-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Yh//yk8XlWdrzJHWhWGEWjMRIOnY6hdLmZld5gMPQc03Pbnq5FsqxjuR2E+jXVhq QftiqvsDzFWRQKIjat9N4A== 0000355876-94-000002.txt : 19940216 0000355876-94-000002.hdr.sgml : 19940216 ACCESSION NUMBER: 0000355876-94-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19940101 FILED AS OF DATE: 19940215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GANDALF TECHNOLOGIES INC CENTRAL INDEX KEY: 0000355876 STANDARD INDUSTRIAL CLASSIFICATION: 3577 STATE OF INCORPORATION: A6 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 34 SEC FILE NUMBER: 000-12643 FILM NUMBER: 94508624 BUSINESS ADDRESS: STREET 1: 130 COLONNADE RD S STREET 2: ZIP K2E 7M4 CITY: NEPEAN ONTARIO CANAD STATE: A6 BUSINESS PHONE: 6137236500 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended January 1, 1994 Commission file number 0-12643 --------------- ------- GANDALF TECHNOLOGIES INC. - --------------------------------------------------------------- (Exact name of registrant as specified in its charter) ONTARIO, CANADA NOT APPLICABLE - --------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 130 COLONNADE ROAD SOUTH, NEPEAN, ONTARIO K2E 7M4 - ----------------------------------------- ------------------ (Address of principal executive offices) (Postal Code) Registrant's telephone number, including area code (613) 723-6500 -------------- NOT APPLICABLE - ----------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. *Indicate by check mark whether the registrant (1) has filed all reports required to be iled by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding as at January 31, 1994 was 28,041,333. GANDALF TECHNOLOGIES INC. INDEX Page No. - -------- PART I FINANCIAL INFORMATION Consolidated Balance Sheet - 3 Consolidated Statements of Income and Retained Earnings - 4 Consolidated Statement of Changes in Financial Position - 5 Notes to Consolidated Financial Statements - 6 Management's Discussion and Analysis of Financial Condition and Results of Operations - 11 PART II OTHER INFORMATION 17 SIGNATURE PAGE 17 GANDALF TECHNOLOGIES INC. CONSOLIDATED BALANCE SHEET (Unaudited) (Thousands of U.S. dollars)
Jan 1 Mar 31 1994 1993 ------- ------- ASSETS Current assets: Cash and short-term deposits $ 1,759 $ 9,737 Accounts receivable (note 1) 29,946 35,950 Inventories (note 2) 24,177 25,898 Other current assets 2,191 2,464 -------- - -------- Total current assets 58,073 74,049 Fixed assets (note 3) 27,852 30,768 Goodwill, net of amortization of $2,624 (March 31, 1993: $2,441) 3,790 3,973 Deferred income taxes 8,488 8,381 Other assets (note 4) 12,397 12,432 -------- - -------- Total assets $110,600 $129,603 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank operating lines $ 2,957 $ 10,025 Accounts payable and accrued liabilities (note 5) 19,549 28,802 Deferred revenue 7,116 8,932 Current portion of long-term debt 784 694 -------- - -------- Total current liabilities 30,406 48,453 Long-term debt 2,182 22,980 8.5% convertible debentures, due 2002 22,659 23,862 Shareholders' equity: Capital stock: Common shares, 28,041,333 issued and outstanding (March 31, 1993: 15,864,833) (note 6) 79,742 45,585 Retained earnings (deficit) (17,614) (6,532) Cumulative translation adjustment (6,775) (4,745) -------- - -------- Total shareholders' equity 55,353 34,308 -------- - -------- Total liabilities and shareholders' equity $110,600 $129,603 ======== ======== (See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (Unaudited) (Thousands of U.S. dollars)
13 Weeks Ended 39 Weeks Ended ------------------- - -------------------- Jan 1 Dec 26 Jan 1 Dec 26 1994 1992 1994 1992 -------- ------- - -------- ------- INCOME Revenues: Product revenue $ 20,301 $ 29,365 $ 68,386 $ 87,089 Service revenue 9,965 11,926 31,071 35,326 -------- -------- - -------- -------- 30,266 41,291 99,457 122,415 Operating expenses: Cost of product sales 11,295 14,569 35,754 47,317 Service expenses 6,963 7,378 20,569 21,970 Selling and distribution 11,274 11,323 33,027 37,099 Administration and general 2,825 3,073 7,938 12,088 Research and development(note 7) 4,204 3,671 10,646 13,670 -------- -------- - -------- -------- Income (loss) from operations (6,295) 1,277 (8,477) (9,729) Unusual items (note 8) - - - (5,547) Interest expense (1,010) (1,395) (3,468) (3,396) Other income 517 126 863 140 -------- -------- - -------- -------- Net income (loss) for the period $ (6,788) $ 8 $(11,082) $(18,532) ======== ======== ======== ======== Basic earnings (loss) per share $ (0.29) $ - $ (0.60) $ (1.18) (note 9) ======== ======== ======== ======== Weighted average number of shares outstanding (thousands) 23,517 15,682 18,460 15,681 ====== ====== ====== ====== RETAINED EARNINGS Balance at beginning of period $(10,826) $ (5,565) $ (6,532) $ 12,975 Net income (loss) for the period (6,788) 8 (11,082) (18,532) -------- -------- - -------- -------- Balance at end of period $(17,614) $ (5,557) $(17,614) $ (5,557) ======== ======== ======== ======== (See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC. CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION (Unaudited) (Thousands of U.S. dollars)
39 Weeks Ended - -------------------- Jan 1 Dec 26 1994 1992 -------- ------- Operating activities: Cash provided by (applied to) operations (note 10) $(3,179) $ 478 Decrease (increase) in operating working capital requirements (note 11) (8,038) 1,665 ------- -------- Cash provided by (applied to) operations (11,217) 2,143 ------- -------- Financing activities: Issue of capital stock (note 6) 34,157 9 Decrease in term bank indebtedness (20,382) (2,638) Increase (decrease) in operating lines (7,068) 4,095 Decrease in long-term debt (197) (95) Issue of convertible subordinated notes - 23,787 Escrow funds - (23,970) ------- -------- Cash provided by financing activities 6,510 1,188 ------- -------- Investing activities: Proceeds on disposal of assets 2,246 - Purchase of fixed assets (3,110) (2,687) Software development costs deferred (note 7) (1,923) (2,025) Other (159) (310) ------- -------- Cash applied to investing activities (2,946) (5,022) ------- -------- Decrease in cash in the period (7,653) (1,691) Effect of currency translation adjustments on cash flows (325) (122) Cash and short-term deposits, beginning of period 9,737 3,832 ------- -------- Cash and short-term deposits, end of period $ 1,759 $ 2,019 ======= ======== (See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (All amounts stated in thousands of U.S. dollars.) 1. ACCOUNTS RECEIVABLE Jan 1 Mar 31 1994 1993 ------- ------- Trade $26,546 $32,797 Contract 2,583 1,291 Current portion of sales-type leases 817 1,862 ------- ------- $29,946 $35,950 ======= ======= 2. INVENTORIES Jan 1 Mar 31 1994 1993 ------- ------- Raw materials $ 7,736 $ 7,167 Work-in-process 3,970 3,271 Finished goods 12,471 15,460 ------- ------- $24,177 $25,898 ======= ======= 3. FIXED ASSETS Jan 1 Mar 31 1994 1993 ------- ------- Cost: Land $ 211 $ 216 Buildings 4,612 4,756 Equipment 67,921 72,185 Leasehold improvements 3,954 4,056 ------- - -------- 76,698 81,213 Accumulated depreciation 48,846 50,445 ------- ------- Net book value $27,852 $30,768 ======= ======= 4. OTHER ASSETS Jan 1 Mar 31 1994 1993 ------- ------- Software development costs $ 5,496 $ 5,437 Assets held for disposal 3,910 2,485 Deferred financing costs 1,656 2,122 Other 1,335 1,121 Net investment in sales-type leases - 1,267 ------- - -------- $12,397 $12,432 ======= ======= Assets held for disposal at January 1, 1994 primarily represent certain portfolio investments including approximately $2.6 million relating to the sale by the Company of its mobile dispatch subsidiary during fiscal 1994. At March 31, 1993, assets held for disposal included a vacant facility in the United Kingdom which was sold during fiscal 1994. Certain comparative figures for March 31, 1993 have been reclassified to conform to this presentation. 5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Jan 1 Mar 31 1994 1993 ------- ------- Trade accounts payable $ 9,419 $14,989 Payroll, commissions and related taxes 4,442 5,055 Other payables 5,688 8,758 ------- ------- $19,549 $28,802 ======= ======= 6. CAPITAL STOCK The authorized capital stock of the Company consists of an unlimited number of common shares without par value. An analysis of the capital stock account for each of the thirty-nine week periods ended January 1, 1994 and December 26, 1992 is presented in the following table. During the third quarter of fiscal 1994, the Company completed the sale of 12,000,000 common shares through public issue. 39 Weeks Ended - -------------------- Jan 1 Dec 26 1994 1992 -------- ------- Shares: Balance March 31 15,864,833 15,671,907 Issued for cash 12,176,500 5,926 ---------- ---------- Balance end of period 28,041,333 15,677,833 ========== ========== Amount: Balance March 31 $45,585 $45,242 Issued for cash, net of share issue costs 34,157 9 ------- ------- Balance end of period $79,742 $45,251 ======= ======= 7. RESEARCH AND DEVELOPMENT 13 Weeks Ended 39 Weeks Ended --------------------- - --------------------- Jan 1 Dec 26 Jan 1 Dec 26 1994 1992 1994 1992 ------ ------ ------ ------ Research and development costs $4,185 $4,320 $11,415 $16,401 Investment incentives (156) (500) (710) (1,726) Software development costs: Amortized 602 395 1,864 1,020 Deferred (427) (544) (1,923) (2,025) ------ ------ ------- ------- $4,204 $3,671 $10,646 $13,670 ====== ====== ======= ======= 8. UNUSUAL ITEMS Unusual items appearing on the consolidated statement of income for the thirty-nine week period ended December 26, 1992 represent provisions for severance and redundant facilities which were made at the end of the second quarter of fiscal 1993. Under Staff Accounting Bulletin 67, issued by the Securities and Exchange Commission in the United States, such costs would be presented as a component of the loss from operations. Under this format of presentation the loss from operations for the thirty-nine week period ended December 26, 1992 would have been $15.3 million instead of $9.7 million. Subsequent to the January 1, 1994 fiscal quarter end, the Company eliminated approximately 60 staff positions. The Company anticipates that further downsizing of the workforce will occur during the balance of the current fiscal quarter. Severance costs relating to these actions will be recorded during the fourth quarter ending March 31, 1994. 9. BASIC LOSS PER SHARE Fully diluted earnings per share information has not been presented as potential conversions are anti-dilutive. Basic loss per share figures are calculated using the monthly weighted average number of common shares outstanding for the period. 10. CASH PROVIDED BY (APPLIED TO) OPERATIONS Cash provided by (applied to) operations is computed as follows: 39 Weeks Ended - --------------------- Jan 1 Dec 26 1994 1992 ------ - ------ Loss from operations $(8,477) $(9,729) Depreciation and amortization 7,541 11,237 Other reserves not requiring an outlay of cash - 6,182 Gain on disposal of assets (542) - Income taxes 438 (1,208) Restructuring costs paid - (2,748) Interest paid (3,002) (3,396) Other income 863 140 ------- - ------- $(3,179) $ 478 ======= ======= During the thirty-nine week period ended December 26, 1992, other non-cash reserves of $6.2 million represented provisions relating to inventory and other reserves made during the second quarter of fiscal 1993. 11. DECREASE (INCREASE) IN OPERATING WORKING CAPITAL REQUIREMENTS The decrease (increase) in operating working capital requirements is computed as follows: 39 Weeks Ended - --------------------- Jan 1 Dec 26 1994 1992 ------ - ------ Accounts receivable $ 4,339 $ 2,814 Inventories 189 1,230 Other current assets 228 815 Accounts payable and accrued liabilities (9,244) (3,025) Deferred revenue (1,383) (72) Foreign currency equity adjustment (2,167) (97) ------- - ------- $(8,038) $ 1,665 ======= ======= MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction - ------------ The consolidated financial statements for the third fiscal quarter ended January 1, 1994, together with accompanying notes, should be read as an integral part of this review. These financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada, the application of which, in the case of the Company, conforms in all material respects for the periods presented with accounting principles generally accepted in the United States and the International Accounting Standards for historical costs. All amounts are stated in U.S. dollars unless otherwise indicated. "C$" refers to Canadian dollars. Liquidity and Capital Resources - ------------------------------- During the third quarter of fiscal 1994, the Company completed the sale of 12,000,000 common shares through public issue and received proceeds of C$45.1 million (approximately $33.8 million) net of the underwriters' fees and before deducting expenses of the issue. Term bank indebtedness of $19.7 million was retired during the third quarter of fiscal 1994 from the proceeds of the share issue, representing the full amount outstanding under these loans. The balance of the proceeds of approximately $13.5 million following payment of expenses of the issue was retained for working capital purposes. This latter amount was initially applied in November 1993 to eliminate the utilization of short-term bank operating lines thereby making those lines available for future working capital purposes and reducing interest costs to the Company. At January 1, 1994, the Company was borrowing $1.2 million under these lines, net of cash and short-term deposits of $1.8 million. At the end of the previous quarter on October 2, 1993, utilization of these operating lines on a net basis was $8.6 million. Following the completion of the share issue in the third quarter of fiscal 1994 and the subsequent retirement of all term bank debt, the Company renegotiated the terms of its operating loan agreements with a Canadian chartered bank. These amended agreements, which represent committed credit facilities until the annual review date of July 31, 1994, became effective in January 1994 following the end of the third quarter. Under the amended agreements, the authorized amount of the facilities increased from $11.3 million to $15.8 million, when expressed in U.S. funds. The extent to which these facilities are available to the Company at any time is determined by a margin formula based on trade accounts receivable and inventories of two of the Company's subsidiaries. During January 1994, following the date on which the amended loan agreements became effective, approximately $11.8 million of the $15.8 million was available to the Company under the margin formulas. A demand loan facility in the United Kingdom provided an additional $2.1 million in available short-term credit. As indicated above, at January 1, 1994, borrowings under these facilities were $1.2 million, net of cash balances of $1.8 million. The two operating loan agreements in Canada contain covenants relating to the Company's financial performance during the period for which the facility is committed (i.e. up to July 31, 1994). Although the Company is currently in compliance with these covenants, the Company is unlikely to be in full compliance with the terms of the agreements at the end of the current fiscal quarter ending March 31, 1994. The breach of a financial covenant would constitute an event of default for which the Company would seek a waiver from the bank. There can be no assurance that such a waiver would be granted. The breach of a financial covenant, if not waived, would give the bank the right to repayment on demand of all outstanding borrowings. If such demand is made the Company does not currently have the financial resources available to repay those lines. Upon maturity of the operating loans on July 31, 1994, the outstanding borrowings under these facilities become repayable on demand unless a renewal of the committed operating facility is agreed between the Company and the bank. There can be no assurance that such an offer to renew the facilities will be provided by the bank. The Company reported negative cash flow of $7.7 million during the thirty-nine week period ended January 1, 1994, representing negative cash flow from operating activities of $11.2 million and net positive cash flow from financing and investing activities (including the share issue in the third quarter) of $3.5 million. Of the $11.2 million in negative cash flow from operations during the first three quarters of fiscal 1994, $5.1 million occurred in the third quarter ended January 1, 1994 and was primarily related to the net loss sustained in the quarter. Significant negative cash flow is expected to occur in the fourth quarter as a result of an anticipated operating loss and the payments associated with staff downsizing actions. Negative cash flow from operations is expected to continue during the first quarter of fiscal 1995 which will also be influenced by the fourth quarter restructuring actions. The restructuring measures being taken in the fourth quarter of fiscal 1994 will not have a full-quarter impact on expenses until the second quarter of fiscal 1995. The Company intends to meet its short-term cash requirements through operating cash flow and currently available credit resources. However, as described above, it is currently unclear whether those credit resources will be available after the March 31, 1994 quarter. Even if they remain available, due to anticipated additional cash requirements during the next several fiscal quarters relating to operations and restructuring costs, there can be no assurance that the Company's short-term bank credit facilities, to the extent they remain available, will be sufficient to meet the Company's short-term obligations. The availability of these credit facilities will in part be determined by future operating performance. The Company is examining alternative sources of short-term financing. There can be no assurance that such financing will be obtained, if required by the Company. The Company's ability to generate positive cash flow is ultimately dependent on its ability to attain the break even level resulting from the downsizing actions being taken in the fourth quarter. During the fourth quarter of fiscal 1994, the Company retained the services of Wood Gundy Inc. to explore possible strategic alliances to accelerate the return to profitability. Results of Operations - Third Quarter Ended January 1, 1994 - ----------------------------------------------------------- The following table sets forth items derived from the quarterly consolidated statements of income as a percentage of revenues for each of the five fiscal quarters ended January 1, 1994. The column in the table entitled "Percentage Change Quarter 3, 1994 vs 1993" represents the percentage change, either favourable or (unfavourable), in the dollar amount of such items for the third quarter of fiscal 1994 compared with the third quarter of fiscal 1993.
Percentage Fiscal 1993 Fiscal 1994 Change -------------------- - ------------------------------- Quarter 3 Quarter 3 Quarter 4 Quarter 1 Quarter 2 Quarter 3 1994 vs. 1993 --------- --------- --------- --------- - --------- ------------- (Thousands of dollars) Revenues $41,291 $38,485 $34,173 $35,018 $30,266 (26.7)% ======= ======= ======= ======= ======= ======= (Percentage of Revenues) Revenues: Product 71.1% 69.6% 68.6% 70.3% 67.1% (30.9)% Service 28.9 30.4 31.4 29.7 32.9 (16.4) ------- ------- ------- ------- ------- 100.0% 100.0% 100.0% 100.0% 100.0% (26.7) ======= ======= ======= ======= ======= Gross Profit: Product 50.4% 48.0% 49.6% 48.7% 44.4% (39.1) Service 38.1 37.1 36.2 34.8 30.1 (34.0) Combined 46.9 44.7 45.4 44.6 39.7 (37.9) Expenses: Selling & distribution 27.4 28.1 31.0 31.9 37.3 0.4 Administration & general 7.5 7.3 7.8 7.0 9.3 8.1 Research & development 8.9 9.4 9.0 9.6 13.9 (14.5) ------- ------- ------- ------- ------- Income (loss) from operations 3.1 (0.1) (2.4) (3.9) (20.8) Financial expenses (3.1) (2.4) (3.3) (2.8) (1.6) ------- ------- ------- ------- ------- Net income (loss) -% (2.5%) (5.7%) (6.7)% (22.4) ======= ======= ======= ======= =======
Revenues - -------- The following table sets forth revenues by geographic segment for the quarter ended January 1, 1994 and for each of the preceding four quarters. The table also includes the change in revenues, expressed as a percentage, in the third quarter of fiscal 1994 compared to the corresponding period of fiscal 1993.
