-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Zl4TZD2ZiUpPDDvoIbDU6gXJ+udbnawNQoooN+NEHjhjAqg1W8BOIeWsGDLgtR2z lI/grBUZTwnPPl4TGzc5Wg== 0000355876-95-000006.txt : 199506300000355876-95-000006.hdr.sgml : 19950630 ACCESSION NUMBER: 0000355876-95-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950303 FILED AS OF DATE: 19950629 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GANDALF TECHNOLOGIES INC CENTRAL INDEX KEY: 0000355876 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] 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: 95550923 BUSINESS ADDRESS: STREET 1: 130 COLONNADE RD S CITY: NEPEAN ONTARIO CANAD STATE: A6 BUSINESS PHONE: 6137236500 10-K 1 FORM 10-K FOR YEAR ENDED MARCH 31, 1995 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 [FEE REQUIRED] For the fiscal year ended March 31, 1995 -------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF - ----- THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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) 723-6500 - ---------------------- 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 June 1, 1995 was approximately $202,073,190. This amount excludes 4,648,227 common shares held by all executive officers, directors, and shareholders holding over five percent of the outstanding common shares on that date, as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of June 1, 1995, 38,681,607 common shares, without nominal or par value, were issued and outstanding. All dollar amounts in the Annual Report on Form 10-K are in United States dollars, except where indicated. C$ refers to Canadian dollars. DOCUMENTS INCORPORATED BY REFERENCE PART I None PART II Item 5 Market for Registrant's Common Stock and Related Security Holder Matters. Page 31 of the Annual Report to Shareholders for the fiscal year ended March 31, 1995 (Exhibit 13). Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. Pages 26 to 30 of the Annual Report to Shareholders for the fiscal year ended March 31, 1995 (Exhibit 13). Item 8 Financial Statements and Supplementary Data. Pages 12 to 25 of the Annual Report to Shareholders for the fiscal year ended March 31, 1995 (Exhibit 13). PART III None [Cover page 2 of 2 pages] TABLE OF CONTENTS Page PART I Item 1. Description of Business 4 Industry Background 4 The Company and Corporate Structure 4 Products and Strategy 4 Sales and Marketing 6 Field Service and Customer Support 6 Research and Development 6 Manufacturing 7 Customers 7 Competition 7 Backlog 8 Proprietary Rights 8 Employees 8 Environmental Affairs 8 Item 2. Properties 9 Item 3. Legal Proceedings 9 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 10 Item 6. Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 8. Financial Statements and Supplementary Data 11 Item 9. Disagreements on Accounting and Financial Disclosure 11 PART III Item 10. Directors and Executive Officers 11 Item 11. Executive Compensation 13 Item 12. Security Ownership of Certain Beneficial Owners and Management 18 Item 13. Certain Relationships and Related Transactions 19 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 19 Signatures 22 PART 1 ITEM 1. DESCRIPTION OF BUSINESS Industry Background - ------------------- Current economic, technical and social changes have influenced the way to obtain access to information. New client/server applications, government environmental regulations, an increasingly competitive business climate and a changing social environment have resulted in a growing number of teleworkers, business travelers and remote office users. Corporations are faced with many new challenges as their networks grow, among them the need for increased performance, greater flexibility and cost-effective network management. New applications, emerging multimedia technologies and a growing number of users impose great bandwidth demands. This combination of events is placing increasing demands on the enterprise network of the '90s -- from the need to provide location independent access for a growing number of users to the need for higher transmission speeds and capabilities to support the new generation of client/server, image processing and multimedia applications. The Company and Corporate Structure - ----------------------------------- Gandalf Technologies Inc. was incorporated on April 29, 1971 as Gandalf Data Communications Limited, by articles of incorporation under the laws of the Province of Ontario, Canada. The terms "Gandalf" and the "Company" herein refer to Gandalf Technologies Inc. and its subsidiaries. The registered office of the Company is 130 Colonnade Road South, Nepean, Ontario, Canada K2E 7M4, telephone (613) 723-6500. On August 2, 1991 the Company acquired Infotron Systems Corporation ("Infotron"), an American company incorporated in 1968 and merged its two U.S. subsidiaries under the name Gandalf Systems Corporation. In addition, the Company has subsidiaries in the United Kingdom, the Netherlands, France and an International subsidiary whose head office is located in the United Kingdom. For information regarding Gandalf's foreign and domestic operations, see note 17 to the Company's financial statements incorporated by reference herein. Products and Strategy - --------------------- Gandalf's software and hardware products permit users to communicate between information sources originating from a variety of equipment supplied by different vendors, over distances ranging from inter-office local area networks to intercontinental wide area networks. The Company's products may be sold separately as discrete network components or they may be configured, integrated and serviced by the Company or its partners as value-added networks designed to interconnect multi-vendor computer, voice and video systems in geographically dispersed areas. The Company's vision is to provide people with access to information through technology. More specifically, the Company's vision is to provide the most effective, efficient, user friendly, advanced products and services that provide its customers with needed and secure access to their information, while preserving and enhancing their investment, using the best technology. The Company's products feature modular designs which provide a high degree of flexibility in terms of features, performance and price, but which are tightly coupled within the Company's customer value architecture to ensure seamless integration and security. The Company has core competencies in ISDN, frame relay, compression, switching, bandwidth on demand and cell relay. In order to meet the need to grow and increase the traffic handling capacity of networks, the Company has developed a product architecture and strategy that protects and enhances a customer's investment in network infrastructure equipment while enabling the network to grow and evolve, leveraging public wide area networks and utilizing new high speed LAN switching and ATM technologies. The Company's product strategy spans four lines of business. These are access products, backbone products, concentration products and services, encompassing remote, on-demand internetworking access, LAN and WAN access, concentration and switching, private networking and network management software, all supported and complemented by the Company's service offerings. Access Products The increase in LAN traffic, coupled with the rapidly increasing variety of telephone carrier service offerings, means that in addition to optimizing their private networks, customers are also managing a selection of telephone carrier service offerings chosen for their cost effectiveness. The user selects the services which provide the functionality needed, at the lowest cost. The Company's access devices are designed to connect remote LAN devices to corporate or public information sources over a variety of switched digital, bandwidth-on-demand carrier facilities. The Company's family of XpressConnect TM internetworking access devices sit at the edge of the network, providing teleworkers in a regional office, on the road or in their home, access to information, giving them the same look and feel as those users directly connected to the local LAN. XpressConnect products operate over a number of different carrier services such as ISDN, switched 56K, and frame relay and can support future functionality through software upgrades that can be downline loaded and managed from a centralized location. Backbone Products The Company's backbone products transport and switch at high rates, information collected by one or more concentrators on a campus or over a wide area between major sites, forming the main integrated communications path of a company. Xpressway Virtual LAN Switch (VLS TM) resolves bandwidth congestion and traffic bottlenecks due to the growth of bandwidth intensive PC applications, without requiring additional investment in infrastructure. The Company's WAN 2000 family of backbone products are designed to concentrate and integrate multimedia traffic (including voice, fax, low-speed and high-speed data, LAN and video) over leased facilities such as T1. The product incorporates fast-packet technologies such as cell and frame relay and combines voice with low speed data and high speed LAN traffic on a single platform that delivers data and voice compression and dynamic bandwidth utilization. Concentration Products The Company's concentration products collect, concentrate and switch information from remote sites over a variety of carrier facilities (ISDN basic and primary rate, switched 56K, leased lines) and feed the information to a campus or building backbone of an enterprise network. Xpressway TM is a chassis-based concentration and internetworking system that is designed to address the high end of the remote access market where high port density, fault tolerance and robustness are mandatory characteristics. Xpressway provides the network manager with centralized network monitoring, management control, including eight levels of security and the ability to downline load software to the XpressConnect family of products. XpressStack TM is a new family of stackable, concentration and switching devices that deliver much of the performance of the Xpressway but on platforms which are more granular in terms of network size and functionality and which, as a result, are more easily installed and maintained. XpressStack is designed to provide performance and ease of use for medium density applications. Services The Company provides expertise in the design, implementation and management of customer networks. The Company provides value added services, customized to meet specific customer needs, which are designed to increase productivity, reduce costs or add value through the design and implementation of well managed networks. The Company provides an end-to-end network management system with Gandalf Passport TM, which combines the management of both local and wide area networks on a common, standards based platform. Sales and Marketing - ------------------- Gandalf supplies its customers in more than 75 countries with telecommunication networking products and services that provide the infrastructure necessary to enable people to communicate and easily access information regardless of the geography and technology separating the people and the desired information. Gandalf markets its products and services through both direct and indirect channels through wholly-owned subsidiaries in the United States, Canada, United Kingdom, the Netherlands and France. The Company's International subsidiary sells through local distributors worldwide. Field Service and Customer Support - ---------------------------------- The Company provides, through its field service staff, both technical support relating to the successful installation and interconnection of the Company's products with those of other manufacturers, and ongoing field service and maintenance support. The Company's field service and technical support staff consists of over 180 employees in the United Sates, Canada, the United Kingdom and continental Europe. The Company believes that providing network services and support to its installed base of customers is fundamental to growth. The Company, through its extensive field service organization, sells support services under contract to many of its customers. The Company believes that the customer support contracts generated through its field service organization provide the opportunity for sales of additional Gandalf products and enhance referrals for the sale of products to new customers. Research and Development - ------------------------ The Company believes that success in the rapidly changing communications element 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. The Company spent $20.5 million in product development in fiscal 1993, $15.0 million in fiscal 1994 and $10.1 million in fiscal 1995. Manufacturing - ------------- The Company's manufacturing operations consist of materials planning and procurement, assembling and testing electronic assemblies. In addition, enclosures and racks are built complete with electrical power apparatus, interconnect wiring and cabling. Finally, electronic assemblies are integrated with the enclosures or racks to engineering specifications and customer configurations and are final tested before shipment to customers. All manufacturing process procedures are managed under the ISO 9002 quality management program. This program provides a basis for the Company's ongoing quality improvement and is recognized as the mark of a world class manufacturer. In some cases, the Company subcontracts the entire manufacturing of a product to a single supplier. Also, a single source supplier is 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. If necessary, these items could be sourced from other vendors. Customers - --------- Gandalf's target customers are end users of data processing equipment and include major corporations, institutions, carriers and governments in all of its major geographic markets. Gandalf sells to end user customers either directly or via indirect sales channels which include distributors, value added resellers, systems integrators and original equipment manufacturers. 