-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GSzlXuAcKnjBpZ1lxBKplmd/9P7wlv/mZv5ewo4PfBYlqlcTb7KTSlStf5YSN59y F5V5eN5UXxVOK2HoxEmbiA== 0000355876-96-000020.txt : 19961113 0000355876-96-000020.hdr.sgml : 19961113 ACCESSION NUMBER: 0000355876-96-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960928 FILED AS OF DATE: 19961112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GANDALF TECHNOLOGIES INC CENTRAL INDEX KEY: 0000355876 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 132991700 STATE OF INCORPORATION: A6 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12643 FILM NUMBER: 96657745 BUSINESS ADDRESS: STREET 1: 130 COLONNADE RD S CITY: NEPEAN ONTARIO CANAD STATE: A6 BUSINESS PHONE: 6137236500 MAIL ADDRESS: STREET 1: 130 COLONNADE RD S CITY: NEPEAN ONTARIO CANAD STATE: A6 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 28, 1996. 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 September 28, 1996 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) 274-6500 -------------- 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 filed 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 October 31, 1996 was 43,356,270. GANDALF TECHNOLOGIES INC. INDEX Page No. -------- PART I FINANCIAL INFORMATION Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Changes in Financial Position 5 Consolidated Statements of Shareholders' Equity 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II OTHER INFORMATION 19 SIGNATURE PAGE 20
GANDALF TECHNOLOGIES INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Thousands of US dollars) Sept 28 March 31 1996 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 6,519 $ 13,602 Accounts receivable 17,466 28,694 Inventories (note 2) 15,635 13,491 Other 1,120 1,867 -------- -------- Total current assets 40,740 57,654 Fixed assets (note 3) 14,207 16,253 Goodwill, net of amortization of $3,277 (March 31, 1996: $3,172) 3,137 3,242 Other assets 2,173 2,226 -------- -------- Total assets $ 60,257 $ 79,375 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank operating lines (note 4) $ 1,360 $ - Accounts payable and accrued liabilities (note 5) 17,576 21,755 Deferred revenue 5,660 6,178 Current portion of long-term debt 540 360 -------- -------- Total current liabilities 25,136 28,293 Long-term debt 2,702 2,496 Shareholders' equity: Capital stock: Common shares, 43,349,604 issued and outstanding (March 31, 1996: 42,939,523) (note 6) 55,637 54,198 Retained earnings (deficit) (note 6) (17,383) 260 Cumulative translation adjustment (5,835) (5,872) -------- -------- Total shareholders' equity 32,419 48,586 -------- -------- Total liabilities and shareholders' equity $ 60,257 $ 79,375 ======== ======== (See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Thousands of US dollars except per share amounts) 13 Weeks Ended 26 Weeks Ended September 28 September 28 -------------------- -------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Revenues: Product $ 8,082 $ 18,401 $ 18,999 $ 37,815 Service 7,145 8,956 14,565 18,192 -------- -------- -------- -------- 15,227 27,357 33,564 56,007 Operating expenses: Cost of product sales 5,873 8,572 12,304 18,235 Service expenses 4,942 5,910 10,249 11,779 Sales and marketing 7,740 7,659 15,034 15,857 Administration and general 2,203 2,142 4,481 4,213 Research and development 3,110 2,839 6,114 5,434 Restructuring costs (note 7) - - 3,010 - -------- -------- -------- -------- Income (loss) from operations (8,641) 235 (17,628) 489 Interest expense (39) (136) (86) (342) Interest income and foreign exchange 17 (64) 71 (46) -------- -------- -------- -------- Net income (loss) for the period $ (8,663) $ 35 $(17,643) $ 101 ======== ======== ======== ======== Basic earnings (loss) per share (note 8) $ (0.20) $ - $ (0.41) $ - ======== ======== ======== ======== Weighted average number of shares outstanding (thousands) 43,319 39,553 43,202 38,592 ======== ======= ======== ======== (See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (Unaudited) (Thousands of US dollars) 13 Weeks Ended 26 Weeks Ended September 28 September 28 -------------------- -------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Operating activities: Cash provided by (applied to) operations (note 9) $ (7,608) $ 1,169 $(14,066) $ 2,745 Decrease (increase) in operating working capital (note 10) 2,424 (125) 5,117 (327) -------- -------- -------- -------- Cash provided by (applied to) operating activities (5,184) 1,044 (8,949) 2,418 -------- -------- -------- -------- Financing activities: Issue of capital stock 273 1,878 1,439 8,301 Conversion of debentures (note 11) - (1,802) - (7,999) Other 293 149 385 451 -------- -------- -------- -------- Cash provided by financing activities 566 225 1,824 753 -------- -------- -------- -------- Investing activities: Purchase of fixed assets (697) (484) (1,307) (1,158) Other (22) (3) (7) (37) -------- -------- -------- -------- Cash applied to investing activities (719) (487) (1,314) (1,195) -------- -------- -------- -------- Effect of exchange rate changes on cash balances 18 (85) (4) (166) -------- -------- -------- -------- Increase (decrease) in cash position in the period (5,319) 697 (8,443) 1,810 Cash position at beginning of period 10,478 7,076 13,602 5,963 -------- -------- -------- -------- Cash position at end of period $ 5,159 $ 7,773 $ 5,159 $ 7,773 ======== ======== ======== ======== Cash position is