and regulations under the United
States Securities Exchange Act of 1934 and consequently may differ from similar
information that appears in the Company's proxy circular prepared in accordance
with the Canada Business Corporations Act for the annual and special meeting of
shareholders to be held on September 23, 1999.
Shares Issuable
Within 60 Days Total Shares
Shares Currently Upon Exercise Beneficially % of
Name and Address Directly Owned of Options/(1)/ Owned Class
- -----------------------------------------------------------------------------------------------
Terence H. Matthews 39,710,908 nil 39,726,908/(2)/ 22.02%
Kanata, Ontario
FMR Corp. 18,375,407 nil 18,375,407/(3)/ 10.18%
Boston, Massachusetts, USA
Donald Mills 784,016 1,325 801,341/(4)/ *
Kent H. E. Plumley 289,187 24,500 358,909/(5)/ *
Peter D. Charbonneau 28,000 102,250 283,650/(6)/ *
Alan G. Lutz 10,000 166,666 176,666 *
John C. J. Thynne 34,000 17,000 51,000 *
Graham C. C. Miller 35,616 10,500 46,116/(7)/ *
Denzil J. Doyle 29,000 10,500 43,200/(8)/ *
Trevor G. Jones 8,000 12,000 20,000 *
Alan D. Horn nil nil nil
Page 78
All directors and executive
officers as a group (19 persons) 41,045,225 529,723 41,810,220/(9)/ 23.17%
_______________
* Less than 1%
(1) Shares issuable upon exercise of stock options that are exercisable within
60 days of June 17, 1999.
(2) Includes 4,974,000 shares owned directly; 16,000 shares beneficially owned
through his wife, as to which shares he disclaims beneficial ownership;
32,379,153 shares beneficially owned through control of Wesley Clover
Corporation; 1,745,920 shares beneficially owned through 2874806 Canada
Inc.; 595,000 shares beneficially owned through control of 3090-8081
Quebec Inc.; 16,835 shares beneficially owned through 2985314 Canada Inc.,
and 1,745,920 shares beneficially owned through 2874814 Canada Inc.
(3) Shares held by Fidelity Management & Research Company, an investment
advisor registered under Section 203 of the Investment Advisors Act of
1940, as amended, and a subsidiary of FMR Corp.
(4) Includes 16,000 shares beneficially owned through his wife, as to which
shares he disclaims beneficial ownership.
(5) Includes 42,872 shares and 2,350 shares issuable within 60 days upon the
exercise of options beneficially owned through his wife, as to which
shares and shares issuable upon the exercise of options he disclaims
beneficial ownership.
(6) Includes 153,400 shares beneficially owned through his wife, as to which
shares he disclaims beneficial ownership.
(7) Includes 35,616 shares owned jointly with his wife.
(8) Includes 3,500 shares beneficially owned through his wife, as to which
shares he disclaims beneficial ownership.
(9) Includes, in the aggregate, 232,922 shares and 2,350 shares issuable
within 60 days of June 17, 1999 upon the exercise of options beneficially
owned through spouses and children, as to which shares and shares issuable
upon the exercise of options they disclaim beneficial ownership.
Except as otherwise indicated, the persons in the table have sole voting and
investment powers with respect to all Common Shares beneficially owned by them
subject to community property laws where applicable and the information
contained in the footnotes to the table.
Statements contained in the table as to shares beneficially owned by directors
and executive officers or over which they exercise control or direction are, in
each instance, based upon information obtained from such directors and executive
officers. The Company is not aware of any person except the holders set forth
above who beneficially owns or exercises control or direction over shares
carrying more than 5% of the votes attached to such shares of the Company as at
June 17, 1999.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to
Exhibit 99 to this Annual Report on Form 10-K, "Statement of Executive
Compensation" as set forth in the form of the Company's proxy circular for the
annual and special meeting of shareholders to be held on September 23, 1999.
Such incorporation by reference shall not be deemed to specifically incorporate
by reference the information contained under the sub-captions "Report on
Executive Compensation" and "Performance Graph".
