-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CcL1y//m1TUjvAypPNfhdEra/Kj2F9zkfHazRGvhBWQyhpvx4hOGE3RXmbioLeZY lcfLpHjTo43x57rbZKg8Kw== 0000355876-96-000015.txt : 19960701 0000355876-96-000015.hdr.sgml : 19960701 ACCESSION NUMBER: 0000355876-96-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960628 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: 96587556 BUSINESS ADDRESS: STREET 1: 130 COLONNADE RD S CITY: NEPEAN ONTARIO CANAD STATE: A6 BUSINESS PHONE: 6137236500 MAIL ADDRESS: STREET 1: 130 COLONNADE RD S CITY: NEPEAN ONTARIO CANAD STATE: A6 10-K 1 FORM 10-K FOR YEAR ENDED MARCH 31, 1996 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, 1996 -------------------- 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) 274-6500 ---------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Shares Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] [Cover page 1 of 2 pages] The aggregate market value of the common shares held by non-affiliates of the registrant, based upon the closing sales price of the common shares as reported on The Nasdaq Stock Market (National Market System) on May 31, 1996 (the last trading day prior to June 1, 1996) was approximately $592,724,210. This amount excludes 544,079 common shares held by all executive officers, directors, and shareholders holding over five percent of the outstanding common shares on that date, as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of June 1, 1996, 43,262,941 common shares, without nominal or par value, were issued and outstanding. All dollar amounts in the Annual Report on Form 10-K are in United States dollars, except where indicated. C$ refers to Canadian dollars. References to years are to fiscal years ended March 31. DOCUMENTS INCORPORATED BY REFERENCE PART I None PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters Page 35 of the Annual Report to Shareholders for the fiscal year ended March 31, 1996 (Exhibit 13). Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. Pages 28 to 34 of the Annual Report to Shareholders for the fiscal year ended March 31, 1996 (Exhibit 13). Item 8. Financial Statements and Supplementary Data. Pages 14 to 27 of the Annual Report to Shareholders for the fiscal year ended March 31, 1996 (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 Business Environment and Risk Factors 5 The Company and Corporate Structure 6 Products and Services 6 Sales and Marketing 8 Research and Development 8 Manufacturing 9 Customers 9 Competition 10 Backlog 10 Intellectual Property and Proprietary Rights 10 Employees 11 Environmental Affairs 11 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters 13 Item 6. Selected Financial Data 13 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 8. Financial Statements and Supplementary Data 14 Item 9. Disagreements on Accounting and Financial Disclosure 14 PART III Item 10. Directors and Executive Officers of the Registrant 15 Item 11. Executive Compensation 19 Item 12. Security Ownership of Certain Beneficial Owners and Management 25 Item 13. Certain Relationships and Related Transactions 26 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26 Signatures 30 PART 1 ITEM 1. DESCRIPTION OF BUSINESS Industry Background - ------------------- For many organizations, access to information is a strategic element of business. A number of current factors have influenced the way information is accessed, including the corporate trend towards moving the business closer to the customer, spurring the creation of branch offices; the provision of flexible work environments as a means to attract and retain highly-skilled employees; the popularity of the Internet; and government environmental legislation requiring the reduction of work- related travel. All of these dynamics have resulted in a growing number of teleworkers, business travelers and remote office users increasing the demand for network infrastructure products and services. Challenges associated with managing such a network infrastructure include asset control in an increasingly distributed environment; interoperability in a multivendor environment; technical skill shortages; maximization of an installed base of legacy networking equipment; and information security. Gandalf Technologies Inc. and its subsidiaries (Gandalf or the Company) participates in three areas of the networking market - the remote access market, the wide area networking market and the network services market. Remote access is defined as extending corporate network-based, or public network-based resources to remote, distributed locations. Wide area networks are defined as those networks designed to carry a variety of traffic types (video, data, voice, fax, LAN) over private or public networks. Network services are defined as the provision of value added services, which are customized to meet specific customer needs and designed to increase productivity, reduce costs, or add value through the design and implementation of well-managed networks. Business Environment and Risk Factors - ------------------------------------- The Company's future operating results may be affected by various trends and factors that the Company must successfully address in order to achieve favorable operating results. In addition, there are trends and factors beyond the Company's control which affect its operations. Such trends and factors include adverse changes in general economic conditions, or conditions in the specific markets for the Company's products, government regulation or intervention affecting networking, fluctuations in foreign exchange rates and other factors including those listed in other sections below. The Company's success depends in substantial part on the timely and successful introduction of new products. An unexpected change in one or more of the technologies affecting data networking or in market demand for products based on a particular technology could have a