-----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, PBI3EvGvEDFRFh/GfQgMDf+o1tZ/r7VXCkaxnEO4vkCwiUUUYKGUo3jwpFBIcjZr 8y7TgSVIyUh27aJ4NKOo7Q== 0000355876-97-000008.txt : 19970701 0000355876-97-000008.hdr.sgml : 19970701 ACCESSION NUMBER: 0000355876-97-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970630 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12643 FILM NUMBER: 97633342 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-K 1 FORM 10-K FOR YEAR ENDED MARCH 31, 1997 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE - ----- SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1997 -------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF - ----- THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------- --------- 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 (I.R.S. Employer of incorporation or organization) Identification No.) 130 COLONNADE ROAD SOUTH, NEPEAN, ONTARIO, CANADA K2E 7M4 (Address of principal executive offices) (Postal Code) Registrant's telephone number, including area code:(613) 274-6500 ---------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Shares Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] [Cover page 1 of 2 pages] The aggregate market value of the common shares held by non-affiliates of the registrant, based upon the closing sales price of the common shares as reported on The Nasdaq Stock Market (National Market System) on May 30, 1997 (the last trading day prior to June 1, 1997) was approximately $66,405,720. This amount excludes 73,700 common shares held by all executive officers, directors, and shareholders holding over five percent of the outstanding common shares on that date, as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of June 1, 1997, 43,440,701 common shares, without nominal or par value, were issued and outstanding. All dollar amounts in the Annual Report on Form 10-K are in United States dollars, except where indicated. C$ refers to Canadian dollars. References to years are to fiscal years ended March 31. DOCUMENTS INCORPORATED BY REFERENCE PART I None PART II None PART III None [Cover page 2 of 2 pages} TABLE OF CONTENTS Page PART I Item 1. Description of Business 4 The Company and Corporate Structure 4 Industry Background 4 Products and Services 5 Sales and Marketing 7 Research and Development 7 Manufacturing 8 Customers 8 Competition 8 Backlog 9 Intellectual Property and Proprietary Rights 9 Employees 9 Environmental Affairs 9 Item 2. Properties 10 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters 11 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 8. Financial Statements and Supplementary Data 20 Item 9. Disagreements on Accounting and Financial Disclosure 36 PART III Item 10. Directors and Executive Officers of the Registrant 36 Item 11. Executive Compensation 38 Item 12. Security Ownership of Certain Beneficial Owners and Management 44 Item 13. Certain Relationships and Related Transactions 45 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 45 Signatures 47 PART 1 ITEM 1. DESCRIPTION OF BUSINESS The Company and Corporate Structure - ----------------------------------- Gandalf Technologies Inc. ("Gandalf" or the "Company") was created by Articles of Amendment on July 22, 1981 as the continuation of Gandalf Data Communications Limited which was incorporated on April 29, 1971 under the laws of the Province of Ontario, Canada. The registered office of the Company is 130 Colonnade Road South, Nepean, Ontario Canada K2E 7M4, telephone (613) 274-6500. The Company's common shares are traded on The Toronto Stock Exchange and The Nasdaq Stock Market (National Market System). The Company operates through six principal subsidiary companies: Gandalf Canada Ltd., Gandalf Systems Corporation in the United States, Gandalf Digital Communications Limited in the United Kingdom, Gandalf S.A. in France, Gandalf Nederland B.V. and Gandalf International Limited. The Company's sales operations are conducted through two distinct operating units: the North America Group based in Nepean, Ontario and Boston, Massachusetts covering Canada, the United States and Mexico; and the International Group, based in Bracknell, UK, covering Europe, the Middle East, Africa, Asia, Australia and New Zealand. For information regarding Gandalf's foreign and domestic operations, see Note 17 to the Company's consolidated financial statements contained in this Annual Report of Form 10-K. The Company is currently facing financial difficulties. See "Liquidity and Capital Resources" contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Volatility of Stock Prices" contained in "Market for Registrant's Common Stock and Related Security Holder Matters" at page 13 and 11 respectively, of this Annual Report on Form 10-K. Industry Background - ------------------- For many organizations, access to information is a strategic element of business. A number of factors have influenced the way information is accessed, including the corporate trend towards moving the business closer to the customer, spurring the creation of branch offices; the provision of flexible work environments as a means to attract and retain highly-skilled employees; the popularity of the Internet; and government environmental legislation requiring the reduction of work-related travel. All of these dynamics have resulted in a growing number of teleworkers, business travelers and remote office users increasing the demand for network infrastructure products and services. Remote access is that segment of the networking industry which involves workstation-to-network connections from remote locations. Products in this segment allow individuals and remote business offices to connect to local and wide area networks via telephone lines. The end-user market consists of part-time and full-time teleworkers, small remote branch offices, large branch offices, corporate head offices and the Internet Service Provider (ISP) segment activities. The Company is engaged in the design, production, and marketing of communications networking products and solutions, and has increasingly focused its sales and marketing efforts on the remote access market over the last three years. Specifically, the Company produces server and concentrator products for central sites as well as multiplexers, routers and remote access adapters. The Company also provides full life cycle services for the remote access market. The remote access market is divided into three segments; corporate LAN access ("Corporate access"), WAN access, and Internet access. The Company's primary focus is the Corporate access market; however, the Company also participates in the Internet market. Products and Services - --------------------- Gandalf and its subsidiaries sell products and services in four principal segments of the networking market: remote access, LAN connectivity, wide area networking and network services. Remote access products include internetworking edge routers, carrier class concentration servers for central sites, ISDN terminal adapters, bridges, modems, routers and software products which extend corporate, public network, or Internet Service Provider (ISP) based resources, integrating voice and data, to remote, distributed locations. LAN connectivity products include concentrators for connectivity to Ethernet LANs, and LAN switches, providing interconnectivity among small, independent networks. Wide area networking products include multiplexers and concentrators designed to carry a variety of traffic types, including voice, data, video, fax, and LAN, over private or public networks. Network services include value-added network design, implementation and full life cycle support services customized to meet specific user needs, reduce costs, and increase productivity. Gandalf has increasingly focused its sales and marketing efforts on remote access products and services over the last three years. Remote Access Products The Company has developed a wide array of products and services for the remote access market. XpressAnywhere(TM) is Gandalf's total-solution strategy that creates and supports a virtual office environment by extending integrated voice and data features to the remote office through the delivery of central site and remote site products, as well as a full range of services. Gandalf has conducted extensive research to determine its customers' priority requirements for virtual office infrastructures. Gandalf has designed the XpressAnywhere solution around its customers' requirements to deliver four principal benefits: productivity, ease of use, value and security. Gandalf serves the expanding remote access market with 25 core products in three categories: remote devices and central site access servers and concentrators. Many of Gandalf's products can operate over a variety of public networks as they are designed with a compatible module for each transmission technology including Frame Relay, ISDN, analog, and X.25. As networks evolve, the Company's products are designed to remain compatible with new transport technologies, such as xDSL, ATM and cable. This approach provides investment protection to customers by allowing them to easily modify their systems at low incremental cost as their enterprises grow and develop. The Company's remote access family of products fall into four branded groups: XpressConnect(TM), XpressStack(TM), Xpressway(TM), and XpressView(TM). Gandalf's range of products address the needs of each user segment from small business operations to major corporations. The XpressConnect group of products is designed for the home, desktop, or regional office. XpressStack and Xpressway provide companies with sufficient capacity to connect corporate headquarters. The XpressConnect line of access products is Gandalf's solution for customers seeking connection to the edge of a network. Each model comes with a selection of features to allow end users to tailor their networks according to individual or corporate requirements. XpressConnect products deliver the response time and performance of a local LAN connection even over a low speed, WAN or local loop facility. The XpressConnect line comprises a range of access solutions for casual, part time and full time teleworkers or Internet users, small and large branch offices, as well as corporate head offices. While the XpressConnect family provides edge access, XpressStack and Xpressway are designed to connect corporate headquarters to remote access networks. XpressStack is a modular and stackable line of remote access server and internetworking products. XpressStack provides concentration to small and medium branch offices, teleworkers, or ISPs who serve a moderate number of subscribers. The Xpressway line of concentrators and internetworking products offers a high-density, chassis-based solution which allows enterprises and service providers the ability to concentrate large numbers of remote users, providing them access to the LAN, WAN and the Internet within a single chassis. The scaleable design ensures that performance remains consistent as additional remote users are added to the system. Numerous internetworking modules can be added to an Xpressway system (multiprotocol router, campus LAN switch, hub cards) to enable a complete solution. Designed for larger corporate offices, the Xpressway RLAN subsystem allows a large number of users to connect to and from a central network through ISDN, analog, Frame Relay, or leased line connections. Gandalf's Xpressway solution for multiple large offices is the XBR 7202, a local and remote Ethernet bridge and multiprotocol router which delivers secure and reliable interconnection between corporate offices and remote sites. Network management software is available at both central and remote sites, using XpressView and Passport. XpressView allows users to configure and manage the full set of Gandalf products. The console-based system simplifies system management through its Windows(TM)-based Graphical User Interface (GUI) available on a PC. The Company's Passport Network Management System offers solutions for complex multi-vendor networks. Passport draws a visual map to provide a clear representation of the network to the user. The system allows for navigation and control of even the most complicated LAN and WAN environments. LAN Connectivity Products The Company markets the LANLine series of bridges and routers in addition to its Xpress family of remote access products. Gandalf's LAN products are designed to substitute expensive leased lines with switched digital services for high volume teleworkers and branch offices. Users may select a number of Xpressway Ethernet modules to connect multiple segments of Ethernet LANs. LAN connectivity is further enhanced by the Company's Virtual LAN Switch (VLS(TM)) which segments client/server LANs into smaller, independent networks and interconnects them at full network speed, resulting in increased bandwidth for faster networking. Wide Area Network Products The Company continues to market its legacy wide area networking (WAN) products directly to long-standing customers, and new customers primarily in international markets. Gandalf's WAN solutions allow organizations to concentrate and integrate multimedia traffic and minimize bandwidth volumes. Gandalf's WAN 2000 family of bandwidth management concentrators and multiplexers has been designed to maximize the efficiency of carrying LAN, digital and analog voice, fax, video, Frame Relay and data traffic over single or multiple leased lines. Gandalf's WAN 2000 family includes three products: the 2120 Access Concentrator, the 2300 Regional Concentrator and the 2050 Communications Switch. Other Products The Company continues to derive revenue from a number of mature products which were designed to facilitate terminal-to-computer traffic. These include data switches, modems and multiplexers under brand names: Starmaster, LDS, LDM and MUX 2000. Network Services and Support Gandalf provides life cycle support and services for its products, including network design, implementation, management and operations, asset management, training, and maintenance. Services are sold with products as part of the Company's total networking solutions. The Company has devised a number of branded services packages for its business partners and customers. Services include the Partner Program, for those channel partners who wish to enhance their own services capabilities, and the Alliance Program for channel partners who do not have their own service organizations. Teleworking services include RemoteConnect a complete turnkey, value-added, integrated services package encompassing installation, projection management, line provisioning, and user support. Remote Connect is designed to provide customers with a cost-effective solution for deploying and supporting teleworking programs. Gandalf's end user service programs include the ServiStart Program for network installation, the ServiStat Extended Warranty Program for additional product coverage, and the ServiSelect Services for network maintenance. Sales and Marketing - -------------------- In the first quarter of fiscal 1997, Gandalf altered its sales and distribution model by shifting from direct sales toward indirect channels, a model which the Company considers to be the most effective and efficient method of distribution for its chosen markets. Gandalf has built its remote access sales and distribution infrastructure around national distributors, value added resellers (VARs), telephone companies, Internet service providers and OEM partnerships, in addition to its own direct sales force. The Company has distribution and reseller agreements in North America, Europe and the Pacific Rim, with companies such as Ingram Micro, Tech Data, Bell Atlantic, Bell South, Ameritech, Nippon Telegraph and Telephone, NEC, KNC in Korea, France Telecom, and PTT Nederland. Over the past year, the Company has added additional distributors such as Samsung Electronics in Korea, Telecom Italia in Italy, and Pacific Bell Network Integration in the U.S., as well as Internet service providers such as COLOMSAT, Information Gateway Services, and the Zoo Corporation. The Company operates two regional sales and marketing groups: North America and International. The Company has structured its sales and marketing organization to meet the standards and market practices of target countries and to maximize the penetration of local telephone companies, VARs, distributors and OEMs. Research and Development - ------------------------ The Company believes that success in the rapidly changing communications segment of the information industry is dependent upon the ability to anticipate and respond to customer needs and to develop reliable, cost-effective products with expanded capabilities and performance. Gandalf's research and development effort is focused on continually expanding its remote access product capabilities through feature innovation and performance enhancements. The Company's technical competencies include data compression, encryption, voice and data integration, bandwidth-on-demand routing, switched digital connectivity, and scalability in design. The Company integrates commodity products and components via OEM relationships. The majority of the Company's research and development involves information handling, network interconnections, interoperability and network management. These efforts capitalize on the Company's expertise in several underlying technologies, including remote access protocols (PPP, PPTP, multilink, SLIP, BACP); ISDN, X.25 and Frame Relay implementation; LAN and WAN interface development; bandwidth management; data compression and encryption; voice interfaces and network management. The Company operates separate North American and European technology centers at its facilities in Nepean, Canada and Fearnhead, U.K. The majority of development staff is located in North America. Gandalf's U.K. research facility employs a small number of professionals with expertise in ISDN, X.25 and PRI development. The Company's processes encompass computer aided engineering (CAE), computer aided design (CAD), and automated testing techniques. A minor portion of R&D has been contracted to a third party. The Company spent $13.0 million in fiscal 1997, $11.5 million in fiscal 1996 and $10.1 million in fiscal 1995 on product development. Manufacturing - ------------- The Company's manufacturing operations consist of materials planning and procurement, assembling, and testing of electronic assemblies. In addition, the Company manufactures printed circuit boards for use in its products. Gandalf's manufacturing quality systems are managed to the ISO 9002-1994 standard and are recognized under the Quality Management Institute's registration program. In some cases, the Company may subcontract part of the manufacturing process, or the entire manufacturing, of a product to a single supplier. Also, a single source supplier may be used in instances when the Company designs components and sub-assemblies. As a corporation, the Company believes that the close working relationship with a single supplier enhances product quality, delivery and cost control. However, there can be no assurance that in the future the Company's suppliers will be able to meet the Company's demand for components in a timely and cost-effective manner. The Company's operating results and customer relationships could be adversely affected by either an increase in prices for, or an interruption or reduction in supply of, any key components. Customers - --------- The Company's revenues are derived from a broad base of customers and distributors, reducing its dependence on individual corporate and distribution accounts. Gandalf's target customers include corporations from the financial, technology, healthcare, utility and government sectors that are implementing remote access solutions to support teleworkers, remote offices and mobile workers. The Company's customers also include ISPs and telephone companies, who use Gandalf's products for their own environments in addition to providing solutions for their customers. The Company's business is not seasonal. The Company is not dependent upon a single customer or a few customers, and the loss of any one or more would not be anticipated to have a material adverse effect on the Company. During the three-year period ended March 31, 1997, no customer accounted for 10 percent or more of the Company's revenues in any year. Competition - ----------- The networking industry has become increasingly competitive, and the Company's results may be adversely affected by the actions of existing or future competitors. Such actions may include the development or acquisition of new technologies, the introduction of new products and the reduction of prices by competitors to gain or retain market share. Industry consolidation or alliances may also affect the competitive environment. The Company's competitors vary depending upon the sector of the market being identified and include companies such as 3Com Corporation, Ascend Communications, Inc., Bay Networks Inc., and Cisco Systems Inc. These and other competitors and potential competitors have greater financial, technological, manufacturing, marketing and personnel resources than the Company. Gandalf is devoting significant time and energy to establishing strategic alliances and partnerships that would give it the critical mass it needs to succeed in its chosen market segment. Since February 1997, the Company has been working with JP Morgan & Co in seeking a strategic partner which will complement the Company's strengths and provide the additional resources the Company requires to continue its operation in its chosen market. While these efforts continue, to date no firm offers have been received and no assurance can be given that the Company will be successful in achieving a strategic agreement. Backlog - ------- The Company attempts to manufacture inventory in quantities sufficient to provide timely delivery of its products. Because of the short delivery cycle, backlog is not considered to be a meaningful indication of future revenues. Intellectual Property and Proprietary Rights - -------------------------------------------- The Company relies on a combination of patent, trademark, copyright and trade secret laws, non- disclosure agreements and other contractual provisions to establish and maintain its proprietary rights. Gandalf protects its intellectual property through patents and trademarks on a worldwide basis. The Company either holds or has applied for patents on its proprietary compression and encryption technology. The Company utilizes non-disclosure and confidentiality agreements to disclose proprietary information to its resellers, distributors, and potential customers. The firm's products include proprietary software and firmware which are provided under license to customers and end-users. Employees - --------- On March 31, 1997, the Company had 615 employees worldwide. Of these, 237 were sales, marketing and customer support personnel, 111 were engaged in engineering development, 150 were engaged in manufacturing and distribution and 117 held general administrative positions. On March 31, 1996 the Company had 812 employees and on March 31, 1995 the Company had 897 employees. The majority of the reduction in employees from fiscal 1996 to fiscal 1997 resulted from the transformation of the Company's sales distribution structure to an indirect sales channel model -- one where intermediaries manage the final sale -- instead of the direct sales model it had in place. In addition, since January 1997, the Company has further consolidated its sales and marketing units, consistent with its focus on the corporate access segment of the remote access market. Organizational changes in other functional groups have taken place as well. The Company has consolidated North American engineering with the objective of streamlining the organization and focusing it more directly on remote access development. Support staff in administration, marketing, service, finance and information systems have been reduced. The number of manufacturing staff has been reduced to a level commensurate with the current production volume. As a result of these changes, at June 1, 1997 the Company had fewer than 540 employees. Approximately 67% of these employees are located in North America and the remainder are employed in other parts of the world, mostly in Europe. The Company has experienced the loss of some employees with valuable skills. The Company continues to recruit and hire qualified and skilled employees. Environmental Affairs - --------------------- The Company is currently in the final stages of remediation of certain non-hazardous materials at the Company's former engineering, administration and distribution facility in Cherry Hill, New Jersey, in compliance with the State of New Jersey's Environmental Cleanup Responsibility Act. The Company maintains a letter of credit in the amount of $100,000 with Royal Bank of Canada to secure its clean-up obligations under New Jersey law. In the opinion of management, the cost to complete the remediation is not anticipated to have a material effect on future expenditures or earnings. ITEM 2. PROPERTIES Properties - ---------- The Company's head office is located in Nepean, Ontario, Canada, near Ottawa. The Company operates from three adjacent leased premises at this location, consisting of a research and administration facility (97,000 square feet), a manufacturing facility (58,000 square feet) and a printed circuit board manufacturing facility (18,250 square feet). The research and administration facility and the manufacturing facility were sold to the builder upon completion in 1987 and leased back to the Company for a 10-year term, expiring in September 1997, with four options to renew of five years each. These properties currently exceed the Company's needs and the Company has therefore not exercised the option to renew. The printed circuit board manufacturing facility was sold to the builder upon completion in 1988 and leased back to the Company for a 20-year term. As a result of the restructuring activities carried out during fiscal 1997, the Company closed, reduced and consolidated many of its sales offices worldwide. Outside of North America the Company's other principal leased premises are in Bracknell, England (15,000 square feet), Fearnhead, England (10,000 square feet) and Amsterdam, Netherlands (28,000 square feet). It is the Company's belief that these properties are adequate for the Company's current needs. ITEM 3. LEGAL PROCEEDINGS The Company has been, from time to time, subject to litigation in its ordinary course of business, none of which, with the exception noted below, the Company believes to be material. 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 and 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 VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Markets Information The common shares of Gandalf Technologies Inc. are listed on The Toronto Stock Exchange in Canada (Symbol GAN) and on The Nasdaq Stock Market (NMS) in the United States (Symbol GANDF).