Page 79
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) The following financial statements and supplementary data are
filed as part of this Report under Item 8:
Page
----
Financial Statements
Auditors' Report to the Shareholders............................. 44
Consolidated Statements of Earnings and
Retained Earnings for the years
ended May 2, 1999, and April 30, 1998 and 1997................. 45
Consolidated Balance Sheets as at
May 2, 1999 and April 30, 1998................................ 46
Consolidated Statements of Cash Flows for the
years ended May 2, 1999, and April 30 1998 and 1997............ 47
Consolidated Statements of Shareholders' Equity for the
years ended May 2, 1999, and April 30 1998 and 1997............ 48
Notes to the Consolidated Financial Statements................... 49
Selected Quarterly Financial Data (unaudited)...................... 74
(b) The Registrant filed no reports on Form 8-K during the fourth quarter
of the fiscal year ended May 2, 1999.
(c) The following exhibits are filed or incorporated by reference as part
of this Report (Exhibit 10.1 and 10.2 are compensatory plans or
arrangements):
3.1 Articles of Amalgamation.
3.2 By-Law No. 3./(1)/
10.1 Newbridge Networks Corporation Consolidated Key Employee
Stock Option Plan, as amended./(2)/
10.2 Newbridge Networks Corporation 1999 Key Employee Stock
Option Plan./(2)/
10.3--
10.7 [Reserved]
10.8 Credit Facilities Letter dated December 19, 1997 between
Newbridge Networks Corporation and Royal Bank of
Canada./(3)/
10.9 Loan Agreement dated January 30, 1998 between Newbridge
Networks Corporation and Citibank Canada./(2)/
10.10 Note Purchase Agreement dated April 28, 1998 between
Newbridge Networks Corporation and the Purchasers named
therein./(2)/
10.11--
10.13 [Reserved]
Page 80
10.14 License Agreement effective May 1, 1994 between 2880016
Canada Inc. and Newbridge Networks Corporation; Development
Agreement effective May 1, 1994 between 2880016 Canada Inc.
and Newbridge Networks Corporation./(4)/
10.15 License Agreement effective May 1, 1994 between 3015955
Canada Inc. and Newbridge Networks Corporation; Development
Agreement effective May 1, 1994 between 3015955 Canada Inc.
and Newbridge Networks Corporation./(4)/
10.16 License Agreement effective May 1, 1994 between 3028623
Canada Inc. and Newbridge Networks Corporation; Development
Agreement effective May 1, 1994 between 3028623 Canada Inc.
and Newbridge Networks Corporation./(4)/
10.17 Lease dated May 29, 1997 for 76,230.65 square feet at 359
Terry Fox Drive, Kanata, Ontario./(1)/
10.18 Agreement and Purchase and Sale dated February 16, 1996 for
approximately 25,000 square feet at Langstone Business Park,
Langstone, Newport, Wales./(5)/
10.19 Reserved
10.20 Lease dated May 1, 1995 for 1,882 square feet, more or less,
at 362 Terry Fox Drive, Kanata, Ontario./(4)/
10.21 Lease dated April 1, 1995 for 13,106 square feet, more or
less, at 50 Sandhill Road, Kanata, Ontario./(4)/
10.22 Lease dated April 23, 1997 for 242,856.67 square feet, more
or less, at 349 Terry Fox Drive, Kanata, Ontario./(1)/
10.23 Sublease dated October 1, 1996 for 20,718 square feet, more
or less, at 350 Terry Fox Drive, Kanata, Ontario./(1)/
10.23a Letter Agreement dated March 12, 1998 amending Sublease
referred to in Exhibit 10.23.
10.24 Non-Competition Agreement between Terence Matthews and
Newbridge Networks Corporation dated October 14, 1987.
10.25 Employment Agreement between Alan G. Lutz and Newbridge
Networks Corporation dated May 21, 1998./(2)/
10.26 Lease amendment between Kanata Research Park Corporation and
Newbridge Networks Corporation dated January 7, 1998 for
10,930 square feet at 555 Legget Drive.
10.27 Lease amendment between Crosskeys Systems Corporation,
Kanata Research Park Corporation and Newbridge Networks
Corporation dated September 21, 1998.
Page 81
10.28 Lease assignment dated November 5, 1998 between Castleton
Network Systems Corporation, Kanata Research Park
Corporation and Newbridge Networks Corporation.
10.29 Lease agreement between Kanata Research Park Corporation and
Newbridge Networks Corporation dated February 26, 1999
amending Sublease referred to in Exhibit 10.17.