Percentage Fiscal 1993 Fiscal 1994 Change -------------------- - ------------------------------- Quarter 3 Quarter 3 Quarter 4 Quarter 1 Quarter 2 Quarter 3 1994 vs. 1993 --------- --------- --------- --------- - --------- ------------- (Thousands of dollars) United States $12,349 $10,972 $ 9,515 $ 9,226 $ 7,480 (39.4)% United Kingdom 10,224 9,958 9,575 10,719 9,061 (11.4) Canada 7,954 9,134 5,577 6,338 5,078 (36.2) Holland/France 5,640 3,736 4,141 3,628 4,024 (28.7) International markets 5,124 4,685 5,365 5,107 4,623 (9.8) ------- ------- ------- ------- - ------- $41,291 $38,485 $34,173 $35,018 $30,266 (26.7) ======= ======= ======= ======= =======
Revenues in the third quarter of fiscal 1994 were $30.3 million, consisting of $20.3 million of product revenue and $10.0 million of service revenue. In the second quarter of fiscal 1994, total revenues were $35.0 million (product revenue of $24.6 million and service revenue of $10.4 million) and in the third quarter of fiscal 1993, total revenues were $41.3 million ($29.4 million of product revenue and $11.9 million of service). The decline in revenues in the third quarter of fiscal 1994 compared to the second quarter of fiscal 1994 and the third quarter of fiscal 1993 has occurred primarily in North America. The decline in revenues in the third quarter of fiscal 1994 compared to the second quarter resulted from the decline in revenues from traditional product lines which more than offset the growth in the Company's new remote networking access products. The decline in revenues between the third quarters of fiscal 1993 and fiscal 1994 was influenced by changes in the average exchange rates used to translate the results of foreign operations to U.S. dollars and also as a result of the sale by the Company of its mobile dispatch subsidiary during the first quarter of the current fiscal year. On a fully comparable basis, after adjusting for the effect of these two items, total revenues declined by 20.5% during the third quarter of fiscal 1994 compared to the same quarter a year ago. The quarter-over-quarter decrease in reported revenues of 26.7% included 3.2% or $1.3 million relating to the strengthening of the U.S. dollar against certain European currencies and the Canadian dollar and 3.0% or $1.2 million relating to GMSI, the Company's former mobile dispatch subsidiary. Revenues outside the Company's North American markets (the United Kingdom, Holland/France and other international markets), when expressed in their domestic currencies, declined by 7.5% in the third quarter of fiscal 1994 compared to the third quarter of fiscal 1993. The weakening of the underlying currencies against the U.S. dollar increased the decline in revenues in these markets to 15.6%. Revenues in the Company's two North American markets (the United States and Canada) were $12.6 million in the third quarter of fiscal 1994, $15.6 million in the second quarter of fiscal 1994 and $20.3 million in the third quarter of fiscal 1993. The continuing trend in the third quarter of fiscal 1994 to lower product revenue resulted from declining sales in mature product lines which occurred at a faster rate in the third quarter than had been anticipated. Gross Profit - ------------ Gross profit on product revenue (product revenue minus the cost of product sales), expressed as a percentage of product revenue was 44.4% during the third quarter of fiscal 1994, compared with 48.7% in the second quarter of fiscal 1994 and 50.4% in the third quarter of fiscal 1993. The decline in the product gross margin between the second and third quarters of fiscal 1994 occurred primarily as a result of higher adverse manufacturing volume variances which are influenced by production levels. The gross profit on service revenue (service revenues minus service expenses), expressed as a percentage of service revenue was 30.1% in the third quarter of fiscal 1994, 34.8% in the second quarter of fiscal 1994 and 38.1% in the third quarter of fiscal 1993. The gross margin on service revenue has declined from the level in the third quarter a year ago due to a decline in service revenue of approximately 16% while service expenses during the same period have declined by approximately 6%. The Company is examining alternatives to improve the efficiency of the service organization. Operating Expenses - ------------------ Operating expenses (selling and distribution, administration and general and research and development) were $18.3 million in the third quarter of fiscal 1994, $17.0 million in the second quarter of fiscal 1994 and $18.1 million in the third quarter of fiscal 1993. Operating expenses increased in the third quarter of fiscal 1994 compared to the second quarter of fiscal 1994 primarily in the area of research and development which increased $0.8 million. The primary components of the increase in net research and development costs in the third quarter were reduced levels of contract engineering for customers of $0.3 million, increased net amortization of deferred software development costs of $0.3 million and reduced government grants of $0.1 million. During the third quarter of fiscal 1994, the Company received grants of $0.2 million under the Canadian federal government's Microelectronics and Systems Development Program ("MSDP"). To date, grants totalling approximately $3.8 million have been received under this program. This funding is potentially repayable in installments based on revenues of the Company, provided certain conditions are met relating to the commercialization of the resulting technology. The Company is currently examining the actions necessary to reduce operating expenses. Operating Loss - -------------- The loss from operations in the third quarter of fiscal 1994 was $6.3 million. This loss from operations was greater than the $1.4 million operating loss in the second quarter of fiscal 1994 as a result of lower revenues and higher operating expenses, primarily in the area of research and development. In the third quarter of fiscal 1993, the Company reported income from operations of $1.3 million. Financial Expenses - ------------------ Interest expense was $1.0 million in the third quarter of fiscal 1994 compared to $1.2 million in the second quarter of fiscal 1994 and $1.4 million in the third quarter of fiscal 1993. Interest-bearing debt has been reduced to $28.6 million at January 1, 1994 from $57.9 million at October 2, 1993. This reduction occurred as a result of the retirement of term bank loans and the reduced utilization of bank operating lines following the issuance of common shares by the Company in the third quarter of fiscal 1994. Net Income (Loss) - ----------------- The net loss for the third quarter of fiscal 1994 was $6.8 million or $0.29 per share. In the third quarter of fiscal 1993 the Company's net income was at the break even level. The net loss for the thirty-nine weeks ended January 1, 1994 was $11.1 million or $0.60 per share compared to a net loss of $18.5 million or $1.18 per share for the corresponding period in fiscal 1993. II - OTHER INFORMATION - ---------------------- Item 6(a) - Exhibits - -------------------- Exhibit No. Description - ----------- ----------- 10.1 Underwriting Agreement (Canadian) dated as of October 20, 1993 among Wood Gundy Inc., Deacon Barclays de Zoete Wedd Limited, Gordon Capital Corporation and Richardson Greenshields of Canada Limited and the Company. 10.2 Credit Agreement dated as of January 7, 1994 between the Royal Bank of Canada and the Company. 10.3 Credit Agreement dated as of January 7, 1994 between the Royal Bank of Canada and Gandalf Canada Ltd. Item 6(b) - Reports on Form 8-K - ------------------------------ There were no reports on Form 8-K filed for the quarter ended January 1, 1994. SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GANDALF TECHNOLOGIES INC. February 10, 1994 BY: s/BRIAN R.HEDGES ________________________ ___________________________________ Date Brian R. Hedges President (Chief Executive Officer) February 10, 1994 BY: s/WALTER R. MACDONALD ________________________ __________________________________ Date Walter R. MacDonald Vice President, Finance (Chief Financial Officer) EX-10.1 2 EXHIBIT 10.1 October 20, 1993 Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Attention: Mr. Brian R. Hedges President and Chief Executive Officer Dear Sirs: We understand that Gandalf Technologies Inc. (the "Company") intends to offer (the "Offering") to the public the Offered Shares (as defined below). To that end , we understand that the Company has filed the Preliminary Prospectus (as defined below) in each of the Qualifying Jurisdictions (as defined below) and will file the Prospectus (as defined below) as soon as practicable in accordance with the terms of this agreement in each of the Qualifying Jurisdictions. OFFER TO PURCHASE 1. (1) Based upon the foregoing and subject to the terms and conditions set out below, Wood Gundy Inc. ("WGI"), Deacon Barclays de Zoete Wedd Limited ("DBZW"), Gordon Capital Corporation ("GCC") and Richardson Greenshields of Canada Limited ("RGC") (collectively the "Underwriters" and individually an "Underwriter") hereby severally and not jointly offer to purchase from the Company, as more particularly described in section 15, and by its acceptance hereof the Company agrees to allot, issue and sell to the Underwriters, at the Closing Time (as defined below), 12,000,000 Common Shares (the "Offered Shares") at a price of $4.00 for each Offered Share, being an aggregate purchase price of $48,000,000. (2) In this Agreement: "business day" means a day which is not a Saturday, a Sunday or a statutory holiday in the Province of Ontario; "Closing" means the completion of the issue and sale by the Company and the purchase by the Underwriters of the Offered Shares; "Closing Date" means November 5, 1993 or such other date as the Company and the Underwriters may agree in writing, provided that in no event shall the Closing Date be later than six weeks after the date a receipt is issued by the Ontario Securities Commission for the Prospectus; " Closing Time" means 8:00 a.m. (Toronto time) on the Closing Date or such other time on the Closing Date as the Company and the Underwriters may agree; " Company's Auditors" means KPMG Peat Marwick Thorne, the auditors of the Company; " Material Subsidiaries" means the Subsidiaries disclosed under the heading "Intercorporate Relationships" in the Preliminary Prospectus and the Prospectus; " misrepresentation", " material fact" and " material change" have the respective meanings ascribed thereto in the Securities Act (Ontario), except as otherwise expressly provided herein; " Preliminary Prospectus" means the preliminary prospectus of the Company dated September 21, 1993; " Prospectus" means the (final) prospectus of the Company to be filed in the Qualifying Jurisdictions in order to qualify for distribution the Offered Shares; " Qualifying Jurisdictions" means all of the provinces of Canada; " Securities Laws" means, collectively, the applicable securities laws, regulations and published policy statements of each of the Qualifying Jurisdictions; " Securities Regulator" means the applicable securities commission or regulatory authority in each of the Qualifying Jurisdictions; " Subsidiaries" has the meaning ascribed thereto in the Securities Act (Ontario); " Supplementary Material" has the meaning ascribed thereto in section 8; " this Agreement" means the agreement resulting from the acceptance by the Company of the offer made by the Underwriters herein; and " to the best of the knowledge, information and belief of" means (unless otherwise expressly stated) a statement of the declarant's knowledge of the facts or circumstances to which such phrase relates after having made due inquiries and investigations in connection with such facts and circumstances. (3) Any reference in this Agreement to any section, subsection, paragraph or subparagraph shall refer to a section, subsection, paragraph or subparagraph of this Agreement. (4) All defined terms herein denoted by initial capital letters and not otherwise defined have the meanings attributed thereto in the Preliminary Prospectus. (5) Words importing the singular number only shall include the plural and vice versa, and words importing the use of any gender shall include all genders. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 2. (1) The Company represents and warrants to each of the Underwriters, and the Company acknowledges that the Underwriters are relying upon such representations, warranties and agreements in entering into this Agreement, that: (a) Each of the Company and its Material Subsidiaries has been duly incorporated and organized and is validly subsisting under the laws of its jurisdiction of incorporation, has all requisite power and authority and, except where failure to be so qualified would not in the aggregate have a material adverse effect on the Company and its Subsidiaries, as a whole, is duly qualified to carry on its business as now conducted and to own, lease or operate its properties and assets in each of the jurisdictions in which it carries on its business or owns, leases or operates its properties or assets. (b) The authorized and issued capital of the Company is as described in the Preliminary Prospectus and all of the issued Common Shares in the capital of the Company have been duly authorized and validly issued and are fully paid and non-assessable. (c) The Company directly or indirectly owns all of the outstanding shares in the capital of each of its Subsidiaries; provided, however, that shares of certain Subsidiaries are pledged to banks as disclosed in note 9 on page 41 of the Preliminary Prospectus. (d) No person, firm or corporation has, as of the date hereof, or will have as at the Closing Time, any agreement or option, or right or privilege (whether preemptive, contractual or otherwise) capable of becoming an agreement for the purchase, subscription and issuance of any Common Shares or other securities of the Company or its Subsidiaries which are not disclosed in the Preliminary Prospectus. (e) The Company does not have any Subsidiaries which are not disclosed in the Preliminary Prospectus other than Subsidiaries which, on an individual and aggregated basis, do not have (i) assets, or investments or advances from the Company or other Subsidiaries, which exceed 10% of the assets of the Company and its Subsidiaries on a consolidated basis, or (ii) sales and operating revenues which exceed 10% of the sales and operating revenues of the Company and its Subsidiaries on a consolidated basis. (f) The R-M Trust Company has been duly appointed as registrar and transfer agent for the Common Shares. (g) The Company has all requisite corporate power and authority to: (i) enter into this Agreement; (ii) offer, sell, issue and deliver the Offered Shares in accordance with the provisions of this Agreement; and (iii) to carry out all the terms and provisions hereof to be carried out by it. The execution and delivery of this Agreement and the performance of the transactions contemplated hereby has been duly authorized by all necessary action of the Company and, at the Closing Time, this Agreement will have been duly executed and delivered by the Company and will be a valid and binding agreement of the Company enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency and other laws affecting the rights of creditors generally and subject to the qualifications that equitable remedies may be granted in the discretion of a court of competent jurisdiction and that rights of indemnity and waiver of contribution may be contrary to public policy. (h) The execution and delivery of this Agreement by the Company and the consummation of the transactions contemplated herein, including, without limitation, the offering, issuance, sale and delivery in the Qualifying Jurisdictions of the Offered Shares and the compliance by the Company with the other provisions of this Agreement: (i) do not require the consent, approval, authorization, registration or qualification of or with any governmental or regulatory authority, administrative tribunal, stock exchange, Securities Regulator or other third party applicable to the Company or its Subsidiaries, except such as may be required (and shall be obtained as provided in this Agreement) under applicable Securities Laws of the Qualifying Jurisdictions or section 12 hereof; and (ii) not conflict with nor will any of such events conflict with or constitute a default under or breach of, or create a state of facts which after notice or lapse of time, or both, could constitute a default under or breach of, any of the terms, conditions and provisions of any contract, indenture, mortgage, trust deed, loan agreement, note, lease or other agreement or instrument to which the Company or its Subsidiaries is a party or by which any of its properties or assets is or may be contractually bound at the Closing Time or to which any of the properties or assets of the Company or its Subsidiaries is subject, or the constating documents, resolutions or by-laws of the Company or its Subsidiaries or any statute or regulation or any judgment, decree, order, rule or regulation of any court or any governmental or regulatory authority, arbitrator, administrative tribunal, stock exchange or Securities Regulator which may, in any way, have a material adverse effect on the condition (financial or otherwise) of the business, affairs, properties, assets, net worth, capital, results of operations or business prospects of the Company or its Subsidiaries. (i) Except that the loan agreement with The Chase Manhattan Bank (National Association) ("Chase N.A."), as agent requires that any proceeds from an equity offering of the Company be used to pay down outstanding indebtedness under the loan, the execution and delivery of this Agreement and the consummation of the transactions contemplated herein will not result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Company or its Subsidiaries pursuant to any contract, indenture, trust deed, mortgage, loan agreement, note, lease or other agreement or instrument to which the Company or its Subsidiaries is a party or by which it may be contractually bound at the Closing Time, or to which any of the properties or assets of the Company or its Subsidiaries is subject. (j) The Company is not in violation of any of its constating documents, resolutions or by-laws or, except in connection with loan agreements with Chase N.A., as agent and Royal Bank of Canada, default in the performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, trust deed, mortgage, loan agreement, note, lease or other agreement or instrument to which the Company is a party or by which it may be contractually bound at the Closing Time, or to which any of the properties or assets of the Company may be subject where such default or violation may have a material adverse effect on the Company. Except in connection with loan agreements with Chase N.A., as agent and Royal Bank of Canada, there exists no state of facts which, after notice or lapse of time or both, or otherwise, would constitute a default under or breach of a material obligation, agreement, covenant or condition of any of such documents where such default may have a material adverse effect on the Company. All of such documents are now in good standing and in full force and the Company is entitled to all of the benefits thereunder. (k) Each of the Company and its Subsidiaries possesses all material certificates, authorizations, permits or licenses issued by the appropriate governmental or regulatory agencies or bodies in each of the applicable provinces or countries in order for it to carry on its business or own, lease or operate its properties or assets, and none of the Company nor its Subsidiaries have received any notice of proceedings relating to the revocation or modification of any such certificate, authorization, permit or licence which may, singly or in the aggregate, materially and adversely affect the Company or its Subsidiaries or any of their properties or assets. (l) Except as disclosed in the Preliminary Prospectus, there are no actions, suits, proceedings or inquiries pending or, to the best of the knowledge, information and belief of the Company, threatened against or affecting the Company or its Subsidiaries or any of their properties or assets at law or in equity or before or by any governmental or regulatory agency or board, domestic or foreign, which may, in any way, have a material adverse effect on the condition (financial or otherwise) of the business, properties, assets, capital, net worth, results of operations or business prospects of the Company or its Subsidiaries. (m) Except as disclosed in the Preliminary Prospectus, the Company does not have any contingent liabilities which are material to the Company or its Subsidiaries or their business, operations, properties or assets. (n) The Offered Shares have been approved for listing on The Toronto Stock Exchange ("TSE"), subject to the satisfaction by the Company of the conditions (the "Listing Conditions") set out in the letter dated October 7, 1993 from the TSE to Stikeman, Elliott, counsel to the Company, and, at the Closing Time, the Company will have satisfied such of the Listing Conditions as will be possible to satisfy at such time and will use its best efforts to satisfy any conditions not satisfied at the Closing Time as soon as practicable after the Closing Time. At the Closing Time, the definitive form of certificate for the Offered Shares will be in proper form under the laws of the Province of Ontario and will comply with the requirements of the TSE. (o) The Company has not agreed to issue or sell any securities (as defined in the Securities Act (Ontario)) of the Company, other than as described in the Preliminary Prospectus. All Offered Shares to be issued as hereinbefore described have been duly authorized and conditionally issued and, at the Closing Time when certificates for the Offered Shares are countersigned by the Company's transfer agent and registrar and issued, delivered and paid for, such Offered Shares will be validly issued as fully paid and non-assessable Common Shares in the capital of the Company. (p) No order, ruling or determination having the effect of suspending or restricting the offer or sale, or ceasing the trading, of the Offered Shares or any other securities of the Company has been issued or made by any court or any governmental or regulatory authority, arbitrator, administrative tribunal, stock exchange or Securities Regulator and is continuing in effect, and no proceedings for that purpose have been instituted or are pending or, to the best of the knowledge, information and belief of the Company, contemplated or threatened by any such authority or under any Securities Laws. (q) The audited consolidated balance sheets of the Company as at March 31, 1993 and March 31, 1992 and the consolidated statements of income and retained earnings and changes in financial position for the year ended March 31, 1993, the eight months ended March 31, 1992 and for each of the years in the three year period ended July 31, 1991 (collectively, the "Historical Financial Statements"), as set out in the Preliminary Prospectus, are fairly and, in all material respects, completely and accurately stated and have been prepared in accordance with Canadian generally accepted accounting principles. (r) Except as provided herein, there is no person, firm or corporation which has been engaged by the Company to act for the Company and which is entitled to any brokerage or finder's fee in connection with this Agreement or any of the transactions contemplated hereunder, and in the event any such person, firm or corporation establishes a claim for any fee from the Underwriters, the Company covenants to indemnify and hold harmless the Underwriters with respect thereto and with respect to all costs reasonably incurred in the defence thereof. (s) To the best of the knowledge of the Company, none of the holders of Common Shares or the directors or officers of the Company or any associate or affiliate of any of the foregoing had, has or intends to have any material interest, direct or indirect, in any material transaction contemplated by this Agreement or the Preliminary Prospectus or in any proposed material transaction with the Company which, as the case may be, materially affects, is material to or will materially affect the Company or its Subsidiaries, except as and to the extent disclosed in the Preliminary Prospectus. (t) The Company will not take any action, directly or indirectly, to cause or result in, or which might reasonably be expected to constitute, the stabilization or manipulation of the price of its securities prior to the date set forth in the notice contemplated by Section 17 that distribution of the Common Shares has ceased. (u) The Company and its Subsidiaries have timely filed all necessary tax returns and notices and have paid or made provision for all applicable taxes of whatever nature for all tax years to the date hereof to the extent such taxes have become due or have been alleged to be due; the Company is not aware of any material tax deficiencies or material interest or penalties accrued or accruing, or alleged to be accrued or accruing, thereon with respect to itself or its Subsidiaries which have not otherwise been provided for by the Company. (2) The Company represents and agrees, for the benefit of the Underwriters, to the representations and agreements of the Company described in Schedule "A" hereto, which is incorporated by reference in this Agreement. (3) Each certificate required to be provided in accordance with the terms of this Agreement and signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. The Company's obligations as regards the breach of any representation and warranty of the Company set forth in this section 2 or in any such certificate or in section 9 or elsewhere in this Agreement shall be limited to those obligations which are provided for in section 13. UNDERWRITERS' FEES 3. In consideration for the Underwriters' services in: (a) assisting in the preparation of the Preliminary Prospectus, the Prospectus and of any Supplementary Material; (b) forming and managing banking, selling or other groups for the distribution of the Offered Shares; (c) distributing the Offered Shares both directly and through other registered dealers and brokers in Canada; and (d) arranging marketing information meetings; the Company (out of its general funds) agrees to pay to the Underwriters by certified cheque or bank draft, at the Closing Time, in the event that the Offered Shares are purchased by the Underwriters, an aggregate fee of $2,880,000, being a fee of $0.24 per Offered Share so purchased. CLOSING PROCEDURES 4. (1)The purchase of the Offered Shares shall be completed at the Closing Time at the offices of Stikeman, Elliott, Suite 5300, Commerce Court West, Toronto, Ontario M5L 1B9 or at such other place in Toronto as the Underwriters and the Company may agree. At the Closing Time, the Company shall issue the Offered Shares to, or to the order of, WGI, on behalf of the Underwriters, and deliver to WGI, on behalf of the Underwriters, one or more Common Share certificate(s) in definitive form representing the Offered Shares, such Common Share certificate(s) to be registered in the name of WGI, on behalf of the Underwriters, or in such other name or names as WGI, on behalf of the Underwriters, shall notify the Company in writing not less than one (1) whole business day prior to the Closing Date, against payment by the Underwriters to the Company of the aggregate purchase price for the Offered Shares in lawful money of Canada by certified cheque or bank draft at par in Toronto together with the receipt of WGI, on behalf of the Underwriters, for such Common Share certificate(s) against delivery of the Company's receipt for such monies. The Company shall contemporaneously pay to WGI, on behalf of the Underwriters, the Underwriters' fees as described in section 3 in connection with the issue and sale of the Offered Shares, by the Company's certified cheque or bank draft at par in Toronto against delivery of the Underwriters' receipt therefor. (2)Provided notice in writing reasonably satisfactory to the Company is provided by one or more Underwriters, it is understood that any one of the Underwriters, individually, may (but shall not be obliged to) make payment on behalf of any other Underwriter or Underwriters for all, but not less than all, of the Common Shares to be purchased by such Underwriter or Underwriters. No such payment shall relieve such Underwriter or Underwriters from any of its or their obligations hereunder. (3)The Company shall make all necessary arrangements for the exchange on the Closing Date of the Common Share certificate(s), issued as aforesaid, at the principal offices of The R-M Trust Company in the cities of Halifax, Montreal, Toronto, Winnipeg, Calgary and Vancouver for Common Share certificates representing such number of Common Shares and registered in such names as shall be designated to The R-M Trust Company by WGI, on behalf of the Underwriters and any members of the Underwriters' banking, selling or other groups referred to in paragraph 3(b), not less than three (3) business days prior to the Closing Date. All such exchanges and other exchanges necessary to complete the distribution of the Offered Shares shall be made without cost to the Underwriters or the members of such Underwriters' banking, selling or other groups. COMPLIANCE WITH SECURITIES LAWS 5. (1) The Company shall as soon as practicable fulfill all requirements as are appropriate and obtain receipts for the Prospectus which under the applicable Securities Laws must be fulfilled or received in order to qualify the Offered Shares for distribution in the Qualifying Jurisdictions by the Underwriters and by any other investment dealers or brokers registered in the Qualifying Jurisdictions. (2) The Offered Shares shall be offered for sale by the Underwriters to the public in the Qualifying Jurisdictions in compliance with applicable laws and at the offering price per Offered Share of $4.00 to be specified on the cover page of the Prospectus. The Underwriters shall cause similar