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 have a material adverse effect on the Company. During the three-year period ended March 31, 1995, no customer accounted for 10 percent or more of the Company's revenues in any year. Competition - ----------- Competition in the telecommunications market is intense and marked by advances in technology which frequently result in the introduction of products with improved performance characteristics. Failure to keep pace with such advances could negatively affect the Company's competitive position and prospects for growth. The Company competes on the basis of price, product quality and communications reliability, various supporting services, product development capabilities and availability. The Company believes it is competitive in each of these respects. The Company's competitors vary depending upon the sector of the network being identified. Generally, these include 3Com Corporation, Cisco Systems Inc., Bay Networks Inc., Ascend Communications, Inc., Newbridge Networks Corp. and Combinet. These and other competitors may have greater financial, technological, manufacturing, marketing and personnel resources than the Company. Gandalf believes its worldwide coverage, its extensive customer base, its experienced sales force and its global technical support will allow it to compete successfully in its chosen markets. Backlog - ------- The Company attempts to manufacture inventory in quantities sufficient to provide timely delivery of its products. Because of this short delivery cycle, backlog is not considered to be a meaningful indication of future revenues. Proprietary Rights - ------------------ The Company believes that while proprietary information represents a valuable asset of the Company, it is secondary to the ability of the Company to continue to develop and implement innovative engineering and design initiatives. The Company protects its proprietary information through the worldwide use of trademarks and patents, and has accumulated goodwill in respect of its name, GANDALF, which is a registered trademark internationally. The Company has received a patent for its compression technology, which in the view of the Company, represents a significant competitive advantage. Proprietary information is disclosed to distributors, customers and potential customers only under confidentiality agreements. The Company's proprietary software is provided under license to its customers. Employees - --------- On March 31, 1995 the Company had 897 employees worldwide. Of these, 202 were engaged in manufacturing, 121 were engaged in engineering development, 440 were sales, marketing and customer support personnel and 134 held general administrative positions. On March 31, 1994 the Company had 1,127 employees and on March 31, 1993 the company had 1,366 employees. Restructuring actions taken in the fourth quarter of fiscal 1994 and completed in the first quarter of fiscal 1995 led to the reduction in the number of employees from fiscal 1994 to fiscal 1995. Fifty percent of the Company's employees are located in Canada, 25% in the United Kingdom and 13% in the United States. The remainder are employed in France, the Netherlands and in the International operations. While the attrition rate in the Company is within acceptable norms, the Company has experienced the loss of some employees with valuable skills. The Company continues to recruit and hire qualified and skilled employees. The Company believes that its relationship with its employees is satisfactory. Environmental Affairs - --------------------- In compliance with the State of New Jersey's Environmental Cleanup Responsibility Act, the Company is presently engaged in the remediation of certain nonhazardous materials at its former engineering, administration and distribution facility in Cherry Hill, New Jersey. The Company maintains a letter of credit in the amount of $500,000 with the Royal Bank of Canada to secure its clean-up obligations under New Jersey law. In the opinion of management, the Company's compliance with New Jersey environmental laws and regulations are not expected to have a material effect on future expenditures or earnings. ITEM 2. PROPERTIES The Company's headquarters are located in Nepean, Ontario, Canada, near Ottawa. The Company operates from three leased premises at this location. A research and administration facility (97,000 square feet) is located on land adjacent to the Company's manufacturing facility (58,000 square feet) in Nepean. Both facilities were sold to the builder upon completion in 1987 and leased back to the Company for a 10- year term with four options to renew of five years each. The Company also occupies an 18,250 square foot printed circuit board manufacturing facility on land adjacent to the Company's other buildings in Nepean. In 1988, this building was sold to the builder and leased back to the Company for a 20-year term. The Company's principal property in the United States is located in Delran, New Jersey. The 27,000 square foot facility is leased for a three year period expiring in 1997 and is occupied by certain engineering, service and sales and marketing staff of the Company. The Company owns a facility in Warrington, Cheshire, England (37,200 square feet) used as a distribution centre and offices. It is management's belief that the existing principal properties described above are adequate for the Company's current needs. ITEM 3. LEGAL PROCEEDINGS In April 1993, the Company was joined by way of third party claim in an action started in the Ontario Court (General Division) between Deskin Inc. and a Quebec numbered company as plaintiffs and Digital Equipment of Canada Limited, Distribution Architects International Inc. and D.A. Distribution Software Systems Ltd. as defendants. The third party claim was brought by the defendants D.A. Distribution Software Systems Ltd. and Distribution Architects International Inc. for contribution and indemnity in respect of the main claim for damages for breach of contract and negligence relating to the design, supply and installation of a computer system. The main action claims specified damages totalling C$2.6 million and damages for lost sales and profits of C$20.0 million. Each of the defendants has defended the claim. The third party claim alleges that the Company improperly selected network hardware and improperly designed the network for Deskin. Deskin has not sued the Company. The Company had limited involvement in the project and has defended the third party claim on the grounds that Deskin's complaints related to malfunctions in equipment or deficiencies in software unrelated to equipment or software supplied by the Company. Pleadings in the action were completed in August 1993. The plaintiff has taken no further steps in the action. Based upon the information received by the Company and the present state of proceedings, counsel believes the Company has a good defense to the third party claim on the merits and that the Company's liability, if any, is for a nominal portion of the amount claimed in the main action. 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 For information relating to the registrant's common stock and related shareholder matters, reference is made to page 31 of the 1995 Annual Report to Shareholders, filed as Exhibit 13 hereto, which information is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA
Thousands of U.S. dollars except per share amounts 1995*** 1994*** 1993*** 1992** 1991* 1990* - ---------------------------------------------------------------------------------------------------- Income Statement Data: Revenues $120,511 $131,323 $160,900 $119,181 $129,013 $140,366 Gross margin 44.5% 41.7% 43.7% 46.5% 49.4% 48.5% Selling, general and administration 40,661 54,772 62,807 45,778 54,223 56,662 Research and development 10,197 14,316 17,279 13,679 13,788 13,702 Net income (loss) 1,406 (47,238) (19,507) (9,912) (5,869) (9,190) Basic earnings (loss) per share 0.05 (2.27) (1.24) (0.63) (0.48) (0.75) - ---------------------------------------------------------------------------------------------------- Balance Sheet Data: Total assets 81,508 89,186 129,603 141,408 102,999 110,754 Fixed assets 18,619 20,214 30,768 38,416 22,761 27,074 Working capital 21,057 13,978 25,596 19,276 22,050 32,673 Current ratio 1.6 1.3 1.5 1.3 1.6 1.9 Cash and cash equivalents net of current bank debt 5,963 (5,239) (688) (17,918) (9,030) (3,196) Long-term debt 1,877 2,020 22,980 23,729 5,548 5,330 Convertible debentures 10,051 21,681 23,862 - - - Shareholders' equity 34,442 19,109 34,308 55,491 59,363 67,425 *** Year ended March 31 ** For eight months only, ended March 31, 1992 * Year ended July 31
BUSINESS EXPERIENCE DIRECTOR DURING THE PAST FIVE YEARS, NAME SINCE DIRECTORSHIPS AND OTHER INFORMATION - ----------------------------------------------------------------------------------------------------- Desmond Cunningham, 64 1971 Past Chairman and co-founder of the Company. Director of Gandalf Canada Ltd., Gandalf Systems Corporation, Gandalf Digital Communications Limited, Gandalf International Limited (subsidiaries of the Company). Alexander Curran, 68 1987 President, Alex Curran Consultant Inc. (management consultant) since December 1988. John Gamba (Nominee) Senior Vice President, Corporate Resources and Performance Assurance of Bell Atlantic Corporation since May 1994. Group President, Network Technologies and Systems of Bell Atlantic Network Services, Inc. from March 1992 to May 1994. Executive Vice President Bell Atlantic Network Services from April 1990 to March 1992. Prior to 1990 held senior management positions in finance, operations, labor relations, external affairs and customer services areas of Bell Atlantic Corporation and its related companies. Charles J. Gardner, Q.C., 59 1981 Partner of Goldberg, Shinder, Gardner & Kronick (Barristers & Solicitors)since 1965. Donald M. Gleklen, 58 1991 President, Jocard Financial Services, Inc. since October 1994 (merchant banking). Special Counsel to Robert J. Brobyn & Associates, Attorneys at Law from February 1994 to October 1994. Senior vice president of MEDIQ Incorporated (health care services company) from September 1968 to February 1994. Robert E. Keith, 53 1992 President, Technology Leaders Management Inc. (high technology venture capitalists) since December 1991 and Managing Director of Radnor Venture Partners, LP (high technology venture capitalists) since July 1989. A. Graham Sadler, 70 1994 President, Moreline Inc. (suppliers of electronic and mechanical components and parts) since 1991. Executive with Northern Telecom (manufacturers of telecommunications products) from 1962 to 1991 and President of Northern Telecom Electronics (a subsidiary of Northern Telecom) from 1987 to 1991. Albert Sinyor, 48 (Nominee) President, Amico Corporation (medical equipment manufacturing) since 1993. From 1988 to 1993, General Manager, Canadian Operations of Bell Atlantic Business Systems Services. Prior to 1988 held senior management positions in various companies. Thomas A. Vassiliades, 59 1993 Chairman of the Company since May 1995 and president and chief executive officer of the Company since May 1994. President and chief executive officer of Avatar Management Services, Inc. (management and consulting services) since June 1993. President and chief executive officer of Bell Atlantic Business Systems Inc. (international independent computer and network services) from February 1990 to June 1993. From August 1988 to February 1990, chief executive officer of Bell Atlantic Customer Services Inc. (independent computer services).
There are no family relationships between directors or executive officers of the Company. 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, other than Mr. Vassiliades, are as follows: Gatone A. Daniello, 50, has been Vice President Product Operations and Chief Technology Officer since June 1993. From March 1991 to May 1993, he was founder and president of Network Architects Inc., (a software company specializing in the development of custom business applications). From May 1982 to March 1991, he was president and chief executive officer of Datamedia Corp., (a specialty microcomputer manufacturer). Michael Chawner, 48, joined the Company in February 1995 as Vice President of Strategy and Business Development. From 1988 to February 1995, Mr. Chawner was with Newbridge Networks Corporation and held positions as Vice President of Research and Development and Vice President of Network Engineering. Mr. Chawner has over 20 years of combined experience in the industry with Bell-Northern Research Ltd., Mitel Corporation, Leigh Instruments and British Telecom in the United Kingdom. Walter R. MacDonald, 33, has been Vice President of Finance and Chief Financial Officer since September 1993. From June 1992 to September 1993, he was Controller; from June 1991 to June 1992 he was Treasurer and from January 1990 to June 1991 he was Assistant Treasurer of the Company. Paul Beaumont, 39, has been Vice President Sales, Services and Marketing for the Americas since April 1995. Previously, he was Vice President North American Sales and Marketing, from October 1994 to March 1995, and from April 1994 to October 1994 was the Managing Director, Europe for Gandalf Digital Communications Limited. Prior to April 1994 Mr. Beaumont was with the Company's sales organization since October 1990. John McGoldrick, 42, has been Managing Director of Sales, Services and Marketing in Europe, the Middle East, Australasia and Africa since April 1995. Mr. McGoldrick previously held the position of Managing Director of Gandalf Digital Communications Limited from January 1995 to April 1995, and General Manager, European Direct for Gandalf Digital Communications Limited from October 1994 to January 1995. Between February 1990 and October 1994, Mr. McGoldrick was Vice President of Sorbus UK, and from July 1991 to October 1994 was also general manager of a joint venture between ICL Company located in the United Kingdom, and Bell Atlantic Customer Services, located in the United States. From November 1987 to January 1991 Mr. McGoldrick was Director of Sales and Marketing, reporting to Sorbus UK. ITEM 11. EXECUTIVE COMPENSATION Overview - -------- The Company currently has six executive officers. The aggregate cash compensation (excluding amounts paid on retirement) paid to all executive officers as a group (10 persons) by the Company and its subsidiaries for services rendered during the fiscal year ended March 31, 1995 was $927,767 Liability Insurance - ------------------- The Company provides liability insurance for directors and officers of the Company and its subsidiaries. A new policy was put into place effective November 1, 1994 with policy limits of $17.9 million per claim with an aggregate deductible to the Company of $107,000 on any Canadian claims and $250,000 for any US claims, and no deductible to the individual. The premium for said coverage during fiscal 1995 was $160,000. The individual directors and officers of the Company and its subsidiaries are insured for losses arising from claims against them for certain of their acts, errors or omissions. The Company is insured against any loss arising out of any liability to indemnify a director or officer. Summary Compensation Table - --------------------------- The following table presents information provided in accordance with regulations under the Securities Act (Ontario) which requires the disclosure of compensation paid during each of the years in the three year period ended March 31, 1995, in respect of the individuals who, during any portion of fiscal 1995, served as the chief executive officer of the Company, the individuals who were at March 31, 1995, the other four most highly compensated executive officers of the Company and one additional individual who was an executive officer of the Company during fiscal 1995, but was not serving at March 31, 1995. In addition, the Company has included information in respect of two other executive officers of the Company serving at March 31, 1995.
SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Awards ----------------------------------- ----------- Securities Under Name and Fiscal Other Annual Options All Other Principal Position Year Salary Bonus Compensation Granted Compensation ($) ($) (#) (a) (b) (c) (d) (e) (f) (g) - ------------------------------------------------------------------------------------------------------ Executive officers serving with the Company as at June 1, 1995 - ------------------------------------------------------------------------------------------------------ T.A. Vassiliades 1995 $178,498 (1) --- --- 600,000 --- Chairman, President and CEO 1994 --- --- --- --- --- 1993 --- --- --- --- --- G.A. Daniello 1995 $137,478 --- --- 75,000 --- VP Product Operations 1994 $111,493 (2) --- --- 125,000 --- and Chief Technology Officer 1993 --- --- --- --- --- M. Chawner 1995 $10,228 (3) --- --- 75,000 --- VP Strategy and Business 1994 --- --- --- --- --- Development 1993 --- --- --- --- --- W. R. MacDonald 1995 $84,443 --- --- 40,000 --- VP Finance and CFO 1994 $71,287 --- --- 71,000 --- 1993 --- --- --- --- --- P. Beaumont 1995 $149,376 (4) --- --- 125,000 --- VP Sales, Services and 1994 --- --- --- --- --- Marketing for the Americas 1993 --- --- --- --- --- J. McGoldrick 1995 $62,240 (5) --- --- 50,000 --- Managing Director, Sales, 1994 --- --- --- --- --- Services and Marketing in 1993 --- --- --- --- --- Europe, the Middle East, Australasia and Africa Executive officers no longer serving with the Company as at June 1, 1995 - ------------------------------------------------------------------------------------------------------ B.R. Hedges 1995 $39,707 (6) --- --- --- --- President and CEO 1994 $147,455 --- --- 50,000 --- 1993 $65,787 (7) --- --- 75,000 --- A. Brisbourne (8) 1995 $96,296 --- --- 40,000 --- Managing Director, 1994 $90,076 $65,496 --- 85,000 --- Gandalf International 1993 $92,709 --- --- 25,000 --- Limited J.M. Scott 1995 $97,538 (9) --- --- 50,000 $113,507 (10) Managing Director, 1994 $101,860 $8,726 $ 15,920 (11) 50,000 --- International 1993 $101,655 $44,297 --- 50,000 --- (1) T.A. Vassiliades was appointed President and CEO on May 10, 1994. He held this office for ten months in fiscal 1995, and previously provided consulting services to the Company through Avatar Management Services, Inc., a company controlled by him. (2) G. A. Daniello was employed by the Company for ten months during fiscal 1994. (3) M. Chawner was employed by the Company for one month during fiscal 1995. (4) Includes sales commissions. (5) J. McGoldrick was employed by the Company for five months during fiscal 1995. (6) B. R. Hedges resigned as CEO on April 15, 1994 and from the board of directors of June 1, 1994. He continued to receive a salary until June 3, 1994. (7) B. R. Hedges was employed by the Company for six months in fiscal 1993. (8) A. Brisbourne resigned from the Company on April 10, 1995. (9) J.M. Scott retired from the Company on January 10, 1995. (10) Amounts accrued or paid in respect of retirement. (11) Includes automobile lease payments and payments of $4,074 for retirement benefits.
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR % Market of Total Value of Options Securities Securities to Granted Underlying Under Employees Option on Name and Options Financial Exercise or the Date Expiration Principal Positions Granted Year Base Price of Grant (1) Date (#) ($/Security) ($/Security) (a) (b) (c) (d) (e) (f) Executive officers serving with the Company as at June 1, 1995 - ----------------------------------------------------------------------------------------------- T.A. Vassiliades 600,000 33.52% 300,000 @ $0.91 $0.91 November 10, 2003 Chairman, President 300,000 @ $1.20 $1.20 October 19, 2004 and CEO G.A. Daniello 75,000 4.2% 75,000 @ $0.64 (2) $0.64 July 4, 2004 VP Product Operations and Chief Technology Officer M. Chawner 75,000 4.2% 75,000 @ $2.32 (2) $2.32 February 19, 2005 VP Strategy and Business Development W. R. MacDonald 40,000 2.2% 40,000 @ $0.64 (2) $0.64 July 4, 2004 VP Finance and CFO P. Beaumont VP Sales, Services 125,000 7.0% 50,000 @ $0.68 (3) $0.68 July 4, 2001 and Marketing for 75,000 @ $0.98 (3) $0.98 September 30, 2001 the Americas J. McGoldrick 50,000 2.8% 50,000 @ $1.38 (3) $1.38 October 30, 2001 Managing Director, Sales, Services and Marketing in Europe, the Middle East, Australasia and Africa Executive officers no longer serving with the Company as at June 1, 1995 - ----------------------------------------------------------------------------------------------- B.R. Hedges Nil N/A N/A N/A N/A President and CEO A. Brisbourne 40,000 2.2% 40,000 @ $0.64 (2) $0.64 July 4, 2004 Managing Director, Gandalf International Limited J.M. Scott 50,000 2.8% 50,000 @ $0.68 (3) $0.68 July 4, 2001 Managing Director, International (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=$0.7148. (3) Options were granted in pounds sterling. Translated at the year end exchange rate of 1 pound sterling=$1.6203
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION VALUES Value of (1) Unexercised Unexercised in-the-Money Options Options at Fiscal at Fiscal Securities Aggregate Year End (#) Year End ($) Name and Acquired Value Exercisable/ Excerciseable/ Principal Positions on Exercise Realized Unexerciseable Unexcerciseable (#) ($) (a) (b) (c) (d) (e) - -------------------------------------------------------------------------------------------------------------- Executive officers serving with the Company as at June 1, 1995 - -------------------------------------------------------------------------------------------------------------- T.A. Vassiliades --- --- 609,583 Exercisable $1,732,571 Exercisable Chairman, President 20,417 Unexercisable $16,981 Unexercisable and CEO G.A. Daniello --- --- 66,670 Exercisable $77,065 Exercisable VP Product Operations 133,330 Unexercisable (4) $351,353 Unexercisable (4) and Chief Technology Officer M. Chawner --- --- 75,000 Unexercisable $120,750 Unexercisable (5) VP Strategy and Business Development W. R. MacDonald --- --- 30,670 Exercisable $46,547 Exercisable (5) VP Finance and CFO 80,330 Unexercisable $220,944 Unexercisable (5) P. Beaumont --- --- 125,000 Unexercisable $383,750 Unexercisable (6) VP Sales, Services and Marketing for the Americas J. McGoldrick --- --- 50,000 Unexercisable $127,500 Unexercisable (6) Managing Director, Sales, Services and Marketing in Europe, the Middle East, Australasia and Africa Executive officers no longer serving with the Company as at June 1, 1995 - ------------------------------------------------------------------------------------------------------- B.R. Hedges --- --- Nil (7) --- President and CEO A. Brisbourne 48,007 $39,898 104,993 Unexercisable (8) $251,553 Unexercisable (5) Managing Director, Gandalf International Limited J.M. Scott 16,670 $11,793 44,833 Exercisable (9)(10) $25,611 Exercisable (6) Managing Director, 99,997 Unexercisable (9)(11) $251,363 Unexercisable (6) International (1) The market value of common shares underlying the options on March 31, 1995 was $3.93. (2) Includes 9,583 options granted to Mr. Vassiliades in his capacity as a director, prior to his appointment as President and CEO. (3) Options were granted to Mr. Vassiliades in his capacity as a director, prior to his appointment as President and CEO. (4) Includes options granted in Canadian dollars. Translated at the year end exchange rate of C$1=0.7148. (5) Options were granted in Canadian dollars. Translated at the year end exchange rate of C$1=0.7148. (6) Options were granted in pounds sterling. Translated at the year end exchange rate of 1 pound sterling =$1.6203. (7) B. R. Hedges resigned from the Company on April 15, 1994. The options expired upon the Optionee ceasing to be employed by the Company. (8) A. Brisbourne resigned from the Company on April 10, 1995. The options expired upon the Optionee ceasing to be employed by the Company. (9) J.M. Scott retired from the Company on January 10, 1995. Expiry date of options was extended beyond the fiscal 1995 year end date. (10) Includes 33,333 options which were not in-the-money at March 31, 1995. (11) Includes 16,667 options which were not in-the-money at March 31, 1995.