10.30 Lease agreement between Kanata Research Park Corporation and
Newbridge Networks Corporation dated March 15, 1999 for
6,832 square feet at 555 Legget Drive.
10.31 Lease agreement between Kanata Research Park Corporation and
Newbridge Networks Corporation dated March 15, 1999 for
1,151 square feet at 555 Legget Drive.
11.1 Computation of earnings per share under accounting
principles generally accepted in Canada.
11.2 Computation of earnings per share under accounting
principles generally accepted in the United States.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
99 "Statement of Executive Compensation" as set forth in the
form of the Company's proxy circular for the annual and
special meeting of shareholders to be held on September 23,
1999, incorporated by reference in Items 11 and 13 of this
Annual Report on Form 10-K, to the extent set forth therein.
This exhibit shall not be deemed to be "soliciting material"
or to be "filed" with the United States Securities and
Exchange Commission for purposes of Section 14 of the United
States Securities Exchange Act of 1934, nor shall it be
deemed to be a "management proxy circular" for the purposes
of soliciting proxies under the Canada Business Corporations
Act.
___________
(1) Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 1-13316) for the fiscal year ended April 30, 1997.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 1-13316) for the fiscal year ended April 30, 1998.
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-Q (File No. 1-13316) for the fiscal quarter ended February 1, 1998.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 1-13316) for the fiscal year ended April 30, 1995.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 1-13316) for the fiscal year ended April 30, 1996.
Page 82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NEWBRIDGE NETWORKS CORPORATION
Date: June 17, 1999 By: /s/ Terence H. Matthews
-----------------------
Terence H. Matthews,
Chairman of the Board of
Directors and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: June 17, 1999 By: /s/ Terence H. Matthews
-----------------------
Terence H. Matthews,
Chairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: June 17, 1999 By: /s/ Kenneth B. Wigglesworth
---------------------------
Kenneth B. Wigglesworth,
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: June 17, 1999 By: /s/ Alan G. Lutz
----------------
Alan G. Lutz,
President, Chief Operating Officer
and Director
Page 83
Date: June 17, 1999 By: /s/ Peter D. Charbonneau
------------------------
Peter D. Charbonneau,
Vice Chairman of the Board
and Director
Date: June 17, 1999 By: /s/ Dr. Denzil J. Doyle
-----------------------
Dr. Denzil J. Doyle,
Director
Date: June 17, 1999 By: /s/ Alan D. Horn
----------------
Alan D. Horn,
Director
Date: June 17, 1999 By: /s/ Trevor G. Jones
-------------------
Trevor G. Jones,
Director
Date: June 17, 1999 By: /s/ Graham C. C. Miller
-----------------------
Graham C. C. Miller,
Director
Date: June 17, 1999 By: /s/ Dr. Donald Mills
--------------------
Dr. Donald Mills,
Corporate Vice President and Director
Date: June 17, 1999 By: /s/ Kent H. E. Plumley
---------------------
Kent H. E. Plumley,
Director
Date: June 17, 1999 By: /s/ Dr. John C. J. Thynne
-------------------------
Dr. John C. J. Thynne,
Director
Page 84
EXHIBIT INDEX
Exhibit
No. Page
- --- ----
3.1 Articles of Amalgamation. 88
3.2 By-Law No. 3./(1)/
10.1 Newbridge Networks Corporation Consolidated Key Employee Stock
Option Plan, as amended./(2)/
10.2 Newbridge Networks Corporation 1999 Key Employee Stock Option
Plan./(2)/
10.3--
10.7 [Reserved]
10.8 Credit Facilities Letter dated December 19, 1997 between
Newbridge Networks Corporation and Royal Bank of Canada./(3)/
10.9 Loan Agreement dated January 30, 1998 between Newbridge
Networks Corporation and Citibank Canada./(2)/
10.10 Note Purchase Agreement dated April 28, 1998 between Newbridge
Networks Corporation and the Purchasers named therein./(2)/
10.11--
10.13 [Reserved]
10.14 License Agreement effective May 1, 1994 between 2880016 Canada
Inc. and Newbridge Networks Corporation; Development Agreement
effective May 1, 1994 between 2880016 Canada Inc. and Newbridge