comprised of: Cash and cash equivalents $ 6,519 $ 11,628 $ 6,519 $ 11,628 Bank operating lines (1,360) (3,855) (1,360) (3,855) -------- -------- --------- -------- $ 5,159 $ 7,773 $ 5,159 $ 7,773 ======== ======== ======== ======== (See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Thousands of US dollars) 13 Weeks Ended 26 Weeks Ended September 28 September 28 -------------------------------------------- -------------------------------------------- 1996 1995 1996 1995 --------------------- -------------------- --------------------- --------------------- Shares Dollars Shares Dollars Shares Dollars Shares Dollars ---------- --------- --------- --------- ---------- -------- ---------- --------- Capital Stock: Consisting of an unlimited number of common shares authorized, without par value Balance at beginning of period (note 6) 43,264,941 $ 55,364 38,934,289 $ 97,775 42,939,523 $ 54,198 35,238,064 $ 91,644 Issued: On exercise of stock options 45,932 81 95,529 75 371,350 1,247 178,162 301 On conversion of debentures (note 11) - - 1,026,378 1,734 - - 4,639,970 7,639 Other 38,731 192 - - 38,731 192 - - Reduction in stated capital (note 6) - - - (52,364) - - - (52,364) ---------- --------- ---------- --------- ---------- --------- ---------- --------- Balance at end of period 43,349,604 $ 55,637 40,056,196 $ 47,220 43,349,604 $ 55,637 40,056,196 $ 47,220 ========== ========= ========== ========= ========== ========= ========== ========= Retained Earnings (Deficit): Balance at beginning of period $ (8,720) $ (52,298) $ 260 $ (52,364) Net income (loss) (8,663) 35 (17,643) 101 Reduction in stated capital (note 6) - 52,364 - 52,364 --------- --------- --------- --------- Balance at end of period $ (17,383) $ 101 $ (17,383) $ 101 ========= ========= ========= ========= Cumulative Translation Adjustment: Balance at beginning of period $ (5,836) $ (4,947) $ (5,872) $ (4,838) Adjustment arising on translation of foreign subsidiaries' financial statements to US dollars 38 749 (72) 1,525 Adjustment relating to subsidiary loans designated as long-term investments (37) (562) 109 (1,447) --------- --------- --------- --------- Balance at end of period $ (5,835) $ (4,760) $ (5,835) $ (4,760) ========= ========= ========= ========= (See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) All amounts are stated in US dollars unless otherwise indicated. C$ refers to Canadian dollars. Tabular amounts are in thousands. References to years are to fiscal years ending March 31. 1. INTERIM FINANCIAL STATEMENTS The consolidated financial statements at September 28, 1996 and for the three and six month periods then ended are unaudited and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. 2. INVENTORIES
Sept 28 March 31 1996 1996 -------- -------- Raw materials $ 4,263 $ 2,905 Work-in-process 3,796 3,821 Finished goods 7,576 6,765 -------- -------- $ 15,635 $ 13,491 ======== ========
3. FIXED ASSETS Sept 28 March 31 1996 1996 -------- -------- Cost: Land $ 223 $ 218 Buildings 3,316 4,627 Equipment 59,794 58,336 Leasehold improvements 1,946 1,966 --------- -------- 65,279 65,147 Accumulated depreciation 51,072 48,894 -------- -------- Net book value $ 14,207 $ 16,253 ======== ========
4. BANK OPERATING LINES At September 28, 1996 the Company's authorized bank lines totaled $20.9 million under two committed credit facilities provided by a Canadian chartered bank which bear interest at the bank's prime rate plus 0.5% to 1.5%. The authorized credit lines are secured by certain of the accounts receivable, inventories and other assets of the Company. The amount available for borrowing at any time is based on margin formulas relating to levels of accounts receivable, inventories and other bank covenants. Based on the margin formulas, $12.2 million was available to the Company at September 28, 1996 of which $1.3 million was being utilized. Cash and cash equivalents held as of that date represented a further $6.5 million of cash resources available to the Company. Cash and cash equivalents and unused credit lines totaled $17.4 million at September 28, 1996. Financial covenants contained in one of the bank credit agreements measure on a quarterly basis, among other things, the tangible net worth, the ratio of liabilities to tangible net worth and the current ratio of the Company. Subsequent to the end of the second quarter of 1997, the bank retroactively amended one of the financial covenants at September 28, 1996 measuring the tangible net worth of the Company, which resulted in the Company remaining compliant with this covenant. In addition, the Company obtained waivers from the bank of a technical default under one of the credit agreements at September 28, 1996, and the resulting cross-default under the other agreement, which occurred as a result of the reported net loss for the second quarter of 1997 exceeding the maximum permitted quarterly net loss amount. The bank had previously provided a waiver under the same sections of the agreements in respect of the reported net loss for the first quarter of 1997. The Company is in full compliance with all other terms of its bank credit agreements.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Sept 28 March 31 1996 1996 -------- -------- Trade accounts payable $ 6,208 $ 7,376 Payroll, commissions and related taxes 2,714 3,873 Accrued restructuring charges 2,742 2,747 Other payables 4,362 6,434 Income and other taxes payable 1,550 1,325 -------- -------- $ 17,576 $ 21,755 ======== ========