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 Compensation 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 objectives are achieved. There were no bonuses paid to executive officers during the fiscal year ended March 31, 1995. The Company has five stock options plans, of which only two are active plans from which future grants may be made. These are the Stock Option Plan for Executives and Directors and the 1988 Stock Option Plan for Directors. As at March 31, 1995 2,339,786 common shares were subject to options at prices ranging from C$0.88 to C$6.00 (approximately $0.63 to $4.29) and expiring at various dates between January 10, 1997 and April 18, 2005. Of such options, 1,632,486 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. The Board has approved the following schedule of fees for directors who are not employees of the Company ("Outside Directors"). Outside Directors resident in Canada receive an annual retainer of C$7,500. Outside Directors resident in the United States receive an annual retainer of $7,000. In addition, each director receives an attendance fee of $400 (in local currency) for meetings of shareholders, the Board and committees of the Board of which he is a member. 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. During the fiscal year ended March 31, 1995, the following amounts were paid to directors of the Company in their capacity as directors, including amounts paid for committee participation or special assignments: Alexander Curran C$10,300; Charles J. Gardner C$17,500; Donald M. Gleklen $11,800; Robert E. Keith $16,600; A. Graham Sadler C$6,018. Thomas A. Vassiliades was appointed president and chief executive officer on May 10, 1994. He received $1,148 for the period in fiscal 1995 which preceded his appointment. Brian R. Hedges resigned as president and chief executive officer on April 15, 1994 and as a director of the Company on June 6, 1994. He received C$596 in respect of services as a director during fiscal 1995. The Company has one active stock option plan for directors under which directors who are not employees are each awarded stock options on 5,000 common shares of the Company on the date of their initial election or re-election as a director, provided they do not hold unexercised stock options at that time under any of the Company's stock option plans. On August 11, 1994, Mr. Sadler was elected as a director of the Company and received a stock option under the 1984 Stock Option Plan for Directors to purchase 5,000 common shares at a discounted exercise price of C$1.23 (approximately $0.88) per share. The market price on the date of grant was C$1.36 (approximately $0.97) per common share of the Company. Directors are also eligible to receive grants of options under in the 1993 Stock Option Plan for Executives and Directors. A stock option under this plan was granted to Mr. Vassiliades on May 10, 1994, upon his appointment as president and chief executive officer, to purchase 300,000 common shares of the Company at an exercise price of $0.91. Mr. Vassiliades also received a stock option grant on October 19, 1994 to purchase 300,000 additional common shares of the Company at an exercise price of $1.20. A further option grant was made on April 8, 1995 to Mr. Vassiliades, of 800,000 common shares, at an exercise price of $3.77. The exercise price of each of these grants was determined based on the market price on the date of grant. Mr. Gardner is a member of a law firm that provides legal services to the Company. During the fiscal year ended March 31, 1995, Mr. Gardner's firm was paid $42,107 in legal fees by the Company and its subsidiaries. Desmond Cunningham had a consulting arrangement with the Company during fiscal 1995 under which he received fees from the Company and its subsidiaries in the amount of $97,440. Mr. Vassiliades provided consulting services to the Company on certain specific matters prior to his appointment as president and chief executive officer on May 10, 1994 pursuant to which he was paid $18,000 during fiscal 1995. Following his appointment, Mr. Vassiliades received $178,498 in compensation during fiscal 1995. Mr. Keith is an executive of Radnor Venture Partners, LP and Safeguard Scientifics (Delaware), Inc. which are parties to a loan agreement with the Company which was retired in fiscal 1995. During the fiscal year ended March 31, 1995, a subsidiary of the Company repaid $301,500, representing the remaining outstanding balance. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of June 1, 1995 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 (8) - ---------------------------------------------------------------------------------- Technology Investors 1 Limited Partnership (2,575,935) 260 Engleburn Ave., Peterborough, Ontario, K9H 1S7 and BCI Holdings Inc. (353,300) 2,929,235 (2)(3) 7.6% 1437 Matthews Ave., Vancouver, B.C., V6H 1W7 Paul Beaumont 16,667 (5) - Michael Chawner - - Desmond Cunningham 1,576,425 (4)(6) 4.1% Alexander Curran 12,083 (6) - Gatone A. Daniello 91,675 (5) - John Gamba - - Charles J. Gardner 28,333 (6) - Donald Gleklen 83,333 (6) - Robert Keith 34,583 (6) - John McGoldrick - - A. Graham Sadler 12,150 (6) - Albert Sinyor - - Walter MacDonald 44,006 (5) - Thomas A. Vassiliades 907,499 (6) 2.3% All executive officers and directors as a group (14 persons) 2,806,754 (7) 7.1% Footnotes (1) All shares are owned of record and beneficially and the sole investment and voting power is held by the person named, except as set forth below. (2) At June 1, 1995, Technology Investors 1 Limited Partnership also held 8.5% convertible debentures with an aggregate principle amount of C$2,850,000 which, if converted, would increase their ownership by 1,212,765 common shares to 10.4%. This percentage ownership is calculated based upon total shares outstanding as of June 1, 1995 plus shares issuable on conversion of the debentures held by such shareholders. (3) Michael H. Iles is a principal shareholder in Iles & Isherwood Inc. which indirectly manages Technology Investors 1 Limited Partnership. As of June 1, 1995 Michael H. Iles personally held 138,300 common shares of the Company. (4) Shares are owned personally or by Donosti Investments Inc., a corporation controlled by Desmond Cunningham. (5) Represents options (currently exercisable or exercisable within 60 days). (6) Includes options (currently exercisable or exercisable within 60 days) on the following shares: Desmond Cunningham 8,333 Alex Curran 9,583 Charles J. Gardner 13,333 Donald M. Gleklen 13,333 Robert E. Keith 12,083 A. Graham Sadler 1,250 Thomas A. Vassiliades 877,499 (7) Includes options (currently exercisable or exercisable within 60 days) on 1,087,762 common shares. (8) 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 Mr. Gardner is a member of a law firm that provides legal services to the Company. Mr. Cunningham had a consulting arrangement with the Company under which he performed services for the Company during the fiscal year ended March 31, 1995. Mr. Vassiliades provided consulting services to the Company on certain specific matters prior to his appointment as president and chief executive officer on May 10, 1994. Other than as described above, there are no material relationships and related transactions with directors and executive officers of the Company. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report. (1) The following financial statements, included in the 1995 Annual Report to Shareholders are incorporated by reference into this report. Auditors' Report. Consolidated Financial Statements of Gandalf Technologies Inc. including: Consolidated Balance Sheets at March 31, 1995 and March 31, 1994. Consolidated Statements of Income for the years ended March 31, 1995, March 31, 1994 and March 31, 1993. Consolidated Statements of Changes in Financial Position for the years ended March 31, 1995, March March 31, 1994 and March 31, 1993. Consolidated Statements of Shareholders' Equity for the years ended March 31, 1995, March 31, 1994 and March 31, 1993. Notes to Consolidated Financial Statements. (2) 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. (3) 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). *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 re-purchase 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 Agreement dated as of July 3, 1991, among Radnor Venture Partners, L.P., Safeguard Scientifics (Delaware), Inc., the Company and Gandalf Systems Corporation (filed as Exhibit 10.17 to the Form 10-K for the fiscal year ended July 31, 1991). *10.5 Registration Agreement dated as of August 1, 1991, among Radnor Venture Partners, L.P., Safeguard Scientifics (Delaware), Inc. and the Company (filed as Exhibit 10.18 to the Form 10- K for the fiscal year ended July 31, 1991). *10.6 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). *10.7 Trust Indenture dated as of November 10, 1992 between The R-M Trust Company and the Company (filed as Exhibit 10.26 to the Form 10-K for the fiscal year ended March 31, 1993). *10.8 Special Note Indenture dated November 10, 1992 between The R-M Trust Company and the Company (filed as Exhibit 10.27 to the Form 10-K for the fiscal year ended March 31, 1993). *10.9 Underwriting Agreement (Canadian) dated as of October 20, 1993 among Wood Gundy Inc., Deacon Barclays de Zoete Wedd Limited, Gordon Capital Corporation and Richardson Greenshields of Canada Limited and the Company (filed as Exhibit 10.1 to the Form 10-Q for the quarter ended January 1, 1994). *10.10 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). 13 Pages 12 to 31 of the Annual Report to Shareholders for the fiscal year ended March 31, 1995. 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 last quarter of the fiscal year ended March 31, 1995. 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/THOMAS A. VASSILIADES ----------------------- (Thomas A. Vassiliades) Chairman, President and Chief Executive Officer Dated: June 29, 1995 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas A. Vassiliades and Walter R. MacDonald, jointly and severally, his attorneys-in-fact, each 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 each 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/DESMOND CUNNINGHAM - -------------------- (Desmond Cunningham) Director June 29, 1995 s/ALEXANDER CURRAN - ------------------ (Alexander Curran) Director June 29, 1995 s/CHARLES J. GARDNER - -------------------- (Charles J. Gardner) Director June 29, 1995 s/DONALD M. GLEKLEN - ------------------- (Donald M. Gleklen) Director June 29, 1995 s/ROBERT E. KEITH - ----------------- (Robert E. Keith) Director June 29, 1995 s/WALTER R. MACDONALD - ---------------------- Vice President June 29, 1995 (Walter R. MacDonald) of Finance (Principal Financial and and Accounting Officer) s/A. GRAHAM SADLER - ------------------ (A. Graham Sadler) Director June 29, 1995 s/THOMAS A. VASSILIADES - ------------------------ Director, Chairman, June 29, 1995 (Thomas A. Vassiliades) President, and Chief Executive Officer (Principal Executive Officer)
GANDALF TECHNOLOGIES INC. 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(2) of year - ------------------------------------------------------------------------------- Fiscal 1995 (Year ended March 31, 1995) - ----------- Reserve for bad debts deducted in the balance sheet from amounts receivable ...... $ 4,414 $ 519 $ (503) $ - $ 4,430 Fiscal 1994 (Year ended March 31, 1994) - ----------- Reserve for bad debts deducted in the balance sheet from amounts receivable ....... $ 3,797 $ 2,235 $(1,345) $ (273) $ 4,414 (1) Relates to accounts receivable charged directly against reserve for bad debts. (2) Balance deducted represents a reserve recorded in the accounts of a subsidiary which was sold in the fiscal year.
EX-13 2 FINANCIAL STATEMENTS
Consolidated Balance Sheet (Thousands of U.S. dollars) As at March 31 1995 1994 - --------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 11,817 $ 5,273 Accounts receivable 26,880 30,182 Inventories (note 2) 15,230 20,877 Other 2,268 4,022 - --------------------------------------------------------------------------------------- Total current assets 56,195 60,354 Fixed assets (note 3) 18,619 20,214 Goodwill, net of accumulated amortization of $2,952 (1994 - $2,734) 3,462 3,680 Other assets 3,232 4,938 - --------------------------------------------------------------------------------------- Total assets $ 81,508 $ 89,186 ======================================================================================= Liabilities and Shareholders' Equity Current liabilities: Bank operating lines (note 4) $ 5,854 $ 10,512 Accounts payable and accrued liabilities (note 5) 21,369 27,854 Deferred revenue 7,758 7,424 Current portion of long-term debt (note 6) 157 586 - --------------------------------------------------------------------------------------- Total current liabilities 35,138 46,376 Long-term debt (note 6) 1,877 2,020 8.5% convertible debentures (note 7) 10,051 21,681 Shareholders' equity: Capital stock (notes 7 and 8) Common shares, 35,238,064 issued and outstanding (1994 - 28,072,333) 91,644 79,811 Retained earnings (deficit) (52,364) (53,770) Cumulative translation adjustment (4,838) (6,932) - --------------------------------------------------------------------------------------- Total shareholders' equity 34,442 19,109 - --------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 81,508 $ 89,186 ======================================================================================= Commitments and contingencies (note 16) On behalf of the Board of Directors: s/D. CUNNINGHAM s/D.M. GLEKLEN D. Cunningham, Director D.M. Gleklen, Director See accompanying notes to consolidated financial statements