undertakings to be contained in any agreements among the members of any banking, selling or other groups formed for the distribution of the Offered Shares. (3) The Underwriters covenant and agree that if they offer to sell or sell any Offered Shares in jurisdictions other than the Qualifying Jurisdictions, such offers or sales shall be effected in accordance and compliance with the applicable laws of such jurisdictions. The Underwriters shall, and shall use their reasonable best efforts to cause members of any banking, selling or other groups (the "selling dealer group") formed for the distribution of the Offered Shares to, only sell the Offered Shares in any jurisdiction other than the Qualifying Jurisdictions in full compliance with all local laws, regulations and policy statements and in such manner so as not to require the production or qualification of a prospectus or other offering document in respect of such sale under the laws of any such jurisdiction or to require the Company to become registered as an issuer of securities, or to require the Offered Shares to become registered for distribution under such laws, regulations and policy statements. (4) The Underwriters agree, on behalf of themselves and their United States affiliates, for the benefit of the Company to comply with the selling restrictions imposed by the laws of the United States and described in Schedule "A" hereto, which is incorporated by reference in this Agreement. They also agree to obtain such an agreement of each member of the selling dealer group. Notwithstanding the provisions of this Section 5(4), no Underwriter shall be liable to the Company pursuant to this Section or Schedule "A" as a result of the violation by another member of the selling dealer group of this Section 5(4) or Schedule "A" if the Underwriter first mentioned is not itself in violation. (5) The Underwriters shall not make use of any "green sheet" in respect of the Offered Shares or the offering thereof without the prior approval of the Company, and will comply with the notice dated July 7, 1989 issued by the Ontario Securities Commission with respect to the use of "green sheets" and other marketing material during the waiting period under the Securities Act (Ontario). DELIVERY OF PROSPECTUS 6. (1) The Company shall deliver to the Underwriters, without charge, in Toronto, Ontario, contemporaneously with or prior to the filing of the Prospectus with the Ontario Securities Commission: (a) a copy of the Prospectus in each of the English and French language (which French language copy need not be delivered until the French language version of the Prospectus has been filed with the Quebec Securities Commission), signed as required by the Securities Laws; (b) a copy of any other document required to be filed by the Company under the Securities Laws in connection with the distribution of the Offered Shares in each of the Qualifying Jurisdictions; (c) evidence reasonably satisfactory to the Underwriters that application to list the Offered Shares on the TSE has been accepted by the TSE, subject to the satisfaction by the Company of the Listing Conditions; (d) a comfort letter dated the date of the Prospectus and addressed by the Company's Auditors to the Underwriters, their counsel and the directors of the Company, in form and substance satisfactory to the Underwriters, acting reasonably; (e) an opinion of the Company's Quebec counsel addressed to the Underwriters and their counsel in form and substance satisfactory to the Underwriters, acting reasonably, substantially to the effect that, except for the financial information appearing in the Prospectus in the English language under the heading "Prospectus Summary-Selected Consolidated Financial Information", the information appearing under the headings "Management's Discussion and Analysis" and "Auditors' Report" (including the financial statements referred to therein), the Prospectus printed in the French language is in all material respects a complete and proper translation of the Prospectus printed in the English language and the said English and French language versions of the Prospectus are not susceptible of any materially different interpretation with respect to any material matter contained therein; (f) an opinion of the Company's Auditors addressed to the Underwriters and their counsel in form and substance satisfactory to the Underwriters, acting reasonably, substantially to the effect that the information under the headings "Prospectus Summary-Selected Consolidated Financial Information", the information appearing under the headings "Management's Discussion and Analysis" and "Auditors' Report" (including the financial statements referred to therein), in the French version of the Prospectus are, in all material respects, a complete and proper translation of the English language version; and (g) an opinion of the Company's Quebec counsel addressed to the Underwriters and their counsel, in form and substance satisfactory to the Underwriters, acting reasonably, with respect to compliance with the laws of Quebec relating to the use of the French language in connection with the distribution of the Offered Shares in Quebec. (2) The Company shall co-operate in all respects with the Underwriters to allow and assist the Underwriters to participate fully in the preparation of the Prospectus and shall allow the Underwriters to conduct all "due diligence" investigations which the Underwriters may reasonably require to fulfil the Underwriters' obligations as underwriters and to enable the Underwriters responsibly to execute any certificate required to be executed by the Underwriters in such documentation. (3) The Company shall cause to be delivered to the Underwriters, without charge, as soon as possible following the time of issuance of a receipt in the Province of Ontario for the Prospectus and in any event not later than 9:00 a.m. (Toronto time) on November 1, 1993, in the cities of Toronto and Montreal, such numbers of commercial copies of the Prospectus, in both the English and French languages, as the Underwriters shall reasonably request (and in respect of which they have provided the Company with reasonable advance written notice). The Company shall similarly cause to be delivered to the Underwriters commercial copies of any Supplementary Material required to be delivered to the Underwriters or to be delivered to purchasers or prospective purchasers of the Offered Shares in the Qualifying Jurisdictions. NOTICE OF MATERIAL CHANGE 7. During the period of distribution (which shall be deemed to have terminated with the giving of notice under section 17(ii) of this Agreement) of the Offered Shares, the Company shall promptly notify the Underwriters in writing of: (a) any material change (actual, anticipated, proposed or threatened) in any or all of the business, affairs, properties, assets, capital, net worth, liabilities (contingent or otherwise), results of operations or business prospects of the Company or its Subsidiaries; (b) any change (actual, anticipated, proposed or threatened) in a material fact contained in the Preliminary Prospectus, the Prospectus or any Supplementary Material; (c) any change in applicable laws materially affecting or which may materially affect the business, affairs, properties, assets, capital, net worth, liabilities (contingent or otherwise), results of operations or business prospects of the Company or its Subsidiaries or the Offered Shares or the distribution thereof, which change is or may be of such a nature as to render any statement in the Preliminary Prospectus, the Prospectus or any Supplementary Material misleading or untrue or result in a misrepresentation therein or which would otherwise require an amendment to the Preliminary Prospectus, the Prospectus or the Supplementary Material under the Securities Laws; and (d) any material fact which becomes known which, pursuant to the Securities Laws, would have been required to be stated in the Preliminary Prospectus, the Prospectus or any Supplementary Material had it been known by the Company at or prior to the respective date hereof. In any such case, the Company shall promptly and, in any event within applicable time limitations under the Securities Laws, comply with all legal requirements necessary to comply with the Securities Laws applicable to continued distribution of the Offered Shares in the Qualifying Jurisdictions as contemplated in section 5. The Company shall in good faith discuss with the Underwriters any change in circumstances (actual, anticipated, proposed or threatened) which is of such a nature that there is reasonable doubt whether notice need be given to the Underwriters pursuant to this section 7. SUPPLEMENTARY MATERIAL 8. The Company shall also deliver to the Underwriters and their counsel duly signed copies of any amendments or supplements to the Preliminary Prospectus or the Prospectus or other documents required to be filed by the Company under the Securities Laws (collectively, the "Supplementary Material"), together with copies of any other documents required to be filed with the Supplementary Material. The Company shall cooperate in all respects with the Underwriters to allow and assist the Underwriters to participate fully in the preparation of any Supplementary Material and shall allow the Underwriters to conduct all "due diligence" investigations which the Underwriters may request to fulfill the Underwriters' obligations as underwriters and to enable the Underwriters to responsibly execute any certificate required to be executed by the Underwriters in the Supplementary Material. The provisions of section 6 shall apply, with any changes required by the context, to any Supplementary Material of which copies are, under the applicable Securities Laws, required to be delivered to any purchaser or prospective purchaser of the Offered Shares. REPRESENTATIONS AND WARRANTIES REGARDING PROSPECTUS 9. The delivery to the Underwriters of the Preliminary Prospectus, the Prospectus or any Supplementary Material shall constitute the representation and warranty of the Company to the Underwriters that, at the time of such delivery, the information and statements contained therein (except information and statements relating solely to, or provided by, the Underwriters): (a) are true and correct in all material respects; (b) constitute full, true and plain disclosure of all material facts relating to the Company and the Offered Shares; (c) contain no misrepresentation; and (d) comply in all material respects with the Securities Laws. Such delivery shall constitute the Company's consent to the use of the Preliminary Prospectus, the Prospectus and the Supplementary Material by the Underwriters for the purpose of offering and selling the Offered Shares in the Qualifying Jurisdictions in accordance with the Securities Laws as contemplated in this Agreement. COVENANTS OF THE COMPANY 10. The Company covenants and agrees with each of the Underwriters that the Company: (a) will advise the Underwriters, promptly after receiving notice thereof, of the time when the Prospectus or any Supplementary Material has been filed and receipts therefor have been obtained and will provide evidence satisfactory to the Underwriters of each such filing and issuance of receipts; (b) will advise the Underwriters, promptly after receiving notice or obtaining knowledge thereof, of: (i) the issuance by any court or by any governmental or regulatory authority, arbitrator, administrative tribunal, stock exchange or Securities Regulator of any judgment, decree, order, rule or regulation suspending or preventing the use of the Preliminary Prospectus, the Prospectus or any Supplementary Material; (ii) the suspension of the qualification of the Offered Shares for offering or sale in any of the Qualifying Jurisdictions; (iii) the institution, proposal, threat or contemplation of any proceeding in connection with the matters referred to in (i) or (ii) above; or (iv) any request made by any Securities Regulator for an amendment or supplement to the Preliminary Prospectus, the Prospectus or for additional information. The Company will use its reasonable best efforts to prevent the issuance of any such judgment, decree, order, rule or regulation and, if any such judgment, decree, order, rule or regulation is issued, to obtain the withdrawal thereof as quickly as possible; (c) will apply the net proceeds from the sale of the Offered Shares as set forth under the headings "Prospectus Summary - - Use of Proceeds" and "Use of Proceeds" in the Prospectus; (d) will not, directly or indirectly, without the prior written consent of the Underwriters, issue, offer, sell, grant any option to purchase or otherwise dispose of (or agree to or publicly announce any issue, offer, sale, grant of any option to purchase or other disposition) any Common Shares or any securities convertible into, or exchangeable or exercisable for, Common Shares for a period of 120 days after the Closing Date, except for the sale of the Offered Shares pursuant to this Agreement, the granting of options to purchase Common Shares pursuant to the Company's stock option plans or the issue of Common Shares pursuant to the Company's employee share purchase plan to an aggregate maximum of 500,000 Common Shares, or the issue of Common Shares pursuant to the exercise of existing rights, options, warrants or debentures disclosed in the Prospectus; and (e) will, prior to filing the Prospectus in the Qualifying Jurisdictions, deliver to the Underwriters a certificate, dated the date the Prospectus is filed with the Ontario Securities Commission, of the Chief Executive Officer and the Chief Financial Officer on behalf of the Company, and not in their personal capacities, to the effect that the representations and warranties of the Company in the Agreement are true and correct as if made on and as of the date of the certificate except that, in place of any exceptions currently in section 2 of the Agreement in connection with the Company being in breach of financial covenants in any loan agreements, the certificate will provide a representation and warranty that the Company is not in breach of any covenants of the loan agreements or will have obtained a waiver from the applicable banking institution. EXPENSES 11. The Company agrees to pay all of its costs, fees, and expenses incidental to the performance of its obligations under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to section 16, including, without limitation, all costs, fees and expenses incidental to: (i) the printing or other production of documents with respect to the transactions contemplated by this Agreement, including all costs of printing the Preliminary Prospectus, the Prospectus and any Supplementary Material; (ii) all reasonable arrangements relating to the delivery to the Underwriters of copies of the foregoing documents; (iii) the organizing and holding of the information meetings, including the food, travel and accommodation expenses of the Underwriters; (iv) the fees and disbursements of the counsel, the accountants and any other experts or advisors retained by the Company; (v) the preparation, issuance and delivery to the Underwriters of any certificates evidencing the Offered Shares, including all transfer agent's, sub-transfer agent's, registrar's and sub-registrar's fees; (vi) the qualification of the Offered Shares under the Securities Laws of the Qualifying Jurisdictions, including the payment of any filing fees to the Securities Regulators; and (vii) the listing fees for the Offered Shares on the TSE. In addition, if the Agreement resulting from the acceptance of this offer is terminated prior to the Closing Time by the Company for any reason other than default of the Underwriters, the Company shall assume and be responsible for the reasonable fees and disbursements of the Underwriters' counsel and the reasonable out-of-pocket expenses incurred by the Underwriters in connection with the offering of the Offered Shares. CONDITIONS OF CLOSING 12. The obligations of the Underwriters to purchase and pay for the Offered Shares shall be subject, in the Underwriters' reasonable discretion, to the accuracy of the representations and warranties of the Company contained herein as of the date hereof and as of the Closing Date as if made on and as of the Closing Date, to the accuracy of the statements of the officers of the Company and others made pursuant to the provisions of this section 12, to the performance by the Company of its covenants and agreements hereunder and to the following additional conditions: (a) The Underwriters shall have received favourable legal opinions, dated the Closing Date, from the Company's counsel, Stikeman, Elliott, substantially in the form of Schedule "B" hereto and the Underwriters' counsel, Fasken Campbell Godfrey, in form and substance reasonably satisfactory to them and as to such matters as may be reasonably required by them; it being understood that such counsel may rely: (i) to the extent appropriate in the circumstances, as to matters of fact, on certificates of the Company executed on its behalf under corporate seal by any two officers of the Company acceptable to the Underwriters, acting reasonably, and on certificates of public officials; (ii) on the opinions of local counsel (signed copies of which shall be addressed to and delivered to the Underwriters and their counsel) reasonably acceptable to the Underwriters' counsel as to the qualification of the Offered Shares for offering and sale, as to other matters in the Qualifying Jurisdictions applicable to the offering and sale of the Offered Shares and as to matters in paragraphs 1 and 2 of the draft opinion in Schedule "B"; and (iii) as to matters of fact not independently established, on certificates of the Company's Auditors and certificates of the Company's registrar and transfer agent; and that the Underwriters' counsel may rely on the opinion of the Company's counsel as to matters which relate specifically to the Company. The Company agrees to use its reasonable best efforts to cause Stikeman, Elliott, and the Underwriters agree to use their reasonable best efforts to cause Fasken Campbell Godfrey, to provide the respective opinion hereinbefore provided for. (b) the Underwriters shall have received at the Closing Time a favourable legal opinion, dated the Closing Date from the Company's U.S. counsel, in form and substance satisfactory to the Underwriters' counsel, acting reasonably, with respect to the sale of the Offered Shares by the Underwriters in the United States. (c) an opinion of Quebec counsel to the Company, addressed to the Company and the Underwriters, in form and substance satisfactory to the Underwriters, acting reasonably, with respect to compliance with the laws of Quebec relating to the use of the official language in connection with the sale of the Offered Shares and that the French language version of the certificate for the Common Shares is in all material respects a complete and accurate translation of the English language version thereof, and that such versions are not susceptible of any materially different interpretation with respect to any material matter contained therein. (d) Each of the Underwriters and counsel to the Underwriters shall have received from the Company's Auditors a letter dated the Closing Date in form and substance satisfactory to the Underwriters, acting reasonably, to the effect that, in all material respects, as of the date of such letter (or, with respect to matters involving changes or developments since the respective dates as of which specified Financial Information (as defined below) is given in the Prospectus, as of a date not more than two (2) business days prior to the date of the Closing Date), the conclusions and findings of the Company's Auditors with respect to the financial information disclosed in the Prospectus, including the financial statements of the Company and such other financial information as the Underwriters shall reasonably identify, (collectively, the "Financial Information") shall be confirmed. References to the Prospectus in this paragraph (d) shall include any Supplementary Material at the date of such letter. (e) Incumbency certificates, dated the Closing Date, including specimen signatures of the Chief Executive Officer, the Chief Financial Officer and any other relevant signing officer of the Company. (f) The Underwriters shall have received a certificate, dated the Closing Date, of the Chief Executive Officer and the Chief Financial Officer on behalf of the Company, and not in their personal capacities, to the effect that, to the best of their knowledge, information and belief: (i) (A) the representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Closing Time; (B) the Prospectus, as amended or supplemented as of the Closing Time, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and (C) the Company has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time; (ii) receipts have been issued by the appropriate Securities Regulators for the Prospectus and no judgment, decree, order, rule or regulation suspending or preventing the use of the Prospectus or any Supplementary Material has been issued, and no proceedings for that purpose have been instituted, proposed, threatened or contemplated, by any court or by any governmental or regulatory authority, arbitrator, administrative tribunal, stock exchange or Securities Regulator; (iii) the constating documents and by-laws of the Company attached to the certificate are full, true, correct and complete copies of all constating documents and by-laws of the Company in effect on the date of such certificate, unamended; (iv) the minutes or other records of various proceedings and actions of the Company's board of directors attached to the certificate relating to the Offered Shares and the Prospectus, including the Historical Financial Statements included therein, are full, true and correct copies thereof and have not been modified or rescinded as of the date thereof; (v) subsequent to the respective dates as of which information is given in the Prospectus, neither the Company nor any of its Subsidiaries has sustained any material loss or interference with its businesses, properties or assets, whether or not covered by insurance, or from any labour dispute or any judicial, governmental or regulatory proceeding, and there has not been any development which may, in any way, have a material adverse effect on the condition (financial or otherwise) of the business, properties, assets, capital, net worth, results of operations or business prospects of the Company or its Subsidiaries; and (vi) subsequent to the respective dates as of which information is given in the Prospectus, no transaction out of the ordinary course of business of a nature material to the Company or its Subsidiaries has been entered into by the Company or its Subsidiaries or has been approved by the management or board of directors of the Company or its Subsidiaries, as the case may be; (g) The Offered Shares shall have been, subject to the satisfaction by the Company of the Listing Conditions, approved for listing and posting for trading on the TSE at the end of the business day immediately preceding the Closing Date, subject only to the official notices of issuance of the Offered Shares. (h) The Underwriters shall have received such other certificates, statutory declarations, opinions, agreements or materials in form and substance satisfactory to the Underwriters as the Underwriters may reasonably request. INDEMNIFICATION AND CONTRIBUTION 13. (1) The Company shall indemnify and save harmless each of the Underwriters, and each of the directors, officers, employees and agents of the Underwriters (with respect to an Underwriter, the "Underwriter's Personnel" and with respect to all Underwriters, the "Underwriters' Personnel") against any losses (other than loss of profits), claims, costs, damages, expenses or liabilities to which the Underwriters or the Underwriters' Personnel may become subject, including counsel fees, caused by or out of, based on or resulting from: (a) any untrue statement or alleged untrue statement made by the Company in sections 2 or 9 or in any certificate delivered to the Underwriters pursuant to this Agreement; (b) any untrue statement or alleged untrue statement of any material fact (except information or a statement relating solely to the Underwriters or any of them and except any order, enquiry, investigation or proceeding based solely or primarily on activities or alleged activities of the Underwriters or any of them and/or members of the banking, selling or other groups formed by them) contained in: (i) the Preliminary Prospectus, the Prospectus or any Supplementary Material, or any amendment or supplement thereto; or (ii) any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any Qualifying Jurisdiction in order to qualify the Offered Shares under the Securities Laws thereof or filed with any securities exchange (each, an "Application"); (c) the omission or alleged omission to state in the Preliminary Prospectus, Prospectus or Supplementary Material, or any amendment or supplement thereto, or any Application, a material fact required to be stated therein or necessary to make the statements therein not misleading; (d) the Company not complying with any requirement of the applicable Securities Laws; or (e) any order, ruling or determination having the effect of suspending or restricting the offer or sale, or ceasing the trading, of the Offered Shares or any other securities of the Company has been issued or made by any court or any governmental or regulatory authority, arbitrator, administrative tribunal, stock exchange or Securities Regulator, or proceedings for that purpose have been instituted or are pending by any such court or authority or under any Securities Laws. As used herein, "Indemnified Parties" collectively means the Underwriters and the Underwriters' Personnel, and "Indemnified Party" means any of them. (2)Neither the Company nor any Indemnified Party shall settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not the Underwriters or any Underwriters' Personnel is a party to such claim, action, suit or proceeding) unless the other has consented in writing thereto, such consent not to be unreasonably withheld, or such settlement, compromise or consent includes an unconditional release of the other from all liability arising out of such claim, action, suit or proceeding. (3) Promptly after receipt by an Indemnified Party of notice of the commencement of any claim, action, suit or proceeding in respect of which it may be entitled to indemnity by the Company, such Indemnified Party will, if a claim, action, suit or proceeding in respect thereof may be made against the Company, notify the Company of the commencement thereof, but the omission so to notify the Company will not relieve the Company from any liability which it may have to any Indemnified Party otherwise than under this section 13 provided that such omission to so notify the Company does not materially adversely affect any defences the Company may have to such claim, action, suit or proceeding. In case any such claim, action, suit or proceeding is brought against any Indemnified Party, and such Indemnified Party notifies the Company of the commencement thereof, the Company will be entitled (but not required) to participate therein and assume the defence thereof, provided, however, that such defence shall be through legal counsel satisfactory to such Indemnified Party, acting reasonably. If the Company elects to participate in or assume the defence of such claim, action, suit or proceeding, the Indemnified Party shall have the right to participate in the defence of such claim, action, suit or proceeding and have separate counsel at its own expense; provided however, that if the defendants in any such claim, action, suit or proceeding include both the Indemnified Party and the Company and the Indemnified Party shall have been advised by such Indemnified Party's counsel that representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, the Company shall not have the right to direct the defence of such action on behalf of such Indemnified Party and such Indemnified Party shall have the right to select separate counsel to defend such claim, action, suit or proceeding on behalf of such Indemnified Party or Indemnified Parties and, in such case, the Company shall bear the reasonable fees, costs and expenses of such separate counsel, provided that the Company shall not be obliged under this paragraph (3) to pay the fees, costs and expenses of more than one legal counsel in any one jurisdiction acting as counsel on behalf of one or more Indemnified Parties. If the Company does not elect to participate in or assume the defence of such claim, action, suit or proceeding, the Indemnified Party shall have the right to retain counsel and the Company shall bear the reasonable fees, costs and expenses of such counsel. (4)If the indemnity provided for in the preceding paragraphs of this section 13 is unavailable or insufficient to hold harmless the Indemnified Parties in respect of any losses, claims, costs, damages, expenses or liabilities flowing out of or related to a claim, action, suit or proceeding, then, in order to provide for just and equitable contribution, the Company shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, costs, damages, expenses or liabilities in such proportion as is appropriate to reflect: (i) the relative benefits received by the Indemnified Party on the one hand and the Company on the other from the offering of the Offered Shares; or (ii) if the allocation provided by the foregoing (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the Indemnified Party on the one hand and the Company on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, costs, damages, expenses or liabilities. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering of the Offered Shares (after deducting the fees payable to the Underwriters but before deducting issue expenses) received by the Company bear to the total fees received by the Underwriters in connection therewith. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. Notwithstanding any other provision of this subsection (4), the Indemnified Party shall not be obligated to make contributions hereunder that in the aggregate exceed the fees paid to the Underwriters under this Agreement, less the aggregate amount of any losses, claims, costs, damages, expenses or liabilities that the Indemnified Party has otherwise been required to pay in respect of the same or any substantially similar claim, action, suit or proceeding and no person who committed a fraudulent misrepresentation shall be entitled to contribution from any person who did not commit a fraudulent misrepresentation. For purposes of this subsection (4), each of the Underwriters' Personnel shall have the same rights to contribution as the Underwriters, and each director of the Company and each officer of the Company who signed the Prospectus shall have the same rights to contribution as the Company. The rights to contribution provided in this subsection (4) shall be in addition to and not in derogation of any right to contribution which the Underwriters may have by statute or otherwise at law. (5)The rights of indemnity contained in this section 13 shall not enure to the benefit of an Underwriter or any of such Underwriter's Personnel if the Company has complied with the provisions of section 8 and the person asserting any claim, action, suit or proceeding contemplated by this section 13 was not sent a copy of the Preliminary Prospectus, the Prospectus or any Supplementary Material which corrects any untrue statement or information, misrepresentation or omission which is the basis of such claim, action, suit or proceeding and which is required under the Securities Laws to be sent to such person by such Underwriter. (6)If the Underwriters have reason to believe that a claim for contribution may arise, they shall give the Company notice thereof in writing as soon as reasonably possible, but failure to notify the Company shall not relieve the Company of any obligation it may have to the Underwriters under this section 13. (7)The Company hereby waives its right to recover contribution from the Underwriters or any of their respective directors, officers, employees or agents with respect to any liability of the Company by reason of or arising out of any misrepresentation contained in the Preliminary Prospectus, the Prospectus or any Supplementary Material; provided, however, that such waiver shall not apply in respect of liability caused or incurred by reason of or arising out of (i) any misrepresentation which is based upon or results from information relating solely to the Underwriters contained in such document; (ii) any information provided in writing to the Company by the Underwriters; or (iii) any failure by the Underwriters or members of their banking, selling or other groups, if any, to send to prospective purchasers of the Offered Shares any document which the Company is required to provide to such prospective purchasers and which it has provided to the Underwriters to send to such prospective purchasers. (8)To the extent that any Indemnified Party is not a party to this Agreement, the Underwriters shall obtain and hold the rights and benefits of this section 13 in trust for and on behalf of such Indemnified Party. SURVIVAL 14. The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company, its officers and the Underwriters set forth in this Agreement shall survive the Closing Date and remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, the Underwriters or any of their respective directors, officers, agents or advisors; (ii) delivery of and payment for the Offered Shares; and (iii) any subsequent disposition by the Underwriters of the Offered Shares. OBLIGATIONS OF THE UNDERWRITERS 15. (1) Subject to the terms hereof, the obligations of the Underwriters to purchase the Offered Shares at the Closing Time shall be several and not joint and their respective obligations and rights in this regard shall be in the following percentages: WGI 35% DBZW 30% GCC 20% RGC 15% 100% If one or more of the Underwriters should default in its or their obligation to purchase its or their respective percentage of the Offered Shares, the other Underwriter or Underwriters shall have the right, subject to compliance with applicable law, but not the obligation, at its or their option, to severally purchase, on a pro rata basis between themselves or in such other proportions as they may agree upon, all but not less than all of the Offered Shares, which the defaulting Underwriter(s) failed or refused to purchase. If the non-defaulting Underwriter(s) elect(s) not to exercise such right, the Company shall have the right, subject to compliance with applicable law, but not the obligation, at its option, to arrange for one or more substitute Underwriter(s) to purchase that portion of the defaulting Underwriter(s)' Offered Shares which it or they have failed to or refused to purchase. If the Company does not arrange for a substitute Underwriter(s), the non-defaulting Underwriter(s) shall be entitled by notice to the Company to terminate this Agreement without liability on the part of the non-defaulting Underwriter(s) or the Company (on submission of reasonable evidence of its or their own ability to purchase its or their own percentage of the Offered Shares, unless the termination is in accordance with any other termination provision in this Agreement). Nothing in this section 15 shall require the Company to sell less than all of the Offered Shares to relieve any defaulting Underwriter from liability in respect of its default hereunder to the Company or to any non-defaulting Underwriter. (2) Unless WGI is a defaulting Underwriter under this section 15, the Company shall be entitled to act, and shall act, on any notice, waiver, extension or communication given by or on behalf of the Underwriters by WGI which shall represent the Underwriters and which shall have the authority to bind the Underwriters in respect of all matters hereunder, except in respect of any settlement under section 13, any agreement referred to under section 15 or any matter referred to under sections 16 or 19. WGI agrees to use its reasonable best efforts to consult fully with the other Underwriters with respect to any such notice, waiver, extension or other communication. TERMINATION 16. (1) In addition to any other remedies which may be available to the Underwriters, any Underwriter shall be entitled, at such Underwriter's sole discretion, to terminate and cancel, without any liability on such Underwriter's part, such Underwriter's obligations under this Agreement, by notice to the Company given at any time during the period of this Agreement and up to and including the Closing Time, in the event that if, at or prior to the Closing Time: (a) any inquiry, investigation or other proceeding should be undertaken, threatened or announced or any order, ruling or determination should be issued by any court or any governmental or regulatory authority, arbitrator, administrative tribunal, stock exchange or Securities Regulator (except for any such inquiry, investigation, other proceeding or order, ruling or determination based upon the activities or the alleged activities of the Underwriters or their banking, selling or other group members, if any, and not of the Company) which, in the sole opinion of the Underwriters (or any of them), acting reasonably, prevents or operates to prevent or materially and adversely restrict trading in the Offered Shares, or which materially and adversely affects the marketability of the Offered Shares; (b) there shall occur any material change or change in a material fact such as is contemplated in section 7 which, in the sole opinion of the Underwriters (or any of them), acting reasonably, would be expected to have a material adverse effect on the market price or value of the Offered Shares; (c) there should develop, occur or come into effect or existence any event, action, state, condition or major financial occurrence of national or international consequence or any action, government regulation, inquiry or other occurrence of any nature whatsoever which, in the reasonable opinion of the Underwriters (or any of them), materially and adversely affects or will materially and adversely affect the financial markets or the business, operations or affairs of the Company or the marketability of the Offered Shares; (d) the state of financial markets is such that, in the reasonable opinion of the Underwriters (or any or them), the Offered Shares cannot be marketed profitably; or (e) the Company or its Subsidiaries shall have sustained any material loss or interference with its businesses or properties or there shall have been any material adverse change, or any development involving a prospective material adverse change including, without limitation, a change in the management or control of the Company or the condition (financial or otherwise) of the business, affairs, properties, assets, net worth, capital, results of operations or business prospects of the Company except, in each case, as described in the Preliminary Prospectus or, once filed with a Securities Regulator, the Prospectus. (2) The rights of termination contained in this section 16 may be exercised by any one or more of the Underwriters and are in addition to any other rights or remedies the Underwriters or any of them may have in respect of any default, act or failure to act or non-compliance by the Company in respect of any of the matters contemplated by this Agreement or otherwise. In the event of any such termination pursuant to paragraph (1)(a), (b), (c), (d) or (e) of this section 16, there shall be no further liability on the part of the Company to such Underwriter except in respect of any liability which may have arisen or may thereafter arise under sections 5, 9, 11 or 13. A notice of termination given by an Underwriter under this section 16 shall not be binding upon any other Underwriter. (3) In the event that one or more but not all of the Underwriters shall exercise the right of termination herein, the others shall have the right, but shall not be obligated, to purchase all of the Offered Shares which would otherwise have been purchased by the Underwriter which has so terminated. Nothing in this section 16 shall oblige the Company to sell to the Underwriters less than all of the Offered Shares. POST CLOSING COVENANTS OF THE UNDERWRITERS 17. The Underwriters shall after the Closing Time: (i) use their best efforts to terminate, and to cause the members of the Underwriters' banking, selling or other groups to terminate, distribution of the Offered Shares as promptly as possible; (ii) give prompt written notice to the Company when, in the opinion of the Underwriters, they and the members of such Underwriters' banking, selling or other groups have ceased distribution of the Offered Shares and of the total proceeds realized from such distribution in the respective Qualifying Jurisdictions in which much information is or may be required by the appropriate Securities Regulators; and (iii) as soon as is practicable in the circumstances give to the Company a statement as to the distribution of the Offered Shares for the purpose of assisting in the listing of the Offered Shares on the TSE. NOTICES 18. Unless herein otherwise expressly provided, any notice, request, direction, consent, waiver, extension, agreement or other communication required or permitted to the given hereunder shall be in writing and shall be delivered by personal delivery to an officer of the party to whom notice is given or shall be sent by commercial courier or by facsimile to the attention of the individuals noted below, in each case at the following address or facsimile number, as the case may be: (a) Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Attention: Brian R. Hedges Facsimile: (613) 727-0617 with a copy to: (b) Stikeman, Elliott Barristers & Solicitors Suite 5300 Commerce Court West Toronto, Ontario M5L 1B9 Attention: Mihkel E. Voore Facsimile: (416) 947-0866 and in the case of notice to the Underwriters: (c) Wood Gundy Inc. BCE Place 161 Bay Street, 6th Floor Toronto, Ontario M5J 2S8 Attention: Douglas G. Cunningham Facsimile: (416) 594-7470 (d) Deacon Barclays de Zoete Wedd Limited 304 Bay Street Toronto, Ontario M5H 2P2 Attention: Peter A. Mackenzie Facsimile: (416) 350-3375 (e) Gordon Capital Corporation Box 67, Suite 5300 Toronto Dominion Bank Tower Toronto-Dominion Centre Toronto, Ontario M5K 1E7 Attention: Robert Cross Facsimile: (416) 369-9498 (f) Richardson Greenshields of Canada Limited 313 Second Avenue Ottawa, Ontario K1S 2J1 Attention: Graham C. MacMillan Facsimile: (613) 565-4800 with a copy to: (g) Fasken Campbell Godfrey Barristers and Solicitors P.O. Box 20 Toronto Dominion Bank Tower Toronto-Dominion Centre Toronto, Ontario M5K 1N6 Attention: Cathy Singer Facsimile: (416) 362-2381 The Company and the Underwriters may change their respective addresses for notice, by notice given in the manner aforesaid, with any such notification to take effect at the time of receipt. TERMS AND CONDITIONS 19. All terms and conditions of this Agreement shall be construed as conditions and any breach or failure by the Company to comply with any of such terms and conditions shall entitle the Underwriters to terminate their obligations to purchase the Offered Shares by written notice to that effect given to the Company prior to the Closing Time. It is understood that the Underwriters may waive, in whole or in part, or extend the time for compliance with, any of such terms and conditions without prejudice to their rights in respect of any other of such terms and conditions or any other or subsequent breach or non-compliance, provided that to be binding on the Underwriters any such waiver or extension must be in writing and signed by the Underwriters. SUCCESSORS 20. This Agreement shall enure to the benefit of, and shall be binding upon, the Underwriters, the Company, and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that the indemnities of the Company contained in section 13 shall also be for the benefit of all officers, directors, employees and agents of the Underwriters. APPLICABLE LAW 21. The validity and interpretation of this Agreement, and the terms and conditions set forth herein, shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein. COUNTERPARTS 22. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. TIME OF ESSENCE 23. Time shall be of the essence of this Agreement. If the foregoing is in accordance with your understanding and agreed to by you, please signify your acceptance by signing in the space provided therefor below and return this letter to us whereupon this letter as so accepted shall constitute a binding agreement among us in accordance with the foregoing. Yours very truly, WOOD GUNDY Inc. DEACON BARCLAYS DE ZOETE WEDD Limited By: s/DOUGLAS G. CUNNINGHAM By: s/PETER A. MACKENZIE GORDON CAPITAL CORPORATION Richardson Greenshields of Canada Limited By: s/ROBERT CROSS By: s/GRAHAM C. MACMILLAN Accepted this 20th day of October, 1993. GANDALF TECHNOLOGIES INC. By: s/B.R. HEDGES s/W.MACDONALD SCHEDULE A United States Selling Restrictions 1. (a)For the purposes of this Schedule, the following terms shall have the meanings indicated: (i) "Directed Selling Efforts" means "Directed Selling Efforts" as that term is defined in Regulation S. Without limiting the foregoing, but for greater clarity in this Agreement, it means, subject to the exclusions from the definition of "directed selling efforts" in Regulation S, any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the Offered Shares and includes the placement of any advertisement in a publication with a general circulation in the United States that refers to the offering of any of the Offered Shares; (ii) "Regulation S" means Regulation S adopted by the SEC under the U.S. Securities Act; (iii) "SEC" means the United States Securities and Exchange Commission; (iv) "Selling Dealer Group" means the dealers and brokers other than the Underwriters who participate in the offer and sale of the Offered Shares pursuant to the Underwriting Agreement; (v) "Substantial U.S. Market Interest" means "substantial U.S. market interest" as defined in Regulation S; (vi) "United States" means the United States of America, its territories and possessions, any state of the United States, and the District of Columbia; (vii) "U.S. Exchange Act" means the United States Securities Exchange Act of 1934, as amended; and (viii) "U.S. Securities Act" means the United States Securities Act of 1933, as amended. 2. Each Underwriter acknowledges that the Offered Shares have not and will not be registered under the U.S. Securities Act and that any sale of the Offered Shares by the Underwriters will be made in one or more private placements under the U.S. Securities Act or pursuant to Regulation S. 3. Each Underwriter shall cause each purchaser in the United States (a "Purchaser") to execute a subscription agreement in the form attached as Exhibit I hereto. 4. Each Underwriter agrees that neither it nor any of its affiliates nor any person acting on its behalf or on behalf of its affiliates will: (a) except to the extent permitted by Section 3 of this Schedule, (i) offer to sell, or make any solicitation of an offer to buy, any Offered Shares to any person in the United States, or (ii) make any sale of Offered Shares to any purchaser unless, at the time the buy order was originated, the purchaser was outside the United States, or the seller and any person acting on its behalf reasonably believe that such purchaser was outside the United States; (b) make any Directed Selling Efforts in the United States with respect to the Offered Shares; (c) offer or sell, or solicit any offer to buy, by any form of general solicitation or general advertising (as those terms are used in Regulation D under the 1933 Act), including advertisements, articles, notices or other communications published in any newspaper, magazine or similar media or broadcast over radio or television, or any seminar or meeting whose attendees have been invited by general solicitation or general advertising, or in any manner involving a public offering within the meaning of Section 4(2) of the 1933 Act, any of the Offered Shares. 5. The Underwriters have not entered, and will not enter, into any contractual arrangement without the prior written consent of the Company with respect to the distribution of the Offered Shares, except (i) with their affiliates or (ii) with members of the Selling Dealer Group in accordance with this Schedule "A". 6. The Company: (i) represents that it is a "foreign issuer" within the meaning of Regulation S and reasonably believes that there is no Substantial U.S. Market Interest in the Common Shares of the Company; (ii) represents that it is not, and agrees to use its best efforts not to become at any time prior to the expiration of three years after the Closing, an "investment company" as defined in the United States Investment Company Act of 1940, as amended; (iii) represents and agrees that neither it nor any of its affiliates has taken or will take any action which would cause the exemptions afforded by Regulation S to be unavailable for the offer and sale of the Offered Shares pursuant to the Underwriting Agreement or which would constitute a violation of Rule 10b-6 or Rule 10b-7 of the SEC under the U.S. Exchange Act; (iv) represents and agrees that none of the Company, its affiliates or any person acting on its or their behalf has offered or will offer to sell the Offered Shares by means of any form of general solicitation or general advertising (as those terms are used in Regulation D under the U.S. Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the U.S. Securities Act; and (v) represents and agrees that none of the Company, its affiliates or any person acting on its or their behalf has engaged or will engage in any Directed Selling Efforts in the United States with respect to the Offered Shares within the meaning of Regulation S. EXHIBIT I FORM OF U.S.PURCHASER'S LETTER _________________________________, 1993 Gandalf Technologies Inc. 130 colonnade Road South Nepean, Ontario CANADA K2E 7M4 Gandalf Technologies Inc. ------------------------- Ladies and Gentlemen: In connection with our proposed purchase of common shares (THE "COMMON SHARES") of Gandalf Technologies Inc. (the "Corporation"), we confirm and agree as follows: (1) We are authorized to consummate the purchase of Common Shares. (2) We understand that the Common Shares have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the "U.S. Securities Act") and that the sale contemplated hereby is being made in reliance on a private placement exemption to institutional accredited investors. (3) We have received a copy, for our information only, of the Canadian Prospectus dated _____________, 1993 and a U.S. covering memorandum (the "Canadian Prospectus") relating to the offering in Canada of the Common Shares and have had access to such additional information, if any, concerning the Corporation as we have considered necessary in connection with our investment decision to acquire the Common Shares. (4) We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in Common Shares and we are able to bear the economic risks of such investment. (5) We are an institutional "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the U.S. Securities Act and we are acquiring Common Shares for our own account or for the account of an institutional "accredited investor" as to which we exercise sole investment discretion, and not with a view to any resale, distribution or other disposition of Common Shares in violation of the United States securities laws. (6) We are purchasing Common Shares for our own account having an aggregate purchase price of at least U.S. $250,000 or for one or more accounts as to which we exercise sole investment discretion and each such account is purchasing Common Shares having such an aggregate purchase price. (7) We acknowledge that we have not purchased Common Shares as a result of any general solicitation or general advertising, including advertisements, articles, notices or other communication published in any newspaper, magazine or similar media or broadcast over radio or television, or any seminar or meeting whose attendees have been invited by general solicitation or general advertising. (8) We agree that if we decide to offer, sell or otherwise transfer any Common Shares, we will not offer, sell or otherwise transfer any of such Common Shares (other than pursuant to an effective registration statement under the U.S. Securities Act), directly or indirectly, unless: (a) the sale is to the Corporation; or -- (b) (i) the sale is to an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the U.S. Securities Act and is of a number of Common Shares having an aggregate market value at the time of such sale of not less than U.S. $250,000, (ii) a purchaser's letter containing representations, warranties and agreements substantially similar to those contained in this purchaser's letter (except that such purchaser's letter need not contain the representation set forth in paragraph (3) above), and satisfactory to the U.S. placement agent and the Corporation, is executed by the purchaser and delivered to the U.S. placement agent and the Corporation prior to the sale and (iii) all offers or solicitations in connection with the sale are arranged and conducted solely by the U.S. placement agent or the Corporation; or -- (c) the sale is made outside the United States in compliance with the requirements of Rule 904 of Regulation S under the U.S. Securities Act and in compliance with applicable local laws and regulations; or -- (d) the sale is made pursuant to an exemption from registration under the U.S. Securities Act provided by Rule 144 thereunder, if applicable; or -- (e) the Common Shares are sold in a transaction that does not require registration under the U.S. Securities Act or any applicable United States state laws and regulations governing the offer and sale of securities, and we have therefore furnished to the U.S. placement agent and the Corporation an opinion of counsel of recognized standing reasonably satisfactory to the U.S. placement agent and the Corporation. (9) We understand and acknowledge that upon the original issuance thereof, and until such time as the same is no longer required under applicable requirements of the U.S. Securities Act or applicable state laws, the certificates issued in exchange therefor or in substitution thereof, shall bear the following legend: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED(THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE CORPORATION THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY. (A) TO THE CORPORATION, (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, IF APPLICABLE, OR (D) IN COMPLIANCE WITH CERTAIN OTHER PROCEDURES SATISFACTORY TO THE CORPORATION. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. A NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF WHICH WILL CONSTITUTE "GOOD DELIVERY", MAY BE OBTAINED FROM THE R-M TRUST COMPANY OR MELLON SECURITIES TRUST COMPANY UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN A FORM SATISFACTORY TO SUCH TRANSFER AGENT AND THE CORPORATION, TO THE EFFECT THAT THE SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT; provided, that if Common Shares are being sold under paragraph (8)(c) above, the legend may be removed by providing a declaration to The R-M Trust Company or Mellon Securities Trust Company, as registrar and transfer agent, to the following effect (or as the Corporation may prescribe from time to time): "The undersigned (A) acknowledges that the sale of the securities to which this declaration relates is being made in reliance on Rule 904 of Regulation S under the United States Securities Act of 1933 and (B) certifies that (1) the offer of such securities was not made to a person in the United States and either (a) at the time the buy order was originated, the buyer was outside the United States, or the seller and any person acting on its behalf reasonably believe that the buyer was outside the united States or (b) the transaction was executed on or through the facilities of The Toronto Stock Exchange and neither the seller nor any person acting on its behalf knows that the transaction has been prearranged with a buyer in the United Stats and (2) none of the seller, any affiliate of the seller or any person acting on their behalf engaged in any directed selling efforts in connection with the offer and sale of such securities. Terms used herein have the meanings given to them by Regulation S." (10) We consent to the Corporation making a notation on its records or giving instructions to any transfer agent of Commons Shares in order to implement the restrictions on transfer set forth and described herein. We acknowledge that the representations and warranties and agreements contained herein are made by us with the intent that they may be relied upon by you and by the U.S. placement agent, in determining our eligibility or (if applicable ) the eligibility of others on whose behalf we are contracting hereunder to purchase Common Shares. We further agree that by accepting Common Shares we shall be representing and warranting that the foregoing representations and warranties are true as at the closing time with the same force and effect as if they had been made by us at the closing time and that they shall survive the purchase by us of Common Shares and shall continue in full force and effect notwithstanding any subsequent disposition by us of such Common Shares. You and the U.S. placement agent are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. --------------------------- Name of Purchaser Dated: By: ---------------------- Name: Title: _________________, 1993 The R-M Trust Company Mellon Securities Trust Company Re: Transfer of Common Shares of Gandalf Technologies Inc. bearing a U.S. Securities Act Legend Dear Sires: Enclosed herewith as Schedule A, you will find the Instructions for the Transfer of Common Shares bearing a U.S. Securities Act Legend as set forth herein (the "Instructions") to be followed by you, as co-transfer agent and co-registrar of the Common Shares of Gandalf Technologies Inc., in connection with transfers of Common Shares bearing such U.S. Securities Act legends. Kindly complete the attached acknowledgement in duplicate and return same to each of Gandalf Technologies Inc. and the undersigned to confirm that you will observe the Instructions in connection with transfers of Common Shares bearing such U.S. Securities Act legends. Yours very truly, WOOD GUNDY INC. By: ____________________________ Encls. SCHEDULE B [Opinion of Stikeman, Elliott] ________________, 1993 Wood Gundy Inc. Deacon Barclays de Zoete BCE Place Wedd Limited 161 Bay Street, 6th Floor 304 Bay Street Toronto, Ontario Toronto, Ontario M5J 2S8 M5H 2P2 Gordon Capital Corporation Richardson Greenshields of Box 67, Suite 5300 Canada Limited Toronto Dominion Bank Tower 313 Second Avenue Toronto-Dominion Centre Ottawa, Ontario Toronto, Ontario K1S 2J1 M5K 1E7 Fasken Campbell Godfrey Barristers and Solicitors P.O. Box 20 Toronto Dominion Bank Tower Toronto-Dominion Centre Toronto, Ontario M5K 1N6 Gandalf Technologies Inc. We have acted as counsel to Gandalf Technologies Inc. (the "Corporation") in connection with the issuance and sale by the Corporation and the purchase by Wood Gundy Inc., Deacon Barclays de Zoete Wedd Limited, Gordon Capital Corporation and Richardson Greenshields of Canada Limited (collectively, the "Underwriters") of 12,000,000 Common Shares of the Corporation (the "Offered Shares"), pursuant to the terms and subject to the conditions of an agreement (the "Underwriting Agreement") dated October 20, 1993 between the Underwriters and the Corporation. All capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed thereto in the Underwriting Agreement. As counsel for the Corporation and jointly with Fasken Campbell Godfrey, counsel for the Underwriters, we participated in the preparation of the English language versions of the preliminary prospectus of the Corporation dated September 21, 1993 and the (final) prospectus (the "Prospectus") of the Corporation dated _____________, 1993 prepared in connection with the offering of the Offered Shares to the public in all of the provinces of Canada. As such counsel, we also settled the Underwriting Agreement with Fasken Campbell Godfrey. We have examined such statutes, public and corporate records of the Corporation and such documents and certificates of officers of the Corporation and others and considered such questions of law as we have considered relevant and necessary as a basis for the opinions expressed herein. In particular, we have relied, as to certain matters of fact, upon certificates of officers of the Corporation, of the The R-M Trust Company (the "Trust Company"), of public officials, a letter dated ____________________, 1993 from The Toronto Stock Exchange and of the auditors of the Corporation, KPMG Peat Marwick Thorne, copies of which have been delivered to you. In all such examinations we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals, the conformity to authentic original documents of all documents submitted to us as certified or photostatic copies or facsimiles and the authenticity of the originals of such documents and facsimiles. In rendering our opinion in paragraph 5 below, we have relied, insofar as such opinion relates to the Trust Company, solely upon certificates of the Trust Company, copies of which have been delivered to you. In rendering the opinion set forth in paragraph 6 below, insofar as such opinion relates to the Underwriting Agreement constituting valid and binding obligations of the Corporation, we have assumed that such agreement constitutes a valid and binding obligation of the parties thereto other than the Corporation, enforceable in accordance with its terms, subject to the exceptions set out in paragraph 7 below. We are qualified to practise law in the Province of Ontario and to express legal opinions only with respect to the laws of the Province of Ontario and the federal laws of Canada applicable therein. The opinions expressed below are to be construed in accordance with such laws in effect on the date hereof. We have not made an examination of the laws of any jurisdiction other than Canada and the Province of Ontario and we do not express or imply any opinion with respect to the laws of any foreign jurisdiction. Insofar as our opinions relate to matters governed by laws other than the laws of the Province of Ontario or the federal laws of Canada applicable therein, we have relied upon the opinions of local counsel in each applicable jurisdiction as to the laws of each such jurisdiction, copies of which have been delivered to you. Such opinions are in form satisfactory to us and we are of the opinion that both you and we are entitled to rely thereon. To the extent that any of the opinions of local counsel referred to above upon which we are relying is based upon any assumption or is made subject to any limitation or qualification, our opinions given in reliance thereon are also based upon such assumptions and are subject to such limitations or qualifications. Based and relying upon and subject to the foregoing, we are of the opinion that: 1. Each of the Corporation and its subsidiaries which are incorporated in Canada, the United States and the United Kingdom (the "Subsidiaries") is validly subsisting under the laws of its jurisdiction of incorporation. 