Networks Corporation./(4)/
10.15 License Agreement effective May 1, 1994 between 3015955 Canada
Inc. and Newbridge Networks Corporation; Development Agreement
effective May 1, 1994 between 3015955 Canada Inc. and Newbridge
Networks Corporation./(4)/
10.16 License Agreement effective May 1, 1994 between 3028623 Canada
Inc. and Newbridge Networks Corporation; Development Agreement
effective May 1, 1994 between 3028623 Canada Inc. and Newbridge
Networks Corporation./(4)/
10.17 Lease dated May 29, 1997 for 76,230.65 square feet at 359 Terry
Fox Drive, Kanata, Ontario./(1)/
10.18 Agreement and Purchase and Sale dated February 16, 1996 for
approximately 25,000 square feet at Langstone Business Park,
Langstone, Newport, Wales./(5)/
10.19 [Reserved]
10.20 Lease dated May 1, 1995 for 1,882 square feet, more or less,
at 362 Terry Fox Drive, Kanata, Ontario./(4)/
Page 85
Exhibit
No. Page
- --- ----
10.21 Lease dated April 1, 1995 for 13,106 square feet, more or
less, at 50 Sandhill Road, Kanata, Ontario./(4)/
10.22 Lease dated April 23, 1997 for 242,856.67 square feet, more
or less, at 349 Terry Fox Drive, Kanata, Ontario./(1)/
10.23 Sublease dated October 1, 1996 for 20,718 square feet, more
or less, at 350 Terry Fox Drive, Kanata, Ontario./(1)/
10.23a Letter Agreement dated March 12, 1998 amending Sublease
referred to in Exhibit 10.23./(2)/
10.24 Non-Competition Agreement between Terence Matthews and
Newbridge Networks Corporation dated October 14, 1987. 108
10.25 Employment Agreement between Alan G. Lutz and Newbridge
Networks Corporation dated May 21, 1998./(2)/
10.26 Lease amendment between Kanata Research Park Corporation and
Newbridge Networks Corporation dated January 7, 1998 for
10,930 square feet at 555 Legget Drive. 114
10.27 Lease amendment between CrossKeys Systems Corporation,
Kanata Research Park Corporation and Newbridge Networks
Corporation dated September 21, 1998. 119
10.28 Lease assignment dated November 5, 1998 between Castleton
Network Systems Corporation, Kanata Research Park Corporation
and Newbridge Networks Corporation. 123
10.29 Lease agreement between Kanata Research Park Corporation and
Newbridge Networks Corporation dated February 26, 1999
amending Sublease referred to in Exhibit 10.17. 128
10.30 Lease agreement between Kanata Research Park Corporation and
Newbridge Networks Corporation dated March 15, 1999 for 6,832
square feet at 555 Legget Drive. 133
10.31 Lease agreement between Kanata Research Park Corporation and
Newbridge Networks Corporation dated March 15, 1999 for 1,151
square feet at 555 Legget Drive. 181
11.1 Computation of earnings per share under accounting principles
generally accepted in Canada. 227
11.2 Computation of earnings per share under accounting principles
generally accepted in the United States. 228
21 Subsidiaries of the Registrant. 229
23 Consent of Independent Accountants. 230
Page 86
Exhibit
No. Page
- --- ----
27 Financial Data Schedule. 231
99 "Statement of Executive Compensation" as set forth in the
form of the Company's proxy circular for the annual and
special meeting of shareholders to be held on September 23,
1999, incorporated by reference in Items 11 and 13 of this
Annual Report on Form 10-K, to the extent set forth therein.
This exhibit shall not be deemed to be "soliciting material"
or to be "filed" with the United States Securities and
Exchange Commission for purposes of Section 14 of the United
States Securities Exchange Act of 1934, nor shall it be deemed
to be a "management proxy circular" for the purposes of
soliciting proxies under the Canada Business Corporations Act.
________________
(1) Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 1-13316) for the fiscal year ended April 30, 1997.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 1-13316) for the fiscal year ended April 30, 1998.
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-Q (File No. 1-13316) for the fiscal quarter ended February 1, 1998.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 1-13316) for the fiscal year ended April 30, 1995.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
(File No. 1-13316) for the fiscal year ended April 30, 1996.
Page 87