6. REDUCTION IN STATED CAPITAL On August 10, 1995, during the second fiscal quarter of 1996, the shareholders of the Company passed a special resolution authorizing a reduction in statutory stated capital in respect of the common shares by $52,364,000. This resulted in a corresponding reduction in the accumulated deficit as shown on the consolidated balance sheets and the consolidated statements of shareholders' equity. 7. RESTRUCTURING COSTS Over the past several years the Company has undertaken significant restructuring activities in order to reposition the Company in line with its strategy, reduce costs and improve competitiveness. The size of the Company's workforce is currently less than 700 employees, approximately one-third the level of five years ago. Restructuring charges of $3.0 million recorded in the first quarter of 1997 included a write down following a review of the net carrying amount of the Company's manufacturing facilities in which it was determined, in conjunction with the decision to enter into an agreement with a third party to provide the Company with a high-volume manufacturing capability, that the net carrying amount exceeded the estimated net recoverable amount. Restructuring charges also included provisions for future lease costs on sales offices made redundant in connection with changing the Company's sales distribution model from direct sales to multiple channels of distribution including: national resellers, operating telephone companies, Internet service providers, OEMs, system partners and corporate accounts. 8. EARNINGS PER SHARE Basic earnings (loss) per share figures are presented on the consolidated statements of income. These figures are calculated using the monthly weighted average number of common shares outstanding during the period. Fully diluted earnings per share information has not been presented as potential conversions are anti-dilutive. For the six month period ended September 30, 1995 adjusted earnings per share were not materially different from the basic earnings per share figure. The calculation assumes that the conversion of debentures, which occurred during the first two quarters of 1996, had occurred at the beginning of the year. 9. CASH PROVIDED BY OPERATIONS Cash provided by (applied to) operations is computed as follows:
13 Weeks Ended 26 Weeks Ended September 28 September 28 -------------------- -------------------- 1996 1995 1996 1995 -------- ------- --------- -------- Income (loss) from operations $ (8,641) $ 235 $ (17,628) $ 489 Depreciation and amortization 1,055 1,129 2,207 2,626 Writedowns not involving an outlay of cash - - 1,370 - Interest paid (39) (131) (86) (324) Interest income and foreign exchange 17 (64) 71 (46) -------- -------- --------- ------- $ (7,608) $ 1,169 $ (14,066) $ 2,745 ======== ======== ========= ========
10. DECREASE IN OPERATING WORKING CAPITAL The decrease (increase) in operating working capital is computed as follows:
13 Weeks Ended 26 Weeks Ended September 28 September 28 -------------------- ------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Accounts receivable $ 4,765 $ 5 $ 11,228 $ 662 Inventories 1,271 146 (2,144) 476 Prepaid expenses 436 746 747 918 Accounts payable and accrued liabilities (3,903) (516) (4,404) (1,818) Income taxes payable 275 (298) 223 (278) Deferred revenue (376) (719) (518) (756) Foreign currency equity adjustment (44) 511 (15) 469 -------- -------- -------- -------- $ 2,424 $ (125) $ 5,117 $ (327) ======== ======== ======== ========
11. CONVERTIBLE DEBENTURES
Shares Issued Aggregate Principal Amount % Upon Conversion - ---------------------------------------------------------------------- --------------- Balance at March 31, 1994 C$ 30,000 $ 21,681 100% Converted during the year (15,939) (11,533) (53) 6,782,519 Impact of foreign exchange - (97) - - ---------------------------------------------------------------------- Balance at March 31, 1995 14,061 10,051 47 Converted during the year (14,061) (10,336) (47) 5,983,372 Impact of foreign exchange - 285 - - ---------------------------------------------------------------------- Balance at March 31, 1996 C$ - $ - -% ======================================================================
In November 1992 the Company issued 8.5% convertible debentures with an aggregate principal amount of C$30.0 million which were due to mature in November 2002. At any time prior to maturity they were convertible into common shares of the Company at the option of the holder at a conversion price of C$2.35 (approximately $1.72) which would yield 425.53 common shares for each C$1,000 (approximately $732) of principal amount of debentures held. During 1995 debentures with an aggregate principal amount of $11,533,000 were converted into 6,782,519 common shares. During the first two quarters of 1996 debentures with an aggregate principal amount of $7,999,000 were converted into 4,639,970 common shares. The resulting increase in capital stock of $7,639,000 was determined as the sum of the principal amount of the debentures converted ($7,999,000) plus interest accrued to the date of conversion ($135,000), net of the pro rata share of the associated unamortized deferred financing costs ($495,000). During the third quarter of 1996 all remaining debentures were converted into 1,343,402 common shares. 12. UNITED STATES ACCOUNTING PRINCIPLES The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP") which in the case of the Company differ in the following material respects from those generally accepted in the United States ("US GAAP"). (a) Under US GAAP, financing and investing activities not involving a receipt or outlay of cash are excluded from the consolidated statements of changes in financial position. Accordingly, the following financing activities would not be presented in the consolidated statements of changes in financial position for the thirteen and twenty-six week periods ended September 28, 1995 but would be shown supplementally.