2. Each of the Corporation and its Subsidiaries has all requisite corporate power and authority to carry on its business as now conducted and to own or lease its properties. No general registration, license, consent or other authorization is required by any of the Corporation or its Subsidiaries to carry on its business in the jurisdictions in which it carries on business. 3. The authorized capital of the Corporation consists of an unlimited number of Common Shares, of which _________________ Common Shares are issued and outstanding as fully paid and non-assessable. 4. The Corporation has all requisite corporate power and authority to authorize, execute and deliver, and to carry out its obligations under, the Underwriting Agreement. 5. All necessary corporate action has been taken by the Corporation validly to issue the Offered Shares to the Underwriters and the Offered Shares have been duly and validly issued as fully paid and non-assessable. A single definitive share certificate representing the Offered Shares has been duly certified by the Trust Company and registered in the name of and delivered to Wood Gundy Inc., on behalf of the Underwriters. 6. All necessary corporate action has been taken by the Corporation to authorize the execution and delivery by the Corporation of, and the performance by the Corporation of its obligations under the Underwriting Agreement, and the Underwriting Agreement has been duly executed and delivered by the Corporation and constitutes a legal, valid and binding obligation of the Corporation, enforceable in accordance with its terms, except: (a) that enforcement thereof may be limited by bankruptcy, insolvency and other laws affecting the enforcement of creditors' rights generally; (b) that specific performance, injunction and other equitable remedies may only be granted in the discretion of a court of competent jurisdiction; and (c) that rights to indemnity, contribution and waiver of contribution under the Underwriting Agreement may be limited under applicable law. 7. The execution and delivery of the Underwriting Agreement, the fulfilment of the terms thereof and the issuance and sale of the Offered Shares by the Corporation pursuant to the Underwriting Agreement do not and will not contravene any applicable law of Canada or of the Province of Ontario and do not and will not result in a breach of, and do not and will not create a state of facts which, after notice or lapse of time or both, will result in a breach of, and do not and will not conflict with, any of the terms, conditions or provisions of the constating documents or by-laws of the Corporation or any resolutions of the directors or shareholders of the Corporation or any of the trust indenture dated ______________________, 1993 between the Company and The R-M Trust Company and a loan agreement, as amended, between the Company and The Royal Bank of Canada. 8. No consent, approval, authorization or order of any court or governmental agency or body or regulatory authority is required for the consummation by the Corporation of the transactions contemplated by the Underwriting Agreement, other than those that have been obtained on or prior to the date hereof. 9. To our knowledge, other than as described in Appendix A hereto, there is no action, proceeding, litigation or investigation pending or threatened against or affecting the Corporation, at law or in equity or before or by any federal, provincial, state, municipal or other governmental department, commission, board or agency, domestic or foreign, which in any way would have a material adverse effect upon the Corporation or the consummation of the transactions described in the Underwriting Agreement. 10. The form and terms of the share certificate representing the Common Shares have been duly approved and adopted by the directors of the Corporation and comply with all legal requirements relating thereto. 11. The attributes of the Common Shares are consistent with the description thereof in the Prospectus under the heading "Description of Share Capital". 12. The Toronto Stock Exchange has conditionally approved the listing and posting for trading of the Common Shares subject to the Corporation fulfilling all of the requirements of such exchange on or before ___________________, 1993. 13. The Trust Company at its principal offices in _________________________ has been duly appointed transfer agent and registrar of the Common Shares. 14. All necessary documents have been filed, all requisite proceedings have been taken and all other legal requirements have been fulfilled under the laws of the Qualifying Jurisdictions to qualify the issuance and sale of the Offered Shares to the public in each of the Qualifying Jurisdictions through registrants registered under applicable legislation and who have complied with the relevant provisions of such applicable legislation. 15. The provisions of the Pension Benefits Act (Ontario) and the Regulation thereunder would not, subject to compliance with the prudent investment criteria contained therein and the general investment provisions thereof, preclude the funds of a pension plan registered thereunder from being invested in the Common Shares at the date hereof, provided that the Common Shares are within a category of investment specifically permitted and for which guidelines are established in the statement of investment policies and goals for such plan filed under the Act and provided further that such investment complies with such guidelines. 16. The provisions of the Loan and Trust Corporations Act (Ontario) and the Regulation thereunder would not, subject to compliance with the prudent investment standards and the general investment provisions thereof, preclude the funds received as deposits under section 155 of such Act by loan corporations and trust corporations registered under such Act from being invested in the Common Shares at the date hereof without resorting to the provisions of subsection 166(1) of such Act. 17. The provisions of an Act respecting insurance (Quebec) do not, subject to compliance with the prudent investment standards and the general investment provisions of such Act, preclude an investment in the Common Shares at the date hereof by an insurer governed by such Act, other than a mutual association or professional corporation. 18. The provisions of the Supplemental Pension Plans Act (Quebec) do not, subject to compliance with the general investment provisions of such Act, preclude the assets of a pension plan registered pursuant thereto from being invested in the Common Shares at the date hereof; provided, however, that where an investment policy has been established and adopted for such pension plan in accordance with such Act, an investment in Common Shares is also made in accordance with such investment policy. 19. The provisions of the Trust and Loan Companies Act (Canada) would not, subject to compliance with the prudent investment and lending policies, standards and procedures required to be established pursuant to that Act, preclude the funds of companies regulated under such Act from being invested. 20. The provisions of the Insurance Companies Act (Canada) would not, subject to the prudent investment and lending policies, standards and procedures required to be established pursuant to that Act and in the case of foreign companies (as defined in that Act) subject to any restriction contained in the trust deed creating the trust in respect of such assets, preclude the funds of companies (as defined in that Act) or the assets or foreign companies (as defined in the Act) required to be vested in trust, from being invested. 21. The provisions of An Act respecting trust companies and savings companies (Quebec) would not preclude an investment at the date hereof in the Common Shares by a Quebec company as defined under such Act (other than a trust company as defined under such Act with respect to funds (except deposits) such trust company administers for other persons unless otherwise provided in the instrument creating the administration), subject to compliance with the general investment provisions of such Act and subject to the specific provisions of Division VI of Chapter 15 of such Act applicable to a Quebec company. 22. The Common Shares are, as of the date hereof, qualified investments under the Income Tax Act (Canada) for a trust governed by a registered retirement savings plan, registered retirement income fund or deferred profit sharing plan (as such terms are defined in such Act) registered under such Act. Yours truly, EX-10.2 3 EXHIBIT 10.2 Royal Bank of Canada L.James Blattman Business Banking Centre Senior Account Manager 90 Sparks Street, P.O. Box 746, Station B Advanced Technology Ottawa, Ontario K1P 5T6 January 7, l994 Transit 01196 Fax: (613) 564-4527 Toll Free: 1-800-267-0305 Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Attention: Mr. Walter MacDonald Vice-President, Finance Dear Sirs: Royal Bank of Canada (the "Bank") is pleased to offer Gandalf Technologies Inc. (the "Borrower") the following credit facilities (the "Credit Facility"), which, upon your acceptance shall supersede and cancel the credit facilities provided to the Borrower in our letter agreement of September 16, 1993. The Credit Facility shall be governed by the following terms and conditions: 1. Definitions: The definitions attached hereto in Schedule "A" are incorporated in this agreement by reference as if set out in full herein and unless otherwise provided, all accounting terms herein shall be interpreted in accordance with GAAP. 2. Credit Facility: The Credit Facility is available in the following segments as follows: Segment 1 Letters of Credit in Canadian or US Dollars ("L/Cs"); Segment 2 Foreign exchange forward contracts ("FEF Contracts"). Segment 3 (a) Royal Bank U.S. Base Rate based loans in US Dollars ("RBUSBR Loans"), (b) Royal Bank Prime based loans in Canadian Dollars ("RBP Loans"), (c) Libor based loans in US Dollars ("Libor Loans"), (d) Banker's Acceptances in Canadian Dollars ("B/As"), and (e) Letters of Credit in Canadian or US Dollars ("L/Cs"). Each use of the Credit Facility by way of any of the foregoing methods is referred to as a "Borrowing". The face amount of each Borrowing outstanding shall be used to determine the amount of Borrowings outstanding under the Credit Facility at any time with the exception that the amount of Borrowings ascribed to FEF Contracts shall be determined by the Bank, in its sole discretion, from time to time and advised to the Borrower upon request. 3. Amount: The amount available under the Credit Facility (the "Amount") shall not exceed: Segment 1 $1,350,000 or the Equivalent Amount in US Dollars Segment 2 $6,500,000 or the Equivalent Amount in US Dollars Segment 3 the lesser of: (a) US $4,500,000 or the Equivalent Amount in Canadian Dollars (b) the Margin Requirement 4. Purpose: The Borrower shall use the Credit Facility for the purpose of accommodating: Segment 1 L/C requirements Segment 2 Foreign exchange hedging activities Segment 3 General operating requirements. 5. Availability: Borrowings under the Credit Facility are available on any Business Day through the Branch of Account. During the term of the Credit Facility, the Borrower may borrow, repay and reborrow hereunder at any time, unless otherwise provided. FEF Contracts may not have maturities exceeding one year. After the Maturity Date, the Credit Facility shall convert to a demand facility, the Bank may cancel any undrawn portion of the Amount at any time and all Borrowings outstanding shall be due and payable on demand by the Bank. 6. Interest Rates and Fees: (a) The interest rates applicable to the Credit Facility shall be RBP, RBUSBR, Libor or RBPAF, as applicable, plus an interest component (the "Fluctuating Interest Component") which shall be determined by the profitability of the Borrower during its previous fiscal quarter(s). The Fluctuating Interest Component shall be set on a quarterly basis in accordance with the following schedule, effective on the first day of the third month following the end of such fiscal quarter, subject to receipt of the information stipulated in Section 23 (d) (ii), failing which the Borrower shall thereafter be conclusively deemed to have incurred a net loss during such previous fiscal quarter. Fluctuating Interest Component: No. of Consecutive Profitable RBP RBUSBR Libor Quarters Loans Loans Loans B/A's one or less 1.375% 1.375% 2.375% 1.375% two 1.00% 1.00% 2.00% 1.00% three .75% .75% 1.75% .75% four or more .50% .50% 1.25% .50% (b) L/C fees to be quoted by the Bank at time of issue of each L/C. 7. Calculation and Payment of Interest and Fees: (a) RBP and RBUSBR Loans: The Borrower shall pay interest on each RBP Loan in Canadian Dollars and interest on each RBUSBR Loan in US Dollars monthly in arrears on the first Business Day following the 24th of each month. Such interest will accrue and be computed daily on the daily closing balance on the basis of a year of 365 days. Any change in RBP or RBUSBR shall be effective as of the opening of business on the day such change takes place. (b) Libor Loans: The Borrower shall pay interest on each Libor Loan in U.S. Dollars in arrears on each Libor Interest Date. Such interest will accrue and be computed daily on the basis of a year of 360 days. (c) B/As: The Borrower shall pay acceptance fees in Canadian Dollars at the rates provided for above in advance on the date of issue of each B/A. Acceptance fees shall be calculated on the face amount of the B/A issued and based upon the number of days in the term thereof and a year of 365 days. (d) L/C Fees: The Borrower shall pay an L/C fee on the date of issuance of such L/C in the currency in which such L/C is issued. Such fee shall be calculated on the face amount of the L/C issued and based on the number of days in the term thereof and a year of 365 days. (e) Operation of Account Fee: The Borrower shall pay fees of $100 and US$100 payable monthly in arrears on the first day of each month to compensate the Bank for the expense of revolving the Borrower's accounts. (f) Standby Fee: A standby fee equal to 3/16 of 1% per annum calculated on the unused portion of Segment 3 is payable monthly in arrears within the first five business days of each month. (g) Arrangement fee: An arrangement fee of $20,000 is payable upon acceptance of this agreement. The arrangement fee is non-refundable and will be deemed to have been earned by the Bank upon acceptance of this offer, to compensate for time, effort and expense incurred by the Bank to approve these facilities. (h) Monitoring Fee: The Borrower shall pay a fee of $250. monthly in arrears on the first day of each month to compensate the Bank for the cost of monitoring, reviewing and analyzing financial reports of the Borrower and its Material Subsidiaries. (i) Interest Act (Canada): The annual rates of interest or fees to which the rates calculated in accordance with this Agreement are equivalent, are the rates so calculated multiplied by the actual number of days in the calendar year in which such calculation is made and divided by 365 or, in the case of Libor Loans, 360. 8. Time and Place of Payment: Payments of principal, interest, fees and all other amounts payable by the Borrower pursuant to this Agreement shall be paid at the Branch of Account in immediately available funds in Canadian Dollars except as otherwise herein provided. Each payment under this Agreement shall be made for value on the day such payment is due, provided that if any such day is not a Business Day such payment shall be deemed for all purposes of this Agreement to be due on the Business Day next following such day and all interest and other fees shall continue to accrue until payment. Interest and fees payable under this Agreement are payable both before and after any or all of default, demand and judgment. 9. Withholding Taxes: All payments required under this Credit Facility shall be made free and clear of and without any withholding on account of any taxes or other charges of any nature or kind whatsoever. If any such taxes or charges are required to be withheld from any payment made hereunder, the Borrower shall pay an additional amount such that the net amount received by the Bank shall be equal to the amount which would have been received if no such withholding were required to be made. 10. Exchange Rate Fluctuations: If, in the sole determination of the Bank, due to exchange rate fluctuations or for any other reason, the value of Borrowings outstanding under the Credit Facility, when converted to Canadian Dollars, exceeds the Amount as of the 25th day of any month, the Borrower shall either repay or otherwise retire the outstanding Borrowings to the extent of the amount of such excess, or shall secure the amount of such excess in a manner which is satisfactory to the Bank. 11. Repayment: Borrowings are repayable on the later of the Maturity Date or the date of any demand by the Bank, provided that on or prior to the Maturity Date the Bank may demand repayment pursuant to Section 24 hereof, and in such event, Borrowings shall be payable upon such demand. After the Maturity Date, all Borrowings made hereunder shall be due and payable on demand by the Bank. Upon any demand by the Bank hereunder, the Borrower shall pay all amounts outstanding hereunder including, without limitation, an amount equal to the aggregate of the face amounts of all B/As and L/Cs and the amount advised by the Bank, pursuant to Section 2 hereof, with respect to FEF Contracts which are unmatured or unexpired, which amount shall be held by the Bank as collateral security for the Borrower's obligations to the Bank with respect thereto. With respect to such unmatured or unexpired B/As and L/Cs and FEF Contracts, the Borrower will have the further obligation to execute such security documents as the Bank may reasonably require. 12. Conversion: The Borrower may convert a Borrowing into another basis of Borrowing provided that no Event of Default has occurred and is continuing and that the conditions for borrowing by way of such instruments are fulfilled. Libor Loans may only be converted on the last day of the relevant Libor Interest Period, B/As may only be converted on their respective maturity dates and L/Cs may only be converted on their expiry dates or such earlier date as agreed by the Borrower, Bank and the beneficiary thereof. 13. Prepayment: Libor Loans may only be prepaid on the last day of the relevant Libor Interest Period and B/As may only be prepaid on their respective maturity dates. 14. Evidence of Indebtedness: The Bank shall open and maintain at the Branch of Account accounts and records evidencing the Borrowings made available to the Borrower by the Bank under this Agreement. The Bank shall record the principal amount of each Borrowing, the payment of principal and interest and all other amounts owing to the Bank. The Bank's accounts and records constitute, in the absence of manifest error, conclusive evidence of the indebtedness of the Borrower to the Bank. The Borrower authorizes and directs the Bank to automatically debit any bank account of the Borrower for all amounts payable by the Borrower to the Bank including, without limitation, the repayment of all amounts due under this Agreement and all charges for the keeping of such bank account. This provision shall be interpreted as a separate contract between the parties, independent of all other terms of this Agreement and shall remain in full force and effect notwithstanding that this Agreement shall have otherwise ceased to have any force or effect. 15. Operating Account: Pursuant to a central banking offset agreement dated on or about April 1, 1993 between the Borrower, Gandalf Canada Ltd. ("GCL") and the Bank, the Bank shall establish an account in each of Canadian Dollars and US Dollars (each a "Group Account"). If the balance in a Group Account: (a) is a credit, the Bank may apply at any time in its discretion, the amount of such credit or any part thereof, rounded to the nearest $100,000, or US$100,000, as applicable as a repayment of Borrowings outstanding under Segment 3 hereunder, or (b) is a debit, the Bank shall, provided that Borrowings under Segment 3 hereunder are available, make available a Borrowing by way of an RBP or RBUSBR Loan in an amount, rounded to the nearest $100,000 or US$100,000, as applicable, as required to place the affected Group Account at not less the balance set out in this paragraph. In either instance, a minimum net credit balance of $100,000 or US$100,000, as applicable as adjusted from time to time will be maintained in each Group Account. 16. Libor Loan Conditions: The Borrower may borrow by way of Libor Loan subject to the following conditions: (a) Libor Loans shall be made in minimum amounts of US$1,000,000, as applicable or larger whole multiples of US $100,000, as applicable; (b) the Borrower may select the Libor Interest Period applicable to any Libor Loan and shall notify the Bank of such Libor Interest Period when giving notice pursuant to Schedule "B"; (c) if the Borrower fails to select and to notify the Bank of the Libor Interest Period applicable to any Libor Loan, the Borrower shall be deemed to have selected a 3 month Libor Interest Period; (d) the Borrower shall indemnify the Bank against any loss, cost or expense (including without limitation, any loss incurred by the Bank in liquidating or redeploying deposits acquired to fund or maintain any Libor Loan) incurred by the Bank as a result of: (i) repayments, prepayments, conversions or rollovers of a Libor Loan other than on the last day of the Libor Interest Period applicable to such Libor Loan, or (ii) failure to draw down a Libor Loan on the requested date; (e) if the Bank determines, which determination is final, conclusive and binding upon the Borrower, that: (i) adequate and fair means do not exist for ascertaining the rate of interest on a Libor Loan, (ii) the making or the continuance of a Libor Loan has become impracticable by reason of circumstances which materially and adversely affect the London interbank market, (iii) deposits in US Dollars, as applicable, are not available to the Bank in the London interbank market in sufficient amounts in the ordinary course of business for the applicable Libor Interest Period to make or maintain a Libor Loan during such Libor Interest Period, or (iv) the cost to the Bank of making or maintaining a Libor Loan does not accurately reflect the effective cost to the Bank thereof and if the costs to the Bank are increased or the income receivable by the Bank is reduced in respect of a Libor Loan,then the Bank shall promptly notify the Borrower of such determination and the Borrower shall, prior to the next Interest Determination Date, notify the Bank as to the basis of Borrowing it has selected in substitution for such Libor Loan. If the Borrower has not so notified the Bank, such Libor Loan will automatically be converted into an RBUSBR Loan on the expiry of the then current Libor Interest Period. 17. B/A Conditions: The Borrower may borrow by way of B/A subject to the following conditions: (a) B/As shall be issued and mature on a Business Day and shall be issued in minimum face amounts of $100,000 for terms of not less than 30 and not more than 365 days with each issue being for an aggregate face amount of $500,000 or such larger amount as is a whole multiple of $100,000; (b) the Bank may, in its sole discretion, refuse to accept the Borrower's drafts or limit the amount of any B/A issued at any time; (c) the Borrower shall, by no later than 12:00 (noon) on the day on which a B/A becomes payable, pay to the Bank at the Branch of Account an amount equal to the face amount of such B/A; (d) if any maturing B/A is paid by the Bank with its own funds, then as of the date of such payment, the B/A will be deemed to be converted into an RBP Loan hereunder in the face amount of such B/A; (e) in the event that there is any inconsistency at any time between the terms of this Agreement and the terms of the B/A Undertaking, the terms hereof shall govern. 18. L/C Conditions: The Borrower may borrow by way of L/C subject to the following conditions: (a) the Bank may, in its sole discretion, refuse to issue L/Cs at any time; (b) each L/C shall expire on a Business Day and shall have a term of not more than 365 days; (c) prior to the issue of an L/C, the Borrower shall execute a duly authorized application with respect thereto in form and substance satisfactory to the Bank, and each L/C shall be governed by the terms and conditions of the relevant application for such instrument; (d) the Borrower shall, by no later than 12:00 (noon) on any day on which a drawing is made under an L/C, pay to the Bank at the Branch of Account an amount equal to the face amount of such drawing, and if the Borrower fails to make such payment, the face amount of such drawing shall be converted, at the option of the Bank into a loan with interest at either RBP or RBUSBR; (e) an L/C can only be revoked prior to its expiry date with consent of the Borrower, Bank and the beneficiary thereof; (f) in the event that there is any inconsistency at any time between the terms of this Agreement and the terms of the application for L/C, the terms thereof shall govern. 19. Increased Costs: If, in the reasonable opinion of the Bank, the Bank is now or hereafter becomes subject to, or there is a change in: (a) any reserve, special deposit, deposit insurance, or similar requirement against assets of, or deposits in or for the account of, or credit extended by, or any acquisition of funds by, the Bank, (b) any reserve, special deposit, or similar requirement with respect to all or any of the Borrowings or the undrawn portion of all or any part of the Credit Facility, (c) taxation of, or the basis of, taxation of any payments due to the Bank hereunder (except for taxes on the overall net income of the Bank) or taxation on reserves or deemed reserves with respect to all or any part of the Credit Facility, (d) any requirement relating to capital adequacy, or (e) any other condition imposed by Applicable Law or any interpretation of Applicable Law by an entity charged with the administration thereof or any other condition with which financial institutions operating in Canada are accustomed to comply or have generally complied, whether or not having the force of law, and the result of any of the foregoing, in the sole determination of the Bank, is to increase the cost to, or to reduce any amount received or receivable by, the Bank hereunder, or to reduce the Bank's effective return hereunder to a level below that which the Bank could have otherwise achieved (using any reasonable averaging and attribution method), the Bank shall determine that amount of money which shall compensate it for such increase in cost or reduction in income or reduction in rate of return on the Bank's capital, and the Borrower shall pay to the Bank upon demand such amount in respect of such increased cost or reduction as the Bank may determine to be required to compensate the Bank. The Bank's determination of such increased cost or reduction shall be conclusive absent manifest error. 