material adverse effect on the Company's operating results if the Company does not respond quickly and effectively to such changes. Failure to keep pace with such advances could negatively affect the Company's competitive position and prospects for growth. The market price of the Company's common stock has been, and may continue to be, extremely volatile. Factors such as new product announcements by the Company or its competitors, quarterly fluctuations in the Company's operating results and general conditions in the networking market may have a significant impact on the market price of the Company's common stock. These conditions, as well as factors which generally affect the market for stocks of high technology companies, could cause the price of the Company's stock to fluctuate substantially over short periods. See also Factors That May Affect Future Financial Performance contained in Management's Discussion and Analysis of Financial Condition and Results of Operations and Volatility of Stock Prices contained in Market for Registrant's Common Stock and Related Security Holder Matters at page 29 and 35 respectively, of the Company's Annual Report to Shareholders for the fiscal year ended March 31, 1996 incorporated by reference herein. The Company and Corporate Structure - ----------------------------------- Gandalf Technologies Inc. was created by Articles of Amendment on July 22, 1981 as the continuation of Gandalf Data Communications Limited which was incorporated on April 29, 1971 under the laws of the Province of Ontario, Canada. The registered office of the Company is 130 Colonnade Road South, Nepean, Ontario, Canada K2E 7M4, telephone (613) 274-6500. The Company's common shares are traded on The Toronto Stock Exchange and The Nasdaq Stock Market (National Market System). The Company operates through six principal subsidiary companies: Gandalf Canada Ltd., Gandalf Systems Corporation in the United States, Gandalf Digital Communications Limited in the United Kingdom, Gandalf S.A. in France, Gandalf Nederland B.V. and Gandalf International Limited. The Company's operations are conducted through four distinct operating units: the North America Group based in Nepean, Ontario and Delran, New Jersey covering Canada, the United States and Mexico; the Europe, Middle East and Africa Group, based in Bracknell, UK, consisting of the UK, France, Italy, Spain, Eastern Europe, the Middle East and Africa (excluding South Africa); the Northern Europe Group, located in Amsterdam, Netherlands, encompassing the Netherlands, Belgium, Germany, Austria, Switzerland, Luxembourg, Norway, Sweden, Finland and Denmark; and the Asia Pacific Group, located in Tokyo, Japan which includes Japan, Korea, Singapore, Taiwan, Hong Kong, China, Australia, New Zealand and South Africa. For information regarding Gandalf's foreign and domestic operations, see Note 16 to the Company's consolidated financial statements incorporated by reference herein. Products and Services - --------------------- 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 information, while preserving and enhancing their investment. The Company designs, supplies, markets and services equipment that is designed to transport information in a manner that is efficient, cost effective, secure and reliable. Gandalf creates value for its customers through its ability to integrate a variety of technologies and a range of telephone company services with its customers' information applications. Gandalf accomplishes this through four lines of business -- Access, Concentration, Backbone and Services. Access and Concentration Products Gandalf addresses the remote access market with two lines of business, Access and Concentration, encompassing three families of products, XpressConnect(R), XpressStack(R) and Xpressway(R). The XpressConnect line of high performance, internetworking access products delivers the response time and performance of a local (LAN) connection over a low speed, wide area network (WAN) facility. The XpressConnect line comprises a range of access solutions for the mobile or part-time teleworker, the full-time teleworker, the small or large branch office user and Internet users. The modular, stackable XpressStack line of concentration and internetworking products can be deployed in an enterprise network to concentrate a number of small and large branch offices and teleworkers, or in an Internet service provider to deliver access concentration of many subscribers over telephone services such as ISDN or switched 56K. An XpressStack solution can be scaled upwards, in small increments, to deliver a solution which is a precise cost fit to the requirements of customers. The Xpressway line of concentration and internetworking products is a higher-density, chassis-based solution which allows enterprises and service providers alike to concentrate great numbers of remote users onto a single, robust system over telephone services such as ISDN, switched 56K, Frame Relay, and the public switched telephone network. A scaleable design ensures that performance is consistent as additional remote users are added to the system. In addition to concentration, a number of other internetworking modules can be configured into an Xpressway system (multiprotocol router, campus LAN switch, hub cards, terminal servers) to enable a complete solution. Backbone Products Gandalf addresses the wide area market with its backbone line of business. Gandalf's WAN 2000 family of multiplexers and concentrators is designed to carry in a very efficient manner, a variety of traffic - LAN, voice, fax, video, data - over a single leased line, saving customers long distance charges and line costs by integrating their traffic. The family has three products: the 2120, a modular feeder product which can accommodate concentration at speeds of up to 24Kbps; the 2300, which can grow up to 20 T1s (20 x 1.544Mbps) or 16 E1s (16 x 2.048Mbps) in