13 Weeks Ended 26 Weeks Ended September 28, 1995 September 28, 1995 ------------------ ------------------ Conversion of debentures $ (1,802) $ (7,999) Issue of capital stock on conversion of debentures $ 1,802 $ 7,999
(b) Under US GAAP, bank operating lines would not be included as a component of the cash position presented in the consolidated statements of changes in financial position. The change in bank operating lines would be presented as a financing activity and would therefore be included in the determination of the increase or decrease in cash position in the period. (c) Reductions in stated capital and deficit, as described in note 6 do not fall within the definition of a quasi-reorganization under US GAAP and, accordingly, under US GAAP, capital stock and retained earnings (deficit) would not each be reduced by $52,364,000. (d) US GAAP requires the calculation of primary earnings per share. This figure is not materially different from the basic earnings per share figure calculated under Canadian GAAP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction - ------------ The consolidated financial statements for the second quarter ended September 28, 1996, together with accompanying notes, should be read as an integral part of this review. These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada. Note 12 to the consolidated financial statements describes the impact, in the case of the Company, of differences between accounting principles generally accepted in Canada and the United States. All amounts are stated in US dollars unless otherwise indicated. References to years are to fiscal years ending March 31. Factors That May Affect Future Financial Performance - ---------------------------------------------------- The Company's quarterly and annual operating results are affected by various trends and factors including, but not limited to, competition, the Company's success in developing, introducing and gaining market acceptance for new products, the timing of orders from customers, the levels of inventory held by resellers and distributors, as well as factors such as changes in general economic conditions or conditions in the specific markets for the Company's products, government regulation, tariffing of carrier services, and industry consolidation. The networking industry is intensely competitive and subject to rapid change. As the market for the Company's products continues to develop, additional competitors are expected to enter the market and competition is anticipated to intensify. This may result in price reductions and margin erosion. Many of the Company's current and potential competitors have larger technical staffs, more established and larger marketing and sales organizations, and significantly greater financial resources than does the Company. The Company also competes with other data networking vendors for access to distribution channels. The Company's success is substantially dependent upon its ability to manage changes in its operations. Over the past several years the Company has undertaken significant restructuring activities in order to reposition the Company in line with its strategy, reduce costs and improve competitiveness. During the past year, examples of such changes included the establishment of new marketing and distribution channels, the restructuring of international operations and the outsourcing of the delivery of field service maintenance. In addition, the successful establishment and implementation of relationships with strategic partners and distributors is critical to the future success of the Company. During the past year, the Company has changed the way it distributes its products by establishing multi-tiered distribution channels and entering into agreements with several large resellers and distributors in North America, Europe and the Asia Pacific region. These new distribution channels, while viewed by the Company as critical to its future success, also bring additional new risks. These include less predictability regarding product demand and ordering patterns, reduced gross margins on sales to indirect channels and the time associated with reseller training and increasing awareness for the Company's products. The Company's quarterly operating results fluctuate as a result of a number of factors including pricing, distributor ordering patterns, product returns and reserves, product mix, as well as the timing of new product announcements and introductions by the Company and its competitors. The Company's revenues are difficult to predict due to shipment patterns. A substantial portion of the Company's expenses are fixed, and consequently any significant fluctuations in revenue will impact earnings. Products