20. Illegality: If the introduction of or any change in Applicable Law makes it unlawful, or prohibited for the Bank, in its sole opinion, to perform its obligations under this Agreement, the Bank may, by written notice to the Borrower, terminate its obligations under this Agreement, and the Borrower shall prepay the Borrowings immediately or at the end of such period as the Bank may agree, together with all interest and fees which have accrued to the date of payment. 21. Conditions Precedent to Disbursement: (a) The obligation of the Bank to make available any Borrowing is subject to and conditional upon the receipt in form and substance satisfactory to the Bank, of: (i) a duly executed copy of this Agreement; (ii) the following documents (the "Security Documents"): (a) a general security agreement (the "GSA") on the Bank's standard form signed by the Borrower and representing a first charge on all assets of the Borrower other than real estate and purchase money security interests ("PMSIs"),save for PMSIs over the Borrower's inventory; (b) a general assignment of debts on the Bank's standard form signed by the Borrower; (c) assignment by the Borrower of all of its shares in Gandalf Systems Corporation ("GSC"), Gandalf Digital Communications Ltd. ("GDCL") and GCL; (d) assignment by the Borrower of all patents, trademarks and licenses; (e) a general assignment of leases signed by the Borrower covering 130 Colonnade Rd. S. and 40 Concourse Gate, both in Nepean, Ontario; (f) a general security agreement on the Bank's standard form signed by GSC and representing a first charge on all assets of GSC other than real estate; (g) a guarantee & postponement of claim on the Bank's standard form in the principal amount of not less than US $4,500,000 plus interest and fees, signed by GSC; (h) assignment by GSC of all of its shares in Infotron Systems Limited and Infotron Systems International Limited; (i) assignment by GSC of all patents, trademarks, copyrights and licenses; (j) a guarantee & postponement of claim on the Bank's standard form in the principal amount of $3,000,000 plus interest and fees signed by GCL; (k) a guarantee & postponement of claim on the Bank's standard form in the principal amount of not less than US $4,500,000 plus interest and fees signed by GCL; (l) a general security agreement on the Bank's standard form signed by GCL and representing a second charge on all assets of GCL other than real estate and PMSIs over GCL's inventory; (m) a general assignment of debts on the Bank's standard form signed by GCL; (n) a general hypothecation signed by the Borrower with respect to any Liquid Collateral Security; (o) assignment of insurance policies covering inventory of GSC; all of which shall have been duly registered in all appropriate jurisdictions in order to perfect and maintain the security created by the Security Documents; (iii) a duly executed B/A Undertaking; and (iv) a review of all documentation by legal counsel to the Bank; and (v) such other documents as the Bank may reasonably request. 22. Representations and Warranties of the Borrower: The Borrower represents and warrants to the Bank, which representations and warranties are repeated as of the time of each Borrowing and as of the time at which each payment of interest or fees is due hereunder, that: (a) the Borrower is a corporation validly incorporated and existing under the laws of Ontario and are duly registered or qualified to carry on business in all jurisdictions where the nature of its properties, assets or business makes such registration or qualification necessary or desirable; (b) the execution and delivery of this Agreement and the Security Documents have been duly authorized by all necessary actions and do not (i) violate any law, regulation or rule by which the Borrower is bound, (ii) violate any provision of its constating documents, by-laws or any unanimous shareholders' agreement to which it is subject, (iii) result in a breach of, or a default under, any agreement or instrument to which either it is a party or by which it or any of its properties or assets may be bound or affected, or (iv) result in the creation of any encumbrance on any of its properties or assets, except as contemplated herein; (c) its most recent audited, consolidated financial statements are correct and complete in all material respects; (d) no Event of Default has occurred and no event has occurred which constitutes, or which with giving of notice, lapse of time or the occurrence of any other condition would constitute a default having a material adverse effect on its financial condition under or in respect of any agreement, undertaking or instrument to which the Borrower or any of its properties or assets may be subject; (e) it is in compliance with all Applicable Laws, including, without limitation, those dealing with the environment; (f) the Borrower has filed all material income tax returns which were required to be filed, paid or made provision for payment of all material taxes (including interest and penalties) which are due and payable, and provided adequate reserves for payment of any tax, the payment of which is being contested; (g) no consent, approval, order, authorization, licence, exemption or designation of or by any governmental body or person is required in connection with the execution, delivery and performance of this Agreement or the Security Documents or the transactions contemplated hereby on behalf of the Borrower and no registration, qualification, designation, declaration or filing with any governmental body is necessary to enable or empower either of them to perform their respective obligations under this Agreement, except such as have been made or obtained, which are in full force and effect. The representations and warranties made in this Section shall continue in effect until payment and performance of all debts, liabilities and obligations under this Agreement. 23. Covenants: Without affecting or limiting in any way the right of the Bank to terminate its commitment and demand all Borrowings under the Credit Facility after the Maturity Date, the Borrower covenants and agrees with the Bank, while this Agreement is in effect or any Borrowings are outstanding: (a) to maintain as at the end of any fiscal quarter Tangible Net Worth on a consolidated basis of not less than US $60,000,000 minus any Allowable Reduction, (b) not to permit its Current Ratio on a consolidated basis to be less than 1.50:1 as at the end of any fiscal quarter; (c) not to permit its Total Liabilities to Tangible Net Worth Ratio on a consolidated basis to exceed .90:1 as at the end of any fiscal quarter; (d) to provide the Bank with the following: (i) an aged list of accounts receivable owned by GSC within 15 Business Days of the end of each month, accompanied by a certificate of the Borrower and GSC; (ii) quarterly consolidated and non-consolidated unaudited financial statements within 45 days of the end of each fiscal quarter, accompanied by a certificate in the form of Schedule "C" hereto; and (iii) quarterly consolidated analysis of bookings, billings and backlog within 45 days of the end of each fiscal quarter, and (iv) annual consolidated audited financial statements of each of the Borrower and GSC within 90 days of each fiscal year end, (v) details of securities pledged as Liquid Collateral Security determined in accordance with Schedule D each of the above financial statements to be accompanied by a certificate in form satisfactory to the Bank. (e) to give the Bank prompt notice upon acquiring knowledge of any Event of Default or any event which, with notice or lapse of time or both, would constitute an Event of Default; (f) not to do anything to affect the ranking of this debt. (g) to maintain its corporate existence as a validly existing corporate entity; (h) to provide the Bank with access to its business and records as may be requested from time to time including, without limitation, its annual financial forecasts and plans; (i) to insure and to keep insured with insurers acceptable to the Bank all properties customarily insured by companies carrying on similar business in similar locations against all risks, including but not limited to business interruption, with loss payable to the Bank as loss payee or mortgagee, as the case may be; (j) to file all income tax returns which are to be filed from time to time, to pay or make provision for payment of all taxes (including interest and penalties) and Potential Preferred Claims which are or will become due and payable and to provide adequate reserves for the payment of any tax, the payment of which is being contested; (k) to comply with all Applicable Laws including, without limitation, those dealing with the environment and to hold the Bank harmless for any costs or expenses which it incurs for any environment-related liabilities which exist now or in the future with respect to the Borrower's property; (l) not to grant, create, assume or suffer to exist any mortgage, charge, lien, pledge, security interest or other encumbrance affecting any of its properties, assets or other rights, without the prior written consent of the Bank; (m) during any fiscal year of the Borrower, not to sell, transfer, convey, lease, assign or otherwise dispose of any part of its undertaking, property, assets or rights with an aggregate value exceeding $5,000,000, other than inventory in the ordinary course of business and on commercially reasonable terms, without the prior written consent of the Bank; (n) not to change its name or merge, amalgamate, consolidate or otherwise enter into any other form of business combination with any other person without the prior written consent of the Bank, such consent not to be unreasonably withheld. (o) not to make any capital expenditures in any fiscal year of the Guarantor except those as may be set out in the Guarantor's operating budgets as provided to the Bank from time to time, plus an allowance of 20%, without the Bank's prior written consent; (p) not to directly or indirectly, guarantee or otherwise provide for on a direct or indirect contingent basis, the payment of any monies or performance of any obligations by any third party, other than wholly owned Subsidiaries, for an amount in excess of $5,000,000 in the aggregate, except as may be consented to in writing by the Bank from time to time; (q) To refrain from making any principal repayments on the Convertible Subordinated Debenture. (r) to make best efforts to arrange an operating facility for GSC with a US lender, in replacement of Segment 3 hereunder. 24. Events of Default: During the Term Period if any one or more of the following events has occurred and is continuing: (a) the non-payment when due of principal, interest, fees or any other amounts due under this Agreement; (b) the breach by the Borrower or its Affiliates of any provision of this Agreement or any other agreement with the Bank or any of the Bank's Subsidiaries; (c) the default by the Borrower or its Affiliates under any obligation to repay borrowed money in excess of $1,000,000, other than amounts due under this Agreement, or in the performance or observance of any agreement or condition in respect of such borrowed money where, as a result of such default, the maturity of such obligation is accelerated; (d) if any representation or warranty made or deemed to have been made herein shall be false or inaccurate in any materially adverse respect; (e) if in the opinion of the Bank there is a material adverse change in the financial condition, ownership or operation of the Borrower or any of its Material Subsidiaries; (f) if proceedings for the bankruptcy, receivership, dissolution, liquidation, winding-up, reorganization or readjustment of debt of the Borrower or its Affiliates or for the suspension of the operations of the Borrower or its Affiliates are commenced, unless such proceedings are being actively and diligently contested in good faith; (g) if the Borrower or any of its Affiliates is insolvent, or is adjudged or declared bankrupt or insolvent, or makes an assignment for the benefit of its creditors, or petitions or applies to any tribunal for the appointment of a receiver or trustee for it or for any substantial part of its property, or commences any proceedings relating to it under any reorganization, arrangement, readjustment of debt, dissolution, liquidation or other similar proceeding under Applicable Law, or by any act or failure to act indicates its consent to, approval of, or acquiescence in, any such proceeding for it or any substantial part of its property, or suffers the appointment of any receiver or trustee; (h) if the Borrower should incur a loss exceeding US $5,000,000, excluding restructuring charges to an aggregate maximum of $2,000,000 during the Term Period, in any fiscal quarter. then in such event the ability of the Borrower to make further Borrowings under the Credit Facility shall immediately terminate and the Bank may, by written notice to the Borrower, declare the Borrowings outstanding hereunder to be immediately due and payable. After the Maturity Date, nothing in this Agreement shall be construed to affect or limit in any way the right of the Bank to terminate its commitment and demand all Borrowings under the Credit Facility. 25. Expenses: The Borrower shall pay the reasonable fees (including, without limitation, all documentation fees charged by the Bank for use of its internal legal counsel) and expenses incurred by the Bank in connection with the preparation, negotiation, documentation and operation of the Credit Facility and the Security Documents, including the enforcement of the Bank's rights under the Credit Facility whether or not any amounts are advanced hereunder. 26. Indemnity: The Borrower shall indemnify the Bank from and against all losses, damages, expenses and liabilities (including legal fees on a solicitor and client basis) which the Bank sustains or incurs as a consequence of any breach by the Borrower under any of the provisions of this Agreement or of any document or instrument delivered in connection hereunder. 27. Limit on Rate of Interest: The Borrower shall not be obliged to pay any interest under or in connection with this Agreement to the extent such interest exceeds the effective annual rate of interest on the credit advanced hereunder that would be lawfully permitted under the Criminal Code. For purposes of this section, "interest" and "credit advanced" have the meanings ascribed to such terms in the Criminal Code, and the "effective annual rate of interest" shall be calculated in accordance with generally accepted actuarial practices and principles. 28. Judgment Currency: If for the purpose of obtaining judgment in any court in any jurisdiction with respect to this Agreement, it is necessary to convert into the currency of such jurisdiction (the "Judgment Currency") any amount due hereunder in any currency other than the Judgment Currency, then such conversion shall be made at the rate of exchange prevailing on the Business Day before the day on which judgment is given. For this purpose "rate of exchange" means the rate at which the Bank will, on the relevant date, sell such currency in Toronto, Ontario against the Judgment Currency. In the event that there is a change in the rate of exchange prevailing between the Business Day before the day on which the judgment is given and the date of payment of the amount due, the Borrower will, on the date of payment, pay such additional amounts (if any) or be entitled to receive reimbursement of such amount, if any, as may be necessary to ensure that the amount paid on such date is the amount in the Judgment Currency which, when converted at the rate of exchange prevailing on the date of payment, is the amount then due under this Agreement in such other currency. Any additional amount due from the Borrower under this Section will be due as a separate debt and shall not be affect by judgment being obtained for any other sums due under or in respect of this Agreement. 29. Notices: Any notice or demand hereunder shall be given in writing by telecopier or letter, in each case addressed to an officer of the receiving party. A telecopier communication shall be deemed received on the date of transmission provided such transmission is received prior to 5:00 p.m. on a day on which the receiving party's office is open for normal business, and otherwise on the next such day. A letter shall be deemed received when hand-delivered to the receiving party, at the address shown herein or at such other address as the receiving party may notify the other from time to time. Each party shall be bound by any notice given hereunder and entitled to act in accordance therewith, unless otherwise agreed. The addresses of the parties for the purpose hereof shall be: as to the Borrower: Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Attention: Vice-President, Finance Telecopier: (613) 727-0617 as to the Bank: Royal Bank of Canada 90 Sparks Street Ottawa, Ontario K1P 5T6 Attention: Senior Account Manager, Advanced Technology Telecopier: (613) 564-4527 or such other address for delivery as each party from time to time may notify the other as aforesaid. 30. Assignment: This Agreement shall be binding upon and enure to the benefit of the Bank and the Borrower and their respective successors and permitted assigns. The Borrower cannot assign or transfer all or any of its rights and obligations hereunder without the prior written consent of the Bank. 31. Set-Off: The Bank is authorized (but not obligated), at any time and without notice, to apply any credit balance (whether or not then due) to which the Borrower is then beneficially entitled on any account (in any currency) at any branch or office of the Bank in or towards satisfaction of the obligations and liabilities of the Borrower due to the Bank under this Agreement. For that purpose, the Bank is authorized to use all or any part of any such credit balance to buy such other currencies as may be necessary to effect such application. 32. Waivers and Amendments: No failure to exercise and no delay in exercising on the part of the Bank, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other right, power or privilege. No amendment, modification or waiver of any provision of this Agreement or consent to any departure by the Borrower from any provision of this Agreement will in any event be effective unless it is in writing signed by the Borrower and the Bank, and then the amendment, modification, waiver or consent will be effective only in the specific instance, for the specific purpose and for the specific length of time for which it is given by the Bank. 33. Counterparts: This Agreement may be executed in any number of counterparts, each of which when executed and delivered is an original but all of which taken together constitute one and the same instrument, and any party may execute this Agreement by signing any counterpart of it. 34. Further Assurances: The Borrower shall from time to time promptly upon the request of the Bank take such action and execute and deliver such further documents, as shall be reasonably required in order to fully perform the terms of, and to carry out the intention of, this Agreement. 35. Severability: If any provision of this Agreement is or becomes prohibited or unenforceable in any jurisdiction, such prohibition or unenforceability shall not invalidate, affect or impair any of the remaining provisions hereof or invalidate or render unenforceable the provision concerned in any other jurisdiction. 36. Governing Law and Submission to Jurisdiction: This Agreement shall be construed in accordance with and governed by the laws of the Province of Ontario and of Canada applicable therein. The Borrower irrevocably submits to the non-exclusive jurisdiction of the courts of such Province and acknowledges the competence of such courts and irrevocably agrees to be bound by a judgment of any such court. 37. Periodic Review: The Credit Facility is subject to an annual review by the Bank on or before the Maturity Date. The Bank may, in its sole discretion, terminate the Credit Facility following such annual review without limiting or affecting the Bank's rights pursuant to Section 24 hereof. 38. Whole Agreement: This Agreement and any agreements delivered pursuant to or referred to in this Agreement constitute the whole and entire agreement between the parties in respect of the Credit Facility, and cancel and supersede any prior written or verbal agreements including undertakings, declarations or representations made with respect thereto. 39. Effective Date: Except as otherwise provided in this Agreement, the date on which this Agreement becomes effective is the date the offer is accepted by the Borrower. 40. Expiry Date: This offer is open for acceptance until close of business at the Branch of Account on January 21 , 1994 unless extended in writing by the Bank. Please acknowledge your acceptance of the above terms and conditions by signing the attached copy of this letter in the space provided below and returning it to the undersigned. Yours truly, s/L.J.BLATTMAN ORIGINAL SIGNED BY L.J.BLATTMAN We acknowledge and accept the terms and conditions of this Agreement on the 21st day of January, 1994. THE BORROWER: GANDALF TECHNOLOGIES INC. By: s/W.R. MACDONALD Name/Title: WALTER MACDONALD, VP FINANCE By: s/B.R. HEDGES Name/Title: BRIAN HEDGES, PRESIDENT SCHEDULE "A" Schedule "A" to the Agreement dated as of the 7th day of January, 1994 between Gandalf Technologies Inc. as Borrower and Royal Bank of Canada as the Bank. DEFINITIONS: "Affiliate" of a person means any person which directly or indirectly, controls or is controlled by or is under common control with such first mentioned person, and for the purposes of this definition, "control" (including with correlative meanings the terms "controlled by" and "under common control with") means the power to direct or cause the direction of the management and policies of any person, whether through the ownership of shares or by contract or otherwise, and without restricting the above, one corporate body shall be deemed to be affiliated with another corporate body if one of them is the Subsidiary of the other or both are Subsidiaries of the same corporate body; "Agreement" means collectively this agreement and all schedules attached hereto; "Allowable Reduction" means the amount, not exceeding $2,000,000 in aggregate, expended by the Borrower to restructure between April 1, l993 and March 31, l994. "Applicable Law" means, in respect of any person, property, transaction or event, all present or future applicable laws, statutes, regulations, treaties, judgments and decrees and (whether or not having the force of law) all applicable official directives, rules, guidelines, orders and policies of any governmental body having jurisdiction; "B/A Undertaking" means the Bank's standard form of undertaking in respect of bankers acceptances issued by borrowers and accepted by the Bank; "Branch of Account" means the Bank's branch at 90 Sparks Street, Ottawa, Ontario; "Business Day" means a day, excluding Saturday, Sunday, and any other day which shall be in the City of Toronto, Ontario a legal holiday or a day on which banking institutions are closed and, with respect to a Libor Loan, "Business Day" means a day with the foregoing characteristics which is also a day on which dealings in US Dollar deposits by and between leading banks in the London interbank market may be conducted; "Canadian Dollars" and the symbols "Cdn$" and "$" each means lawful money of Canada; "Convertible Subordinated Debenture" means the Cdn $30,000,000 8.5% convertible subordinated debenture due November 10, 2002 issued by the Borrower; "Current Ratio" of a person means the ratio of that person's current assets to that person's current liabilities, net of cash on hand; "Equivalent Amount" determines the amount of availability only and means on any date, the amount of Canadian Dollars required to convert from Canadian Dollars to U.S. Dollars at the rate of 1.30 Canadian Dollars for 1.00 US$; The Equivalent amount will be amended by the Bank from time to time to reflect changes in the rate of exchange and such amendments will be advised to the Borrower in writing. "Event of Default" means each of the events listed in the section entitled "Events of Default"; "GAAP" means generally accepted accounting principles in effect from time to time in Canada applied in a consistent manner from period to period; "Good Accounts Receivable" means US based trade receivables owing to GSC excluding without duplication: (a) those outstanding more than 90 days after the billing date, (b) those between GSC and any Affiliate (c) those subject to any mortgage, charge, assignment, lien, security interest or other encumbrance ranking in priority to or equal to that granted to the Bank pursuant to this Agreement, (d) those subject to any claim or assertion of a right of set-off on the part of the account debtor to the extent of such claim or assertion, (e) those which would be required to be treated as bad or doubtful accounts in accordance with GAAP including, without limitation, those outstanding from entities which are bankrupt, insolvent or which have suspended operations, and (f) those subject to a contractual right on the part of the account debtor to refuse payment either in whole or in part; "Interest Determination Date" means, with respect to a Libor Loan, the date which is 2 Business Days prior to the first day of theLibor Interest Period applicable to such Libor Loan; "Letter of Credit" or "L/C" each means a documentary credit issued by the Bank on behalf of the Borrower for the purpose of providing security to a third party that the Borrower will perform a contractual obligation owed to such third party; "Libor" means, with respect to each Libor Interest Period applicable to a Libor Loan, the annual rate of interest (rounded upwards, if necessary, to the nearest whole multiple of one sixteenth of one percent (1/16th%)), at which the Bank, in accordance with its normal practice, would be prepared to offer to leading banks in the London interbank market for delivery on the first day of such Libor Interest Period and for a period equal to such Libor Interest Period, deposits in US Dollars of amounts comparable to such Libor Loan to be outstanding during such Libor Interest Period, at or about 10:00 a.m. (Toronto time) on the Interest Determination Date; "Libor Interest Date" means, with respect to any Libor Loan, the last day of each Libor Interest Period and, if the Borrower selects a Libor Interest Period longer than 3 months, the Libor Interest Date shall be the date falling every 3 months after the beginning of such Libor Interest Period as well as the last day of such Libor Interest Period; "Libor Interest Period" means, with respect to any Libor Loan, a period (subject to availability) of approximately 1 month (or longer whole multiples of 1 month to and including 12 months as selected by the Borrower and notified to the Bank) commencing with the date on which such Libor Loan is made, the date on which another method of Borrowing is converted to such Libor Loan or the last day of the immediately prior Libor Interest Period; "Liquid Collateral Security" means the liquid collateral security determined in accordance with Schedule "D"; "Margin Requirement" means the total amount of Borrowings available under this Agreement, which amount may not exceed 75% of Good Accounts Receivable; "Material Subsidiary" means any Subsidiary of the Borrower now or hereinafter located in Canada, the United States, the United Kingdom, France or the Netherlands, as well as any Subsidiary of the Borrower which is identified as being a Material Subsidiary by the Bank in writing to the Borrower from time to time and "Material Subsidiaries" means any such Subsidiaries of the Borrower; "Maturity Date" means July 31, 1994; "Potential Preferred Claims" means amounts accrued or owing for wages, vacation pay, employee benefits or pensions, municipal tax, corporate tax, sales tax, Canadian goods and services tax, source deductions and remittances (including income tax, Canada Pension Plan and unemployment insurance obligations), Government royalties, purchase money security interests and any other statutory preferred claims as well as the aggregate of the next three months rent payments for each rental property of the Borrower; "Royal Bank Prime" (in this Agreement, "RBP") means the annual rate of interest announced by the Bank from time to time as being a reference rate then in effect for determining interest rates on Canadian Dollar commercial loans made in Canada; "Royal Bank Prime Acceptance Fee" (in this Agreement, "RBPAF") means the annual rate announced by the Bank from time to time as being a reference rate then in effect for determining fees on Canadian Dollar bankers' acceptances accepted by the Bank in Canada; "Royal Bank US Base Rate" (in this Agreement, "RBUSBR") means the annual rate of interest announced by the Bank from time to time as being a reference rate then in effect for determining interest rates on US Dollar commercial loans made in Canada; "Subsidiary" of a person means (i) any corporation of which the person and/or any one or more of its Affiliates, holds, directly or beneficially, other than by way of security only, securities to which are attached more than 50% of the votes that may be cast to elect directors of such corporation, or (ii) a corporation of which such person has through operation of law or otherwise, the ability to elect or cause the election of a majority of the directors of such corporation and "Subsidiaries" of such person mean all such corporations; "Tangible Net Worth" of a person means its shareholders' equity plus, but not in duplication, the amount of the Convertible Subordinated Debenture less the aggregate of its goodwill, deferred income taxes, deferred software costs and other assets (all as defined and set out on the person's audited annual financial statements), that the Bank deems to be intangible. For the purpose of calculating shareholders' equity, items on the balance sheet of the relevant person under the heading "foreign exchange translation amount" shall be deemed to be zero; "Term Period" means the period of time from the date of this Agreement to and including the Maturity Date; "Total Liabilities" of any person means all liabilities appearing on the balance sheet of that person, net of cash on hand; "Total Liabilities to Tangible Net Worth Ratio" of a person means the ratio of that person's Total Liabilities to that person's Tangible Net Worth; "US Dollars" and "US$" each means lawful money of the United States of America in same day immediately available funds or, if such funds are not available, the form of money of the United States of America that is customarily used in the settlement of international banking transactions on the day payment is due hereunder. SCHEDULE "B" Schedule "B" to the Agreement dated as of the 7th day of January, 1994 between Gandalf Technologies Inc. as Borrower and Royal Bank of Canada as the Bank. Notice Requirements for Drawdowns and Conversions RBP LOANS AND RBUSBR LOANS Amount: Prior Notice; Under Cdn$ or US$10,000,000 by 12:00 (noon) on the day of drawdown or conversion Cdn$ or US$10,000,000, up to and including the Amount by 12:00 (noon) 1 Business Day prior to drawdown or conversion B/As Amount Prior Notice Under Cdn$10,000,000 by 12:00 (noon) on the day of drawdown or conversion Cdn$10,000,000 up to and including the Amount by 12:00 (noon) 1 Business Day prior to drawdown or conversion Libor Loans Amount Prior Notice Under US$10,000,000 or the Equivalent Amount in Pounds Sterling by 10:00 a.m. on the Interest Determination Date US$10,000,000 up to and including the Amount or the Equivalent Amount in Pounds Sterling by 10:00 a.m. 1 Business Day prior to the Interest Determination Date SCHEDULE "C" Schedule "C" to the Agreement dated as of the 4th day of January, 1994 between Gandalf Technologies Inc. as Borrower and Royal Bank of Canada as the Bank. OFFICER'S COMPLIANCE CERTIFICATE We, ___________________________________, of the City of __________________ and the City of _______________________, respectively in the Province of Ontario, and hereby certify as follows: 1. That we are the [office] and [office], respectively of Gandalf Technologies Inc. (the "Borrower") 2. That we have read the provisions of the letter agreement (the "Agreement") dated January 7, 1994 between the Borrower and Royal Bank of Canada (the "Bank") which are relevant to this compliance certificate and have made such examination or investigation as is reasonably necessary to enable us to express an informed opinion on the matters contained in this certificate. Terms defined in the Agreement have the same meanings where used in this certificate. As of the date of this certificate: (a) the representations and warranties contained in the Agreement are true and correct; (b) no Event of Default or event which would with lapse of time or the happening of some further condition constitute an Event of Default has occurred and is continuing; and (c) the covenants contained in the Agreement have not been breached and during the next fiscal quarter of the Borrower there is no reason to believe that any of such covenants will be breached. 