The Toronto Stock Exchange The Nasdaq Stock Market (Canadian Dollars) (U.S. Dollars) Fourth Third Second First | Fourth Third Second First Quarter Quarter Quarter Quarter | Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------- Fiscal 1997 High 6.10 7.60 11.20 26.30 | 4 - 1/2 5 - 5/8 8 - 3/8 19 - 1/2 Low 2.25 3.15 5.55 9.00 | 1 - 5/8 2 - 1/4 4 - 1/16 6 - 3/4 Volume (000's) 15,021 16,479 13,161 6,204 | 20,745 37,796 55,712 75,381 - ------------------------------------------------------------------------------------------------------------------- Fiscal 1996 High 23 27 - 3/8 17.00 13 - 3/8 | 17 - 1/8 20 - 1/16 12 - 1/8 9 - 3/4 Low 16 - 5/8 6 - 3/8 7 - 4/8 4.85 | 12 - 3/32 4 - 7/8 5 - 5/8 3 - 1/2 Volume (000's) 8,705 33,241 15,958 24,240 | 93,368 168,536 89,217 69,536 - ------------------------------------------------------------------------------------------------------------------- Fiscal 1995 High 6 - 7/8 2.33 1.58 1.74 | 4 - 7/8 1 - 11/16 1 - 3/16 1 - 3/8 Low 1.80 1.26 0.85 0.75 | 1 - 1/4 7/8 9/16 1/2 Volume (000's) 52,236 8,886 9,765 10,037 | 49,876 2,478 1,475 2,810 - -------------------------------------------------------------------------------------------------------------------
Volatility of Stock Prices The market price of the Company's common stock has been, and may continue to be, extremely volatile. In recent quarters, the market price for the Company's stock has been, and may continue to be, adversely affected by operating losses reported by the Company and by concerns over its future financial viability. Other factors which may impact the market price of the Company's stock include new product announcements by the Company or its competitors, strategic alliances, mergers or acquisitions announced by the Company's competitors, general conditions in the data networking market, the general volatility of stocks of high technology companies and other factors that may be unrelated to the performance of the Company. Shareholders As at June 1, 1997, there were 43,440,701 shares issued and outstanding with 1,767 record holders. The stock closed on The Toronto Stock Exchange at C$2.20 on May 30, 1997 (the last trading day prior to June 1, 1997), and on The Nasdaq Stock Market at $1 17/32. Dividends Individuals and corporations resident in the United States are subject generally to a 15 percent withholding tax on dividends, and individuals and corporations resident in countries that do not have a treaty with Canada are subject to a 25% withholding tax. For United States corporations only, however, the United States/Canada Tax Treaty reduces the withholding tax to 10 percent if the United States corporation owns at least 10 percent of the Company's voting shares. It is the Company's present policy not to pay cash dividends and to retain its earnings to finance expansion and growth. Future dividends if any, would be expected to be paid in Canadian dollars. Payment of future dividends will be at the discretion of the Board of Directors and will be dependent on earnings, capital requirements and the financial condition of the Company. Capital gains derived in Canada from the sale or exchange of the Company's shares by an individual or corporation resident in the United States and without a permanent establishment in Canada are exempt from taxation in Canada with limited exceptions. ITEM 6. SELECTED FINANCIAL DATA
Thousands of U.S. dollars except per share amounts Years ended March 31 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ Income Statement Data: Revenues $66,213 $116,533 $120,511 $131,323 $160,900 Gross margin 29.2% 45.9% 44.4% 41.7% 43.7% Selling, general and administration 40,842 39,996 40,661 54,772 62,807 Research and development 13,030 11,524 10,197 14,316 17,279 Net income (loss) (46,316) 260 1,406 (47,238) (19,507) Basic earnings (loss) per share (1.07) 0.01 0.05 (2.27) (1.24) - ------------------------------------------------------------------------------------------------------------------ Balance Sheet Data: Total assets 45,159 79,375 81,508 89,186 129,603 Fixed assets 10,763 16,253 18,619 20,214 30,768 Working capital (6,254) 29,361 21,057 13,978 25,596 Current ratio 0.8 2.0 1.6 1.3 1.5 Cash and cash equivalents net of current bank debt (5,360) 13,602 5,963 (5,239) (688) Long-term debt 2,387 2,496 1,877 2,020 22,980 Convertible debentures - - 10,051 21,681 23,862 Shareholders' equity 3,710 48,586 34,442 19,109 34,308
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The consolidated financial statements together with accompanying notes should be read as an integral part of this review. These financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada. Note 18 to the consolidated financial statements describes the impact, in the case of the Company, of differences between accounting principles generally accepted in Canada and the United States. All amounts are stated in U.S. dollars unless otherwise indicated. C$ refers to Canadian dollars. References to years are to fiscal years ended March 31. At the beginning of 1997 the Company determined that in order to position the Company for growth in the remote access market a transformation of the Company's distribution model was required. Difficulties experienced in the implementation of the new sales distribution model have resulted in a significant unanticipated decrease in product revenues in 1997 compared to the previous year. Although the new sales distribution model is now in place, the Company believes that the financial difficulties currently facing the Company are affecting customers' purchasing decisions, and are having and will continue to have a significant impact on revenue levels until such time as these financial uncertainties are resolved. Service revenues also declined in 1997 compared to 1996 and 1995 as a result of lower revenues on products rom which the Company has traditionally derived the majority of its service revenues. Liquidity and Capital Resources The Company had not anticipated the decline in revenues which occurred during 1997. Initially the Company's infrastructure was maintained in anticipation of revenues returning to levels foreseen in the Company's business plan. As a result, the Company reported significant operating losses for the four fiscal quarters of 1997 and substantial negative cash flow of $19.0 million during 1997. At March 31, 1997 net bank borrowings (bank operating lines net of cash and cash equivalents) were $5.4 million compared to a net cash position (cash and cash equivalents net of bank operating lines) of $13.6 million a year ago. Negative cash flow from operations (cash applied to operations) was $19.4 million. Cash applied to operations for 1997 represents a lower amount than the loss from operations reported on the consolidated statement of income during the same period as a result of reductions in working capital levels and in particular accounts receivable. In the fourth quarter of 1997 it was determined that certain restructuring initiatives should be undertaken which would reduce operating costs in future periods and reduce the Company's break even level for revenues. However the Company expects that it will continue to generate operating losses over the next several quarters and will require significant amounts of capital to fund these operating losses and the restructuring actions. In view of the Company's current bank borrowing levels and anticipated additional demands on cash and credit resources during 1998, the Company has been actively seeking a purchaser since February 1997 who would provide the cash resources the Company requires to continue its operations. While the Company, with the ongoing assistance of an investment banker, is continuing its search, to date the Company has not received any formal offers in this regard. The Company has also explored additional sources of financing which may be required to fund the operations in the short term. However the Company has been unsuccessful to date and is unlikely to secure additional financing. In the absence of additional financing and if no purchaser is forthcoming in the near term, the Company will evaluate all the options available to it which may include seeking court protection from its creditors in order to permit it to restructure and reorganize its affairs. At March 31, 1997 the Company was not in compliance with certain financial covenants contained in its committed credit facilities with Royal Bank of Canada, which 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. This non compliance constitutes an event of default at March 31, 1997 which has not been waived by the bank and thereby renders the borrowings under the credit agreements repayable on demand. The amount available for borrowing at any time is based on margin formulas relating to levels of accounts receivable and inventories and other bank covenants. The Company also advised the bank prior to March 31, 1997 that based on anticipated operating cash requirements it expected that during the first quarter of fiscal 1998 the Company would be required to borrow funds under the credit facilities which would exceed the expected margin amount. During April 1997 the bank provided a letter to the Company tolerating the defaults and reducing the aggregate of the bank credit facilities from $21.2 million to $13.1 million. Based on margin formulas, $10.7 million was available to the Company at March 31, 1997 and $10.2 million was being utilized. Cash and cash equivalents held as of that date represented a further $4.8 million of cash resources available to the Company. Cash and cash equivalents and unused credit lines totaled $5.3 million at March 31, 1997. The authorized credit lines are secured by certain of the accounts receivable, inventories and other assets of the Company and bear interest at the bank's prime rate plus 1.75% or equivalent. The Company's utilization of the credit facilities is now in excess of the amount authorized under the facilities. There can be no assurance that the bank credit facilities will remain in place or will provide sufficient credit capacity to meet the Company's ongoing cash requirements. The Company believes that the bank's future course of action will be dependent among other things on progress on the part of the Company in its efforts to locate a purchaser. The Company's financial statements have been prepared on a going concern basis in accordance with generally accepted accounting principles. The going concern basis of presentation assumes the Company will continue its operation for the foreseeable future and be able to realize its assets and discharge its liabilities in the normal course of business. The uncertainties which currently exist surrounding the Company's ability to continue to fund its operations cast significant doubt on the appropriateness of the going concern assumption. The Company's financial statements do not give effect to the adjustments to the carrying value of assets and liabilities and to the reported revenues and expenses, and the balance sheet classifications used that would be necessary should the Company be unable to continue to operate in the ordinary course of business. The Company's current ratio was 0.84:1 at March 31, 1997 compared to 2.0:1 at March 31, 1996. Accounts receivable were $15.0 million at March 31, 1997 compared to $28.7 million at March 31, 1996. The decline in accounts receivable primarily occurred as a result of lower revenues in the fourth quarter of 1997 compared to the fourth quarter a year ago. Inventories were $11.3 million at March 31, 1997 compared to $13.5 million at March 31, 1996. Lower than anticipated product revenues in the first quarter of fiscal 1997 resulted in an increase in inventory levels. The Company adjusted manufacturing production levels following the first quarter of fiscal 1997 and inventory levels have declined each quarter since the first quarter. Accounts payable and accrued liabilities were $23.1 million at March 31, 1997 compared to $21.8 million a year ago. The increase is primarily due to accrued restructuring costs recorded in the fourth quarter of fiscal 1997. Capital spending was $2.3 million in 1997, $2.7 million in 1996 and $2.9 million in 1995. Results of Operations The following table sets forth items derived from the consolidated statements of income, expressed as a percentage of revenues, for the year ended March 31, 1997 and for each of the preceding two years.
Years Ended March 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- (Percentage of Revenues) Revenues: Product 58.1% 69.6% 69.5% Service 41.9 30.4 30.5 - --------------------------------------------------------------------------------------------------------------- 100.0% 100.0% 100.0% =============================================================================================================== Gross margin: Product 31.8% 52.0% 47.9% Service 25.5 32.2 36.5 Combined 29.2 45.9 44.4 Expenses: Sales and marketing 47.8 27.4 27.5 Administration and general 13.8 6.9 6.2 Research and development 19.7 9.9 8.4 Restructuring and other costs 17.2 1.3 0.6 - -------------------------------------------------------------------------------------------------------------- Income (loss) from operations (69.3) 0.4 1.7 Gain on sale of portfolio investment - - 1.7 Interest expense (0.7) (0.4) (2.5) Interest income and foreign exchange - 0.2 0.3 - -------------------------------------------------------------------------------------------------------------- Net income (loss) (70.0)% 0.2% 1.2% ==============================================================================================================
Revenues The following three tables set forth, for the year ended March 31, 1997 and for each of the two preceding 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 U.S. dollars. Remote access products primarily include internetworking products sold under the names Gandalf Xpressway, XpressStack and XpressConnect. 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 Ended March 31 Access Backbone Connectivity Other Total ------- --------- ------------ ----- ----- 1997 United States 23% 3% 3% 1% 30% Canada 7 1 4 - 12 United Kingdom 14 1 6 2 23 Holland/France 16 1 3 1 21 Other 9 2 3 - 14 --- --- --- --- --- 69% 8% 19% 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 combined gross margin (total revenues minus cost of product sales and service expenses expressed as a percentage of total revenues) was 29% in 1997 compared to 46% in 1996 and 44% in 1995. The gross margin on total revenues declined in 1997 as a result of lower margins earned on both product revenues and service revenues and the fact that a higher proportion of total revenues was derived from service in 1997, which has inherently lower margins than product revenues. The gross margin on product revenues (product revenues minus cost of product sales expressed as a percentage of product revenues) was 32% in 1997, compared to 52% in 1996 and 48% in 1995. During 1997 the gross margin on product revenues 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 1997 was also adversely affected 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. Certain price promotions carried out in 1997 also had an adverse impact on the margin. The gross margin on service revenues (service revenues minus service expenses expressed as a percentage of service revenues) was 26% in 1997, 32% in 1996 and 37% in 1995. The decrease in service margin has occurred as a result of the 22% decline in service revenues in 1997 compared to 1996 which has more than offset the decrease in service expenses. Service expenses declined 14% in 1997 compared to 1996 as a result of the outsourcing to partners for the delivery of field service maintenance which occurred in the fourth quarter of 1996. Operating Expenses Sales and marketing, and administration and general expenses were $40.8 million in 1997, compared to $40.0 million in 1996 and $40.7 million in 1995. Increased spending in the sales and marketing area during 1997, as part of the continuing implementation of the Company's indirect sales distribution model, has more than offset the reduction in variable sales expenses in 1997 compared to 1996 due to lower product revenues. Research and development expenses were $13.0 million in 1997 13% higher than in 1996. The Company has increased its investment in research and development in order to accelerate the completion of certain projects. 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 government's Microelectronics and Systems Development Program (MSDP). This funding is repayable, 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. At March 31, 1997, royalties of approximately $1.2 have been accrued related to these projects. Of this amount, $0.8 million was due for payment under the funding contracts on or before March 31, 1997. The Company has initiated discussions with the Canadian federal government in order to seek ways to restructure the royalty payments under the agreement. There can be no assurance at this time as to the extent to which the Company might be successful in this regard. Restructuring charges of $8.4 million recorded in 1997 resulted from provisions of $3.0 million and $5.4 million in the first and fourth quarters respectively. The provisions include $5.8 million in provisions for redundant facilities, $1.8 million relating to severance and $0.8 million to adjust the book value of field service spares to their estimated net recoverable amount. The provision for redundant facilities represents the estimated future lease cost and the unamortized balance of leasehold improvements for facilities made redundant in connection with changing the Company's sales distribution model and reductions in the workforce, and a writedown in the carrying amount of the Company's manufacturing facilities and a provision for future costs under the capital lease as a result of the decision to outsource portions of the manufacturing process. Other costs of $3.0 million recorded in the fourth quarter of fiscal 1997 represents a writedown in the carrying value of goodwill. This goodwill arose on the acquisition of the minority interests share of the Dutch subsidiary in 1988 and was being amortized over 20 years. As a result of the decline in revenues and poor operating performance reported by the Dutch subsidiary in 1997, management determined that there was significant doubt that the carrying value would be recovered through future cash flows and accordingly it was written down to nil. Restructuring charges in 1996 were recorded in connection with certain consolidation and outsourcing activities carried out in the areas of manufacturing distribution and repair in Europe, outsourcing to partners for the delivery of field service maintenance, and changes in the sales structure to continue the implementation of the Company's distribution channel strategy. These charges primarily relate to severance and facilities costs. Restructuring costs recorded in 1995 represented severance costs associated with the elimination of approximately 70 positions in connection with an internal functional realignment. Income From Operations The Company reported an operating loss of $45.9 million in 1997 on revenues of $66.2 million, compared to income from operations of $488,000 on revenues of $116.5 million in 1996 and income from operations of $2.0 million on revenues of $120.5 million in 1995. Exclusive of restructuring charges the loss from operations was $34.5 million in 1997, compared with income from operations, before restructuring charges, of $2.0 million in 1996 and $2.7 million in 1995. Net Loss The net loss for the year ended March 31, 1997 was $46.3 million or $1.07 per share compared to net income of $260,000 or $0.01 per share in 1996. Net income for 1995 was $1.4 million or $0.05 per share. Segment Operating Results Note 17 to the consolidated financial statements contains information concerning the geographic segments in which the Company operates. The following table sets forth supplemental information regarding product and service revenues by geographic segment for the year ended March 31, 1997 and for each of the preceding two years.