are generally shipped as orders are received, and accordingly, the Company operates with a relatively small backlog. As a result, sales in any quarter are dependent on orders booked and shipped in that quarter. A high percentage of the Company's revenues are typically earned in the third month of each fiscal quarter and tend to be concentrated in the latter half of that month. Accordingly, quarterly financial results will be difficult to predict prior to the end of the quarter and a shortfall in shipments at the end of any particular quarter may cause the results of that quarter to fall significantly short of anticipated levels. At the end of each quarter, the Company's distributors typically hold significant inventories of the Company's products. The Company has established reserves for returns based on experience. New channel relationships introduce additional uncertainty in this area. Setting reserves involves making judgments about future competitive conditions, product acceptance and other factors which by their nature involve uncertainties at the time the reserves are established. Statements included in this Quarterly Report on Form 10-Q which are not historical facts, including statements about the Company's beliefs and strategies, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties and are not guarantees of future performance. The risks described herein and in the Company's other filings with the Securities and Exchange Commission could affect the Company's future results and could cause such results to differ materially from estimates expressed in any forward-looking statement included herein. Results of Operations - Second Quarter Ended September 28, 1996 - --------------------------------------------------------------- The Company has been working through a period of transition for over two years which has included positive changes in product development, services, manufacturing and marketing and is now transforming its sales distribution model from direct to indirect. Difficulties experienced in the implementation of the new sales distribution model have resulted in an unexpected and significant decline in product revenues in the first half of the 1997 fiscal year. In addition, revenues have continued to decline in the Company's mature product lines. While the Company believes that the right actions have been and are being taken to address the problems in the implementation of the sales distribution model the situation is taking longer to correct than the Company had originally anticipated. Service revenues have declined in the first two quarters of 1997, representing a continuation of a trend in recent quarters. This decline has occurred as a result of lower revenues on products which the Company has traditionally derived the majority of its service revenues. Aggressive hiring and training in sales and marketing, combined with the generation of sales support and marketing programs, seminars, on-site representatives, brand recognition, and distributor and reseller incentive programs, are beginning to generate opportunities for Gandalf's sales development. Products scheduled to ship in the second quarter of 1997 were on target and new products scheduled to ship in the third quarter are anticipated to give Gandalf further access to new and existing markets. The following table sets forth items derived from the quarterly consolidated statements of income as a percentage of revenues for the quarter ended September 28, 1996 and for each of the preceding four quarters. The column in the table entitled "Percentage Change Quarter 2, 1997 vs 1996" represents the percentage change, either favourable or (unfavourable), in the dollar amount of such items for the second quarter of 1997 compared with the second quarter of 1996.
Percentage Fiscal 1996 Fiscal 1997 Change ------------------------------- -------------------- Quarter 2 Quarter 2 Quarter 3 Quarter 4 Quarter 1 Quarter 2 1997 vs. 1996 --------- --------- --------- --------- --------- ------------- (Thousands of dollars) Revenues $27,357 $28,171 $32,355 $18,337 $15,227 (44.3)% ======= ======= ======= ======= ======= ======= (Percentage of Revenues) Revenues: Product 67.3% 68.6% 74.0% 59.5% 53.1% (56.1)% Service 32.7 31.4 26.0 40.5 46.9 (20.2) ------- ------- ------- ------- ------- 100.0% 100.0% 100.0% 100.0% 100.0% (44.3) ======= ======= ======= ======= ======= Gross Margin: Product 53.4% 52.5% 51.8% 41.1% 27.3% (77.5) Service 34.0 31.1 26.6 28.5 30.8 (27.7) Combined 47.1 45.8 45.3 36.0 29.0 (65.7) Expenses: Sales & marketing 28.0 28.0 25.3 39.8 50.8 (1.1) Administration & general 7.8 7.5 5.4 12.4 14.5 (2.7) Research & development 10.4 10.3 9.9 16.4 20.4 (9.6) Restructuring costs - - 4.7 16.4 - ------- ------- ------- ------- ------- Income (loss) from operations 0.9 - - (49.0) (56.7) Interest expense (0.5) (0.4) (0.1) (0.3) (0.3) Interest income and foreign exchange (0.3) 0.7 0.3 0.3 0.1 ------- ------- ------- ------- ------- Net income (loss) 0.1% 0.3% 0.2% (49.0)% (56.9)% ======= ======= ======= ======= =======
Revenues - -------- The following table sets forth product and service revenues by geographic segment for the quarter ended September 28, 1996 and for each of the preceding four quarters. The table also includes the change in revenues, expressed as a percentage, in the second quarter of 1997 compared to the corresponding period of 1996.