Consolidated Statement of Income (Thousands of U.S. dollars, except per share amounts) Years Ended March 31 1995 1994 1993 - ----------------------------------------------------------------------------------------- Revenues: Product $ 83,801 $ 90,813 $ 113,877 Service 36,710 40,510 47,023 - ---------------------------------------------------------------------------------------- 120,511 131,323 160,900 Operating expenses: Cost of product sales 43,630 49,509 61,237 Service expenses 23,316 27,024 29,333 Sales and marketing 33,148 43,678 47,928 Administration and general 7,513 11,094 14,879 Research and development (note 9) 10,197 14,316 17,279 Restructuring and other costs (note 10) 685 28,662 5,547 - ---------------------------------------------------------------------------------------- Income (loss) from operations 2,022 (42,960) (15,303) Gain on sale of portfolio investment 2,024 - - Interest expense (note 11) (2,969) (4,127) (4,653) Interest income and foreign exchange 329 991 449 Income taxes (note 12) - (1,142) - - ---------------------------------------------------------------------------------------- Net income (loss) for the year $ 1,406 $ (47,238) $ (19,507) ======================================================================================== Basic earnings (loss) per share (note 13) $ 0.05 $ (2.27) $ (1.24) ======================================================================================== Weighted average number of common shares outstanding (thousands) 28,589 20,802 15,702 ======================================================================================== 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, 1995 and 1994 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, 1995. 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, 1995 and 1994 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, 1995, in accordance with accounting principles generally accepted in Canada which, except as disclosed in Note 19 to the consolidated financial statements, also conform in all material respects with accounting principles generally accepted in the United States. s/KPMG PEAT MARWICK THORNE Chartered Accountants Ottawa, Canada May 26, 1995
Consolidated Statement of Changes in Financial Position (Thousands of U.S. dollars) Years Ended March 31 1995 1994 1993 - ---------------------------------------------------------------------------------------- Operating activities: Cash provided by (applied to) operations (note 14) $ 4,958 $ (14,395) $ (1,650) Decrease in operating working capital (note 15) 4,212 775 3,099 - ---------------------------------------------------------------------------------------- Cash provided by (applied to) operating activities 9,170 (13,620) 1,449 - ---------------------------------------------------------------------------------------- Financing activities: Issue of capital stock 12,242 34,226 343 Issue of 8.5% convertible debentures - - 21,665 Conversion of 8.5% convertible debentures (note 7) (11,533) - - Long-term debt incurred - - 792 Long-term debt retired (446) (20,841) (11,989) - ---------------------------------------------------------------------------------------- Cash provided by financing activities 263 13,385 10,811 - ---------------------------------------------------------------------------------------- Investing activities: Purchase of fixed assets (2,919) (4,411) (3,929) Proceeds on disposal of investments 3,857 1,158 - Proceeds on disposal of fixed assets 298 1,088 - Software development costs deferred (note 9) (150) (1,986) (3,012) Other 443 (55) 1,338 - ---------------------------------------------------------------------------------------- Cash provided by (applied to) investing activities 1,529 (4,206) (5,603) - ---------------------------------------------------------------------------------------- Effect of exchange rate changes on cash balances 240 (510) 31 - ---------------------------------------------------------------------------------------- Increase (decrease) in cash position in the year 11,202 (4,951) 6,688 Cash position at beginning of year (5,239) (288) (6,976) - ---------------------------------------------------------------------------------------- Cash position at end of year $ 5,963 $ (5,239) $ (288) ======================================================================================== Cash position is comprised of: Cash and cash equivalents $ 11,817 $ 5,273 $ 9,737 Bank operating lines (5,854) (10,512) (10,025) - ---------------------------------------------------------------------------------------- $ 5,963 $ (5,239) $ (288) ======================================================================================== See accompanying notes to consolidated financial statements
Consolidated Statement of Shareholders' Equity (Thousands of U.S. dollars) Years Ended March 31 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- 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 28,072,333 $ 79,811 15,864,833 $ 45,585 15,671,907 $ 45,242 Issued: On conversion of debentures (note 7) 6,782,519 11,124 - - - - On public offering, net of share issue costs - - 12,000,000 33,863 - - Exercise of stock options (note 8) 182,214 354 207,500 363 198,000 354 Employee share purchase plan 200,998 355 - - - - Cancelled - - - - (5,074) (11) - -------------------------------------------------------------------------------------------------------- Balance at end of year 35,238,064 $ 91,644 28,072,333 $ 79,811 15,864,833 $ 45,585 ======================================================================================================== Retained Earnings (Deficit): Balance at beginning of year $(53,770) $ (6,532) $ 12,975 Net income (loss) 1,406 (47,238) (19,507) - -------------------------------------------------------------------------------------------------------- Balance at end of year $(52,364) $(53,770) $ (6,532) ======================================================================================================== Cumulative Translation Adjustment: Balance at beginning of year $ (6,932) $ (4,745) $ (2,726) Adjustment arising on translation of foreign subsidiaries' financial statements to U.S. dollars 1,091 (3,122) (1,524) Adjustment relating to subsidiary loans designated as long-term investments 1,003 935 (495) - ------------------------------------------------------------------------------------------------------- Balance at end of year $ (4,838) $ (6,932) $ (4,745) ======================================================================================================== 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. Prior year financial statements have been reclassified to conform with the current year's presentation. 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 19. 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. Buildings are depreciated using the straight-line method based on a useful life of 20 years. Leasehold improvements are amortized using the straight-line method over the term of the related lease. Notes (Cont'd) (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. To date, the only development costs which have met these criteria have been certain computer software development costs. (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 will evaluate recoverability by use of the undiscounted cash flow method. 2. Inventories
As at March 31 1995 1994 - --------------------------------------------------------------------------------------- Raw materials $ 3,336 $ 5,587 Work-in-process 4,591 4,007 Finished goods 7,303 11,283 - --------------------------------------------------------------------------------------- $ 15,230 $ 20,877 =======================================================================================
3. Fixed Assets
As at March 31 1995 1994 - --------------------------------------------------------------------------------------- Cost: Land $ 232 $ 213 Buildings 4,725 4,535 Equipment 55,879 53,340 Leasehold improvements 1,930 1,779 - --------------------------------------------------------------------------------------- 62,766 59,867 Accumulated depreciation 44,147 39,653 - --------------------------------------------------------------------------------------- Net book value $ 18,619 $ 20,214 =======================================================================================
4. Bank Operating Lines At March 31, 1995 the Company's authorized bank operating lines totalled $18.9 million. This included $15.2 million relating to two committed credit facilities with a Canadian chartered bank. During May 1995, two months in advance of their expiry, these facilities were renewed for the period through to the next annual review date of June 30, 1996. The facilities bear interest at the bank's prime rate plus 0.5%. The additional authorized amount of $3.7 million related to a demand credit facility with a bank in the United Kingdom. During the third quarter of 1995, this facility was renewed until September 1995. The interest rate varies depending on borrowing levels and ranges from 2.0% to 2.5% above the bank's base rate. Notes (Cont'd) The operating lines are secured by certain of the accounts receivable, inventories and other assets of the Company. The amount available for borrowing at any time under the facilities is based on margin formulas relating to levels of accounts receivable, inventories and other bank covenants. Under such formulas, $14.8 million was available to the Company at March 31, 1995 and $5.8 million was being utilized. Cash and cash equivalents held as of that date represented a further $11.8 million of cash resources available to the Company. Cash and unused credit lines totalled $20.8 million at March 31, 1995, compared to $10.2 million at March 31, 1994. 5. Accounts Payable and Accrued Liabilities
As at March 31 1995 1994 - --------------------------------------------------------------------------------------- Trade accounts payable $ 7,341 $ 9,784 Payroll, commissions and related taxes 4,072 3,594 Accrued restructuring costs 3,033 6,720 Other payables 5,266 6,292 Income and other taxes payable 1,657 1,464 - --------------------------------------------------------------------------------------- $ 21,369 $ 27,854 =======================================================================================
The decrease in accrued restructuring costs during 1995 occurred primarily as a result of the payment of severance and lease costs for redundant facilities which were accrued during the fourth quarter of the 1994 fiscal year. Accrued restructuring costs at March 31, 1995 primarily represent the remaining portion of lease costs for redundant facilities. 6. Long-term Debt
As at March 31 1995 1994 - --------------------------------------------------------------------------------------- Interest Description Rate Security - --------------------------------------------------------------------------------------- Obligation under capital 12.9% Printed Circuit Board $ 1,984 $ 2,078 lease denominated in Manufacturing Facility, Canadian dollars, lease Nepean, Ontario term ending during 2009 Other Various Various 50 528 - --------------------------------------------------------------------------------------- 2,034 2,606 Classified as current 157 586 - --------------------------------------------------------------------------------------- $ 1,877 $ 2,020 =======================================================================================
The aggregate amount of long-term debt scheduled to be repaid in the five years ending March 31, 2000 is $482,000 with the balance of $1,552,000 due thereafter. Notes (Cont'd) 7. 8.5% Convertible Debentures
Shares Issued Aggregate Principal Amount % Upon Conversion - ---------------------------------------------------------------------- --------------- Balance at March 31, 1994 C$ 30,000 $ 21,681 100% Converted during year (15,939) (11,533) (53%) 6,782,519 Impact of foreign exchange - (97) - - ----------------------------------------------------------------------- Balance at March 31, 1995 14,061 10,051 47% Converted subsequent to year end (8,020) (5,864) (27%) 3,412,747 Impact of foreign exchange - 213 - - ----------------------------------------------------------------------- Balance at May 26, 1995 C$ 6,041 $ 4,400 20% =======================================================================
In November 1992 the Company issued 8.5% convertible debentures with an aggregate principal amount of C$30.0 million which mature in November 2002. At any time prior to maturity they are convertible into common shares of the Company at the option of the holder at a conversion price of C$2.35 (approximately $1.71) which would yield 425.53 common shares for each C$1,000 (approximately $728) of principal amount of debentures held. During the fourth quarter of fiscal 1995 debentures with an aggregate principal amount of $11,533,000 were converted into 6,782,519 common shares. The resulting increase in capital stock of $11,124,000 was determined as the sum of the principal amount of the debentures converted ($11,533,000) plus interest accrued to the date of conversion ($325,000), net of the pro rata share of the associated unamortized deferred financing costs ($734,000). During the period subsequent to March 31, 1995 until May 26, 1995, debentures with an aggregate principal amount of $5,864,000 were converted into 3,412,747 common shares. As of May 26, 1995, approximately 20% of the original amount of debentures remained outstanding which, if converted, would result in a maximum of 2,570,638 additional common shares being issued. At that date the closing price of the Company's common shares on the Toronto Stock Exchange (the "TSE") was C$7.88 and on NASDAQ in the United States the closing price was $5.75, which represented approximately 335% of the conversion price. The remaining outstanding debentures represent an unsecured direct obligation of the Company. After November 10, 1995 any outstanding debentures are redeemable by the Company provided that for the 20 trading days ending with the fifth trading day preceding the date on which the notice of redemption is first given, the weighted average market price at which the shares have traded on the TSE and NASDAQ is not less than 125% of the conversion price. Notes (Cont'd) 8. Stock Options The following table summarizes the activity for the stock options plans in effect during the year ended March 31, 1995 and for each of the preceding two years.