Years ended March 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Product Revenues: United States $ 11,017 $ 24,769 $ 23,341 Canada 4,586 15,033 15,539 United Kingdom 9,361 18,540 24,059 Holland/France 8,161 12,344 9,362 Other 5,335 10,390 11,500 - ------------------------------------------------------------------------------------------------------------- $ 38,460 $ 81,076 $ 83,801 ============================================================================================================= Service Revenues: United States $ 5,103 $ 7,989 $ 9,206 Canada 5,368 6,642 6,934 United Kingdom 11,200 13,104 13,880 Holland/France 6,082 7,722 6,690 - ------------------------------------------------------------------------------------------------------------- $ 27,753 $ 35,457 $ 36,710 =============================================================================================================
Product and service revenues in North America (United States and Canada) were $26.1 million in 1997 compared to $54.4 million in 1996 and $55.0 million in 1995. The Company's European direct sales markets (United Kingdom, Holland and France) reported total revenues of $34.8 million in 1997 compared to $51.7 million in 1996 and $54.0 million in 1995. Other international markets represented revenues of $5.3 million in 1997, $10.4 million in 1996 and $11.5 million in 1995. All segments reported operating losses in 1997 as a result of the unanticipated decline in revenues which occurred in all segments. The segment operating loss in 1997, expressed as a percentage of revenues was 33.4% for North America (United States and Canada) 3.7% for the Company's operations in the United Kingdom, Holland and France and 40.0% in the Company's other international markets. The decline in revenues was proportionately less in the United Kingdom, Holland and France and, accordingly, the segment reported a lower operating loss. Factors That May Affect Future Financial Performance The most critical factor affecting the Company's future will be its ability to deal with its current financial difficulties as described in the section "Liquidity and Capital Resources". Other factors which may affect future financial performance are outlined below. 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 fourth quarter of 1997 the Company undertook further restructuring actions which, when complete, will have reduced the Company's workforce by a further 200 positions. The Company's performance will be impacted by its ability to manage the continuing changes to its operations. The networking industry is intensely competitive and subject to rapid change. The Company's performance will be affected by its ability to develop, introduce and gain market acceptance for new products. 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 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 largely 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 Annual Report on Form 10-K 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA These financial statements are prepared in accordance with Canadian generally accepted accounting principles which in the case of the Company differ in certain respects from those in the United States. See note 18 to the consolidated financial statements.
Consolidated Balance Sheets (Thousands of U.S. dollars) As at March 31 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 4,803 $ 13,602 Accounts receivable 14,971 28,694 Inventories (note 3) 11,295 13,491 Other 1,739 1,867 - ---------------------------------------------------------------------------------------------------------------- Total current assets 32,808 57,654 Fixed assets (note 4) 10,763 16,253 Goodwill (1996 - net of accumulated amortization of $3,172) - 3,242 Other assets 1,588 2,226 - ---------------------------------------------------------------------------------------------------------------- Total assets $ 45,159 $ 79,375 ================================================================================================================ Liabilities and Shareholders' Equity Current liabilities: Bank operating lines (note 5) $ 10,163 $ - Accounts payable and accrued liabilities (note 6) 23,096 21,755 Deferred revenue 5,246 6,178 Current portion of long-term debt (note 7) 557 360 - ---------------------------------------------------------------------------------------------------------------- Total current liabilities 39,062 28,293 Long-term debt (note 7) 2,387 2,496 Shareholders' equity: Capital stock (notes 9 and 10) Common shares, 43,405,695 issued and outstanding (1996 - 42,939,523) 55,740 54,198 Retained earnings (deficit)(note 9) (46,056) 260 Cumulative translation adjustment (5,974) (5,872) - ---------------------------------------------------------------------------------------------------------------- Total shareholders' equity 3,710 48,586 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 45,159 $ 79,375 ================================================================================================================ Going concern assumption (note 2) Commitments and contingencies (note 16) On behalf of the Board of Directors: s/JOHN F. GAMBA s/D.M. GLEKLEN J.F. Gamba, Director D.M. Gleklen, Director See accompanying notes to consolidated financial statements
Consolidated Statements of Income (Thousands of U.S. dollars, except per share amounts) Years Ended March 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Revenues: Product $ 38,460 $ 81,076 $ 83,801 Service 27,753 35,457 36,710 - ------------------------------------------------------------------------------------------------------------ 66,213 116,533 120,511 Operating expenses: Cost of product sales 26,219 38,941 43,630 Service expenses 20,665 24,053 23,316 Sales and marketing 31,672 31,942 33,148 Administration and general 9,170 8,054 7,513 Research and development 13,030 11,524 10,197 Restructuring and other costs (note 11) 11,368 1,531 685 - ------------------------------------------------------------------------------------------------------------ Income (loss) from operations (45,911) 488 2,022 Gain on sale of portfolio investment - - 2,024 Interest expense (455) (487) (2,969) Interest income and foreign exchange 50 259 329 - ------------------------------------------------------------------------------------------------------------ Net income (loss) for the year $ (46,316) $ 260 $ 1,406 ============================================================================================================ Basic earnings (loss) per share (note 13) $ (1.07) $ 0.01 $ 0.05 ============================================================================================================ Weighted average number of common shares outstanding (thousands) 43,295 40,359 28,589 ============================================================================================================ See accompanying notes to consolidated financial statements
Auditors' Report To the Shareholders of Gandalf Technologies Inc. We have audited the consolidated balance sheets of Gandalf Technologies Inc. as at March 31, 1997 and 1996 and the consolidated statements of income, changes in financial position and shareholders' equity for each of the years in the three year period ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 31, 1997 and 1996 and the results of its operations and the changes in its financial position for each of the years in the three year period ended March 31, 1997, in accordance with generally accepted accounting principles. s/KPMG Chartered Accountants Ottawa, Canada May 13, 1997 Comments by Auditor for U.S. Readers on Canada-U.S. Reporting Difference In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern, such as those described in Note 2 to the financial statements. Our report to the shareholders dated May 13, 1997 is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditor's report when these are adequately disclosed in the financial statements. s/KPMG Chartered Accountants Ottawa, Canada May 13, 1997
Consolidated Statements of Changes in Financial Position (Thousands of U.S. dollars) Years Ended March 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Operating activities: Cash provided by (applied to) operations (note 14) $ (36,341) $ 5,687 $ 4,958 Decrease (increase) in operating working capital (note 15) 16,946 (785) 4,212 - ---------------------------------------------------------------------------------------------------------------- Cash provided by (applied to) operating activities (19,395) 4,902 9,170 - ---------------------------------------------------------------------------------------------------------------- Financing activities: Issue of capital stock 1,542 15,273 12,242 Conversion of debentures - (10,336) (11,533) Long-term debt incurred 577 1,020 - Long-term debt retired (441) (251) (446) - ---------------------------------------------------------------------------------------------------------------- Cash provided by financing activities 1,678 5,706 263 - ---------------------------------------------------------------------------------------------------------------- Investing activities: Purchase of fixed assets (2,336) (2,671) (2,919) Proceeds on disposal of investments - - 3,857 Proceeds on disposal of fixed assets 1,193 - 298 Other 46 39 293 - ---------------------------------------------------------------------------------------------------------------- Cash provided by (applied to) investing activities (1,097) (2,632) 1,529 - ---------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash balances (148) (337) 240 - ---------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash position in the year (18,962) 7,639 11,202 Cash position at beginning of year 13,602 5,963 (5,239) - ---------------------------------------------------------------------------------------------------------------- Cash position at end of year $ (5,360) $ 13,602 $ 5,963 ================================================================================================================ Cash position is comprised of: Cash and cash equivalents $ 4,803 $ 13,602 $ 11,817 Bank operating lines (10,163) - (5,854) - ---------------------------------------------------------------------------------------------------------------- $ (5,360) $ 13,602 $ 5,963 ================================================================================================================ See accompanying notes to consolidated financial statements
Consolidated Statements of Shareholders' Equity (Thousands of U.S. dollars) Years Ended March 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Shares Dollars Shares Dollars Shares Dollars - ------------------------------------------------------------------------------------------------------------------ Capital Stock: Consisting of an unlimited number of common shares authorized, without par value Balance at beginning of year 42,939,523 $ 54,198 35,238,064 $ 91,644 28,072,333 $ 79,811 Issued: On conversion of debentures - - 5,983,372 9,839 6,782,519 11,124 Exercise of stock options (note 10) 418,016 1,318 1,582,685 3,531 182,214 354 Other 48,156 224 135,402 1,548 200,998 355 Reduction in stated capital (note 9) - - - (52,364) - - - ------------------------------------------------------------------------------------------------------------------ Balance at end of year 43,405,695 $ 55,740 42,939,523 $ 54,198 35,238,064 $ 91,644 ================================================================================================================== Retained Earnings (Deficit): Balance at beginning of year $ 260 $(52,364) $(53,770) Net income (loss) (46,316) 260 1,406 Reduction in stated capital (note 9) - 52,364 - - ------------------------------------------------------------------------------------------------------------------ Balance at end of year $(46,056) $ 260 $(52,364) ================================================================================================================== Cumulative Translation Adjustment: Balance at beginning of year $ (5,872) $ (4,838) $ (6,932) Adjustment arising on translation of foreign subsidiaries' financial statements to U.S. dollars (1,063) 549 1,091 Adjustment relating to subsidiary loans designated as long-term investments 961 (1,583) 1,003 - ------------------------------------------------------------------------------------------------------------------ Balance at end of year $ (5,974) $ (5,872) $ (4,838) ================================================================================================================== See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements All amounts are stated in U.S. dollars unless otherwise indicated. C$ refers to Canadian dollars. Tabular amounts are in thousands except per share data. References to years are to fiscal years ended March 31. 1. Summary of Accounting Principles These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada. These principles are also generally accepted in the United States in all material respects except as disclosed in note 18. The significant accounting principles are outlined below. (a) Basis of Consolidation The consolidated financial statements include the accounts of Gandalf Technologies Inc. and its subsidiaries. All significant intercompany transactions and balances are eliminated. (b) Foreign Currency Translation Operations using a unit of measurement and presentation other than the U.S. dollar, including the Company's Canadian parent, represent foreign operations. The Company considers that for translation purposes, all of its foreign operations are self-sustaining. The assets and liabilities of self-sustaining foreign operations are translated into U.S. dollars at year-end exchange rates and the resulting unrealized exchange gains or losses are included in the cumulative translation adjustment as a separate component of shareholders' equity. The income statements of such operations are translated at exchange rates prevailing during the year. (c) Revenue Recognition Revenue from the sale of products is recognized at the time goods are shipped to customers, net of appropriate provisions for estimated returns. Revenue from services is recognized at the time services are rendered. Billings in advance of services are included in deferred revenue. (d) Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments purchased with an original maturity of three months or less. (e) Inventories Work-in-process and finished goods inventories are valued at the lower of cost and net realizable value. Raw materials are valued at the lower of cost and replacement cost. Cost is determined on a first-in first-out basis and includes material, labour and manufacturing overhead where applicable. (f) Fixed Assets Fixed assets are recorded at cost net of government assistance. Equipment is depreciated using the declining balance method at an annual rate of 20%, with the exception of service spares which are depreciated using the straight-line method over 5 years. Leasehold improvements are amortized using the straight-line method over the term of the related lease. (g) Research and Development Costs Research costs are expensed as incurred. Development costs are expensed in the year incurred unless management believes a development project meets the generally accepted accounting criteria for deferral and amortization. (h) Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired of subsidiary companies and is amortized using the straight-line method over a period not exceeding 20 years. When warranted by events or circumstances that might indicate that recoverability is impaired, management evaluates recoverability by use of the undiscounted cash flow method. (i) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Going Concern Assumption These consolidated financial statements have been prepared on a going concern basis in accordance with generally accepted accounting principles. The Company has reported substantial operating losses and negative cash flow for the year ended March 31, 1997. While the Company is reducing its cost structure to reduce its break-even level the Company anticipates that it will continue to generate operating losses over the next several quarters and will require significant amounts of capital to fund these operating losses and the restructuring actions. In view of the Company's current bank borrowing levels and anticipated additional demands on cash and credit resources during 1998, the Company has been actively seeking since February 1997 a purchaser who would provide the cash resources the Company requires to continue its operations. While the Company, with the ongoing assistance of an investment banker, is continuing its search, to date the Company has not received any formal offers in this regard. The Company has also explored additional sources of financing which may be required to fund the operations in the short term. However the Company has been unsuccessful to date and is unlikely to secure additional financing. In the absence of additional financing and if no purchaser is forthcoming in the near term, the Company will evaluate all the options available to it which may include seeking court protection from its creditors in order to permit it to reorganize and restructure its affairs. At March 31, 1997, the Company was not in compliance with certain financial covenants contained in its committed credit facilities with Royal Bank of Canada, which 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. This non-compliance constitutes an event of default at March 31, 1997 which has not been waived by the bank and thereby renders the borrowings under the credit agreements repayable on demand. The amount available for borrowing at any time is based on margin formulas relating to levels of accounts receivables and inventories and other bank covenants. The Company also advised the bank prior to March 31, 1997 that based on anticipated operating cash requirements it expected that during the first quarter of fiscal 1998 the Company would be required to borrow funds under the credit facilities which would exceed the expected margin amount. During April 1997 the bank provided a letter to the Company tolerating the defaults and reducing the aggregate of the bank credit facilities from $21.2 million to $13.1 million. The Company's utilization of the credit facilities is now in excess of the amount authorized under the facilities. There can be no assurance that the bank credit facilities will remain in place or will provide sufficient credit capacity to meet the Company's ongoing cash requirements. The Company believes that the bank's future course action will be dependent among other things on progress on the part of the Company in efforts to find a purchaser. The going concern basis of presentation assumes the Company will continue its operation for the foreseeable future and be able to realize its assets and discharge its liabilities in the normal course of business. The uncertainties which currently exist surrounding the Company's ability to continue to fund its operations cast significant doubt on the appropriateness of the going concern assumption. These consolidated financial statements do not give effect to the adjustments to the carrying value of assets and liabilities and to the reported revenues and expenses, and the balance sheet classifications used that would be necessary should the Company be unable to continue to operate in the ordinary course of business. 3. Inventories
As at March 31 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Raw materials $ 3,160 $ 2,905 Work-in-process 3,096 3,821 Finished goods 5,039 6,765 - ------------------------------------------------------------------------------------------------------------------- $ 11,295 $ 13,491 ===================================================================================================================
4. Fixed Assets
As at March 31 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Cost: Land $ - $ 218 Buildings - 4,627 Equipment 56,587 58,336 Leasehold improvements 1,041 1,966 - ------------------------------------------------------------------------------------------------------------------ 57,628 65,147 Accumulated depreciation 46,865 48,894 - ------------------------------------------------------------------------------------------------------------------ Net book value $ 10,763 $ 16,253 ==================================================================================================================
5. Bank Operating Lines As described in note 2, at March 31, 1997 the Company was not in compliance with certain financial covenants contained in its committed credit facilities with Royal Bank of Canada. During April 1997 the bank provided a letter to the Company tolerating the defaults and reducing the aggregate of the bank credit facilities from $21.2 million to $13.1 million. Based on margin formulas, $10.7 million was available to the Company at March 31, 1997 and $10.2 million was being utilized. Cash and cash equivalents held as of that date represented a further $4.8 million of cash resources available to the Company. Cash and cash equivalents and unused credit lines totaled $5.3 million at March 31, 1997. The authorized credit lines are secured by certain of the accounts receivable, inventories and other assets of the Company and bear interest at the bank's prime rate plus 1.75% or equivalent. 6. Accounts Payable and Accrued Liabilities
As at March 31 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Trade accounts payable $ 6,731 $ 7,376 Payroll, commissions and related taxes 2,882 3,873 Accrued restructuring costs 5,696 2,747 Other payables 6,765 6,434 Income and other taxes payable 1,022 1,325 - ------------------------------------------------------------------------------------------------------------------ $ 23,096 $ 21,755 ==================================================================================================================
During 1997, the Company made payments of $2.4 million primarily for lease and severance costs which were accrued in prior periods. Accrued restructuring costs at March 31, 1997 is comprised of $5.4 million in severance and lease costs relating to restructuring actions undertaken in fiscal 1997. The balance represents the remaining portion of lease costs accrued in prior periods. 7. Long-term Debt
As at March 31 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Interest Description Rates Security - ----------------------------------------------------------------------------------------------------------------- Various capital lease 7.5%-12.9% Certain equipment and $ 2,944 $ 2,856 obligations denominated in facilities Canadian dollars, lease terms ending 1999 - 2009 Classified as current (557) (360) - ----------------------------------------------------------------------------------------------------------------- $ 2,387 $ 2,496 =================================================================================================================
The aggregate amount of long-term debt scheduled to be repaid in the five years ending March 31, 2002 is $1,608,000, with the balance of $1,336,000 due thereafter. 8. Fair Value of Financial Assets and Liabilities The carrying values of cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities approximate their fair values due to the relatively short periods to maturity of the instruments. The carrying value of the Company's bank operating lines approximates its fair value as the interest rate on this debt automatically reprices to market rates. The fair value of long-term debt is determined by discounting the future contractual cash flows of the leases at discount rates which represent borrowing rates presently available to the Company for instruments with similar terms and maturities. At March 31, 1997, the carrying amount of the long-term debt approximates its fair value. 9. Reduction in Stated Capital On August 10, 1995, the shareholders of the Company passed a special resolution authorizing a reduction in statutory stated capital in respect of the common shares by $52,364,000. This resulted in a corresponding reduction in the accumulated deficit as shown on the consolidated balance sheets and the consolidated statements of shareholders' equity. 10. Stock Options The Company has five stock option plans, of which only one is an active plan. The following table summarizes the activity for the stock option plans in effect during the year ended March 31, 1997 and for each of the preceding two years.