3. The attached report of aged accounts receivable owned by Gandalf Systems Corporation is complete and accurate in all material respects. DATED this _______ day of _________________, 19__. By: ____________________________________ Name/ Title: ____________________________________ By: ____________________________________ Name/ Title: ____________________________________ SCHEDULE "D" Schedule "D" to the Agreement dated as of the 7th day of January, 1994 between Gandalf Technologies Inc. as Borrower and Royal Bank of Canada as the Bank. LIQUID COLLATERAL SECURITY LIQUID COLLATERAL SECURITY APPLICABLE LOANING VALUE A. Canada Savings Bonds, and Savings 100% of par value Bonds redeemable at par issued by Provincial Governments; Province of British Columbia Parity Bonds redeemable at par and fully guaranteed by the Province of British Columbia, issued in the names of Provincial Crown Corporations. B. Government of Canada or Government 95% of market value of Canada guaranteed bonds and Treasury Bills except as indicated in (a) above. (c) Provincial Government or Provincial 95% of market value Government guaranteed bonds and Treasury Bills except as indicated in (a) above. (d) Bankers acceptances or similar 95% of market value investments effectively assigned to the Bank. ________________ = LIQUID COLLATERAL SECURITY EX-10.3 4 EXHIBIT 10.3 Royal Bank of Canada L. James Blattman Business Banking Centre Senior Account Manager 90 Sparks Street, P.O. Box 746, Station B Advanced Technology Ottawa, Ontario K1P 5T6 January 7, l994 Transit 01196 Fax: (613) 564-4527 Toll Free: 1-800-267-0305 Gandalf Canada Ltd. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Attention: Mr. Walter MacDonald Vice-President, Finance Dear Sirs: Royal Bank of Canada (the "Bank") is pleased to offer Gandalf Canada Ltd. (the "Borrower") a revolving operating facility (the "Credit Facility"), guaranteed by Gandalf Technologies Inc. (the "Guarantor"), which, upon your acceptance shall supersede and cancel the credit facilities outlined in our letter agreement of September 16, 1993. The Credit Facility shall be governed by the following terms and conditions: 1. Definitions: The definitions attached hereto in Schedule "A" are incorporated in this agreement by reference as if set out in full herein and unless otherwise provided, all accounting terms herein shall be interpreted in accordance with GAAP. 2. Amount: The amount available under the Credit Facility (the "Amount") shall not exceed the lesser of: (i) $15,000,000, and (ii) the Margin Requirement, or the Equivalent Amount in US Dollars or Pounds Sterling. 3. Credit Facility: The Credit Facility is available as follows: (i) Royal Bank Prime based loans in Canadian Dollars ("RBP Loans"), (ii) Royal Bank US Base Rate based loans in US Dollars ("RBUSBR Loans"), (iii) Libor based loans in US Dollars or Pounds Sterling ("Libor Loans"), (iv) Bankers' Acceptances in Canadian Dollars ("B/As"), and (v) Letters of Credit in Canadian or US Dollars ("L/Cs"). Each use of the Credit Facility by way of any of the foregoing methods and each rollover is referred to as a "Borrowing". The face amount of each Borrowing outstanding shall be used to determine the amount of Borrowings outstanding under the Credit Facility at any time. 4. Purpose: The Borrower shall use the Credit Facility for the purpose of financing its general operating requirements, including, without limitation, the financing of receivables, inventory and current operating expenditures. 5. Availability: Borrowings under the Credit Facility are available on any Business Day through the Branch of Account, subject to the notice provisions set out in Schedule "B". During the term of the Credit Facility, the Borrower may borrow, repay and reborrow hereunder at any time, unless otherwise provided. After the Maturity Date, the Credit Facility shall convert to a demand facility, the Bank may cancel any undrawn portion of the Amount at any time and all Borrowings outstanding shall be due and payable on demand by the Bank. 6. Interest Rates and Fees: The following rates and fees shall apply: (a) The interest rates applicable to the Credit Facility shall be RBP, RBUSBR, Libor or RBPAF, as applicable, plus an interest component (the "Fluctuating Interest Component") which shall be determined by the profitability of the Guarantor during its previous fiscal quarter(s). The Fluctuating Interest Component shall be set on a quarterly basis, in accordance with the following schedule, effective on the first day of the third month following the end of such fiscal quarter, subject to receipt of the information stipulated in Section 24 (d) (i), failing which, the Guarantor shall thereafter be conclusively deemed to have incurred a net loss during such previous fiscal quarter. Fluctuating Interest Component: No. of Consecutive Profitable RBP RBUSBR Libor Quarters Loans Loans Loans B/A's one or less 1.375% 1.375% 2.375% 1. 375% two 1.00% 1.00% 2.00% 1.00% three .75% .75% 1.75% .75% four or more .50% .50% 1.25% .50% (b) L/C fees to be quoted by the Bank at time of issue of each L/C. 7. Calculation and Payment of Interest and Fees: (a) RBP and RBUSBR Loans: The Borrower shall pay interest on each RBP Loan in Canadian Dollars and interest on each RBUSBR Loan in US Dollars monthly in arrears on the first Business Day following the 24th of each month. Such interest will accrue and be computed daily on the daily closing balance on the basis of a year of 365 days. Any change in RBP or RBUSBR shall be effective as of the opening of business on the day such change takes place. (b) Libor Loans: The Borrower shall pay interest on each Libor Loan in the currency in which such Libor Loan was made in arrears on each Libor Interest Date. Such interest will accrue and be computed daily on the basis of a year of 360 days. (c) B/As: The Borrower shall pay acceptance fees in Canadian Dollars at the rates provided for above in advance on the date of issue of each B/A. Acceptance fees shall be calculated on the face amount of the B/A issued and based upon the number of days in the term thereof and a year of 365 days. (d) L/C Fees: The Borrower shall pay an L/C fee on the date of issuance of such L/C in the currency in which such L/C is issued. Such fee shall be calculated on the face amount of the L/C issued and based on the number of days in the term thereof and a year of 365 days. (e) Operation of Account Fee: The Borrower shall pay fees of $100 and US$100 payable monthly in arrears on the first day of each month to compensate the Bank for the expense of revolving the Borrower's accounts. (f) Standby Fee: A standby fee equal to 3/16 of 1% per annum calculated on the unused portion of the Credit Facility is payable monthly in arrears within the first five business days of each month. (g) Interest Act (Canada): The annual rates of interest or fees to which the rates calculated in accordance with this Agreement are equivalent, are the rates so calculated multiplied by the actual number of days in the calendar year in which such calculation is made and divided by 365 or, in the case of Libor Loans, 360. 8. Time and Place of Payment: Payments of principal, interest, fees and all other amounts payable by the Borrower pursuant to this Agreement shall be paid at the Branch of Account in immediately available funds in Canadian Dollars except as otherwise herein provided. Each payment under this Agreement shall be made for value on the day such payment is due, provided that if any such day is not a Business Day such payment shall be deemed for all purposes of this Agreement to be due on the Business Day next following such day and all interest and other fees shall continue to accrue until payment. Interest and fees payable under this Agreement are payable both before and after any or all of default, demand and judgment. 9. Withholding Taxes: All payments required under this Credit Facility shall be made free and clear of and without any withholding on account of any taxes or other charges of any nature or kind whatsoever. If any such taxes or charges are required to be withheld from any payment made hereunder, the Borrower shall pay an additional amount such that the net amount received by the Bank shall be equal to the amount which would have been received if no such withholding were required to be made. 10. Exchange Rate Fluctuations: If, in the sole determination of the Bank, due to exchange rate fluctuations or for any other reason, the value of Borrowings outstanding under the Credit Facility, when converted to Canadian Dollars, exceeds the Amount as of the 25th day of any month, the Borrower shall either repay or otherwise retire the outstanding Borrowings to the extent of the amount of such excess, or shall secure the amount of such excess in a manner which is satisfactory to the Bank. 11. Repayment: Borrowings are repayable on the later of the Maturity Date or the date of any demand by the Bank, provided that on or prior to the Maturity Date the Bank may demand repayment pursuant to Section 25 hereof, and in such event, Borrowings shall be payable upon such demand. After the Maturity Date, all Borrowings made hereunder shall be due and payable on demand by the Bank. Upon any demand by the Bank hereunder, the Borrower shall pay all amounts outstanding hereunder including, without limitation, an amount equal to the aggregate of the face amounts of all B/As and L/Cs which are unmatured or unexpired, which amount shall be held by the Bank as collateral security for the Borrower's obligations to the Bank with respect thereto. With respect to such unmatured or unexpired B/As and L/Cs, the Borrower will have the further obligation to execute such security documents as the Bank may require. 12. Conversion: The Borrower may convert a Borrowing into another basis of Borrowing provided that no Event of Default has occurred and is continuing and that the conditions for borrowing by way of such instruments are fulfilled. Libor Loans may only be converted on the last day of the relevant Libor Interest Period, B/As may only be converted on their respective maturity dates and L/Cs may only be converted on their expiry dates or such earlier date as agreed by the Borrower, Bank and the beneficiary thereof. 13. Prepayment: Libor Loans may only be prepaid on the last day of the relevant Libor Interest Period and B/As may only be prepaid on their respective maturity dates. 14. Evidence of Indebtedness: The Bank shall open and maintain at the Branch of Account accounts and records evidencing the Borrowings made available to the Borrower by the Bank under this Agreement. The Bank shall record the principal amount of each Borrowing, the payment of principal and interest and all other amounts owing to the Bank. The Bank's accounts and records constitute, in the absence of manifest error, conclusive evidence of the indebtedness of the Borrower to the Bank. The Borrower authorizes and directs the Bank to automatically debit any bank account of the Borrower for all amounts payable by the Borrower to the Bank including, without limitation, the repayment of all amounts due under this Agreement and all charges for the keeping of such bank account. This provision shall be interpreted as a separate contract between the parties, independent of all other terms of this Agreement and shall remain in full force and effect notwithstanding that this Agreement shall have otherwise ceased to have any force or effect. 15. Operating Account: Pursuant to a central banking offset agreement dated on or about April 1, 1993 between the Borrower, the Guarantor and the Bank, the Bank shall establish an account in each of Canadian Dollars and US Dollars (each a "Group Account"). If the balance in a Group Account: (a) is a credit, the Bank may apply at any time in its discretion, the amount of such credit or any part thereof, rounded to the nearest $100,000, or US$100,000, as applicable as a repayment of Borrowings outstanding hereunder, or (b) is a debit, the Bank shall, provided that Borrowings hereunder are available, make available a Borrowing by way of an RBP or RBUSBR Loan in an amount, rounded to the nearest $100,000 or US$100,000, as applicable, as required to place the affected Group Account at not less the balance set out in this paragraph. In either instance, a minimum net credit balance of $100,000 or US$100,000, as applicable as adjusted from time to time will be maintained in each Group Account. 16. Libor Loan Conditions: The Borrower may borrow by way of Libor Loan subject to the following conditions: (a) Libor Loans shall be made in minimum amounts of US$1,000,000 or 500,000 pds.stlg., as applicable or larger whole multiples of US $100,000 or 100,000 pds.stlg., as applicable; (b) the Borrower may select the Libor Interest Period applicable to any Libor Loan and shall notify the Bank of such Libor Interest Period when giving notice pursuant to Schedule "B"; (c) if the Borrower fails to select and to notify the Bank of the Libor Interest Period applicable to any Libor Loan, the Borrower shall be deemed to have selected a 3 month Libor Interest Period; (d) the Borrower shall indemnify the Bank against any loss, cost or expense (including without limitation, any loss incurred by the Bank in liquidating or redeploying deposits acquired to fund or maintain any Libor Loan) incurred by the Bank as a result of: (i) repayments, prepayments, conversions or rollovers of a Libor Loan other than on the last day of the Libor Interest Period applicable to such Libor Loan, or (ii) failure to draw down a Libor Loan on the requested date; (e) if the Bank determines, which determination is final, conclusive and binding upon the Borrower, that: (i) adequate and fair means do not exist for ascertaining the rate of interest on a Libor Loan, (ii) the making or the continuance of a Libor Loan has become impracticable by reason of circumstances which materially and adversely affect the London interbank market, (iii) deposits in US Dollars or Pounds Sterling, as applicable, are not available to the Bank in the London interbank market in sufficient amounts in the ordinary course of business for the applicable Libor Interest Period to make or maintain a Libor Loan during such Libor Interest Period, or (iv) the cost to the Bank of making or maintaining a Libor Loan does not accurately reflect the effective cost to the Bank thereof and if the costs to the Bank are increased or the income receivable by the Bank is reduced in respect of a Libor Loan, then the Bank shall promptly notify the Borrower of such determination and the Borrower shall, prior to the next Interest Determination Date, notify the Bank as to the basis of Borrowing it has selected in substitution for such Libor Loan. If the Borrower has not so notified the Bank, such Libor Loan will automatically be converted into an RBUSBR Loan on the expiry of the then current Libor Interest Period. 17. B/A Conditions: The Borrower may borrow by way of B/A subject to the following conditions: (a) B/As shall be issued and mature on a Business Day and shall be issued in minimum face amounts of $100,000 for terms of not less than 30 and not more than 365 days with each issue being for an aggregate face amount of $500,000 or such larger amount as is a whole multiple of $100,000; (b) the Bank may, in its sole discretion, refuse to accept the Borrower's drafts or limit the amount of any B/A issued at any time; (c) the Borrower shall, by no later than 12:00 (noon) on the day on which a B/A becomes payable, pay to the Bank at the Branch of Account an amount equal to the face amount of such B/A; (d) if any maturing B/A is paid by the Bank with its own funds, then as of the date of such payment, the B/A will be deemed to be converted into an RBP Loan hereunder in the face amount of such B/A; (e) in the event that there is any inconsistency at any time between the terms of this Agreement and the terms of the B/A Undertaking, the terms hereof shall govern. 18. L/C Conditions: The Borrower may borrow by way of L/C subject to the following conditions: (a) the Bank may, in its sole discretion, refuse to issue L/Cs at any time; (b) each L/C shall expire on a Business Day and shall have a term of not more than 365 days; (c) prior to the issue of an L/C, the Borrower shall execute a duly authorized application with respect thereto in form and substance satisfactory to the Bank, and each L/C shall be governed by the terms and conditions of the relevant application for such instrument; (d) the Borrower shall, by no later than 12:00 (noon) on any day on which a drawing is made under an L/C, pay to the Bank at the Branch of Account an amount equal to the face amount of such drawing, and if the Borrower fails to make such payment, the face amount of such drawing shall be converted into either an RBP or RBUSBR Loan hereunder at the option of the Bank; (e) an L/C can only be revoked prior to its expiry date with consent of the Borrower, Bank and the beneficiary thereof; (f) in the event that there is any inconsistency at any time between the terms of this Agreement and the terms of the application for L/C, the terms thereof shall govern. 19. Increased Costs: If, in the reasonable opinion of the Bank, the Bank is now or hereafter becomes subject to, or there is a change in: (a) any reserve, special deposit, deposit insurance, or similar requirement against assets of, or deposits in or for the account of, or credit extended by, or any acquisition of funds by, the Bank, (b) any reserve, special deposit, or similar requirement with respect to all or any of the Borrowings or the undrawn portion of all or any part of the Credit Facility, (c) taxation of, or the basis of, taxation of any payments due to the Bank hereunder (except for taxes on the overall net income of the Bank) or taxation on reserves or deemed reserves with respect to all or any part of the Credit Facility, (d) any requirement relating to capital adequacy, or (e) any other condition imposed by Applicable Law or any interpretation of Applicable Law by an entity charged with the administration thereof or any other condition with which financial institutions operating in Canada are accustomed to comply or have generally complied, whether or not having the force of law, and the result of any of the foregoing, in the sole determination of the Bank, is to increase the cost to, or to reduce any amount received or receivable by, the Bank hereunder, or to reduce the Bank's effective return hereunder to a level below that which the Bank could have otherwise achieved (using any reasonable averaging and attribution method), the Bank shall determine that amount of money which shall compensate it for such increase in cost or reduction in income or reduction in rate of return on the Bank's capital, and the Borrower shall pay to the Bank upon demand such amount in respect of such increased cost or reduction as the Bank may determine to be required to compensate the Bank. The Bank's determination of such increased cost or reduction shall be conclusive absent manifest error. 20. Illegality: If the introduction of or any change in Applicable Law makes it unlawful, or prohibited for the Bank, in its sole opinion, to perform its obligations under this Agreement, the Bank may, by written notice to the Borrower, terminate its obligations under this Agreement, and the Borrower shall prepay the Borrowings immediately or at the end of such period as the Bank may agree, together with all interest and fees which have accrued to the date of payment. 21. Conditions Precedent to Disbursement: (a) The obligation of the Bank to make available any Borrowing is subject to and conditional upon the receipt in form and substance satisfactory to the Bank, of: (i) a duly executed copy of this Agreement; (ii) a review of all documentation by legal counsel to the Bank; (iii) the following documents (the "Security Documents"): (a) guarantee and postponement of claim on the Bank's standard form in the principal amount of $15,000,000 plus interest and fees signed by the Guarantor, (b) general security agreement on the Bank's standard form signed by the Borrower and representing a first charge on all assets of the Borrower other than real estate and purchase money security interests ("PMSIs"), save for PMSIs over the Borrower's inventory, (c) security under Section 427 of the Bank Act covering all inventory of the Borrower, (d) general security agreement on the Bank's standard form signed by the Guarantor and representing a first charge on all assets of the Guarantor other than real estate and purchase money security interests ("PMSIs"), save for PMSIs over the Guarantor's inventory, (e) assignment of insurance policies covering inventory of the Borrower all of which shall have been duly registered in all appropriate jurisdictions in order to perfect and maintain the security created by the Security Documents; (iv) a duly executed B/A Undertaking; and (v) such other documents as the Bank may reasonably request. 22. Representations and Warranties of the Borrower and Guarantor: The Borrower and Guarantor each represents and warrants to the Bank, which representations and warranties are repeated as of the time of each Borrowing or conversion and as of the time at which each payment of interest or fees is due hereunder, that: (a) the Borrower and Guarantor are corporations validly incorporated and existing under the laws of Ontario and are duly registered or qualified to carry on business in all jurisdictions where the nature of their properties, assets or business makes such registration or qualification necessary or desirable; (b) the execution and delivery of this Agreement and the Security Documents have been duly authorized by all necessary actions and do not (i) violate any law, regulation or rule by which the Borrower and Guarantor is bound, (ii) violate any provision of their constating documents, by-laws or any unanimous shareholders' agreement to which either of them is subject, (iii) result in a breach of, or a default under, any agreement or instrument to which any of them is a party or by which they or any of their properties or assets may be bound or affected, or (iv) result in the creation of any encumbrance on any of their properties or assets except as contemplated herein; (c) the Guarantor's most recent audited, consolidated financial statements are correct and complete in all material respects and the Borrower's and Guarantor's most recent annual financial statement are correct and complete in all material respects; (d) no Event of Default has occurred and no event has occurred which constitutes, or which with giving of notice, lapse of time or the occurrence of any other condition would constitute a default having a material adverse effect on their financial condition under or in respect of any agreement, undertaking or instrument to which the Borrower and Guarantor or any of their properties or assets may be subject; (e) they are in compliance with all Applicable Laws, including, without limitation, those dealing with the environment; (f) the Borrower and Guarantor have filed all material income tax returns which were required to be filed, paid or made provision for payment of all material taxes (including interest and penalties) which are due and payable, and provided adequate reserves for payment of any tax, the payment of which is being contested; (g) no consent, approval, order, authorization, licence, exemption or designation of or by any governmental body or person is required in connection with the execution, delivery and performance of this Agreement or the Security Documents or the transactions contemplated hereby on behalf of the Borrower and Guarantor and no registration, qualification, designation, declaration or filing with any governmental body is necessary to enable or empower either of them to perform their respective obligations under this Agreement or the Security Documents, except such as have been made or obtained, which are in full force and effect. The representations and warranties made in this Section shall continue in effect until payment and performance of all debts, liabilities and obligations under this Agreement. 23. Covenants of the Borrower: Without affecting or limiting in any way the right of the Bank to terminate its commitment and demand all Borrowings under the Credit Facility after the Maturity Date, the Borrower covenants and agrees with the Bank, while this Agreement is in effect or any Borrowings are outstanding: (a) to maintain its corporate existence as a validly existing corporate entity; (b) to provide the Bank with the following: (i) quarterly, unaudited financial statements within 45 days of the end of each fiscal quarter accompanied by a certificate in the form of Schedule "C" executed by two officers of the Borrower, one of whom shall be its chief financial officer; (ii) annual audited financial statements within 90 days of each fiscal year end; (iii) an aged list of its accounts receivable and a report of inventory owned by the Borrower within 15 Business Days of the end of each month, accompanied by a certificate of the Borrower; and (iv) details of securities pledged as Liquid Collateral Security determined in accordance with Schedule "D"; (c) to provide the Bank with access to its business and records as may be requested from time to time including, without limitation, its annual financial forecasts and plans; (d) to give the Bank prompt notice upon acquiring knowledge of any Event of Default or any event which, with notice or lapse of time or both, would constitute an Event of Default; (e) to insure and to keep insured with insurers acceptable to the Bank all properties customarily insured by companies carrying on similar business in similar locations against all risks, including but not limited to business interruption, with loss payable to the Bank as loss payee or mortgagee, as the case may be; (f) to file all income tax returns which are to be filed from time to time, to pay or make provision for payment of all taxes (including interest and penalties) and Potential Preferred Claims which are or will become due and payable and to provide adequate reserves for the payment of any tax, the payment of which is being contested; (g) to comply with all Applicable Laws including, without limitation, those dealing with the environment and to hold the Bank harmless for any costs or expenses which it incurs for any environment-related liabilities which exist now or in the future with respect to the Borrower's property; (h) not to directly or indirectly, guarantee or otherwise provide for on a direct or indirect contingent basis, the payment of any monies or performance of any obligations by any third party for an amount in excess of $5,000,000 in the aggregate, except as may be consented to in writing by the Bank from time to time; (i) not to do anything to affect the ranking of this debt; (j) not to grant, create, assume or suffer to exist any mortgage, charge, lien, pledge, security interest or other encumbrance affecting any of its properties, assets or other rights, without the prior written consent of the Bank; (k) during any fiscal year of the Borrower, not to sell, transfer, convey, lease, assign or otherwise dispose of any part of its undertaking, property, assets or rights with an aggregate value exceeding $5,000,000, other than inventory in the ordinary course of business and on commercially reasonable terms, without the prior written consent of the Bank; (l) not to change its name or merge, amalgamate, consolidate or otherwise enter into any other form of business combination with any other person without the prior written consent of the Bank, such consent not to be unreasonably withheld. 