Shares Available Outstanding for Grant Options - ---------------------------------------------------------------------------------------- Balance at March 31, 1992 78,460 896,000 Reserved for issuance 600,000 - Granted (575,000) 575,000 Terminated 125,000 (125,000) Exercised - (198,000) - ---------------------------------------------------------------------------------------- Balance at March 31, 1993 228,460 1,148,000 Reserved for issuance 1,000,000 - Granted (700,000) 700,000 Terminated 376,000 (376,000) Exercised - (207,500) - ---------------------------------------------------------------------------------------- Balance at March 31, 1994 904,460 1,264,500 Reserved for issuance 438,000 - Granted (1,790,000) 1,790,000 Terminated 532,500 (532,500) Exercised - (182,214) - ---------------------------------------------------------------------------------------- Balance at March 31, 1995 84,960 2,339,786 ========================================================================================
The options to purchase common shares granted under the above stock option plans expire between January 10, 1997 and April 18, 2005. Of the 2,339,786 options outstanding at March 31, 1995, 945,474 were exercisable as of that date, and the prices at which the outstanding options may be exercised approximated the market value on the dates of grant. The exercise price for outstanding options granted on or before March 31, 1994 range from C$1.53 to C$5.25 (approximately $1.09 to $3.75) per share. The exercise price for options granted during the year ended March 31, 1995 range from C$0.88 to C$6.00 (approximately $0.63 to $4.29) per share. Directors and executive officers as a group held 1,632,486 options as at March 31, 1995. 9. Research and Development
Years Ended March 31 1995 1994 1993 - ---------------------------------------------------------------------------------------- Research and development expenditures $ 10,078 $ 14,980 $ 20,504 Investment incentives (287) (798) (2,028) Software development costs: Amortized 556 2,120 1,815 Deferred (150) (1,986) (3,012) - ---------------------------------------------------------------------------------------- $ 10,197 $ 14,316 $ 17,279 ========================================================================================
Notes (Cont'd) 10. Restructuring and Other Costs
Years Ended March 31 1995 1994 1993 - --------------------------------------------------------------------------------------- Restructuring $ 685 $ 15,760 $ 5,547 Other - 12,902 - - --------------------------------------------------------------------------------------- $ 685 $ 28,662 $ 5,547 =======================================================================================
Restructuring costs recorded in 1995 represent severance costs associated with the elimination of approximately 70 positions at the end of the first fiscal quarter in connection with an internal functional realignment. Restructuring costs recorded in 1994 relate to decisions made by the Company in February 1994 to reduce its workforce by approximately 300 positions worldwide and consolidate its North American operations under a single organization structure. Restructuring costs included $5.3 million relating to severance, $4.2 million in provisions for redundant facilities representing the estimated future lease costs and the unamortized cost of leasehold improvements for vacant facilities worldwide, and $6.3 million in fixed asset writedowns to adjust the net book value of surplus equipment and spare parts inventory in North America to their estimated net realizable value. During 1994, other costs included a writedown of $7.5 million in deferred tax assets which primarily related to investment tax credits earned in Canada prior to the third quarter of 1993 on research and development expenditures. For financial reporting purposes, as a result of sustaining several consecutive years of losses up to the end of 1994, management believed that the accounting criteria for continuing to recognize these amounts as an asset were no longer met. These tax credits remain available to the Company and the benefit of these tax credits will instead be recorded in the financial statements as they are utilized to reduce future federal income taxes payable in Canada. Other costs in fiscal 1994 also included a writedown of $4.5 million in deferred software development costs which were not expected to be recovered through future cash flows and a $0.9 million writedown of assets held for disposal to their net realizable value. Restructuring costs of $5.5 million recorded in 1993 related to severance costs associated with the elimination of positions within the Company and the estimated future cost of leased property which had become redundant. 11. Interest Expense Interest expense appearing on the consolidated statement of income relates only to bank operating lines, bank term debt and convertible debentures. It does not include interest on the capital lease obligation for the manufacturing facility. Such interest is considered to be a cost of occupancy which is allocated to operating expenses. Total interest expense, including these amounts, during the year ended March 31, 1995 amounted to $3,224,000 (1994 - $4,402,000; 1993 - $4,952,000). Of this amount, $2,212,000 (1994 - $3,578,000; 1993 - $3,568,000) represented interest on indebtedness initially incurred for a term of more than one year. Notes (cont'd) 12. Income Taxes
Years Ended March 31 1995 1994 1993 - --------------------------------------------------------------------------------------- Current: Canadian $ - $ (342) $ - Foreign - (800) - - --------------------------------------------------------------------------------------- $ - $ (1,142) $ - ======================================================================================= The income tax expense reported differs from the amount computed by applying the Canadian tax rates to the income (loss) before income taxes. Years Ended March 31 1995 1994 1993 - --------------------------------------------------------------------------------------- Expected tax rate 44.3% 44.3% 43.5% Expected tax expense (recovery) $ 623 $ (20,420) $ (8,486) Utilization of losses not previously recorded (623) - - Losses for which no tax benefit has been recorded - 20,420 8,486 Other - (1,142) - - --------------------------------------------------------------------------------------- $ - $ (1,142) $ - =======================================================================================
At March 31, 1995, the Company had available, subject to audit and certain restrictions, accumulated accounting losses of approximately $70 million the potential tax benefit of which have not been recorded in the consolidated financial statements. These include loss carry-forwards for income tax purposes of approximately $50 million 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, 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 1997 and 2005. Included in the loss carry-forwards for income tax purposes are approximately $40 million million of net operating loss carry-forwards ("NOLs") in the United States. The Company's ability to use these NOLs to offset future taxable income is subject to restrictions enacted in the United States Internal Revenue Code of 1986 as amended (the "Code"). These restrictions would limit the Company's future use of its NOLs when certain stock ownership changes described in the Code have occurred over a three year period. These ownership changes may arise from the public sale of securities. As a result of the public issue of shares by the Company during fiscal 1994 the Company may be restricted on future use of NOLs. The loss carry-forwards for income tax purposes include losses arising in the Netherlands. Tax authorities in the Netherlands have reassessed income taxes for the years 1989 through 1991, disallowing certain amounts which have been claimed for income tax purposes. The Company has filed objections to these reassessments and is in discussion with the tax authorities. The Company anticipates that the resolution of this matter will lead to amended reassessments which, after taking into consideration available loss carry-forwards, would not result in a material tax liability to the Company. The loss before income taxes attributable to all foreign operations for the year ended March 31, 1995 was $735,000 (1994 - $31,074,000; 1993 - $8,175,000). At March 31, 1995 the balance of unremitted earnings of subsidiaries was $11,113,000 (1994 - $7,761,000; 1993 - $9,676,000). The Company does not currently anticipate repatriating earnings of foreign subsidiaries where such repatriation would give rise to withholding taxes. Notes (Cont'd) 13. Earnings Per Share Basic earnings (loss) per share figures are presented on the consolidated statement 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 for 1995 was $0.07. The calculation assumes that the conversion of debentures, which occurred during 1995, had occurred at the beginning of the 1995 fiscal year. Pro forma earnings per share for 1995 was $0.08. The calculation assumes that the conversion of debentures which occurred during 1995 and from April 1, 1995 until May 26, 1995, had occurred at the beginning of the 1995 fiscal year (see note 7). 14. Cash Provided By Operations Cash provided by (applied to) operations is computed as follows:
Years Ended March 31 1995 1994 1993 - ---------------------------------------------------------------------------------------- Income (loss) from operations $ 2,022 $ (42,960) $ (15,303) Depreciation and amortization 5,616 9,658 11,675 Reserves and writedowns not involving an outlay of cash - 22,004 6,182 Interest paid (2,803) (3,546) (4,653) Interest received and foreign exchange 329 991 449 Other (206) (542) - - ---------------------------------------------------------------------------------------- $ 4,958 $ (14,395) $ (1,650) =========================================================================================
15. Changes in Operating Working Capital The decrease in operating working capital is computed as follows:
Years Ended March 31 1995 1994 1993 - ---------------------------------------------------------------------------------------- Accounts receivable $ 3,302 $ 4,103 $ 3,775 Inventories 5,647 1,750 2,488 Other current assets 78 73 8 Accounts payable and accrued liabilities (6,353) (1,602) (3,462) Income taxes payable 193 470 (1,433) Deferred revenue 334 (1,075) 2,271 Foreign currency translation adjustment 1,011 (2,944) (548) - ---------------------------------------------------------------------------------------- $ 4,212 $ 775 $ 3,099 ========================================================================================
Notes (Cont'd) 16. Commitments and Contingencies (a) The Company has entered into various lease commitments primarily for office premises and automobiles. At March 31, 1995, the minimum amounts payable under such leases in future fiscal years are as follows: 1996 $ 7,100 1997 5,600 1998 3,400 1999 2,100 2000 1,900 Thereafter 5,000 -------- $ 25,100 ======== The Company has provided guarantees totalling approximately $906,000 pursuant to certain contracts and agreements. (b) Since 1991, the Company has received funding of approximately $1.4 million and $2.5 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 10 years following the project completion date and is limited to the amount of the funding received. The first project was completed on March 31, 1995 and the Company will commence accruing the corresponding royalty at the beginning of fiscal 1996. The royalty for this project is 2% of consolidated gross revenue from the resulting products. The royalty payments are due annually six months after the anniversary of the project completion date. The Company expects that the funding will be fully repaid within 3-5 years. The second project is expected to be completed during fiscal 1996 and the Company will commence accruing the corresponding royalty at that time. The royalty for this project is 1% of the Canadian subsidiary's total product revenues. The royalty payments are due annually three months after the anniversary of the project completion date. The Company expects that the funding will be fully repaid within 3-5 years. (c) 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. Notes (Cont'd) 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 of America, 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, 1995.
Years Ended March 31 1995 1994 1993 - ---------------------------------------------------------------------------------------- Sales to customers: United States $ 32,547 $ 35,157 $ 45,347 Canada 22,473 23,341 32,887 United Kingdom 37,939 39,309 41,996 Holland/France 15,772 14,867 19,327 Other International 11,780 18,649 21,343 Segment transfers: United States 964 5,360 3,573 Canada 22,822 24,702 20,846 United Kingdom 977 2,385 7,387 Holland/France 9 476 938 Eliminations (24,772) (32,923) (32,744) - ---------------------------------------------------------------------------------------- Total revenues $ 120,511 $ 131,323 $ 160,900 ======================================================================================== Segment operating profit: United States $ 4,739 $ (1,621) $ 603 Canada 1,764 (226) 4,802 United Kingdom 8,242 6,908 8,488 Holland/France 3,527 2,550 4,200 Other International (65) 2,574 1,627 - ---------------------------------------------------------------------------------------- Total segment operating profit 18,207 10,185 19,720 - ---------------------------------------------------------------------------------------- Expenses: Research and development 10,197 14,316 17,279 General corporate 5,303 10,167 12,197 Restructuring and other costs 685 28,662 5,547 Gain on sale of portfolio investment (2,024) - - Interest expense 2,969 4,127 4,653 Interest income and foreign exchange (329) (991) (449) Income taxes - 1,142 - - ---------------------------------------------------------------------------------------- Net income (loss) $ 1,406 $ (47,238) $ (19,507) ======================================================================================== Identifiable assets: United States $ 10,015 $ 14,919 $ 35,086 Canada 27,376 33,440 58,718 United Kingdom 24,315 23,336 25,560 Holland/France 10,800 7,308 8,869 Other International 9,002 10,183 1,370 - ---------------------------------------------------------------------------------------- Total assets $ 81,508 $ 89,186 $ 129,603 ========================================================================================
18. Quarterly Financial Information (Unaudited) Quarterly unaudited financial information for each of the years ended March 31, 1995 and 1994 is as follows:
First Second Third Fourth 1995 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------- Revenues: Product $ 20,745 $ 21,754 $ 20,363 $ 20,939 Service 8,973 8,906 9,388 9,443 - -------------------------------------------------------------------------------------- 29,718 30,660 29,751 30,382 - -------------------------------------------------------------------------------------- Operating expenses: Cost of product sales 10,896 11,094 10,661 10,979 Service expenses 5,871 5,739 5,754 5,952 Sales and marketing 8,742 8,002 7,854 8,550 Administration and general 1,929 1,907 1,957 1,720 Research and development 2,413 2,581 2,658 2,545 Restructuring costs 685 - - - - -------------------------------------------------------------------------------------- Income (loss) from operations (818) 1,337 867 636 Gain on sale of portfolio investment - - 2,024 - Interest expense (798) (823) (795) (553) Interest income and foreign exhange 57 88 58 126 - -------------------------------------------------------------------------------------- Net income (loss) $ (1,559) $ 602 $ 2,154 $ 209 ====================================================================================== Basic earnings (loss) per share $ (0.06) $ 0.02 $ 0.08 $ 0.01 ====================================================================================== Fully diluted earnings per share $ 0.06 ====================================================================================== First Second Third Fourth 1994 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------- Revenues: Product $ 23,453 $ 24,632 $ 20,301 $ 22,427 Service 10,720 10,386 9,965 9,439 - -------------------------------------------------------------------------------------- 34,173 35,018 30,266 31,866 - -------------------------------------------------------------------------------------- Operating expenses: Cost of product sales 11,820 12,639 11,295 13,755 Service expenses 6,837 6,769 6,963 6,455 Sales and marketing 10,577 11,176 11,274 10,651 Administration and general 2,679 2,434 2,825 3,156 Research and development 3,083 3,359 4,204 3,670 Restructuring and other costs - - - 28,662 - -------------------------------------------------------------------------------------- Loss from operations (823) (1,359) (6,295) (34,483) Interest expense (1,298) (1,160) (1,010) (659) Interest income and foreign exchange 174 172 517 128 Income taxes - - - (1,142) - -------------------------------------------------------------------------------------- Net loss $ (1,947) $ (2,347) $ (6,788) $(36,156) ====================================================================================== Basic loss per share $ (0.12) $ (0.15) $ (0.29) $ (1.29) ======================================================================================
Notes (cont'd) Quarterly earnings per share figures are calculated based on the monthly weighted average number of common shares outstanding during the quarter. Fully diluted earnings per share is calculated assuming convertible debentures had been converted at the beginning of the fiscal period, and all outstanding options had been exercised on the date which is the later of the beginning of the fiscal period and the dates the options were granted. With the exception of the third fiscal quarter of 1995, potential conversions are anti- dilutive for each quarter during the two year period ended March 31, 1995. During the fourth quarter of 1994 the Company recorded additional inventory provisions of $1.5 million on mature product lines, which were included in the caption "Cost of product sales". Restructuring and other costs of $28.7 million in the fourth quarter of 1994 are described in Note 10 to the consolidated financial statements. 19. 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 statement of changes in financial position. Accordingly, the following financing activities would not be presented in the consolidated statement of changes in financial position for the year ended March 31, 1995 but would be shown supplementally. Conversion of 8.5% convertible debentures $ (11,533) Issue of capital stock on conversion of debentures $ 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 statement 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.