Shares Available Outstanding Weighted Average Exercise for Grant Options Price per Share - ---------------------------------------------------------------------------------------------------------------- Balance at March 31, 1994 904,460 1,264,500 C$ 3.16 $ 2.28 Reserved for issuance 438,000 - - - Granted (1,790,000) 1,790,000 1.41 1.08 Terminated 532,500 (532,500) (2.39) (1.83) Exercised - (182,214) (2.67) (2.04) Impact of foreign exchange - - - (0.04) - ---------------------------------------------------------------------------------------------------------------- Balance at March 31, 1995 84,960 2,339,786 2.02 1.44 Reserved for issuance 3,000,574 - - - Granted (1,743,000) 1,743,000 9.12 6.69 Terminated 640,876 (640,876) (2.73) (2.00) Exercised - (1,582,685) (3.05) (2.24) Impact of foreign exchange - - - 0.04 - ---------------------------------------------------------------------------------------------------------------- Balance at March 31, 1996 1,983,410 1,859,225 7.54 5.53 Granted (1,954,500) 1,954,500 7.28 5.35 Terminated 513,152 (513,152) (9.06) (6.66) Exercised - (418,016) (4.41) (3.24) Options repriced-original price - (282,250) (13.77) (10.12) Options repriced-amended price - 282,250 5.50 4.04 Cancelled (185,264) - - - Impact of foreign exchange - - - (0.06) - ---------------------------------------------------------------------------------------------------------------- Balance at March 31, 1997 356,798 2,882,557 C$ 6.75 $ 4.88 ================================================================================================================
The exercise price for options outstanding at March 31, 1997 range from C$0.90 to C$24.00 per share (approximately $0.65 to $17.34). These options expire between April 2, 1997 and March 9, 2007 and their weighted average contractual life is eight years. Of the 2,882,557 options outstanding at March 31, 1997, 759,367 were exercisable as of that date. Directors and officers as a group held 1,730,833 options as at March 31, 1997. All options granted during 1997 were from the Stock Option Plan for Key Employees and Directors. This plan provides for the granting of options at prices equal to the market value at the time of grant. Options granted under the plan may be exercised during such period as may be determined by the Company, provided that no option may be exercisable after the tenth anniversary of the date of the grant. During 1997 options granted to employees vest over a graded three year period, and options granted to directors vest over a graded five year period. During January 1997 the exercise price of 282,250 options was amended to C$5.50 ($4.04) which represented the average market trading price of stock during the month preceding the amendment. The exercise price of options held by directors and officers was not adjusted. 11. Restructuring and Other Costs
Years Ended March 31 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Restructuring $ 8,338 $ 1,531 $ 685 Other 3,030 - - - ----------------------------------------------------------------------------------------------------------------- $ 11,368 $ 1,531 $ 685 =================================================================================================================
Restructuring charges of $8.4 million recorded in 1997 resulted from provisions of $3.0 million and $5.4 million in the first and fourth quarters respectively. The provisions include $5.8 million in provisions for redundant facilities, $1.8 million relating to severance and $0.8 million to adjust the book value of field service spares to their estimated net recoverable amount. The provision for redundant facilities represents the estimated future lease cost and the unamortized balance of leasehold improvements for facilities made redundant in connection with changing the Company's sales distribution model and reductions in the workforce, and a writedown in the carrying amount of the Company's manufacturing facilities and a provision for future costs under the capital lease as a result of the decision to outsource portions of the manufacturing process. Other costs of $3.0 million recorded in the fourth quarter of fiscal 1997 represents a writedown in the carrying value of goodwill. This goodwill arose on the acquisition of the minority interests share of the Dutch subsidiary in 1988 and was being amortized over 20 years. As a result of the decline in revenues and poor operating performance reported by the Dutch subsidiary in 1997, management determined that there was significant doubt that the carrying value would be recovered through future cash flows and accordingly it was written down to nil. Restructuring charges in 1996 were recorded in connection with certain consolidation and outsourcing activities in the areas of manufacturing distribution and repair in Europe, outsourcing to partners for the delivery of field service maintenance, and changes in the sales structure to continue the implementation of the Company's distribution channel strategy. These charges primarily related to severance and facilities costs. Restructuring costs recorded in 1995 represented severance costs associated with the elimination of approximately 70 positions in connection with an internal functional realignment. 12. Income Taxes At March 31, 1997, the Company had available, subject to audit and certain restrictions, accumulated accounting losses of approximately $100 million, the potential tax benefit of which has not been recorded in the consolidated financial statements. These include loss carry forwards for income tax purposes of approximately $70 million ($50 million related to U.S. operations) which begin to expire after the 1999 fiscal year. The remaining amount relates to items expensed in the consolidated financial statements which have not yet been claimed for income tax purposes. The Company also had available at March 31, 1997, subject to audit, investment tax credits of approximately $11 million which can be applied to reduce federal taxes payable in Canada. These investment tax credits expire between 1998 and 2007. The loss before income taxes attributable to all foreign operations for the year ended March 31, 1997 was approximately $29.0 million (1996 - $1.9 million; 1995 - - $0.7 million). At March 31, 1997 the balance of unremitted earnings of subsidiaries was nil (1996 - $9,599,000; 1995 - $11,113,000). 13. 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 year. Fully diluted earnings per share information has not been presented as potential conversions are anti-dilutive. Adjusted earnings per share, which is not applicable for 1997, was $0.01 for 1996 and $0.07 for 1995. The calculation assumes that the conversion of debentures, which occurred during 1996 and 1995, had occurred at the beginning of each applicable fiscal year. 14. Cash Provided By Operations
Cash provided by (applied to) operations is computed as follows: Years Ended March 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- Income (loss) from operations $ (45,911) $ 488 $ 2,022 Depreciation and amortization 4,323 5,408 5,616 Reserves and writedowns not involving an outlay of cash 5,652 - - Interest paid (455) (468) (2,803) Interest received and foreign exchange 50 259 329 Other - - (206) - --------------------------------------------------------------------------------------------------------------- $ (36,341) $ 5,687 $ 4,958 ===============================================================================================================
15. Changes in Operating Working Capital
The decrease (increase) in operating working capital is computed as follows: Years Ended March 31 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Accounts receivable $ 13,723 $ (1,814) $ 3,302 Inventories 2,196 1,739 5,647 Other current assets 128 401 78 Accounts payable and accrued liabilities 1,845 513 (6,160) Deferred revenue (932) (1,580) 334 Foreign currency translation adjustment (14) (44) 1,011 - ----------------------------------------------------------------------------------------------------------------- $ 16,946 $ (785) $ 4,212 =================================================================================================================
16. Commitments and Contingencies (a) The Company has entered into various commitments under leases and other contracts. At March 31, 1997, the minimum amounts payable under such commitments in future fiscal years were as follows: 1998 $ 10,058 1999 1,058 2000 577 2001 446 2002 173 Thereafter 1,326 -------- $ 13,638 ======== (b) 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 government's 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 MSDP 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 the funding received. The Company commenced accruing royalties during 1996 upon completion of each project. To date, royalties of approximately $1.2 million have been accrued related to these projects. Of this amount, $0.8 million was due for payment under the funding contracts on or before March 31, 1997. The Company has initiated discussions with the Canadian Federal Government in order to seek ways to restructure the royalty payments under the agreement. There can be no assurance at this time as to the extent to which the Company might be successful in this regard. (c) During 1997 a claim was made against the Company for negligent misrepresentations and fraud allegedly arising from certain press releases and public statements made by the Company and certain of its officers. The plaintiff seeks to recover monetary damages in an unspecified amount. The Company believes that it complied with all its obligations under securities laws in 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 misrepresentation. However because of the preliminary stage of this litigation, it is impossible, at present, to express an estimate of the amount or range of potential loss, if any, or the likelihood of an outcome unfavourable to the Company. (d) During March 1997, in an effort to retain certain key employees the Company entered into a commitment to provide retention bonuses totalling approximately $1.5 million. The bonuses were provided under two plans. Under one plan the liability to pay the bonus arises if the employee continues to be employed by the Company as of March 31, 1998. Under the second plan the liability to pay the bonus arises on the completion of a transaction to sell or merge the Company. In order to be eligible the employee must continue to be employed by the Company at the time of the transaction. (e) In the normal course of business, various litigation, claims and assessments have arisen involving the Company and its subsidiaries. In certain instances, substantial amounts are being sought. Management is vigorously defending its position in all such actions. While the outcome of such proceedings is currently not determinable, management believes, after consideration of all relevant facts, that their outcome would be unlikely to result in a material adverse effect on the Company's consolidated financial position or its future results of operations. 17. Segmented Information The Company operates in one business segment, providing networking solutions to customers through designing, manufacturing, marketing and servicing a broad line of computerized communications systems. The Company has defined five geographic regions for the segments in which it operates: the United States, Canada, the United Kingdom, Holland/France and other international markets. The following table sets forth information concerning these geographic segments for each of the years in the three year period ended March 31, 1997.
Years Ended March 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Sales to customers: United States $ 16,120 $ 32,758 $ 32,547 Canada 9,954 21,675 22,473 United Kingdom 20,561 31,644 37,939 Holland/France 14,243 20,066 16,052 Other 5,335 10,390 11,500 Segment transfers: United States - - 964 Canada 16,330 27,601 22,822 United Kingdom 792 1,031 977 Holland/France - 6 9 Eliminations (17,122) (28,638) (24,772) - ---------------------------------------------------------------------------------------------------------------- Total revenues $ 66,213 $ 116,533 $ 120,511 ================================================================================================================ Segment operating profit: United States $ (4,041) $ 6,416 $ 4,739 Canada (4,681) 3,433 1,764 United Kingdom (1,205) 5,722 8,242 Holland/France (82) 4,276 3,527 Other (2,138) (1,107) (65) - ---------------------------------------------------------------------------------------------------------------- Total segment operating profit (12,147) 18,740 18,207 - ---------------------------------------------------------------------------------------------------------------- Expenses: Research and development 13,030 11,524 10,197 General corporate 9,366 5,197 5,303 Restructuring and other costs 11,368 1,531 685 Gain on sale of portfolio investment - - (2,024) Interest expense 455 487 2,969 Interest income and foreign exchange (50) (259) (329) - ---------------------------------------------------------------------------------------------------------------- Net income (loss) $ (46,316) $ 260 $ 1,406 ================================================================================================================ Identifiable assets: United States $ 3,585 $ 10,845 $ 10,015 Canada 19,220 31,530 27,376 United Kingdom 11,138 21,201 24,315 Holland/France 9,119 10,727 10,800 Other 2,097 5,072 9,002 - ---------------------------------------------------------------------------------------------------------------- Total assets $ 45,159 $ 79,375 $ 81,508 ================================================================================================================
18. 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(U.S. GAAP) (a) Under U.S. 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 years ended March 31, 1996 and 1995 but would be shown supplementally.
1996 1995 - ----------------------------------------------------------------------------------------------------------------- Issue of capital stock on conversion of debentures $ 10,336 $ 11,533 Conversion of convertible debentures $ (10,336) $ (11,533)
(b) Under U.S. 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 year. (c) The Company follows the deferral method of accounting for income taxes. Under U.S. GAAP the asset and liability method is used. In the case of the Company the application of the asset and liability method does not result in a difference in the amount of the deferred tax asset. U.S. GAAP also requires the disclosure of the tax effect of temporary differences that give rise to deferred tax assets and liabilities. This information is provided in the following table.
1997 1996 ------------------------------------------------------------------------------------------------------------ Operating loss carry-forwards $ 27,500 $ 20,300 Depreciation 1,900 1,700 Restructuring reserves 2,700 200 Investment tax credits 11,000 11,000 Other 7,100 4,800 ------------------------------------------------------------------------------------------------------------ 50,200 38,000 Valuation allowance (50,200) (37,496) ------------------------------------------------------------------------------------------------------------ Net non-current deferred tax asset $ - $ 504 ============================================================================================================
(d) Reductions in stated capital and deficit as described in note 9 do not fall within the definition of a quasi-reorganization under U.S. GAAP and, accordingly, under U.S. GAAP, capital stock and retained earnings would not each be reduced by $52,364,000 as shown in the consolidated statements of shareholders' equity. (e) U.S. 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. (f) The Company accounts for its stock-based awards using the intrinsic value method, whereby the compensation cost is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Since the Company's stock options plan provides for the granting of options at prices equal to the market value at the time of grant no compensation expense has been recognized in the financial statements for employee stock arrangements. U.S. GAAP requires the disclosure of pro forma net loss and loss per share assuming the fair value method of accounting for stock options had been used. This information is provided in the following table.
1997 1996 ------------------------------------------------------------------------------------------------------------ Net income (loss) as reported $ (46,316) $ 260 Estimated stock based compensation costs (1,805) (3,201) ------------------------------------------------------------------------------------------------------------ Pro forma net loss $ (48,121) $ (2,941) ============================================================================================================ Pro forma net loss per share $ (1.11) $ (0.07) ============================================================================================================
The weighted average fair value of all options granted during 1997 and 1996 was estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions.