24. Covenants of the Guarantor: Without affecting or limiting in any way the right of the Bank to terminate its commitment and demand all Borrowings under the Credit Facility after the Maturity Date, the Guarantor covenants and agrees with the Bank, while this Agreement is in effect or any Borrowings are outstanding: (a) to maintain as at the end of any fiscal quarter Tangible Net Worth on a consolidated basis of not less than US$ 60,000,000. minus any Allowable Reduction. (b) not to permit its Current Ratio on a consolidated basis to be less than 1.50:1 as at the end of any fiscal quarter. (c) not to permit its Total Liabilities to Tangible Net Worth Ratio on a consolidated basis to exceed .90:1 as at the end of any fiscal quarter. (d) to provide the Bank with the following: (i ) quarterly consolidated and non-consolidated unaudited financial statements within 45 days of the end of each fiscal quarter, and (ii) quarterly consolidated analysis of bookings, billings and backlog, within 45 days of the end of each fiscal quarter, and (iii) annual consolidated audited financial statements within 90 days of each fiscal year end, each of the above financial statements to be accompanied by a certificate in form satisfactory to the Bank. (e) to maintain its corporate existence as a validly existing corporate entity; (f) to provide the Bank with access to its business and records as may be requested from time to time including, without limitation, its annual financial forecasts and plans; (g) to give the Bank prompt notice upon acquiring knowledge of any Event of Default or any event which, with notice or lapse of time or both, would constitute an Event of Default; (h) to insure and to keep insured with insurers acceptable to the Bank all properties customarily insured by companies carrying on similar business in similar locations against all risks, including but not limited to business interruption, with loss payable to the Bank as loss payee or mortgagee, as the case may be; (i) to file all income tax returns which are to be filed from time to time, to pay or make provision for payment of all taxes (including interest and penalties) and Potential Preferred Claims which are or will become due and payable and to provide adequate reserves for the payment of any tax, the payment of which is being contested; (j) to comply with all Applicable Laws including, without limitation, those dealing with the environment and to hold the Bank harmless for any costs or expenses which it incurs for any environment-related liabilities which exist now or in the future with respect to the Guarantor's property; (k) not to make any capital expenditures in any fiscal year of the Guarantor except those as may be set out in the Guarantor's operating budgets as provided to the Bank from time to time, plus an allowance of 20%, without the Bank's prior written consent; (l) not to directly or indirectly, guarantee or otherwise provide for on a direct or indirect contingent basis, the payment of any monies or performance of any obligations by any third party, other than wholly owned Subsidiaries, for an amount in excess of $5,000,000 in the aggregate, except as may be consented to in writing by the Bank from time to time; (m) not to grant, create, assume or suffer to exist any mortgage, charge, lien, pledge, security interest or other encumbrance affecting any of its properties, assets or other rights, without the prior written consent of the Bank; (n) during any fiscal year of the Guarantor, not to sell, transfer, convey, lease, assign or otherwise dispose of any part of its undertaking, property, assets or rights with an aggregate value exceeding $5,000,000, other than inventory in the ordinary course of business and on commercially reasonable terms, without the prior written consent of the Bank; (o) not to change its name or merge, amalgamate, consolidate or otherwise enter into any other form of business combination with any other person without the prior written consent of the Bank, such consent not to be unreasonably withheld. (p) To refrain from making any principal repayments on the Convertible Subordinated Debenture. 25. Events of Default: During the Term Period if any one or more of the following events has occurred and is continuing: (a) the non-payment when due of principal, interest, fees or any other amounts due under this Agreement; (b) the breach by the Borrower or Guarantor or any of their respective Affiliates of any provision of this Agreement or any other agreement with the Bank or any of the Bank's Subsidiaries; (c) the default by the Borrower or Guarantor or any of their respective Affiliates under any obligation to repay borrowed money in excess of $1,000,000, other than amounts due under this Agreement, or in the performance or observance of any agreement or condition in respect of such borrowed money where, as a result of such default, the maturity of such obligation is accelerated; (d) if any representation or warranty made or deemed to have been made herein shall be false or inaccurate in any materially adverse respect; (e) if in the opinion of the Bank there is a material adverse change in the financial condition, ownership or operation of the Borrower or the Guarantor or any of its Material Subsidiaries; (f) if proceedings for the bankruptcy, receivership, dissolution, liquidation, winding-up, reorganization or readjustment of debt of the Borrower or Guarantor or any of their respective Affiliates or for the suspension of the operations of the Borrower or Guarantor or any of their respective Affiliates are commenced, unless such proceedings are being actively and diligently contested in good faith; (g) if the Borrower or Guarantor or any of their respective Affiliates is insolvent, or is adjudged or declared bankrupt or insolvent, or makes an assignment for the benefit of its creditors, or petitions or applies to any tribunal for the appointment of a receiver or trustee for it or for any substantial part of its property, or commences any proceedings relating to it under any reorganization, arrangement, readjustment of debt, dissolution, liquidation or other similar proceeding under Applicable Law, or by any act or failure to act indicates its consent to, approval of, or acquiescence in, any such proceeding for it or any substantial part of its property, or suffers the appointment of any receiver or trustee; (h) if the Guarantor should incur a loss exceeding US $5,000,000, excluding restructuring charges to an aggregate maximum of $2,000,000 during the Term Period, in any fiscal quarter. then in such event the ability of the Borrower to make further Borrowings under the Credit Facility shall immediately terminate and the Bank may, by written notice to the Borrower, declare the Borrowings outstanding hereunder to be immediately due and payable. After the Maturity Date, nothing in this Agreement shall be construed to affect or limit in any way the right of the Bank to terminate its commitment and demand all Borrowings under the Credit Facility. 26. Expenses: The Borrower shall pay the reasonable fees (including, without limitation, all documentation fees charged by the Bank for use of its internal legal counsel) and expenses incurred by the Bank in connection with the preparation, negotiation, documentation and operation of the Credit Facility and the Security Documents, including the enforcement of the Bank's rights under the Credit Facility whether or not any amounts are advanced hereunder. 27. Indemnity: The Borrower shall indemnify the Bank from and against all losses, damages, expenses and liabilities (including legal fees on a solicitor and client basis) which the Bank sustains or incurs as a consequence of any breach by the Borrower under any of the provisions of this Agreement or of any document or instrument delivered in connection hereunder. 28. Limit on Rate of Interest: The Borrower shall not be obliged to pay any interest under or in connection with this Agreement to the extent such interest exceeds the effective annual rate of interest on the credit advanced hereunder that would be lawfully permitted under the Criminal Code. For purposes of this section, "interest" and "credit advanced" have the meanings ascribed to such terms in the Criminal Code, and the "effective annual rate of interest" shall be calculated in accordance with generally accepted actuarial practices and principles. 29. Judgment Currency: If for the purpose of obtaining judgment in any court in any jurisdiction with respect to this Agreement, it is necessary to convert into the currency of such jurisdiction (the "Judgment Currency") any amount due hereunder in any currency other than the Judgment Currency, then such conversion shall be made at the rate of exchange prevailing on the Business Day before the day on which judgment is given. For this purpose "rate of exchange" means the rate at which the Bank will, on the relevant date, sell such currency in Toronto, Ontario, against the Judgment Currency. In the event that there is a change in the rate of exchange prevailing between the Business Day before the day on which the judgment is given and the date of payment of the amount due, the Borrower will, on the date of payment, pay such additional amounts (if any) or be entitled to receive reimbursement of such amount if any, as may be necessary to ensure that the amount paid on such date is the amount in the Judgment Currency which, when converted at the rate of exchange prevailing on the date of payment, is the amount then due under this Agreement in such other currency. Any additional amount due from the Borrower under this Section will be due as a separate debt and shall not be affect by judgment being obtained for any other sums due under or in respect of this Agreement. 30. Notices: Any notice or demand hereunder shall be given in writing by telecopier or letter, in each case addressed to an officer of the receiving party. A telecopier communication shall be deemed received on the date of transmission provided such transmission is received prior to 5:00 p.m. on a day on which the receiving party's office is open for normal business, and otherwise on the next such day. A letter shall be deemed received when hand-delivered to the receiving party, at the address shown herein or at such other address as the receiving party may notify the other from time to time. Each party shall be bound by any notice given hereunder and entitled to act in accordance therewith, unless otherwise agreed. Th addresses of the parties for the purpose hereof shall be: as to the Borrower: Gandalf Canada Ltd. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Attention: Vice-President, Finance Telecopier: (613) 727-0617 as to the Guarantor: Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Attention: Vice-President, Finance Telecopier: (613) 727-0617 as to the Bank: Royal Bank of Canada 90 Sparks Street Ottawa, Ontario K1P 5T6 Attention: Senior Account Manager, Advanced Technology Telecopier: (613) 564-4527 or such other address for delivery as each party from time to time may notify the other as aforesaid. 31. Assignment: This Agreement shall be binding upon and enure to the benefit of the Bank and the Borrower and their respective successors and permitted assigns. The Borrower cannot assign or transfer all or any of its rights and obligations hereunder without the prior written consent of the Bank. 32. Set-Off: The Bank is authorized (but not obligated), at any time and without notice, to apply any credit balance (whether or not then due) to which the Borrower is then beneficially entitled on any account (in any currency) at any branch or office of the Bank in or towards satisfaction of the obligations and liabilities of the Borrower due to the Bank under this Agreement. For that purpose, the Bank is authorized to use all or any part of any such credit balance to buy such other currencies as may be necessary to effect such application. 33. Waivers and Amendments: No failure to exercise and no delay in exercising on the part of the Bank, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other right, power or privilege. No amendment, modification or waiver of any provision of this Agreement or consent to any departure by the Borrower from any provision of this Agreement will in any event be effective unless it is in writing signed by the Borrower and the Bank, and then the amendment, modification, waiver or consent will be effective only in the specific instance, for the specific purpose and for the specific length of time for which it is given by the Bank. 34. Counterparts: This Agreement may be executed in any number of counterparts, each of which when executed and delivered is an original but all of which taken together constitute one and the same instrument, and any party may execute this Agreement by signing any counterpart of it. 35. Further Assurances: The Borrower shall from time to time promptly upon the request of the Bank take such action and execute and deliver such further documents, as shall be reasonably required in order to fully perform the terms of, and to carry out the intention of, this Agreement. 36. Severability: If any provision of this Agreement is or becomes prohibited or unenforceable in any jurisdiction, such prohibition or unenforceability shall not invalidate, affect or impair any of the remaining provisions hereof or invalidate or render unenforceable the provision concerned in any other jurisdiction. 37. Governing Law and Submission to Jurisdiction: This Agreement shall be construed in accordance with and governed by the laws of the Province of Ontario and of Canada applicable therein. The Borrower irrevocably submits to the non-exclusive jurisdiction of the courts of such Province and acknowledges the competence of such courts and irrevocably agrees to be bound by a judgment of any such court. 38. Periodic Review: The Credit Facility is subject to an annual review by the Bank on or before the Maturity Date. The Bank may, in its sole discretion, terminate the Credit Facility following such annual review without limiting or affecting the Bank's rights pursuant to Section 25 hereof. 39. Whole Agreement: This Agreement and any agreements delivered pursuant to or referred to in this Agreement constitute the whole and entire agreement between the parties in respect of the Credit Facility, and cancel and supersede any prior written or verbal agreements including undertakings, declarations or representations made with respect thereto. 40. Effective Date: Except as otherwise provided in this Agreement, the date on which this Agreement becomes effective is the date the offer is accepted by the Borrower and the Guarantor. 41. Expiry Date: This offer is open for acceptance until close of business at the Branch of Account on January 21, 1994 unless extended in writing by the Bank. Please acknowledge your acceptance of the above terms and conditions by signing the attached copy of this letter in the space provided below and returning it to the undersigned. Yours truly, s/L.J.BLATTMAN ORIGINAL SIGNED BY L.J. BLATTMAN We acknowledge and accept the terms and conditions of this Agreement as of the 21st day of January, 1994. GANDALF CANADA LTD. Per: s/W.R. MACDONALD, VP FINANCE Per: s/B.R. HEDGES Date: JANUARY 21, 1994 GANDALF TECHNOLOGIES INC. Per: s/W.R. MACDONALD, VP FINANCE Per: s/B.R. HEDGES Date: JANUARY 21, 1994 SCHEDULE "A" Schedule "A" to the Agreement dated as of the 7th day of January, 1994 between Gandalf Canada Ltd. as Borrower and Gandalf Technologies Inc. as Guarantor and Royal Bank of Canada as the Bank. DEFINITIONS "Affiliate" of a person means any person which directly or indirectly, controls or is controlled by or is under common control with such first mentioned person, and for the purposes of this definition, "control" (including with correlative meanings the terms "controlled by" and "under common control with") means the power to direct or cause the direction of the management and policies of any person, whether through the ownership of shares or by contract or otherwise, and without restricting the above, one corporate body shall be deemed to be affiliated with another corporate body if one of them is the Subsidiary of the other or both are Subsidiaries of the same corporate body; "Agreement" means collectively this agreement and all schedules attached hereto; "Allowable Reduction" means the amount, not exceeding $2,000,000 in aggregate, expended by the Guarantor to restructure between October 1, l993 and March 31, l994. "Applicable Law" means, in respect of any person, property, transaction or event, all present or future applicable laws, statutes, regulations, treaties, judgments and decrees and (whether or not having the force of law) all applicable official directives, rules, guidelines, orders and policies of any governmental body having jurisdiction; "B/A Undertaking" means the Bank's standard form of undertaking in respect of bankers acceptances issued by borrowers and accepted by the Bank; "Branch of Account" means the Bank's branch at 90 Sparks Street, Ottawa, Ontario; "Business Day" means a day, excluding Saturday, Sunday, and any other day which shall be in the City of Toronto, Ontario a legal holiday or a day on which banking institutions are closed and, with respect to a Libor Loan, "Business Day" means a day with the foregoing characteristics which is also a day on which dealings in US Dollar or Pounds Sterling, as applicable, deposits by and between leading banks in the London interbank market may be conducted; "Canadian Dollars" and the symbols "Cdn$" and "$" each means lawful money of Canada; "Convertible Subordinated Debenture" means the Cdn $30,000,000 8.5% convertible subordinated debenture due November 10, 2002 issued by the Guarantor; "Current Ratio" of a person means the ratio of that person's current assets to that person's current liabilities, net of cash on hand; "Equivalent Amount" determines the amount of availability only and means on any date, the amount of Canadian Dollars required to convert from Canadian Dollars to: U.S. Dollars at the rate of 1.30 Canadian Dollars for 1.00 US$; Pounds Sterling at the rate of 1.90 Canadian Dollars for 1 Pound Sterling. The Equivalent amount will be amended by the Bank from time to time to reflect changes in the rate of exchange and such amendments will be advised to the Borrower in writing. "Event of Default" means each of the events listed in the section entitled "Events of Default"; "GAAP" means generally accepted accounting principles in effect from time to time in Canada applied in a consistent manner from period to period; "Good Accounts Receivable" means all accounts receivable of the Borrower excluding without duplication: (a) those outstanding more than 90 days after the billing date, (b) those between the Borrower and any Affiliate of the Borrower, (c) those subject to any mortgage, charge, assignment, lien, security interest or other encumbrance ranking in priority to or equal to that granted to the Bank pursuant to this Agreement, (d) those subject to any claim or assertion of a right of set-off on the part of the account debtor to the extent of such claim or assertion, (e) those which would be required to be treated as bad or doubtful accounts in accordance with GAAP including, without limitation, those outstanding from entities which are bankrupt, insolvent or which have suspended operations, and (f) those subject to a contractual right on the part of the account debtor to refuse payment either in whole or in part; "Interest Determination Date" means, with respect to a Libor Loan, the date which is 2 Business Days prior to the first day of the Libor Interest Period applicable to such Libor Loan; "Inventory" means inventory of the Borrower not subject to any mortgage, charge, lien, consignment, title retention arrangement, security interest or other encumbrance ranking in priority to or equal to that granted to the Bank pursuant to this Agreement; "Letter of Credit" or "L/C" each means a documentary credit issued by the Bank on behalf of the Borrower for the purpose of providing security to a third party that the Borrower will perform a contractual obligation owed to such third party; "Libor" means, with respect to each Libor Interest Period applicable to a Libor Loan, the annual rate of interest (rounded upwards, if necessary, to the nearest whole multiple of one sixteenth of one percent (1/16th%)), at which the Bank, in accordance with its normal practice, would be prepared to offer to leading banks in the London interbank market for delivery on the first day of such Libor Interest Period and for a period equal to such Libor Interest Period, deposits in US Dollars or Pounds Sterling of amounts comparable to such Libor Loan to be outstanding during such Libor Interest Period, at or about 10:00 a.m. (Toronto time) on the Interest Determination Date; "Libor Interest Date" means, with respect to any Libor Loan, the last day of each Libor Interest Period and, if the Borrower selects a Libor Interest Period longer than 3 months, the Libor Interest Date shall be the date falling every 3 months after the beginning of such Libor Interest Period as well as the last day of such Libor Interest Period; "Libor Interest Period" means, with respect to any Libor Loan, a period (subject to availability) of approximately 1 month (or longer whole multiples of 1 month to and including 12 months as selected by the Borrower and notified to the Bank) commencing with the date on which such Libor Loan is made, the date on which another method of Borrowing is converted to such Libor Loan or the last day of the immediately prior Libor Interest Period; "Liquid Collateral Security" means the liquid collateral security determined in accordance with Schedule "D"; "Margin Requirement" means the total amount of Borrowings available under this Agreement, which amount may not exceed the sum of (i) 75% of Good Accounts Receivable from account debtors resident in Canada, (ii) to a maximum value of $8,000,000, 50% of the book value of the Inventory located in the Province of Ontario and (iii) Liquid Collateral Security; "Material Subsidiary" means, with respect to the Guarantor, any Subsidiary of the Guarantor now or hereinafter located in Canada, the United States, the United Kingdom, France or the Netherlands as well as any Subsidiary of the Guarantor which is identified as being a Material Subsidiary by the Bank in writing to the Guarantor from time to time and "Material Subsidiaries" means any such Subsidiaries of the Guarantor; "Maturity Date" means July 31, 1994; "Potential Preferred Claims" means amounts accrued or owing for wages, vacation pay, employee benefits or pensions, municipal tax, corporate tax, sales tax, Canadian goods and services tax, source deductions and remittances (including income tax, Canada Pension Plan and unemployment insurance obligations), Government royalties, purchase money security interests and any other statutory preferred claims as well as the aggregate of the next three months rent payments for each rental property of the Borrower; "Pounds Sterling" and "character symbol" and "GBP" each means lawful money of the United Kingdom; "Royal Bank Prime" (in this Agreement, "RBP") means the annual rate of interest announced by the Bank from time to time as being a reference rate then in effect for determining interest rates on Canadian Dollar commercial loans made in Canada; "Royal Bank Prime Acceptance Fee" (in this Agreement, "RBPAF") means the annual rate announced by the Bank from time to time as being a reference rate then in effect for determining fees on Canadian Dollar bankers' acceptances accepted by the Bank in Canada; "Royal Bank US Base Rate" (in this Agreement, "RBUSBR") means the annual rate of interest announced by the Bank from time to time as being a reference rate then in effect for determining interest rates on US Dollar commercial loans made in Canada; "Subsidiary" of a person means (i) any corporation of which the person and/or one or more of its Affiliates, holds, directly or beneficially, other than by way of security only, securities to which are attached more than 50% of the votes that may be cast to elect directors of such corporation, or (ii) a corporation of which such person has through operation of law or otherwise, the ability to elect or cause the election of a majority of the directors of such corporation and "Subsidiaries" of such person mean all such corporations; "Tangible Net Worth" of a person means its shareholders' equity plus, but not in duplication, the amount of the Convertible Subordinated Debenture less the aggregate of its goodwill, deferred income taxes, deferred software costs and other assets (all as defined and set out on the person's audited annual financial statements), that the Bank deems to be intangible. For the purpose of calculating shareholders' equity, items on the balance sheet of the relevant person under the heading "foreign exchange translation amount" shall be deemed to be zero; "Term Period" means the period of time from the date of this Agreement to and including the Maturity Date; "Total Liabilities" of any person means all liabilities appearing on the balance sheet of that person, net of cash on hand; "Total Liabilities to Tangible Net Worth Ratio" of a person means the ratio of that person's Total Liabilities to that person's Tangible Net Worth; "US Dollars" and "US$" each means lawful money of the United States of America in same day immediately available funds or, if such funds are not available, the form of money of the United States of America that is customarily used in the settlement of international banking transactions on the day payment is due hereunder. SCHEDULE "B" Schedule "B" to the Agreement dated as of the 7th day of January, 1994 between Gandalf Canada Ltd. as Borrower and Gandalf Technologies Inc. as Guarantor and Royal Bank of Canada as the Bank. Notice Requirements for Drawdowns and Conversions RBP LOANS AND RBUSBR LOANS Amount: Prior Notice; Under Cdn$ or US$10,000,000 by 12:00 (noon) on the day of drawdown or conversion Cdn$ or US$10,000,000, up to and including the Amount by 12:00 (noon) 1 Business Day prior to drawdown or conversion B/As Amount Prior Notice Under Cdn$10,000,000 by 12:00 (noon) on the day of drawdown or conversion Cdn$10,000,000 up to and including the Amount by 12:00 (noon) 1 Business Day prior to drawdown or conversion Libor Loans Amount Prior Notice Under US$10,000,000 or the Equivalent Amount in Pounds Sterling by 10:00 a.m. on the Interest Determination Date US$10,000,000 up to and including the Amount or the Equivalent Amount in Pounds Sterling by 10:00 a.m. 1 Business Day prior to the Interest Determination Date SCHEDULE "C" Schedule "C" to the Agreement dated as of the 7th day of January, 1994 between Gandalf Canada Ltd. as Borrower and Gandalf Technologies Inc. as Guarantor and Royal Bank of Canada as the Bank. OFFICER'S COMPLIANCE CERTIFICATE We, ___________________________________, of the City of __________________ and the City of _______________________, respectively in the Province of Ontario, and hereby certify as follows: 1. That we are the [office] and [office], respectively of the Guarantor, and we have been designated by the Borrower to sign this compliance certificate on behalf of the Borrower. 2. That we have read the provisions of the letter agreement (the "Agreement") dated January 7, 1994 between the Borrower and Guarantor and Royal Bank of Canada (the "Bank") which are relevant to this compliance certificate and have made such examination or investigation as is reasonably necessary to enable us to express an informed opinion on the matters contained in this certificate. Terms defined in the Agreement have the same meanings where used in this certificate. As of the date of this certificate: (a) the representations and warranties contained in the Agreement are true and correct; (b) no Event of Default or event which would with lapse of time or the happening of some further condition constitute an Event of Default has occurred and is continuing; and (c) the covenants contained in the Agreement have not been breached and during the next fiscal quarter of the Borrower and Guarantor there is no reason to believe that any of such covenants will be breached. 3. The attached report of the Borrower of aged accounts receivable by debtor and amount and inventory by net book value is complete and accurate in all material respects. DATED this _______ day of _________________, 19__. By:____________________________________ Name/ Title: ____________________________________ By:____________________________________ Name/ Title: ____________________________________ SCHEDULE "D" Schedule "D" to the Agreement dated as of the 7th day of January, 1994 between Gandalf Canada Ltd. as Borrower and Gandalf Technologies Inc. as Guarantor and Royal Bank of Canada as the Bank. LIQUID COLLATERAL SECURITY LIQUID COLLATERAL SECURITY APPLICABLE LOANING VALUE A. Canada Savings Bonds, and Savings 100% of par value Bonds redeemable at par issued by Provincial Governments; Province of British Columbia Parity Bonds redeemable at par and fully guaranteed by the Province of British Columbia, issued in the names of Provincial Crown Corporations. B. Government of Canada or Government 95% of market value of Canada guaranteed bonds and Treasury Bills except as indicated in (a) above. (c) Provincial Government or Provincial 95% of market value Government guaranteed bonds and Treasury Bills except as indicated in (a) above. (d) Bankers acceptances or similar 95% of market value investments effectively assigned to the Bank. ________________ = LIQUID COLLATERAL SECURITY -----END PRIVACY-ENHANCED MESSAGE-----