1995 1994 ----------------------------------------------------------------------------- Operating loss carry-forwards $ 21,600 $ 20,000 Depreciation 2,500 2,700 Restructuring reserves 800 3,200 Investment tax credits 11,000 11,000 Other 2,900 2,500 ----------------------------------------------------------------------------- 38,800 39,400 Valuation allowance (38,296) (38,896) ----------------------------------------------------------------------------- Net non-current deferred tax asset $ 504 $ 504 =============================================================================
(d) The Company includes the amortization of software development costs as part of research and development expenses. Under U.S. GAAP these costs would be charged to cost of product sales. (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. 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 19 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. General Summary Discussion The financial results for the fiscal year ended March 31, 1995 represented a significant improvement over performance during the previous three year period. In response to declining revenues on mature products following the acquisition of Infotron Systems Corporation, between 1992 and 1994 the Company carried out a series of restructuring and cost reduction activities. In 1995, the combined effect of significant growth in new products and a reduced cost infrastructure led to profitable results and positive cash flow. During the three year period following the acquisition of Infotron, revenues declined from a pre-acquisition combined level for the two companies of $213 million to $131 million, a decline of 38%. During this period, the Company reported losses totalling $77 million including $38 million in restructuring charges and other costs. The size of the Company's workforce is now approximately 900 people, compared with approximately 1,375 prior to the Infotron acquisition and just under 2,000 immediately following the acquisition. The Company operates in one business segment, providing a broad range of internetworking products and services. Within this segment the Company operates in four lines of business: access products, concentration products, backbone products and services. The majority of new product introductions and enhancements during 1995 occurred in the access and concentration lines of business. Product revenues from these two areas grew by 44% in 1995 compared to 1994, and represented close to 60% of total product revenues in 1995 compared to 36% a year earlier. Net income in 1995 was $1.4 million or $0.05 per share compared to the net loss of $47.2 million or $2.27 per share in 1994 and the net loss of $19.5 million or $1.24 per share in 1993. This improvement was achieved in 1995, despite a decline of 8% in total revenues compared to 1994, through improved margins and significantly lower operating expenses. The combined gross margin on product and service revenues improved in 1995 to 44.5% compared to 41.7% in 1994. Operating expenses for sales and marketing, administration and general, and research and development were $50.9 million in 1995, representing a decrease of 26.3% from 1994 and a decrease of 36.5% from 1993. Throughout this three year period, the Company has continued to make expenditures on research and development which are in excess of 12% of its annual revenues derived from the sale of products. In addition to the improvement in 1995 in the Company's operating results and profitability compared to the previous three years, the Company's cash position also improved significantly over 1994. Cash and unused credit lines more than doubled during the year, increasing from $10.2 million at March 31, 1994 to $20.8 million at March 31, 1995. The chartered bank in Canada which represents the Company's primary lending relationship renewed its credit facilities during May 1995, two months in advance of their expiry, for the period through to the next annual review date of June 30, 1996. Positive cash flow from operating activities of $9.2 million in 1995 represented an improvement from the negative cash flow from operating activities of $13.6 million in 1994 and positive cash flow from operating activities of $1.4 million in 1993. Overall, the Company reported positive cash flow of $11.2 million in 1995 compared to negative cash flow of $5.0 million in 1994. Management's Discussion and Analysis (Cont'd) The debt to equity ratio of the Company has improved since March 31, 1992, the first fiscal year end date following the acquisition of Infotron, as a result of a private placement of convertible debentures in 1993, a public offering of common shares in 1994, and positive cash flow from operating activities and the sale of two portfolio investments in 1995. During the fourth quarter of fiscal 1995 and subsequent to March 31, 1995, approximately 80% of the original principal amount of the debentures were converted to common shares of the Company in accordance with the terms of the debentures. Results of Operations The following table sets forth items derived from the consolidated statement of income, expressed as a percentage of revenues, for the year ended March 31, 1995 and for each of the preceding two years.
Years ended March 31 1995 1994 1993 - ------------------------------------------------------------------------------------------ (Percentage of Revenues) Revenues: Product 69.5% 69.2% 70.8% Service 30.5 30.8 29.2 - ------------------------------------------------------------------------------------------ 100.0% 100.0% 100.0% ========================================================================================== Gross profit: Product 47.9% 45.5% 46.2% Service 36.5 33.3 37.6 Combined 44.5 41.7 43.7 Expenses: Sales and marketing 27.5 33.3 29.8 Administration and general 6.2 8.4 9.2 Research and development 8.5 10.9 10.7 Restructuring and other costs 0.6 21.8 3.5 - ------------------------------------------------------------------------------------------ Income (loss) from operations 1.7 (32.7) (9.5) Gain on sale of portfolio investment 1.7 - - Net financial expenses (2.2) (2.4) (2.6) Income taxes - (0.9) - - ------------------------------------------------------------------------------------------ Net income (loss) 1.2% (36.0)% (12.1)% ==========================================================================================
Revenues Revenues in the fiscal year ended March 31, 1995 were $120.5 million compared to $131.3 million in 1994 and $160.9 million during 1993. Approximately 70% of revenues in 1995 were derived from the sale of products with the balance represented by service revenues. The mix of revenues between the sale of products and services has not changed significantly over the last three years. From the third quarter of 1994 to the fourth quarter of the fiscal 1995 year, the Company has reported six consecutive quarters in which revenues have consistently been approximately $30 million. Revenues on the second half of 1994 were $62.1 million compared to $69.2 million in the first half. Product revenues for the year ended March 31, 1995 were $83.8 million. For 1994 and 1993 such revenues were $90.8 million and $113.9 million respectively. Revenues from the Company's access and concentration ("LAN internetworking") products, which are sold under the names Gandalf LANLine and Gandalf Xpressway, showed growth of 44% in 1995 compared to 1994 and represented close to 60% of product revenues in 1995 compared to 36% in 1994. A decline in sales during 1994 and 1995 of other products sold by the Company, including third-party products, more than offset the growth in LAN internetworking products during this two year period, resulting in a decline in total product revenues of 7.7% in 1995 compared to 1994, and 20.3% in 1994 compared to 1993. Management's Discussion and Analysis (Cont'd) Service revenues were $36.7 million in 1995 compared with $40.5 million in 1994 and $47.0 million in 1993. Service revenues declined in 1995 compared to 1994 and 1993 as a result of lower revenues during each of the last two fiscal years on products which the Company has traditionally derived the majority of its service revenues. Gross Profit The combined gross margin (total revenues minus cost of product sales and service expenses expressed as a percentage of total revenues) was 44.5% in 1995 compared to 41.7% in 1994 and 43.7% in 1993. The improvement in the combined gross margin in 1995 compared to 1994 largely mitigated the reduction in revenues of $10.8 million from 1994 to 1995. The combined gross profit (total revenues minus cost of product sales and service expenses) in 1995 was $53.6 million on revenues of $120.5 million compared to $54.8 million on revenues of $131.3 million in 1994. The gross margin on product revenues (product revenues minus cost of product sales expressed as a percentage of product revenues) improved to 47.9% in 1995, compared to 45.5% in 1994 and 46.2% in 1993. The improvement in margin earned on product revenues in 1995 resulted from lower manufacturing costs following the restructuring actions in the fourth quarter of 1994. The gross margin on service revenues (service revenues minus service expenses expressed as a percentage of service revenues) was 36.5% in 1995, 33.3% in 1994 and 37.6% in 1993. Restructuring actions taken in the fourth quarter of 1994 reduced service costs and have resulted in an improvement in the margin earned on service revenues in 1995 compared to 1994. The decline in the margin earned on service revenues during 1994 resulted from service revenues declining at a faster rate than service expenses. Operating Expenses Operating expenses for sales and marketing, administration and general, and research and development in 1995 were $50.9 million, 26.3% lower than the $69.1 million reported in 1994. In 1993, these expenses were $80.1 million or 49.8% of revenues. Reductions in operating expenses in each of 1994 and 1995 related to restructuring and downsizing actions undertaken in 1993 and 1994. Since 1991, the Company has received funding of approximately $1.4 million and $2.5 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 10 years following the project completion date and is limited to the amount of funding received. The first MSDP project was completed on March 31, 1995 and the Company will commence accruing the corresponding royalty at the beginning of fiscal 1996. The royalty for this project is 2% of consolidated gross revenues from the resulting products. The royalty payments are due annually six months after the anniversary of the project completion date. The Company expects that the funding will be fully repaid within 3-5 years. The second MSDP project is expected to be completed during fiscal 1996 and the Company will commence accruing the corresponding royalty at that time. The royalty for this project is 1% of the Canadian subsidiary's total product revenues. The royalty payments are due annually three months after the anniversary of the project completion date. The Company expects that the funding will be fully repaid within 3-5 years. The Company recorded restructuring costs of $0.7 million during the first quarter of 1995, representing severance costs associated with the elimination of approximately 70 positions in connection with an internal functional realignment. Management's Discussion and Analysis (Cont'd) Restructuring costs of $15.8 million recorded during the 1994 fiscal year related to decisions made by the Company in February 1994 to reduce its workforce by approximately 300 positions worldwide and consolidate its North American operations under a single organization structure. These costs included $5.3 million relating to severance, $4.2 million in provisions for redundant facilities representing the estimated future lease costs and the unamortized cost of leasehold improvements for vacant facilities worldwide, and $6.3 million in fixed asset writedowns to adjust the net book value of surplus equipment and spare parts inventory in North America to their estimated net realizable value. Other costs recorded in the fourth quarter of fiscal 1994 included the writedown of $7.5 million in deferred tax assets which primarily related to investment tax credits earned in Canada prior to the third quarter of 1993 on research and development expenditures. These tax credits remain available to the Company in order to reduce federal income taxes payable in Canada and the benefit of these tax credits will instead be recorded in the financial statements as they are utilized. At March 31, 1995, the Company had available, subject to audit, unused investment tax credits totalling approximately $11.0 million which expire between 1997 and 2005. Other costs in 1994 also included a writedown of $4.5 million in deferred software development costs incurred in prior years relating to products for which such costs were not expected to be recovered through future cash flows and a $0.9 million writedown of the carrying value of assets held for disposal to their estimated net realizable value. Restructuring costs of $5.5 million recorded in 1993 related to severance costs associated with the elimination of positions within the Company and the estimated future cost of leased property which had become redundant. Income From Operations The Company reported income from operations of $2.0 million on revenues of $120.5 million in 1995. The respective amounts of losses from operations in 1994 and 1993 were $43.0 million and $15.3 million on revenues of $131.3 million and $160.9 million. The improved operating performance in 1995 compared to 1994 and 1993 occurred as a result of reduced operating expenses associated with downsizing and restructuring actions taken during the latter part of the 1994 fiscal year. Net Financial Expenses Interest expense was $3.0 million in 1995 compared with $4.1 million in 1994 and $4.7 million in 1993. Interest expense was significantly lower in 1995 compared to 1994 and 1993 as a result of the Company reducing its borrowings under bank loans during the second half of 1994 following the issue of common shares by the Company. The proceeds were used to retire $19.7 million in term bank loans and repay outstanding borrowings under the Company's short-term bank credit lines. Interest expense during 1995 included interest on the 8.5% convertible debentures issued in November 1992. Interest costs associated with the debentures which have been converted up to May 26, 1995 were approximately $1.5 million annually. The Company's obligation to pay interest is limited only to those debentures which are outstanding as of the semi-annual interest payment dates on May 10 and November 10 each year. Note 7 to the consolidated financial statements describes the conditions under which the Company can redeem any debentures which remain outstanding after November 10, 1995. Net Income The net income for the year ended March 31, 1995 was $1.4 million or $0.05 per share. This included restructuring costs of $0.7 million and a gain of $2.0 from the sale of a portfolio investment. The respective net loss figures for 1994 and 1993 were $47.2 million and $19.5 million. Management's Discussion and Analysis (Cont'd) Segment Operating Results The following table sets forth revenues by geographic segment for the year ended March 31, 1995 and for each of the two preceding years. Note 17 to the consolidated financial statements contains additional information concerning the geographic segments.