1997 1996 ------------------------------------------------------------------------------------------------------------ Weighted average fair value $ 3.66 $ 4.30 Expected option life (years) 3.5 3.5 Volatility 76% 72% Risk free interest rate 6.3% 5.5% Dividend yield nil nil ============================================================================================================
The Black-Scholes model used by the Company to calculate option values, as well as other currently accepted option valuation models, were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require highly subjective assumptions including future stock price volatility and expected time until exercise, which greatly affect the calculated values. Accordingly, management believes that this model does not necessarily provide a reliable single measure of the fair value of the Company's stock option awards. Quarterly Financial Information (Unaudited) Quarterly unaudited financial information for each of the years ended March 31, 1997 and 1996 is as follows:
First Second Third Fourth 1997 Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------------- Revenues: Product $ 10,917 $ 8,082 $ 10,029 $ 9,432 Service 7,420 7,145 6,593 6,595 - --------------------------------------------------------------------------------------------------------------- 18,337 15,227 16,622 16,027 - --------------------------------------------------------------------------------------------------------------- Operating expenses: Cost of product sales 6,431 5,873 6,833 7,082 Service expenses 5,307 4,942 5,186 5,230 Sales and marketing 7,294 7,740 8,372 8,266 Administration and general 2,278 2,203 2,367 2,322 Research and development 3,004 3,110 3,517 3,399 Restructuring costs 3,010 - - 8,358 - --------------------------------------------------------------------------------------------------------------- Loss from operations (8,987) (8,641) (9,653) (18,630) Interest expense (47) (39) (156) (213) Interest income and foreign exchange 54 17 (41) 20 - --------------------------------------------------------------------------------------------------------------- Net loss $ (8,980) $ (8,663) $ (9,850) $(18,823) =============================================================================================================== Basic loss per share $ (0.21) $ (0.20) $ (0.23) $ (0.43) =============================================================================================================== First Second Third Fourth 1996 Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------------- Revenues: Product $ 19,414 $ 18,401 $ 19,326 $ 23,935 Service 9,236 8,956 8,845 8,420 - --------------------------------------------------------------------------------------------------------------- 28,650 27,357 28,171 32,355 - --------------------------------------------------------------------------------------------------------------- Operating expenses: Cost of product sales 9,663 8,572 9,179 11,527 Service expenses 5,869 5,910 6,096 6,178 Sales and marketing 8,198 7,659 7,892 8,193 Administration and general 2,071 2,142 2,102 1,739 Research and development 2,595 2,839 2,895 3,195 Restructuring costs - - - 1,531 - --------------------------------------------------------------------------------------------------------------- Income (loss) from operations 254 235 7 (8) Interest expense (206) (136) (108) (37) Interest income and foreign exchange 18 (64) 193 112 - --------------------------------------------------------------------------------------------------------------- Net income $ 66 $ 35 $ 92 $ 67 =============================================================================================================== Basic earnings per share $ - $ - $ - $ - ===============================================================================================================
Quarterly earnings per share figures are calculated based on the monthly weighted average number of common shares outstanding during the quarter. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table and the notes thereto set out, as of June 1, 1997, the name and age of each director of the Company and any nominees for director of the Company; his present principal occupation, business or employment; his principal occupation, business or employment during the past five years, the period during which he has served as a director of the Company, all other major positions and offices with the Company and significant affiliates thereof now held by him, if any.
BUSINESS EXPERIENCE DIRECTOR BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS, NAME SINCE DIRECTORSHIPS AND OTHER INFORMATION - ----------------------------------------------------------------------------------------- Richard D. Busto, 53 1996 President since October 1996 and Chief Executive Officer since February 1997; previously Chief Operating Officer from October 1996 to Februar 1997 and Vice President of Strategy, Business Development and Networking Services from January 1996 to October 1996 and Vice President of Networking Services from October 1995 to January 1996. From 1993 to 1995 director of business development for IBM's Services Division, and general manager for IBM's field service operations in the United States from 1990 to 1993. Michael Chawner, 50 1997 Vice President Product Operations and Chief Technology Officer since January 1996; previously Vice President Strategy and Business Development from February 1995 to January 1996. From January 1988 to 1995 Vice President of Research and Development and Vice President of Networking Engineering with Newbridge Networks Corporation. Christopher A. Fournier, 55 1997 Partner, since 1990, with the law firm of Gowling, Strathy & Henderson in Ottawa, Ontario practicing in the areas of corporate and commercial law. John F. Gamba, 58 1995 Chairman of the Company since February 1997; Senior Vice President, Corporate Resources and Performance Assurance, Bell Atlantic Corporation (regional operating telephone company) since January 1995. Group President, Network Technologies & Systems of Bell Atlantic Network Services, Inc. from March 1992 to January 1995. Donald M. Gleklen, 60 1991 President, Jocard Financial Services, Inc. (merchant banking) Ian McLaren, 40 1996 President, SHL Canada, since December 1995 (a wholly owned subsidiary of MCI, providing systems integration and outsourcing services). From 1994 to 1995, Executive Vice President and General Manager of the Ottawa Region for SHL Canada. Prior to 1994, Group Vice President, Finance, Professional and Public Administration Sector of Digital Equipment of Canada. Mihkel E. Voore, 42 1996 Partner, since 1991, with the law firm of Stikeman, Elliott in Toronto, Ontario, practicing in the areas of corporate and securities law.
Under the provisions of the Ontario Business Corporations Act, 1982, a majority of the directors must be resident Canadians. The names, ages, positions with the Company and business experience of the executive officers of the Company as of June 1, 1997, other than Mr. Busto and Mr. Chawner, are as follows: Joceline Lemieux, 38, was appointed Vice President, North American Sales in October 1996, and from January 1996 to October 1996, was Vice President, Worldwide Marketing. Ms. Lemieux has been with the Company's sales organization since April 1986. From September 1995 to April 1996 she was Vice President, Canadian Sales and from April 1992 to September 1995 she was the Regional Manager for the Eastern Canada region. James Cammarata, 43, was appointed Vice President, Network Services in October 1996. Mr. Cammarata joined the Company in January 1996, and held the position of Director of Services Operations from January 1996 to October 1996. Prior to joining the Company, Mr. Cammarata was employed by IBM Corporation, from 1980 to 1995, in various management and executive positions, including services operations, business development, systems integration, project management and marketing. Paul Beaumont, 41, has held the position of Vice President, Worldwide Sales and Marketing since April 1997. From February 1997 to April 1997, Mr. Beaumont was Managing Director, Europe Middle East and Africa. Between January 1996 and February 1997, Mr. Beaumont co-founded Business Progression International, a specialist sales and marketing consultancy business. Prior to January 1996, Mr. Beaumont had worked for Gandalf since October 1990 in the United Kingdom and Canada, in various positions, including Vice President, North American Sales and Marketing from October 1994 to December 1995 and Managing Director for Europe, from July 1994 to October 1994. Pamela Minelli, 34, has held the position of Vice President Marketing, since April 1997. From October 1996 to April 1997, Ms. Minelli was Vice President Worldwide Marketing, from April 1996 to October 1996, Vice President, Channels and Industry Marketing and from January 1996 to April 1996, Director, Industry Marketing. Between 1985 and 1996 Ms. Minelli was with IBM Corporation, in marketing and sales management positions. Frank van der Poll, 32, has been Managing Director, Northern Europe, since April 1996. From March 1994 to April 1996, Mr. van der Poll was Managing Director, Gandalf Nederland B.V. and from 1993 to February 1994, Sales Director, Gandalf Nederland B.V. From 1990 to 1993, Mr. van der Poll held positions with ICL Company in the Netherlands. ITEM 11. EXECUTIVE COMPENSATION Overview - -------- At March 31, 1997 the Company had 9 executive officers of whom two subsequently resigned. One additional executive officer was Chairman, President and CEO for a portion of the 1997 fiscal year but resigned prior to March 31, 1997. The aggregate cash compensation, including amounts paid under the Executive Incentive Plan paid to all executive officers as a group (10 persons, including one individual who served as President Chairman and CEO for a portion of the fiscal year ) by the Company and its subsidiaries for services rendered during the fiscal year ended March 31, 1997 was $1,474,073. In addition, during the fiscal year ended March 31, 1997, executive officers were given the use of automobiles leased by the Company at an aggregate incremental cost to the Company and its subsidiaries of $44,787. Liability Insurance - ------------------- The Company provides liability insurance for directors and officers of the Company and its subsidiaries. Effective November 1, 1996 the Company had directors' and officers' liability insurance with various carriers with policy limits of C$25 million per loss with an annual aggregate of C$25 million. The Company's annual deductible is C$100,000 except C$350,000 for claims originating in the United States, and no deductible to the individual. The premium for directors' and officers' liability insurance in respect of fiscal 1997 was C$447,767. The individual directors and officers of the Company and its subsidiaries are insured for losses arising from claims against them for certain of their acts, errors or omissions. The Company is insured against any loss arising out of any liability to indemnify a director or officer. Summary Compensation Table - -------------------------- The following table presents information provided in accordance with regulations under the Securities Act (Ontario) which requires the disclosure of compensation paid during each of the years in the three year period ended March 31, 1997, in respect of the individuals serving as executive officers at March 31, 1997, who during fiscal 1997 held the position of chief executive officer of the Company or who were the other four most highly compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Awards ----------------------------------- ----------- Securities Under Name and Fiscal Other Annual Options All Other Principal Positions Year Salary Bonus Compensation Granted Compensation ($) ($) (#) (a) (b) (c) (d) (e) (f) (g) - ------------------------------------------------------------------------------------------------------- R.D. Busto 1997 $178,554 (1) $41,009 $4,506 (2) 785,000 --- President and CEO 1996 $146,125 (3) --- --- 100,000 --- 1995 --- --- --- --- --- M. Chawner 1997 $115,984 $23,115 --- 50,000 --- VP Product Operations and 1996 $ 89,903 --- --- 50,000 --- Chief Technology Officer 1995 10,228 (4) --- --- 75,000 --- J. Lemieux 1997 $115,770 (5) $ 3,670 --- 10,000 --- VP North American Sales 1996 $ 99,760 (5) --- --- 50,000 --- 1995 --- --- --- --- --- W.R. MacDonald (6) 1997 $110,533 $19,113 --- 45,000 --- VP Finance and CFO 1996 $ 89,536 $18,164 --- 64,000 --- 1995 $ 84,443 --- --- 40,000 --- P. Merrifield (7) 1997 $174,526 (8) --- --- 15,000 --- Managing Director 1996 --- --- --- 30,000 --- Asia Pacific Group 1995 --- --- --- 15,000 --- Executive officers no longer serving with the Company as at March 31, 1997 - ----------------------------------------------------------------------------------------------------- T.A. Vassiliades (9) 1997 $216,667 --- --- 5,000 --- Chairman, President and 1996 $200,000 --- --- 800,000 --- CEO 1995 $178,498 (10) --- --- 600,000 --- (1) R.D. Busto was appointed President on October 4, 1996 and CEO on February 6, 1997. (2) Pursuant to a contract of employment between the Company and R.D. Busto entered into upon his appointment as President, the Company is required to make an equalization payment to Mr. Busto for the difference between Canadian and US income and payroll taxes. For calander 1996 this payment amounted to $4,506. The amount owing for calander 1997 has not yet been determined. (3) R.D. Busto was employed by the Company for seven months during fiscal 1996. (4) M. Chawner was employed by the Company for one month during fiscal 1995. (5) Includes sales commissions. (6) W.R. MacDonald resigned from the Company on May 8, 1997. (7) P. Merrifield resigned from the Company May 16, 1997. (8) P. Merrifield was appointed Managing Director of EMEA, April 11, 1996 and Managing Director of Asia Pacific Group February 2, 1997. (9) T.A. Vassiliades resigned as President on October 4, 1996 and resigned as Chairman and CEO and from the board of directors on February 6, 1997. (10) T.A. Vassiliades was appointed President and CEO on May 10, 1994.
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR % Market of Total Value of Options Securities Securities Granted to Underlying Under Employees in Option on Name and Options Financial Exercise or the Date Expiration Principal Positions Granted Year Base Price of Grant (1) Date (#) ($/Security) ($/Security) (a) (b) (c) (d) (e) (f) - ---------------------------------------------------------------------------------------------- R.D. Busto 785,000 40.2% 25,000 @ $14.12 $14.12 May 30, 2006 President and CEO 10,000 @ $ 4.20 $ 4.20 November 6, 2006 750,000 @ $ 3.90 $ 3.90 November 10, 2006 M. Chawner 50,000 2.5% 50,000 @ $ 4.08 (2) $ 4.08 October 5, 2006 VP Product Operations and Chief Technology Officer J. Lemieux 10,000 0.5% 10,000 @ $ 5.42 (2) $ 5.42 September 30, 2006 VP North American Sales W. R. MacDonald 45,000 2.3% 25,000 @ $ 4.08 (2) $ 4.08 October 5, 2006 (4) VP Finance and CFO 20,000 @ $ 2.89 (2) $ 2.89 January 29, 2007 (4) P. Merrifield 15,000 0.7% 15,000 @ $19.38 (3) $19.38 April 30, 2003 (5) Managing Director Asia Pacific Group Executive officers no longer serving with the Company as at March 31, 1997 - ---------------------------------------------------------------------------------------------- T.A. Vassiliades 5,000 0.3% 5,000 @ $ 5.69 $ 5.69 July 31, 2006 (6) Chairman, President and CEO (1) The market value of the common shares underlying the options was the closing market price on the Toronto Stock Exchange on the day prior to the date of the grant. (2) Options were granted in Canadian dollars. Translated at the year end exchange rate of C$1=$0.7224 (3) Options were granted in pounds sterling. Translated at the year end exchange rate of 1 pound sterling=$1.6452 (4) W.R. MacDonald resigned from the Company on May 8, 1997. The expiry date of these options was extended until September 13, 1997. (5) P. Merrifield resigned from the Company on May 16, 1997. These options expired upon the optionee ceasing to be employed by the Company. (6) T.A. Vassiliades resigned from the Company on February 6, 1997. The expiration date of these options was extended to April 30, 1997 and they expired at that time.
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION VALUES Value of Unexercised Unexercised in-the-Money Options Options at Fiscal at Fiscal Securities Aggregate Value of Year End (1)(#) Year End (2)($) Name and Acquired Securities Acquired Exercisable/ Excerciseable/ Principal Positions on Exercise on Exercise Unexerciseable Unexcerciseable (#) ($) (a) (b) (c) (d) (e) - ------------------------------------------------------------------------------------------------------------------ R.D. Busto --- --- 225,003 Exercisable --- President and CEO 659,997 Unexercisable --- M. Chawner --- --- 66,673 Exercisable --- VP Product Operations and 108,327 Unexercisable --- Chief Technology Officer J. Lemieux --- --- 20,004 Exercisable --- VP North American Sales 44,996 Unexercisable --- W. R. MacDonald (3) --- --- 119,006 Exercisable (4) $ 56,445 Exercisable (6) VP Finance and CFO 100,994 Unexercisable (5) $ 13,773 Unexercisable (6) P. Merrifield (7) --- --- 15,003 Exercisable (8) $ 2,179 Exercisable (10) Managing Director 39,997 Unexercisable (9) $ 2,177 Unexercisable (10) Asia Pacific Group Executive officers no longer serving with the Company as at March 31, 1997 - ------------------------------------------------------------------------------------------------------------------ T.A. Vassiliades 266,665 3,403,169 9,583 Exercisable --- Chairman, President 6,250 Unexercisable and CEO (1) Includes options granted prior to appointment as an executive officer. (2) The market value of common shares underlying the options on March 31, 1997 was $1.68 (3) W.R. MacDonald resigned from the Company May 8, 1997. Expiry date of options was extended until September 13, 1997. (4) Includes 42,338 options which were not in-the-money at March 31, 1997. (5) Includes 87,662 options which were not in-the-money at March 31, 1997. (6) Includes options granted in Canadian dollars. Translated at the year end exchange rate of C$1=0.7224. (7) P. Merrifield resigned from the Company May 16, 1997. The options expired upon the optionee ceasing to be employed by the Company. (8) Includes 10,002 options which were not in-the-money at March 31, 1997. (9) Includes 34,998 options which were not in-the-money at March 31, 1997. (10) Options were granted in pounds sterling. Translated at the year end exchange rate of 1 pound sterling =$1.6452.