Percentage Fiscal 1996 Fiscal 1997 Change ------------------------------- --------------------- Quarter 2 Quarter 2 Quarter 3 Quarter 4 Quarter 1 Quarter 2 1997 vs. 1996 --------- --------- --------- --------- --------- ------------- (Thousands of dollars) Product Revenues: United States $ 6,243 $ 6,361 $ 6,432 $ 2,669 $ 2,930 (53.1)% Canada 3,642 3,474 4,479 1,408 709 (80.5) United Kingdom 3,783 4,361 5,491 2,676 1,869 (50.6) Holland/France 2,272 3,428 3,791 2,516 1,522 (33.0) Other 2,461 1,702 3,742 1,648 1,052 (57.3) ------- ------- ------- ------- ------- $18,401 $19,326 $23,935 $10,917 $ 8,082 (56.1)% ======= ======= ======= ======= ======= Service Revenues: United States $ 2,078 $ 1,962 $ 1,790 $ 1,526 $ 1,416 (31.9)% Canada 1,598 1,690 1,607 1,316 1,454 (9.0) United Kingdom 3,445 3,074 3,083 2,810 2,727 (20.8) Holland/France 1,835 2,119 1,940 1,768 1,548 (15.6) ------- ------- ------- ------- ------- $ 8,956 $ 8,845 $ 8,420 $ 7,420 $ 7,145 (20.2)% ======= ======= ======= ======= =======
The following table sets forth, for the twenty-six weeks ended September 28, 1996 and for each of the two preceding full fiscal years, product revenues by geographic segment and product group expressed as a percentage of total product revenues. These amounts have been calculated assuming constant rates of exchange in the translation of foreign currency amounts to US dollars. Remote access products primarily include internetworking products sold under the names Gandalf Xpressway (TM), XpressStack (TM) and XpressConnnect (TM). Remote access products represent a subset of the Company's total LAN internetworking product line. The other three product groups shown below represent traditional product areas for the Company which include wide area networking (WAN) backbone products; modems, multiplexers and local connectivity products; and other products which primarily represent third party products.
Modems/ Multiplexers/ Remote WAN Local Years ending March 31 Access Backbone Connectivity Other Total - --------------------- ------- --------- ------------- ------- ------- 1997: (Quarter 1 & 2) United States 24% 2% 3% 1% 30% Canada 6 1 4 - 11 United Kingdom 14 2 6 2 24 Holland/France 15 - 4 1 20 Other 8 3 4 - 15 --- --- --- --- --- 67% 8% 21% 4% 100% === === === === === 1996: United States 25% 1% 5% 1% 32% Canada 12 1 4 1 18 United Kingdom 11 2 7 3 23 Holland/France 9 1 2 2 14 Other 8 3 2 - 13 --- --- --- --- --- 65% 8% 20% 7% 100% === === === === === 1995: United States 15% 1% 8% 4% 28% Canada 9 2 7 1 19 United Kingdom 12 3 9 4 28 Holland/France 6 1 3 1 11 Other 7 3 2 2 14 --- --- --- --- --- 49% 10% 29% 12% 100% === === === === ===
Gross Margin - ------------ The gross margin on product revenues (product revenues minus the cost of product sales expressed as a percentage of product revenues) was 27% in the second quarter of 1997 compared with 53% in the second quarter of 1996 and 41% in the first quarter of 1997. The gross margin on product revenues in the first half of 1997 was adversely impacted by lower sales volumes during the period, resulting in fixed manufacturing costs representing a larger percentage of product revenues. The gross margin in the second quarter of 1997 was also adversely impacted by higher adverse manufacturing volume variances as a result of lower production levels in order to reduce inventories from the end of the first quarter of 1997. The gross margin on service revenues (service revenues less service expenses expressed as a percentage of service revenues) was 31% compared with 34% in the second quarter a year ago. The decrease in service margin has occurred as a result of the continuing decline in service revenues which has more than offset the decrease in service expenses. Service expenses declined 16% in the second quarter of 1997 compared with the second quarter of 1996, as a result of the outsourcing to partners for the delivery of field service maintenance, which has occurred since the end of the third quarter of 1996. Operating Expenses - ------------------ Operating expenses (sales and marketing, general and administration and research and development) totaled $13.1 million in the second quarter of fiscal compared to $12.6 million in the second quarter of 1996. The increase in these expenses has occurred as a result of higher spending on research and development, and marketing in the second quarter of 1997 compared to the second quarter a year ago. The increase in these expenses was partially offset by reduced variable sales expenses in the second quarter of 1997 compared to the first quarter a year ago due to lower product revenues. Since 1991 the Company has received funding of approximately $1.4 million and $2.6 million respectively under two projects approved through the Canadian federal governments Microelectronics and Systems Development Program ("MSDP"). While