Years Ended March 31 1995 1994 1993 - ------------------------------------------------------------- (Millions of dollars) United States $ 32.5 $ 35.2 $ 45.4 Canada 22.5 23.3 32.9 United Kingdom 37.9 39.3 42.0 Holland/France 15.8 14.9 19.3 Other International 11.8 18.6 21.3 - ------------------------------------------------------------- $ 120.5 $ 131.3 $ 160.9 =============================================================
Revenues in North America (United States and Canada) were $55.0 million in 1995, down 6.0% from 1994 and 29.8% from 1993. The Company's European direct sales markets (United Kingdom, Holland and France) reported revenues of $53.7 million in 1995, essentially unchanged from 1994 and 12.4% below the level in 1993. Revenues earned in other international markets was $11.8 million in 1995, $18.6 million in 1994 and $21.3 million in 1993. The overall change in revenue mix during 1995 from the Company's traditional products to the LAN internetworking products has been more pronounced in the Company's markets outside North America and Europe than for the Company as a whole. This has impacted the level of sales to certain customers of the Company's traditional products in other international markets who together previously represented a significant proportion of the revenues earned in these markets. Segment operating profit for North America (United States and Canada) in 1995, expressed as a percentage of revenues, was 11.8%. The 1995 amount represented an improvement from the operating loss of 3.2% for this segment in 1994. In 1993, the segment operating profit in North America represented 6.9% of revenues. The operating results for this segment had deteriorated from 1993 to 1994 as a result of the decline in revenues in 1994. The significant restructuring actions undertaken by the Company in the fourth quarter of 1994 led to the improvement in operating performance for this segment in 1995. Segment operating profit, expressed as a percentage of revenues, for the Company's operations in the United Kingdom, Holland and France was 20.7% in 1993, 17.5% in 1994 and 21.9% in 1995. The level of operating profit for these European markets has traditionally been higher, in the case of the Company, than for its North American operations. Revenues in Europe declined 11.7% in 1994 compared to 1993 resulting in operating profit for this segment falling below 20%. Lower costs in 1995 following the restructuring actions by the Company near the end of the 1994 fiscal year led to the improvement in segment operating profit in 1995. The operating performance in the Company's other international markets deteriorated in 1995 compared to 1994 as a result of a decline in revenues of 36.8% in 1995. The operating loss for this segment represented 0.6% of revenues in 1995. In 1994 and 1993, the respective segment operating profit amounts, expressed as a percentage of revenues in those years, were 13.8% and 7.6%. Management's Discussion and Analysis (Cont'd) Liquidity and Capital Resources The Company recorded positive cash flow of $11.2 million during 1995. At March 31, 1995 the net cash position (cash and cash equivalents net of bank operating lines) was $6.0 million compared with net bank borrowings (bank operating lines net of cash and cash equivalents) of $5.2 million a year ago. The increase in cash included positive cash flow from operating activities of $9.2 million. This represented a significant improvement over the negative cash flow from operating activities of $13.6 million in 1994. Non-operating sources of cash in 1995 included proceeds of $3.9 million from the sale of two portfolio investments. At March 31, 1995 the Company's authorized bank operating lines totalled $18.9 million. This included $15.2 million relating to two committed credit facilities with a Canadian chartered bank. During May 1995, two months in advance of their expiry, these facilities were renewed for the period through to the next annual review date of June 30, 1996. The facilities bear interest at the bank's prime rate plus 0.5%. The additional authorized amount of $3.7 million related to a demand credit facility with a bank in the United Kingdom. During the third quarter of 1995, this facility was renewed until September 1995. The interest rate varies depending on borrowing levels and ranges from 2.0% to 2.5% above the bank's base rate. The operating lines are secured by certain of the accounts receivable, inventories and other assets of the Company. The amount available for borrowing at any time under the facilities is based on margin formulas relating to levels of accounts receivable, inventories and other bank covenants. Under such formulas, $14.8 million was available to the Company at March 31, 1995 and $5.8 million was being utilized. Cash and cash equivalents held as of that date represented a further $11.8 million of cash resources available to the Company. Cash and unused credit lines totalled $20.8 million at March 31, 1995, compared to $10.2 million at March 31, 1994. The Company believes that its current financial base together with available credit facilities provides sufficient financial resources to meet its short-term operating requirements. The Company anticipates that its long-term cash requirements will be satisfied through future operating cash flows and the conversion or refinancing of term debt, the majority of which relates to the remaining outstanding debentures which it is anticipated will be converted during the 1996 fiscal year. Capital spending was $2.9 million in 1995, $4.4 million in 1994 and $3.9 million in 1993. The Company believes it must continue to invest in its capital asset base at 1995 or moderately higher levels. Accounts receivable and inventories at March 31, 1995 were $42.1 million (accounts receivable - $26.9 million; inventories - $15.2 million) versus $51.1 million at March 31, 1994 (accounts receivable - $30.2 million; inventories - $20.9 million). Lower manufacturing costs as a result of the restructuring actions taken in the fourth quarter of 1994 contributed to the decrease in inventory levels. Accounts payable and accrued liabilities have decreased $6.5 million since March 31, 1994 as a result of the payment of restructuring costs accrued in the fourth quarter of 1994 and a reduced level of raw materials inventory. The ratio of term debt, exclusive of the convertible debentures, to shareholders' equity at March 31, 1995 was 0.06:1. This compares favourably to the corresponding figures at March 31, 1994, 1993 and 1992 which were 0.14:1, 0.69:1 and 0.63:1 respectively. The Company's current ratio improved to 1.6:1 at March 31, 1995 compared to 1.3:1 at March 31, 1994. Market for Gandalf 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 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 - ---------------------------------------------------------------------------------------------------- Fiscal 1994 High 3.75 4.60 4.00 4.60 | 3 3 - 1/2 3 - 1/4 3 - 19/32 Low 0.95 3.40 2.85 3.60 | 13/16 2 - 1/2 2 - 1/8 2 - 3/4 Volume (000's) 20,284 9,167 1,633 3,008 | 1,418 798 453 605 - ---------------------------------------------------------------------------------------------------- Fiscal 1993 High 5.50 4.10 3.35 3.65 | 4 - 1/2 3 - 1/4 2 - 7/8 3 - 1/8 Low 3.90 1.85 2.25 2.50 | 3 1 - 1/2 1 - 3/4 2 - 1/8 Volume (000's) 6,356 4,266 417 1,161 | 1,393 826 459 920 - ----------------------------------------------------------------------------------------------------
Shareholders As at June 1, 1995, there were 38,681,607 shares issued and outstanding with 2,239 record holders. The stock closed on The Toronto Stock Exchange at $8.00 (Cdn.) on June 1, 1995, and on The Nasdaq Stock Market at $5 30/32. 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 percent 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. EX-21 3 EXHIBIT 21 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 19 Kingsland Grange Woolston, Warrington Cheshire, WA1 4RW England Gandalf Systems Corporation Delaware, U.S.A. 501 Delran Parkway Delran, New Jersey 08075 USA Gandalf International Limited United Kingdom Doncastle Road Bracknell, Berkshire RG12 8GD Gandalf Nederland B.V. Holland Kruisweg 609 2132 NA Hoofddorp Postbus 3084 2130 KB Hoofddorp Gandalf S.A. France 16, Burospace route de Gisy 91572 Bievres Cedex France Jurisdiction of Name Incorporation - ------------------------------------- ----------------- Gandalf Systems Belgium N.V. Belgium Koningin Fabiolalaan 25 1810 Wemmel, Belgium Infotron Puerto Rico, Inc. Delaware, United States 9 North Olney Cherry Hill, New Jersey 08003 USA T3-Inc. Delaware, United States 200 Fairbrook Drive Suite 202 Herndon, VA 22070 USA Infotron Belgium N.V. Belgium Heizel Esplande P.O. Box 6 1020 Brussels Belgium Infotron Systems Foreign Virgin Islands Sales Corporation No. 24-25 Kongensgade Charlotte Amalie St Thomas, Virgin Islands 00801 USA Infotron Systems Worldwide Inc. Delaware, United States 103 Springer Building 3411 Silver Road Wilmington, Delaware 19810 USA Infotron Systems Italia, S.r.l. Italy Via Del Grana, Di Nervi, 42 00142 Roma, Italy Infotron Systems Limited England Systems House Poundbury Road Dorchester, England Jurisdiction of Name Incorporation - ------------------------------------- ----------------- Infotron France S.A.R.L. France 58 rue Jean Bleuzen 92178 Vances Cedex France Infotron Systems France S.A. France 58 rue Jean Bleuzen 92178 Vances Cedex France Infotron Systems Sweden A.B. Sweden Nytorpsvagen 7 S-183 63 TABY Sweden EX-23 4 CONSENT OF ACCOUNTANTS 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 and No. 033-58691); on Form S-4 (No. 33-41556); on Form S-3 (No. 33-42077) and in the related prospectuses therein of our reports dated May 26, 1995 on the consolidated financial statements and schedule of Gandalf Technologies Inc., which reports are included or incorporated by reference in this annual report on Form 10-K. S/KMPG PEAT MARWICK THORNE - -------------------------- KMPG PEAT MARWICK THORNE Ottawa, Ontario May 26, 1995 -----END PRIVACY-ENHANCED MESSAGE-----