Bonus and Stock Plans - --------------------- The Company has an executive incentive plan under which cash compensation is distributed to executive officers during the year. The plan is administered by the Human Resources Committee of the board of directors which determines the amount that may be paid to executive officers as a bonus during the year. The criteria used to determine the amount awarded reflects the position held by the executive officer in the Company, the level of responsibility, and the degree to which established objectives are achieved. Bonuses paid to the ten executive officers during the fiscal year ended March 31, 1997 totaled $142,463 During March 1997, in an effort to retain certain key executives the Company entered into a commitment to provide retention bonuses to the certain executives. The liability to pay the bonus arises on the completion of a transaction to sell or merge the Company. In order to be eligible, the employee must continue to be employed by the Company at the time of the transaction. The bonuses are as follows: R.D. Busto, President and Chief Executive Officer $375,000; P. Beaumont, Vice President Worldwide Sales and Marketing $180,000; M. Chawner, Vice President Product Operations and Chief Technology officer C$178,000; J. Cammarata, Vice President Network Services $100,000; P. Minelli, Vice President Marketing $85,000. The Company has five stock option plans as set out below, of which only one is an active plan. All option grants made during the fiscal year ended March 31, 1997 were from the 1993 Stock Option Plan for Key Employees and Directors (formerly the 1993 Stock Option Plan for Executives and Directors). 1983 Stock Option Plan for Key Employees 1984 Stock Option Plan for Directors 1988 Stock Option Plan for Key Employees 1988 Stock Option Plan for Directors 1993 Stock Option Plan for Key Employees and Directors As at March 31, 1997, 2,882,557 Common Shares were subject to options at prices ranging from C$0.90 to C$24.00 and expiring at various dates between April 2, 1997 and March 9, 2007. Of such options, 1,730,833 Common Shares were subject to options held by all directors and executive officers as a group. Compensation of Directors The by-laws of the Company authorize the Board to determine the amount of remuneration to be paid to directors for their services as directors. During the fiscal year ended March 31, 1997, directors who were not employees of the Company ("Outside Directors") resident in Canada received an annual retainer of C$7,500. Outside Directors resident in the United States received an annual retainer of $7,000. The annual retainer was paid in advance, in quarterly installments. In addition, each director received an attendance fee of $400 (in local currency) for meetings of shareholders, the Board of Directors and Committees of the Board of which he was a member. During the fiscal year ended March 31, 1997, the following amounts were paid or accrued to directors of the Company in their capacity as directors, including amounts paid for Committee participation or special assignments: John F. Gamba $12,200; Charles J. Gardner C$21,900; Donald M. Gleklen $20,200; Barclay C. Isherwood C$5,562; Robert E. Keith $12,478; Ian McLaren C$5,794; Albert Sinyor C$19,500, Mihkel E. Voore C$7,794; Johnny Wai-Nang Wong C$8,994. Thomas A. Vassiliades resigned as President on October 4, 1996 and as Chairman and Chief Executive Officer on February 6, 1997. Richard D. Busto was appointed President and Chief Operating Officer on October 4, 1996 and Chief Executive Officer on February 6, 1997. Mr. Gamba was appointed Chairman of the Company on February 6, 1997. Mr. Gardner, Mr. Isherwood, Mr. Keith, Mr. Sinyor and Mr. Wong resigned as directors during the 1997 fiscal year. Directors are entitled to reimbursement by the Company for all reasonable expenses incurred in attending such meetings. Directors who are employees receive no remuneration for serving as members of the Board or as members of Committees of the Board. No additional compensation is paid to the Chairs of the various Committees. On April 30, 1997, the Board approved a revised schedule of fees for Outside Directors. Outside Directors resident in Canada will now receive an annual retainer of C$14,600. Outside Directors resident in the United States will receive an annual retainer of $10,650. The annual retainer is paid in advance, in quarterly installments. In addition, each Canadian director receives an attendance fee for meetings of the shareholders, the Board of Directors and Committees of the Board of which he is a member, in the amount of C$540 for Canadian directors and $400 for U.S. directors, in respect of meetings held by teleconference, and C$1,010 for Canadian directors and $750 to U.S. directors, for meetings attended in person. Under the revised schedule of fees, the aggregate amount of fees to be paid to seven directors of the Company in fiscal 1998 are not expected to exceed the amounts paid to nine directors during fiscal 1997. Directors of the Company, are eligible to receive stock options under the 1993 Stock Option Plan for Key Employees and Directors (the "Option Plan"). Pursuant to the terms of the Option Plan, as amended, directors are awarded stock options on 10,000 common shares of the Company on the date of their initial election or appointment, and stock options on 5,000 common shares of the Company on each subsequent re-election, up to a maximum 50,000 unexercised stock options. On August 1, 1996, Mr. Isherwood, Mr. McLaren, Mr. Voore and Mr. Wong were elected directors of the Company and each received a stock option under the Option Plan to purchase 10,000 common shares at an exercise price of $5.69 per common share (the U.S. dollar equivalent of the Canadian market price on the date of grant). Stock options on 5,000 common shares of the Company, at the same price, were granted to Mr. Gamba, Mr. Gardner, Mr. Gleklen, Mr. Keith, Mr. Sinyor and Mr. Vassiliades on their re-election on August 1, 1996. Mr. Busto, Mr. Chawner and Mr. Fournier were appointed to the Board on November 6, 1996, April 2, 1997 and April 30, 1997, respectively, and on their appointment each received a stock option under the Option Plan to purchase 10,000 common shares at an exercise of price of $4.20, $1.80 and $1.03 respectively per common share (the U.S. dollar equivalent of the Canadian market price on the date of grant). Charles J. Gardner, a director during fiscal 1997, and Mr. Voore, a current director, are members of law firms that provide legal services to the Company. During the fiscal year ended March 31, 1997, Mr. Gardner's firm was paid C$38,207, and Mr. Voore's firm was paid C$222,612 in legal fees by the Company and its subsidiaries. On April 15, 1997, the Company entered into an agreement for the personal services of Mr. Gamba with respect to his position as Chairman. Pursuant to this agreement, Mr. Gamba's current honorarium is $48,000, which was effective April 1, 1997. In addition, Mr. Gamba received options under the Option Plan to purchase 50,000 common shares of the Company, exercisable at $1.42 per common share (the U.S. dollar equivalent of the Canadian market price on the date of grant). The compensation provided under this agreement is in lieu of the annual and meeting fees otherwise paid to directors of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of June 1, 1997 with respect to (1) all shareholders known to the Company to be beneficial owners of more than 5 percent of its outstanding Common Shares and (2) share ownership by each director and nominee for director and by each named executive officer still in the employ of the Company and by all executive officers and directors as a group.
Amount Percent Name Beneficially Owned (1) of Class (5) - ---------------------------------------------------------------------------------- Richard Busto 248,338 (2) - Paul Beaumont - Jim Cammarata 6,668 (3) Michael Chawner 76,306 (2) - Christopher A. Fournier nil John F. Gamba 5,400 (2) - Donald M. Gleklen 87,000 (2) - Joceline Lemieux 21,671 (3) - Ian McLaren - - Pamela Minelli 15,003 (3) Frank van der Poll 20,002 (3) Mihkel E. Voore - - All executive officers and directors as a group (12 persons) 480,388 (4) 1.1% FOOTNOTES (1) All shares are owned of record or beneficially and the sole investment and voting power is held by the person named, except as set forth below. (2) Includes options (currently exercisable or exercisable within 60 days) on the following shares: Richard Busto 233,338 Michael Chawner 75,006 John F. Gamba 2,000 Donald M. Gleklen 33,000 (3) Represents options (currently exercisable or exercisable within 60 days). (4) Includes options (currently exercisable or exercisable within 60 days) on 406,688 common shares. (5) Percentage ownership is calculated based upon total shares outstanding plus shares subject to options (currently exercisable or exercisable within 60 days) held by the individual named or the persons included in the relevant group. "-" indicates beneficial ownership of less than 1% of the class.
Statements contained in the table as to securities beneficially owned by directors, officers and certain shareholders or over which they exercise control or direction are, in each instance, based upon information obtained from such directors, executive officers and shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Richard D. Busto, President and Chief Executive Officer is related to one of the other executive officers of the Company, namely Pamela Minelli, Vice President Marketing, who is his wife. Mihkel E. Voore and Christopher A. Fournier, current directors, are each partners in law firms which provide legal services to the Company. Other than as described above, there are no material relationships and related transactions with directors and executive officers of the Company. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report. (1) Financial Statement Schedule. Auditors' Report on Schedule. Schedule II: Valuation and qualifying accounts. Note: Schedules other than the one above are omitted as not applicable, not required, or the information is included in the consolidated financial statements thereto. (2) Exhibits Exhibit No. Description ----------- ----------- *3.1 Articles of Incorporation of the Registrant and amendments thereto (filed as Exhibit 3.1 to Registration Statement No. 2-74405 on Form S-1). *3.2 Articles of Amendment to Articles of Incorporation of the Registrant effective December 14, 1983 and December 13, 1985 (filed as Exhibit 4.4 to Registration Statement No.33 14899 on Form S-2). *3.3 By-laws of the Registrant (filed as Exhibit 3.2 to the Form 10-K for the fiscal year ended July 31, 1985). *3.4 Amendment to By-laws of the Registrant (filed as Exhibit 4.5 to Registration Statement No. 33-14899 on Form S-2). 3.5 Amendment to By-laws of the Registrant. *4.1 Common Share certificate (filed as Exhibit 4.1 to the Form 10-K for the fiscal year ended March 31, 1993). *10.1 Lease dated 15th September, 1987 between The Glenview Corporation, the Company and Gandalf Data Limited whereby The Glenview Corporation leased the land and buildings known as 130 Colonnade Road South, Nepean to the Company and Gandalf Data Limited for an initial term of 10 years at an initial rent of C$1,125,000 per annum with four options to extend each being for five year periods (filed as Exhibit 10.2 to the Form 10-Q for the quarter ended April 30, 1988). *10.2 Lease dated 15 September, 1987 between The Glenview Corporation, the Company and Gandalf Data Limited whereby The Glenview Corporation leased the land and the buildings known as 100 Colonnade Road South, Nepean, to the Company and Gandalf Data Limited for an initial term of 10 years at an initial rent of C$402,000 per annum with four options to extend each being for five year periods (filed as Exhibit 10.3 to the Form 10-Q for the quarter ended April 30, 1988). *10.3 Agreement of Purchase and Sale dated October 14, 1988 between the Company and The Glenview Corporation of the land and building known as 40 Concourse Gate in Nepean, Ontario for C$3,000,000 subject to a lease-back to the Company for 20 years at a basic rent of C$420,000 per annum; and providing the Company with an exclusive option to repurchase the lands for C$3,500,000 within 10 years or C$4,000,000 after October 31, 1998 and before October 31, 2003 (filed as Exhibit 10.27 to the Form 10-K for the fiscal year ended July 31, 1989). *10.4 Lease dated September 13, 1988 between Cherry Hill Industrial Sites, Inc. and Gandalf Systems Corporation (filed as Exhibit 10.52 to the Form 10-K for the fiscal year ended July 31, 1991). *10.5 Consulting Agreement dated as of February 21, 1994 between the Company and Thomas A. Vassiliades (filed as Exhibit 10.17 to the Form 10-K for the fiscal year ended March 31, 1994). *10.6 Consulting Agreement dated as of March 1, 1995 between Thomas A. Vassiliades and the Company (filed as Exhibit 10.11 to the Form 10-Q for the quarter ended July 1, 1995). *10.7 Credit Agreement dated as of May 30, 1995 between Royal Bank of Canada and the Company (filed as Exhibit 10.12 to the Form 10-Q for the quarter ended July 1, 1995). *10.8 Credit Agreement dated as of May 30, 1995 between Royal Bank of Canada and Gandalf Canada Limited/Gandalf Technologies Inc. (filed as Exhibit 10.13 to the Form 10-Q for the quarter ended July 1, 1995). *10.9 Credit Agreement dated as of June 11, 1996 between Royal Bank of Canada and the Company. (Filed as Exhibit 10.11 to the Form 10-Q for the quarter ended June 29, 1996). *10.10 Amendment dated November 18, 1996 to Credit Agreement dated June 11, 1996 between Royal Bank of Canada and the Company. (Filed as Exhibit 10.12 to the Form 10-Q for the quarter ended December 28, 1996). 10.11 Amendment dated February 7, 1997 to the Credit Agreement dated June 11, 1996 between Royal Bank of Canada and the Company. 10.12 Amendment dated April 11, 1997 to Credit Agreement dated June 11, 1996 between Royal Bank of Canada and the Company. 10.13 Employment Agreement dated November 11, 1996 between Richard D. Busto and the Company. 10.14 Consulting Agreement dated April 15, 1997 between John G. Gamba and the Company. 10.15 Letter Agreement dated April 2, 1997 between Richard D. Busto and the Company. 21 List of subsidiaries. 23 Consent of KPMG Peat Marwick Thorne. - ---------------------------------- *Incorporated herein by reference. (b) The Company did not file any reports on Form 8-K during the fourth quarter of the fiscal year ended March 31, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GANDALF TECHNOLOGIES INC. By: s/RICHARD D. BUSTO ----------------------- (Richard D. Busto) President and Chief Executive Officer Dated: June 25, 1997 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard D. Busto his attorneys-in-fact, with full power of substitution, for him in any and all capacities, to sign any amendments to the Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission hereby ratifying and confirming all that said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signatures Title Date - ------------------ ----- -------- s/RICAHARD D. BUSTO - -------------------- (Richard D. Busto) President and June 25, 1997 Chief Executive Officer (Principal Executive Officer and Principal Financial and Accounting Officer) s/MICHAEL CHAWNER - ------------------ (Michael Chawner) Director June 25, 1997 s/CHRISTOPHER A. FOURNIER - ------------------------- (Christopher A. Fournier) Director June 25, 1997 s/JOHN F. GAMBA - -------------------- (John F. Gamba) Director and Chairman June 25, 1997 s/IAN MCLAREN - ------------------- (Ian McLaren) Director June 25, 1997 s/DONALD M. GLEKLEN - ----------------- (Donald M. Gleklen) Director June 25, 1997 s/MIHKEL E. VOORE - ---------------------- Director June 25, 1997 (Mihkel E. Voore) AUDITORS' REPORT ON SCHEDULE To the Board of Directors and Shareholders of Gandalf Technologies Inc. Under date of May 13, 1997, we reported on the consolidated balance sheets of Gandalf Technologies Inc. as at March 31, 1997 and 1996 and the consolidated statements of income, changes in financial position and shareholders' equity for each of the years in the three year period ended March 31, 1997 as contained in the 1997 annual report to shareholders on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in item 14 of Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. s/KPMG Chartered Accountants Ottawa, Canada May 13, 1997
Schedule II: Valuation and qualifying accounts and reserves. (Thousands of United States dollars) - ------------------------------------------------------------------------------- Col. A Col. B Col. C Col. D Col. E Additions --------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts Deductions at end Description of year expenses - describe(1) - describe of year - ------------------------------------------------------------------------------- Year ended March 31, 1997 - ----------- Reserve for bad debts deducted in the balance sheet from amounts receivable ...... $ 4,902 $ 1,130 $ (471) $ - $ 5,561 Year ended March 31, 1996 - ----------- Reserve for bad debts deducted in the balance sheet from amounts receivable ....... $ 4,430 $ 836 $ (364) $ - $ 4,902 (1) Relates to accounts receivable charged directly against reserve for bad debts.