the repayment terms of the two projects differ slightly, both are tied to future sales, with the liability to repay the funding arising from product revenues earned following both the commercialization of the resulting technology and the completion of the MDSP project. The amount that is potentially repayable is calculated without interest as a royalty on revenues earned in the ten years following the project completion date and is limited to the amount of funding received. The Company commenced accruing royalties during 1996 upon completion of each project and expects that the funding will be fully repaid within three to five years. To date, royalties of approximately $1.0 million have been accrued related to these projects. Operating loss - -------------- The Company reported a loss from operations of $8.6 million for the second quarter of 1997 on revenues of $15.2 million. For the second quarter of 1996, income from operations was $235,000 on revenues of $27.4 million. Net loss - -------- The net loss for the second quarter of 1997 was $8.7 million or $0.20 per share. Net income for the second quarter of 1996 was $35,000 or break even on a per share basis. The net loss for the twenty-six weeks ended September 28, 1996 was $17.6 million or $0.41 per share on revenues of $33.6 million. The corresponding half-year figures for the previous fiscal year were net income of $101,000 or break-even on a per share basis on revenues of $56.0 million. Liquidity and Capital Resources - ------------------------------- The Company's current ratio was 1.6:1 at September 28, 1996 compared to 2.0:1 at March 31, 1996. Accounts receivable were $17.5 million at September 28, 1996 compared to $28.7 million at March 31, 1996. The decline in accounts receivable primarily occurred as a result of lower revenues in the second quarter of 1997 compared to the fourth quarter of 1996. Inventories were $15.6 million at September 28, 1996 compared to $16.9 million at June 29, 1996 and $13.5 million at March 31, 1996. Lower than anticipated product revenues in the first quarter of 1997 resulted in an increase in inventory levels. The Company adjusted production levels in the second quarter of 1997 to reduce inventories from the level at the end of the first quarter and planned production levels for the third quarter of 1997 have similarly been adjusted. The Company recorded negative cash flow of $5.3 million during the second quarter of 1997. At September 28, 1996 the net cash position (cash and cash equivalents net of bank operating lines) was $5.2 million compared to $10.5 million at the end of the first quarter on June 29, 1996. At March 31, 1996 the net cash position was $13.6 million. The decrease in the net cash position during the second quarter of 1997 occurred as a result of negative cash flow from operating activities of $5.2 million arising from the combined effect of the net loss for the second quarter and the reduced level of accounts receivable at June 29, 1996 compared to March 31, 1996 in connection with the net loss reported for the first quarter of 1997. The Company anticipates that the net loss reported for the second quarter of 1997 will also adversely impact cash flow in the third quarter primarily due to the further reduced level of accounts receivable at September 28, 1996 compared to the end of the first quarter of 1997. At September 28, 1996 the Company's authorized bank lines totaled $20.9 million under two committed credit facilities provided by a Canadian chartered bank which bear interest at the bank's prime rate plus 0.5% to 1.5%. The authorized credit lines are secured by certain of the accounts receivable, inventories and other assets of the Company. The amount available for borrowing at any time is based on margin formulas relating to levels of accounts receivable, inventories and other bank covenants. Based on the margin formulas, $12.2 million was available to the Company at September 28, 1996 of which $1.3 million was being utilized. Cash and cash equivalents held as of that date represented a further $6.5 million of cash resources available to the Company. Cash and cash equivalents and unused credit lines totaled $17.4 million at September 28, 1996. Financial covenants contained in one of the bank credit agreements measure on a quarterly basis, among other things, the tangible net worth, the ratio of liabilities to tangible net worth and the current ratio of the Company. Subsequent to the end of the second quarter of 1997, the bank retroactively amended one of the financial covenants at September 28, 1996 measuring the tangible net worth of the Company, which resulted in the Company remaining compliant with this covenant. In addition, the Company obtained waivers from the bank of a technical default under one of the credit agreements at September 28, 1996, and the resulting