EX-3.5 2 GANDALF TECHNOLOGIES INC. (the "Company") BY-LAW A3 BE IT ENACTED as a by-law of the Company as follows: THAT Section 7.10 of By-Law A of the Corporation be and the same is hereby amended to provide as follows: A quorum for the transaction of business at any meeting of shareholders shall be two (2) persons present or represented by proxy, holding not less than thirty percent (30%) of issued and outstanding common shares of the Company. Passed and adopted by the Shareholders of the Company at the Annual General Meeting held August 10, 1995. EX-10.11 3 L.J.(Jim) Blattman Senior Manager Technology Banking Group Royal Bank of Canada 90 Sparks Street Ottawa, Ontario K1P 5T6 Tel: 613-564-4898 Fax: 613-564-4527 jimblattman@royalbank.e-mail.com February 7, 1997 Private & Confidential - ---------------------- Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Attention: Mr. Walter R. MacDonald Vice-President, Finance & CFO ----------------------------- Dear Sirs: We refer to the letter agreement date June 11, 1996 detailing a Credit Facility made available to Gandalf Technologies Inc. by Royal Bank of Canada (the "Agreement"). All capitalized terms and references herein have the same meaning as those in the Agreement. We also refer to a letter agreement dated November 18, 1996 between the Bank and the Borrower which waived certain defaults of the Borrower pursuant to the Agreement and detailed related amendments to the Agreement (the "Amending Agreement"). The Bank and the Borrower hereby acknowledge the breach by the Borrower of the Agreement and the Amending Agreement in relation to Sections 23(a), 23(b) and 24(h) for the reporting period ended December 28, 1996. The Bank hereby waives its rights in respect of such breaches for the period December 28, 1996 to March 31, 1997. This waiver is granted only in respect of the aforementioned breaches and only for the aforementioned period and is subject to and conditional upon the following: i. The Borrower will provide to the bank, within 5 days hereof, a forecast of cash flow and Margin Requirement, prepared in a weekly format to March 31, 1997 inclusive. The forecast will be delivered in both consolidated and non-consolidated versions. ii. The Borrower will provide to the Bank, by Tuesday of each week commencing February 4, 1997, with evidence of compliance with the Margin Requirements together with supporting documentation as required. iii. The Borrower will provide to the Bank, within 15 calendar days of each month end, consolidated, rolling sales forecast for the current fiscal quarter with comparisons to the previous fiscal quarter. iv. The Borrower will provide to the Bank, within 5 days hereof, evidence satisfactory to the Bank of the engagement of an investment banking firm, chosen by the Borrower, together with a related schedule of activities targeted to provide the Borrower with a cash infusion of not less than CDN $20 million by no later than March 31, 1997 (the "Funding Arrangement"). If, in the Bank's sole opinion, there is material adverse change in the scope or timing of the Funding Arrangement, the Bank may, at its option, declare Borrowings in default, notwithstanding any other terms herein. v. The borrowing spreads detailed in Section 6 (2) (a), (b) and (d) of the Agreement are increased to 1.75% pending full compliance with the Agreement. vi. The Borrower will pay to the Bank a risk premium equal to 1% per annum, calculated and payable monthly in arrears, of the amount committed under Segment 2(a) of the Agreement, until the earlier of Tangible Net Worth exceeding US $40,000,000 or the company recording net after tax profit of $1,000,000 or more in any fiscal quarter. vii. Acceptance of similar terms and conditions (with the specific exception of (iv) above) by GDCL with respect to a credit facility extended to GDCL by the Bank's office in London, England. viii. Suspension of Segment (1) of the Agreement with respect to FEF Contracts. All other terms and conditions of the Agreement remain unchanged. Please confirm your acceptance by signing and returning the enclosed copy of this letter no later than February 19, 1997. Yours truly, S/J.L. (JIM) BLATTMAN - --------------------- J.L. (Jim) Blattman EX-10.12 4 L.J.(Jim) Blattman Senior Manager Technology Banking Group Royal Bank of Canada 90 Sparks Street Ottawa, Ontario K1P 5T6 Tel: 613-564-4898 Fax: 613-564-4527 jimblattman@royalbank.e-mail.com April 11, 1997 Private & Confidential - ---------------------- Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Attention: Mr. Walter R. MacDonald Vice-President, Finance & CFO ----------------------------- Dear Sirs: We refer to the letter agreement dated June 11, 1996 detailing a Credit Facility made available to Gandalf Technologies Inc. by Royal Bank of Canada (the "Agreement") and to a waiver letter dated November 6, 1996 in relation thereto (the "First Waiver") and a waiver letter dated February 7, 1997 (the "Second Waiver"). The Second Waiver having expired March 31, 1997, the Borrower is in default of the Agreement beginning April 1, 1997, which default continues to this day, and has advised the Bank of its inability to remedy the defaults in relation to Sections 23 (a), (b), (c) and 24 (h). While the bank does not waive its rights in respect of such defaults, it agrees to tolerate the defaults subject to the following conditions: 1. Section 2 paragraphs (1), (2c) and (2d) of the Agreement are hereby withdrawn. 2. Section 3 paragraph (1) of the Agreement is reduced to nil. 3. Section 3 paragraph (2a) of the Agreement is reduced to US $10,000,000. 4. The borrowing spreads detailed in Section 6 paragraphs (2a) and (2b) of the Agreement are increased to 1.75%. 5. The Borrower will provide to the Bank, by Tuesday of each week commencing immediately, with evidence of compliance with the Margin Requirement together with supporting documentation as required. 6. Acceptance of similar terms and conditions by GDCL as outlined above with respect to a credit facility extended to GDCL by the Bank's office in London, England, including a reduction in said facility to a maximum of (pound)2,500,000. 7. Payment of a risk premium of US $25,000 commencing April 1, 1997 and monthly thereafter. This tolerance is granted only for the aforementioned defaults and may be rescinded on ten days written notice or, in the event of an unauthorized breach of the Margin Requirements, without notice. All other terms and conditions of the Agreement remain unchanged. Please confirm your acceptance by signing and returning the enclosed copy of this letter no later that April 16, 1997. Yours truly, S/J.L. (JIM) BLATTMAN - --------------------- J.L. (Jim) Blattman EX-10.13 5 THIS AGREEMENT made as of the 11th day of November, 1996. BETWEEN: GANDALF TECHNOLOGIES INC., a corporation duly incorporated under the laws of Ontario having its head office at the City of Nepean, in the Province of Ontario (the "Employer") AND RICHARD BUSTO (the "Executive") WHEREAS: 1. The Employer is engaged in the development, manufacture and distribution of network infrastructure equipment and services. 2. The Employer and the Executive have agreed to enter into an employment relationship for their mutual benefit; THIS AGREEMENT witnesses that the parties have agreed that the terms and conditions of the relationship shall be as follows: 1. Duties The Employer appoints the Executive to undertake the duties and exercise the powers as President and Chief Operating Officer of the Employer as may be requested of the Executive by the Board of Directors of the Employer and in the other offices to which he may be appointed by the subsidiary companies of the Employer provided always that such other offices shall be in an officer capacity consistent with the Executive's position as Chief Operating Officer of the Employer. The Executive accepts the office, on the terms and conditions set forth in this agreement. The parties further agree that subject to the provisions of this agreement, the Executive will be appointed Chief Executive Officer of the Employer (and will cease to be Chief Operating Officer) at such time as Thomas Vassiliades ceases to be Chief Executive Officer of the Employer. 2. Term The appointment shall commence with effect from October 3, 1996 and shall continue for thirty-six months. 3. Compensation (1) The salary of the Executive for his services shall be at annual the rate of U.S. $200,000 while serving as Chief Operating Officer and U.S. $250,000 while serving as Chief Executive Officer ("Base Remuneration") which shall be paid in equal installments at the same intervals as other officers of the Employer are paid. (2) In addition to the Base Remuneration, the Executive may receive from the Employer a bonus payment equal to 50% of the Base Remuneration for his services for each year during the period of his employment. Payment of such bonus shall be based on the performance criteria agreed to by the Executive and the Employer. 4. Benefits (1) The Executive shall receive an annual automobile allowance of U.S. $7,500 which shall be paid in equal monthly installments. (2) It is understood and agreed that the Executive will incur expenses in connection with his duties under this agreement. The Employer will reimburse the Executive for any expenses provided that the Executive provides to the Employer an itemized written account and receipts acceptable to the Employer within thirty days after they have been incurred. (3) The Executive shall participate in all benefit plans which the Employer provides to its employees. (4) Recognizing the extra requirement for customer entertainment by the Executive, the Employer will provide for initiation and annual dues payments for one dinner or private business club. (5) The Employer shall reimburse the Executive for any Canadian income taxes and payroll taxes payable on his income from the Employer and on income not exceeding U.S. $50,000 per year from other sources that are in excess of actual U.S. income taxes and payroll taxes on such income excluding income taxes relating to gains realized by the Executive before, during or after the term of this agreement that relate to the options to purchase its Shares granted by the Employer to the Executive. The amount of any reimbursement payable to the Executive pursuant to this paragraph shall be calculated prior to applying any deduction in Canada or in the U.S. for contributions to a retirement savings plan such as a RRSP or 401K. (6) The Employer agrees that upon the execution of this agreement it will grant the Executive options, under the Employer's Stock Option Plan for Executives and Directors (the "Plan") to purchase 750,000 Common Shares of the Employer. The exercise price shall be the market price for Common Shares of the Employer at the close of business on the date hereof. The said options shall vest and be exercisable as follows: 116,666 on the date of grant; 116,667 on the first anniversary of the date of grant; 116,667 on the second anniversary of the date of grant; 75,000 upon being appointed Chief Executive Officer; 75,000 on the first anniversary of being appointed Chief Executive Officer; 125,000 on October 3, 1998; 125,000 on October 3, 1999. The Employer's obligation to grant options as set out above is subject to the Employer being able to comply with the requirements of the Toronto Stock Exchange including, without limiting the generality of the foregoing, the obtaining of shareholder approval to create a sufficient number of options. The Employer shall use reasonable efforts to insure that all of the options referred to above can be granted in compliance with the requirements of the Toronto Stock Exchange. Except as provided in this agreement all terms and conditions of the Plan shall apply to the options granted pursuant to this agreement. 5. Authority (1) The Executive shall have, subject always to the general or specific instructions and directions of the Board of Directors of the Employer, full power and authority to manage and direct the business and affairs of the Employer (except only the matters and duties as by law must be transacted or performed by the Board of Directors or by the shareholders of the Employer in general meeting), including power and authority to enter into contracts, engagements or commitments of every nature or kind in the name of and on behalf of the Employer and to engage and employ and to dismiss all managers and other employees and agents of the Employer. (2) The Executive shall conform to all lawful instructions and directions given to him by the Board of Directors of the Employer, and obey and carry out the by-laws of the Employer. 6. Service (1) The Executive, throughout the term of his appointment, shall devote his full time and attention to the business and affairs of the Employer and its subsidiaries and shall not, without the consent in writing of the Board of Directors of the Employer undertake any other business or occupation or become a director, officer, employee or agent of any other company, firm or individual. For greater certainty this paragraph is not meant to preclude the Executive from pursuing any other non-conflicting and non-competing business activities which are primarily passive in nature or from serving on other boards of directors so long as such directorships are disclosed fully to the Employer's Board of Directors. (2) The Executive shall well and faithfully serve the Employer and its subsidiaries and use his best efforts to promote the interests thereof and shall not disclose the private affairs or trade secrets of the Employer and its subsidiaries to any person other than the Directors and other employees of the Employer or for any purposes other than those of the Employer any information he may acquire in relation to the Employer's business. 7. Non-competition (1) The Executive agrees that, during employment pursuant to this agreement and for a period of one year following termination of employment, however caused, he will not hire or take away or cause to be hired or taken away any employee of the Employer or any former employee who was in the employ of the Employer during the six months preceding termination. (2) The Executive further undertakes and agrees with the Employer that the Executive will not, without written consent of the Employer, for a period of six months following termination of employment, however caused, either individually or in partnership or jointly or in connection with any person as principal, agent, employee, shareholder (other than a holding of shares listed in a Canadian or United States stock exchange that does not exceed 5% of the outstanding shares so listed) or in any other manner whatsoever, directly or indirectly, carry on or be engaged in or be concerned with or interested in or advise, lend money to, guarantee the debts or obligations of or permit its name or any part thereof to be used or employed by any person engaged in or concerned with or interested in, within Canada or the United States of America, any business carried on by the Employer. 8. Confidential Information (1) The Executive acknowledges that as the Chief Executive Officer and in any other position as the Executive may hold, the Executive will acquire information about certain matters and things which are confidential to the Employer, and which information is the exclusive property of the Employer, including: (a) product design and manufacturing information; (b) names and addresses, buying habits and preferences of present customers of the Employer, as well as prospective customers; (c) pricing and sales policies, techniques and concepts; and (d) other confidential information of a proprietary nature concerning the business operations or financing of the Employer. (2) The Executive acknowledges the information as referred to in paragraph 8(1) could be used to the detriment of the Employer. Accordingly, the Executive undertakes not to disclose same to any third party either during the term of his employment except as may be necessary in the proper discharge of his employment under this agreement, or after the termination of his employment, however caused, except with the written permission of an officer of the Employer. (3) The Executive acknowledges and agrees that without prejudice to any other rights of the Employer, in the event of his violation or attempted violation of any of the covenants contained in paragraphs 7 and 8 of this agreement, an injunction or any other like remedy shall be the only effective remedy to protect the Employer's rights and property as set out in paragraphs 7 and 8, and that an interim injunction may be granted immediately on the commencement of any suit. (4) The Executive understands and agrees that the Employer has a material interest in preserving the relationship it has developed with its customers against impairment by competitive activities of a former employee. Accordingly, the Executive agrees that the restrictions and covenants contained in paragraph 7 and those contained in paragraph 8 of this agreement and the Executive's agreement to it by his execution of this agreement, are of the essence to this agreement and constitute a material inducement to the Employer to enter into this agreement and to employ the Executive, and that the Employer would not enter into this agreement absent such inducement. Furthermore, a claim or cause of action by the Executive against the Employer whether predicated on this agreement or otherwise, shall not constitute a defense to the enforcement by the Employer of the covenants or restrictions provided, however, that if any provision shall be held to be illegal, invalid or unenforceable in any jurisdiction, the decision shall not affect any other covenant or provision of this agreement or the application of any other covenant or provision. 9. Vacation The Executive shall be entitled during each year to five weeks' paid vacation. U.S. statutory holidays may be substituted for Canadian statutory holidays should the Executive wish to do so. 10. Termination of Employment (1) The parties understand and agree that this agreement may be terminated in the following manner in the specified circumstances: (a) By the Employer, in its absolute discretion, without any notice or pay in lieu thereof, for cause. For the purposes of this agreement, cause includes the following: (i) any willful material breach of the provisions of this agreement; (ii) any conduct of the Executive which in the reasonable opinion of the Employer may bring himself or the Employer into disrepute; (iii) the commission of an act of bankruptcy by the Executive; (iv) conviction of the Executive of a criminal offense; (v) the inability of the Executive to perform the duties of his employment hereunder due to physical or emotional incapacity or illness, where such inability is expected to result in death or to be of long-continued and indefinite duration. The determination of disability shall be made by the Board of Directors of the Company in conjunction with physicians competent in the area to which such disability relates. Failure by the Employer to rely on the provision of this paragraph in any given instance or instances, shall not constitute a precedent or be deemed a waiver. (b) By the Employer in its absolute discretion and for any reason. Provided that if the employment of the Executive is terminated without cause, the Employer will pay the Executive as termination pay and in full settlement of any and all claims the Executive may have arising from such termination, an amount equal to one year's Base Remuneration as at the date of termination which shall be paid in two equal installments on the date of termination and 180 days after the date of termination. Provided further that the Employer shall give the Executive 90 days written notice if termination is for any reason other than forcause although the Employer may excuse the Executive from his duties during the 90 day period. (c) By the Executive upon giving the Employer 90 days notice in writing and subject to all applicable provisions of this agreement. (2) The parties understand and agree that the giving of notice or the payment of pay in lieu of notice by the Employer to the Executive on termination of the Executive's employment shall not prevent the Employer from alleging cause for the termination. (3) On termination of employment the Executive shall immediately resign all offices held (including directorships) in the company and save as provided in this agreement, the Executive shall not be entitled to receive any severance payment or compensation for loss of office or otherwise by reason of the resignation. If the Executive fails to resign as mentioned the Employer is irrevocably authorized to appoint some person in his name and on his behalf to sign any documents or do any things necessary or requisite to give effect to it. (4) On termination of employment the following shall apply with respect to stock options granted to the executive pursuant to paragraph 4.06 hereof: (a) if termination is by the Employer for cause, the Executive shall have the right, to and including the 90th day following his receipt of a Notice of Termination from the Employer, to exercise all options that have vested to that date; (b) if termination is by the Executive for any reason, the Executive shall have the right, to and including the date his employment terminates, to exercise all options that have vested to that date; (c) if termination is by the Employer without cause, all unexercised options held by the Executive and granted pursuant to this agreement shall vest and be exercisable to and including the 90th day following his receipt of notice of termination from the Employer. 11. Failure to appoint as Chief Executive Officer If the Employer does not appoint the Executive to the position of Chief Executive Officer as provided in paragraph 1 hereof the Executive may, at the Executive's option, terminate this Agreement and his employment by notice in writing to the Employer, which notice shall be given not later than 30 days after the date that Thomas Vassiliades ceases to be Chief Executive Officer of the Employer. If the Executive terminates his employment in accordance with the provisions of this paragraph, the Employer shall pay or grant him the same benefits that the Executive would have been entitled to as if he had been dismissed without cause with the exception that the option to purchase a total of 250,000 Shares of the Corporation that would have vested in two equal installments on October 3, 1998 and October 3, 1999 shall not be vested or be exercisable and shall be cancelled. The Executive acknowledges and agrees that the benefits to which he is entitled to under this paragraph are the sole and only benefits that he is entitled to arising out of the failure by the Employer to appoint the Executive to the position of Chief Executive Officer. 12. Employer's Property The Executive acknowledges that all items of any and every nature or kind created or used by the Executive pursuant to the Executive's employment under this agreement, or furnished by the Employer to the Executive, and all equipment, automobiles, credit cards, books, records, reports, files, manuals, literature, confidential information or other materials shall remain and be considered the exclusive property of the Employer at all times and shall be surrendered to the Employer, in good condition, promptly on the termination of the Executive's employment irrespective of the time, manner or cause of the termination. 13. Assignment of Rights The rights which accrue to the Employer under this agreement shall pass to its successors or assigns resulting from an amalgamation, merger or other reorganization to which the Employer is a party or resulting from the transfer of a substantial portion of the Employer's assets or undertaking to another legal entity. The rights of the Executive under this agreement are not assignable or transferable in any manner. 14. Notices (1) Any notice required or permitted to be given to the Executive shall be sufficiently given if delivered to the Executive personally or if mailed by registered mail to the Executive's address last known to the Employer. (2) Any notice required or permitted to be given to the Employer shall be sufficiently given if mailed by registered mail to the Employer's Head Office at its address last known to the Executive. 15. Severability In the event that any provision or part of this agreement shall be deemed void or invalid by a court of competent jurisdiction, the remaining provisions or parts shall be and remain in full force and effect. 16. Entire Agreement This contract constitutes the entire agreement between the parties with respect to the employment and appointment of the Executive by the Employer and any and all previous agreements, written or oral, express or implied, between the parties or on their behalf, including an employment contract dated September 12, 1995 between the Executive and Gandalf Systems Corporation relating to employment and appointment of the Executive by the Employer are terminated and cancelled and each of the parties releases and forever discharges the other of and from all manner of actions, causes of action, claims and demands whatsoever, under or in respect of any such previous agreement. 17. Modification of Agreement Any modification to this agreement must be in writing and signed by the parties or it shall have no effect and shall be void. 18. Headings The headings used in this agreement are for convenience only and are not to be construed in any way as additions to or limitations of the covenants and agreements contained in it. 19. Governing law This agreement shall be construed in accordance with the laws of the Province of Ontario. IN WITNESS WHEREOF this agreement has been executed by the parties to it, the day, month and year first written above. SIGNED, SEALED AND DELIVERED in the presence of: GANDALF TECHNOLOGIES INC. Per: s/CHARLES J. GARDNER - Chairman, Human Resources Committee - -------------------- Charles J. Gardner Per: s/DONALD M. GLEKLEN - ------------------- Donald M. Gleklen s/RICHARD D. BUSTO - ------------------ Richard D. Busto EX-10.14 6 THIS AGREEMENT made in triplicate this 15th day of April, 1997. BETWEEN: GANDALF TECHNOLOGIES INC. a corporation duly incorporated under the laws of the Ontario, having its head office at the City of Nepean, in the Province of Ontario (hereinafter referred to as the "Company") JOHN F. GAMBA 7905 Sandalfoot Drive, Potomac, Maryland, USA 20854 (hereinafter referred to as the "Chairman") WHEREAS GAMBA was appointed to the position of Chairman of the Board on February 6, 1997; AND WHEREAS the Company is desirous of retaining the services of GAMBA in the capacity of Chairman of the Board of the Company; AND WHEREAS GAMBA is desirous to provide his personal services in the capacity of Chairman of the Board of the Company. NOW THEREFORE THIS AGREEMENT WITNESSETH THAT in consideration of the premises and the mutual covenants and agreements hereinafter contained, the parties hereto mutually covenant and agree as follows: 1.0 Definitions - ---------------- (a) "Board" shall mean the board of directors of the Company. (b) "Business of the Company" shall mean and include the business of Gandalf Technologies Inc., and any of its subsidiary companies, (c) "Change of Control" shall mean the ownership by a person or entity or group of persons and/or entities acting in concert of (i) 50% or more of the issued and outstanding shares of the Company resulting from a purchase or acquisition of the voting securities of the Company; or (ii) all or substantially all of the Company's assets as a result of an amalgamation, consolidation, merger or acquisition. (d) "Company" shall mean Gandalf Technologies Inc., and its subsidiary companies. (e) "Confidential Information" shall mean all trade secrets, customer lists, sales and marketing information, customer account records, training and operations material and memoranda, personnel records, pricing information, and financial information concerning or relating to the business, accounts customers, employees and affairs of the Company, obtained by or furnished, disclosed or disseminated to GAMBA, or obtained, assembled or complied by GAMBA or under his supervision during the course of his services rendered to the Company, and all physical embodiments of the foregoing, all of which are hereby agreed to be the property of and confidential to the Company, but Confidential Information shall not include any of the foregoing to the extent the same is or becomes publicly known through no fault or breach of this Agreement by GAMBA. 2.0 Services - ------------- 2.01 Position - -------------- Subject to being re-elected to the Board by the shareholders of the Company, and subject to the will of the Board and the terms and conditions herein contained, GAMBA shall hold the position of Chairman of the Board of the Company and shall perform such duties and exercise such powers related thereto as may from time to time be assigned to him by the board of directors and the Company. 2.02 Term - ---------- The terms of this agreement shall commence with effect from April 1, 1997 and shall continue during GAMBA's tenure as Chairman of the Board, unless terminated in accordance with the provisions of this agreement. 2.03 Location - -------------- GAMBA shall perform his work and services for the Company in such places as the Board and the Company may require from time to time. 3.0 Compensation - ----------------- 3.01 Currency Transaction - -------------------------- All dollar amounts are expressed in US dollars. 3.02 Honorarium - ---------------- Subject to the provisions in paragraph 4 hereof, the Company shall pay to GAMBA an annual honorarium of FORTY EIGHT THOUSAND ($48,000) per annum during the term of this Agreement. The honorarium shall be paid in accordance with the normal payroll practices of the Company and shall be subject to such deductions and withholdings as are required by law. 3.03 GAMBA shall be granted options under the Company's Stock Option Plan for Key Employees and Directors (the "Plan") to purchase 50,000 common shares of the Company. The date of grant shall be April 15, 1997 and the options shall vest in one-fifth increments on each of the next five anniversary dates of the date of grant. The exercise price shall be the closing price of one common share of the Company's stock as quoted by The Toronto Stock Exchange on the day prior to the date of grant. The Company's obligation to grant the options as set out above is subject to the Company being able to comply with the requirements of The Toronto Stock Exchange including, without limiting the generality of the foregoing, the obtaining of shareholder approval to create a sufficient number of options. The Company shall use reasonable efforts to insure that all of the options referred to above can be granted in compliance with the requirements of The Toronto Stock Exchange. Except as provided in this agreement, all terms and conditions of the Plan shall apply to the options granted pursuant to this Agreement. 3.04 Expenses - -------------- GAMBA shall be entitled to be reimbursed in accordance with the policies of the Company, as adopted and amended from time to time, for all reasonable and necessary expenses incurred by him in connection with the services rendered hereunder; which shall include but not be limited to travel, lodging, meals and incidental expenses, provided GAMBA shall as a condition of such reimbursement, submit verification of the nature and amount of such expenses in accordance with the reimbursement policies from time to time adopted by the Company. 4.0 Covenants - -------------- 4.01 Service - ------------- GAMBA shall devote not less than twelve (12) full days of service in each fiscal quarter to the business of the Company and shall well and faithfully serve the Company and shall use his best efforts to promote the interests of the Company. 4.02 If GAMBA devotes more than forty -eight (48) full days of service in any fiscal year to the business of the Company, GAMBA shall be paid an additional TWO THOUSAND DOLLARS ($2,000) for each additional day of service in excess thereof. 4.03 If GAMBA does not devote forty-eight (48) full days of service to the Company in any fiscal year, the amount of ONE THOUSAND DOLLARS ($1,000) shall be deducted from the honorarium set out in paragraph 3.02 hereof, for each day's service, or part thereof, less than forty-eight (48). 4.04 For purposes of computing a full day of service under this paragraph, GAMBA may combine partial days or hours of service rendered to the Company within a fiscal year. 4.05 The compensation paid under this agreement shall be in lieu of the directors' annual retainer and meeting fees paid to outside directors. 4.06 GAMBA shall maintain a log of the days of service provided to the Company and shall submit such logs to the Chief Executive Officer of the Company on a monthly basis. 5.0 Change of Control - ---------------------- 5.01 In the event of a Change of Control, the following shall apply: (a) in respect of the honorarium paid to GAMBA as set out in paragraph 3.02, the difference, if any, between the honorarium stipulated in paragraph 3.02 and the amount or amounts paid to the date of the Change of Control, shall immediately become payable in lump sum; and (b) in respect of the options granted in paragraph 3.03, all unexercised options granted pursuant to this Agreement shall vest and be immediately exercisable. 6.0 Confidential Information - ----------------------------- 6.01 GAMBA acknowledges that as the Chairman he will acquire information about certain matters and things which are confidential to the Company, and which information is the exclusive property of the Company, including: (a) product design and manufacturing information; (b) names and addresses, buying habits and preferences of present customers of the Company, as well as prospective customers; (c) pricing and sales policies, techniques and concepts; and (d) other confidential information of a proprietary nature concerning the business operations or financing of the Company. 6.02 GAMBA acknowledges the information as referred to in paragraph 6.01 could be used to the detriment of the Company. Accordingly, GAMBA undertakes not to disclose same to any third party either during the term of this agreement except as may be necessary in the proper discharge of the services to be rendered under this agreement, or after he ceases to be Chairman except with the written permission of an officer of the Company. 6.03 GAMBA acknowledges and agrees that without prejudice to any other rights of the Company, in the event of his violation or attempted violation of any of the covenants contained in paragraph 6 of this agreement, an injunction or any other likely remedy shall be the only effective remedy to protect the Company's rights and property as set out in paragraph 6, and that an interim injunction may be granted immediately on the commencement of any suit. 6.04 GAMBA understands and agrees that the Company has a material interest in preserving the relationship it has developed with customers against impairment by competitive activities of a former executive. Accordingly, GAMBA agrees that the restrictions and covenants contained in paragraph 6 of this agreement, are of the essence to this agreement and constitute a material inducement to the Company to enter into this agreement and to retain the services of GAMBA, and that the Company would not enter this agreement absent such inducement. Furthermore, a claim or cause of action by GAMBA against the Company whether predicated on this agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants or restrictions provided, however, that if any provision shall be held to be illegal, invalid or unenforceable in any jurisdiction, the decision shall not affect any other covenant or provision of this agreement or the application of any other covenant or provision. 7.0 Termination of Agreement - ----------------------------- 7.01 The parties understand and agree that this agreement may be terminated in the following manner in the specified circumstances: (a) by the Company, in its absolute discretion, without any notice, and subject to the provision of section 5.01(a) of this Agreement, without compensation in lieu thereof upon GAMBA ceasing to be the Chairman of the Board; (b) by GAMBA, upon giving the Company ninety (90) days notice in writing and subject to all applicable provisions of this agreement, of his intention to resign his position as Chairman of the Board. Except as specifically provided in this agreement, GAMBA shall not be entitled to receive any payment or compensation for loss of office or otherwise by reason of the resignation. 8.0 General - ------------ 8.01 Sections and Headings - --------------------------- The division of this Agreement into Articles and Sections and the insertion of headings are for the convenience of reference only and shall not affect the constructions or interpretation of this Agreement. The terms "this Agreement", "hereof", "hereunder" and similar expressions refer to this Agreement and not to any particular Article, Section or other portion hereof and include any agreement or instrument supplemental or ancillary hereto. Unless something in the subject matter or context is inconsistent therewith, references herein to Articles and Sections are to Articles and Sections of this Agreement. 8.02 Number - ------------ In this Agreement words importing the singular number only shall include the plural and vice versa and words importing the masculine gender shall include the feminine and neuter genders and vice versa and words importing persons shall include individuals, partnerships, associations, trusts, unincorporated organizations and corporations and vice versa. 8.03 Benefit of Agreement - -------------------------- This Agreement shall enure to the benefit of and be binding upon the heirs, executors, administrators and legal personal representatives of GAMBA and the successors and permitted assigns of the Company respectively. This Agreement is a contract for personal services and may not be assigned by GAMBA. 8.04 Entire Agreement - ---------------------- This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and cancels and supersedes any prior understandings and agreement between the parties hereto with respect thereto. There are no representations, warranties, forms, conditions, undertakings, or collateral agreements, express, implied or statutory between the parties other than as expressly set forth in this Agreement. 8.05 Amendments and Waivers - ---------------------------- No amendment to this Agreement shall be valid or binding unless set forth in writing and duly executed by both of the parties hereto. No waiver of any breach of any provision of this Agreement shall be effective or binding unless made in writing and signed by the party purporting to give the same and, unless otherwise provided in the written waiver, shall be limited to the specific breach waived. 8.06 Severability - ------------------ If any provision of this Agreement is determined to be invalid or unenforceable in whole or in part, such invalidity or unenforceability shall attach only to such provision or part thereof and the remaining part of such provision and all other provisions hereof shall continue in full force and effect. 8.07 Notices - ------------- Any demand, notice or other communication (hereinafter in this Section 8.07 referred to as a "Communication") to be given in connection with this Agreement shall be given in writing and may be given by personal delivery or by registered mail addressed to the recipient as follows: The President & CEO c/o Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Tel: 613 - 274-6500 Fax: 613 - 274-6505 or such other address or individual as may be designated by notice by either party to the other. Any Communication given by personal delivery shall be conclusively deemed to have been given on the day of actual delivery thereof and, if made or given by registered mail, on the 3rd day, other than a Saturday, Sunday or statutory holiday in Ontario, following the deposit thereof in the mail. If the party giving any Communication knows or ought reasonably to know of any difficulties with the postal system which might affect the delivery of mail, any such Communication shall not be mailed but shall be given by personal delivery. 8.08 Governing Law - ------------------- This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario. For the purpose of all legal proceedings this Agreement shall be deemed to have been performed in the Province of Ontario and the courts of the Province of Ontario shall have safe and exclusive jurisdiction to entertain any action arising under this Agreement. 8.09 Interpretation of Agreement - --------------------------------- Any issues arising out of the application, interpretation or administration of this Agreement shall be determined by final and binding arbitration pursuant to the Arbitration Act, 1991 or successor legislation. The arbitrator shall be appointed in accordance with the Arbitration Act, 1991, and the arbitrator shall have the power to award compensation, or damages in case of breach of the terms of this Agreement. However, the arbitrator shall not have the power to order reinstatement nor shall he/she have the power to amend, or alter in any way the terms of this Agreement. 8.10 Copy of Agreement - ----------------------- GAMBA hereby acknowledges receipt of a copy of this Agreement duly signed by the Company. 8.11 Confidentiality of This Agreement - --------------------------------------- Save and except for such disclosure of this Agreement may be required to be made by the Company in order to comply with applicable securities laws and regulations, in further consideration of the mutual promises contained in this agreement, the GAMBA agrees that the terms of this Agreement shall remain and be kept confidential by him. IN WITNESS WHEREOF the parties have executed this Agreement. SIGNED AND DELIVERED In the presence of: s/JOHN F. GAMBA - --------------- John F. Gamba GANDALF TECHNOLOGIES INC. per: s/RICHARD D. BUSTO - ------------------ Richard D. Busto President and Chief Executive Officer EX-10.15 7 Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Canada Telephone: (613) 274-6500 Facsimile: (613) 274-6501 WEB URL: http://www.gandalf.ca PERSONAL & CONFIDENTIAL April 2, 1997 Richard D. Busto President and Chief Executive Officer, 130 Colonnade Road South, Nepean, Ontario K2E 7M4 Dear Dick, RE: RETENTION BONUS - -------------------- As you know, Gandalf has engaged the services of JP Morgan to identify and enter into discussion with potential strategic partners or investors. These discussions, if successful, could result in a transaction to sell or merge Gandalf with a third party. It is my belief that, in order to successfully complete that process, as well as to continue to operate the company in the interim, you are, and continue to be, an important and necessary member of the senior executive team. For that reason, I am extending to you an opportunity to become eligible to receive a retention bonus of up to $375,000 US, in exchange for your commitment to Gandalf. Upon a change of control, the 750,000 options which were granted to you on your appointment as President and CEO of the company will accelerate and become immediately exercisable. The exercise price of those options is $3.90 US. The actual amount of the bonus for which you are eligible will be the difference between the benefit derived upon the exercise of those options and $375,000 US. To be eligible to receive the retention bonus, you must continue to be employed by Gandalf at the time of the change of control of the company and you must continue to meet or exceed all requirements of your job. In order for the company to comply with its reporting requirements under applicable securities legislation, it may become necessary for the company to disclose this retention bonus arrangement in its public filings. Until such disclosure, if required, is made by the company, it is also a prerequisite that you keep the arrangement that is being offered to you, and its terms, strictly confidential and that you not reveal same to anyone except family members, your legal and financial advisors. Specifically, you are not to communicate or discuss the retention bonus opportunity, directly or indirectly, with employees or former employees of Gandalf. Failure to comply with each of these requirements will result in disqualification from eligibility for the retention bonus. The retention bonus is not earned until the conditions set out above have been satisfied. When earned, the retention bonus will be paid in lump sum within two months of the date of change of control. If a transaction to sell or merge Gandalf with a third party is not completed within one year of the date of this letter, the retention bonus opportunity will automatically terminate. Please indicate your acknowledgment of this opportunity and agreement to its terms by signing the enclosed duplicate copy of this letter, and returning it to me at your earliest opportunity. I look forward to continuing to work with you. s/JOHN F. GAMBA - -------------------- John F. Gamba Chairman of the Board Acknowledge and Agreed s/RICHARD D. BUSTO - ------------------ Richard D. Busto EX-21 8 LIST OF SUBSIDIARIES Jurisdiction of Name Incorporation - ------------------------------------- ----------------- Gandalf Australia Pty. Limited Australia Unit 17 390-392 Eastern Valley Way East Roseville, NSW 2083 Australia Gandalf Canada Ltd. Ontario, Canada 130 Colonnade Road South Nepean, Ontario Canada K2E 7M4 Gandalf Digital Communications Limited United Kingdom Gandalf House Doncastle Road Bracknell, Berkshire, England RG12 8PE Gandalf Systems Corporation Delaware, U.S.A. 501 Delran Parkway Delran, New Jersey 08075-1249 USA Gandalf International Limited United Kingdom Doncastle Road Bracknell, Berkshire, England RG12 8PE Gandalf Nederland B.V. Holland Kruisweg 609 2132 NA Hoofddorp Amsterdam, Netherlands Gandalf S.A. France 16, Burospace route de Gisy 91572 Bievres Cedex France Infotron Puerto Rico, Inc. Delaware, United States 501 Delran Parkway Delran, New Jersey 08075-1249 USA T3-Inc. Delaware, United States 501 Delran Parkway Delran, New Jersey 08075-1249 USA Infotron Systems Foreign Virgin Islands Sales Corporation 5 Kronprindsens Gade P.O. Box 8560, Charlotte Amalie St Thomas, Virgin Islands 00801-8080 Infotron Systems Worldwide Inc. Delaware, United States 103 Springer Building 3411 Silver Side Road Wilmington, Delaware 19810 USA Infotron Systems Italia, S.r.l. Italy Via Del Grana, Di Nervi, 42 00142 Roma, Italy EX-23 9 CONSENT OF CHARTERED ACCOUNTANTS To the Board of Directors of Gandalf Technologies Inc. We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 2-87578, No. 2-93961, No.33-31498, No. 33-31499, No. 33-50017, No. 03-55221, No. 033-58691, No. 033-64375, No. 333-00783, No. 333-02677); on FormS-4 (No. 33-41556); on Form S-3 (No. 33-42077) and in the related prospectuses therein of our reports dated May 13, 1997 on the consolidated financial statements and schedule of Gandalf Technologies Inc., which reports are included in this annual report on Form 10-K. S/KPMG - -------------------------- Chartered Accountants Ottawa, Ontario May 13, 1997 -----END PRIVACY-ENHANCED MESSAGE-----