cross-default under the other agreement, which occurred as a result of the reported net loss for the second quarter of 1997 exceeding the maximum permitted quarterly net loss amount. The bank had previously provided a waiver under the same sections of the agreements in respect of the reported net loss for the first quarter of 1997. The Company is in full compliance with all other terms of its bank credit agreements. In addition to providing the waivers and amendment described above the bank further amended the financial covenants contained in the credit agreements, reducing the minimum required levels for the current ratio and tangible net worth and increasing the maximum permitted ratio of liabilities to tangible net worth, until June 1997, representing the balance of the committed term. The Company believes that its current financial base together with available credit facilities can provide sufficient financial resources to meet its short-term operating requirements. Any non-compliance with the financial covenants would represent a technical default under the credit agreements for which the Company would seek a waiver from the bank. While to date the Company has been successful in obtaining a waiver or amendment from the bank under such circumstances, there can be no assurance that the Company will continue to be successful in this regard in the future, if required. While the Company currently anticipates that the credit facilities will remain available to the Company, it believes that its ability to obtain future waivers or amendments, if required, will depend, among other things, on future operating performance. If continued unrestricted access to the bank credit lines, subject to the margin formulas, was no longer available to the Company, it would likely be necessary for the Company to seek other additional sources of financing. While the Company believes that such financing could be arranged, there can be no assurance that such financing would be available if and when it became required. II - OTHER INFORMATION - ---------------------- Item I - Legal Proceedings - -------------------------- In August 1996, an action was instituted in the Superior Court of the State of New Jersey, Law Division, for Burlington County against the Company certain of its officers and directors, and one former director, by Michael Wagnerman purportedly on behalf of all persons who purchased or otherwise acquired shares of the Company's stock from November 6, 1995 through July 2, 1996. The plaintiff's claim is for common law negligent misrepresentation and common law fraud allegedly arising from certain press releases and public statements purportedly made by the Company and certain of its officers during the period in question relating to its business. The plaintiff seeks to recover monetary damages in an unspecified amount, including punitive damages, and unspecified injunctive relief. The Company believes that it has complied with all of its obligations under the securities laws of the United States and Canada, and does not believe that any of the Company's conduct or the conduct of any of its officers or directors resulted in any negligent misrepresentations. Accordingly, the Company intends to vigorously defend against the plaintiff's allegations and considers such allegations to be groundless and without merit. Item 4 - Submission of Matters to a Vote of Security Holders - --------------------------------------------------------------- At the Annual Meeting of Shareholders held August 1, 1996, resolutions were adopted for (a) the election of directors as follows: Name For Withheld John F. Gamba 29,346,374 220,116 Charles J. Gardner 29,346,974 219,516 Donald M. Gleklen 29,346,529 219,961 Barclay C. Isherwood 29,347,524 218,966 Robert E. Keith 29,347,524 218,966 Ian McLaren 29,340,249 226,241 Albert Sinyor 29,340,249 226,241 Thomas A. Vassiliades 29,345,724 220,766 Mihkel E. Voore 29,340,249 226,241 Johnny Wai-Nang Wong 29,340,249 226,241 (b) the appointment of KPMG Peat Marwick Thorne as auditors, (votes for - 29,444,026; withheld - 54,115), (c) amendments to the Employee Stock Purchase Plan to reserve for issuance an additional 200,000 shares of the Company, (votes for - 26,986,907; against - 769,422; withheld - 7,350), Item 6(b) - Report on Form 8-K - ------------------------------ There were no reports on Form 8-K filed for the quarter ended September 28, 1996. 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. November 7, 1996 BY: s/THOMAS A. VASSILIADES - ------------------------- ---------------------------- Date Thomas A. Vassiliades Chairman and Chief Executive Officer November 7, 1996 BY: s/WALTER R. MACDONALD - -------------------------- --------------------------- Date Walter R. MacDonald Vice President, Finance and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----