total capacity; and the 2050 network communications switch, which permits switching capacity up to 80 T1s. Network Services and Support The Company provides its customers with a suite of services ranging from ongoing maintenance support to a full life cycle of services such as network design, implementation, management and operations, asset management and training. Services are sold as a complementary part of the product sale. They are delivered with business partners and often through distribution channels. Gandalf's services vision is to be best of breed at satisfying the needs of its customers by providing the full life cycle of support solution delivered by Gandalf and its business partners. Gandalf's end user service programs include the ServiStart Program for network installation, the ServiStat Extended Warranty Program for additional product coverage, and the ServiSelect Services for network maintenance. Partner services include the Partner Program, for those channel partners who want to enhance their own service capabilities, and the Alliance Program for those channel partners who do not have their own service organization. Teleworking services include RemoteConnect, a turnkey, value-add, integrated services package encompassing installation, projection management, line provisioning end user support, designed to provide customers with a cost-effective solution for deploying teleworking programs. Sales and Marketing - ------------------- Gandalf markets its products and services through both direct and indirect channels through its wholly-owned subsidiaries in the United States, Canada, United Kingdom, the Netherlands and France. The Company's International subsidiary sells through local distributors worldwide. The Company's sales and marketing model focuses on four channels of distribution - national resellers, service providers, corporate accounts and OEM (Original Equipment Manufacturer) partnerships. Research and Development - ------------------------ The Company believes that success in the rapidly changing communications segment of the information industry is dependent upon the ability to anticipate and respond to customer needs and to develop reliable, cost- effective products with expanded capabilities and performance. The Company is engaged in research and development activities in both LAN and WAN technologies. The Company spent $11.5 million on product development in fiscal 1996, and $10.1 million in fiscal 1995 and $15.0 million in fiscal 1994. Manufacturing - ------------- The Company's manufacturing operations consist of materials planning and procurement, assembling and testing electronic assemblies. The quality systems of Gandalf's manufacturing operation are managed to the ISO 9002-1994 quality standard and are recognized under the Quality Management Institute's (QMI's) registration program, registration number 000367. The Company's adherence to known international and national quality standards provides one of the strongest assurances of product/service quality available. In some cases, the Company may subcontract part of the manufacturing process, or the entire manufacturing, of a product to a single supplier. Also, a single source supplier may be used in instances when the Company designs components and sub-assemblies. As a corporation, the Company believes that the close working relationship with a single supplier enhances product quality, delivery and cost control. However, there can be no assurance that in the future the Company's suppliers will be able to meet the Company's demand for components in a timely and cost- effective manner. The Company's operating results and customer relationships could be adversely affected by either an increase in prices for, or an interruption or reduction in supply of, any key components. Customers - --------- 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. The Company's business is not seasonal. The Company is not dependent upon a single customer or a few customers, and the loss of any one or more would not be anticipated to have a material adverse effect on the Company. During the three-year period ended March 31, 1996, no customer accounted for 10 percent or more of the Company's revenues in any year. Competition - ----------- The networking industry has become increasingly competitive, and the Company's results may be adversely affected by the actions of existing or future competitors. Such actions may include the development or acquisition of new technologies, the introduction of new products and the reduction of prices by competitors to gain or retain market share. Industry consolidation or alliances may also affect the competitive environment. The Company's competitors vary depending upon the sector of the network being identified and include networking vendors as well as independent systems integrators. Principal competitors include companies such as 3Com Corporation, Ascend Communications, Inc., Bay Networks Inc., and Cisco Systems Inc. These and other competitors and potential competitors may have greater financial, technological, manufacturing, marketing and personnel resources than the Company. Gandalf believes its worldwide coverage, its technology leadership, its operational support excellence and its market driven management system will allow it to compete effectively in its chosen markets. Backlog - ------- The Company attempts to manufacture inventory in quantities sufficient to provide timely delivery of its products. Because of the short delivery cycle, backlog is not considered to be a meaningful indication of future revenues. Intellectual Property and Proprietary Rights - -------------------------------------------- The Company believes that intellectual property constitutes a valuable asset of the Company and protects its intellectual property through certain patents and trademarks on a worldwide basis. The Company holds international trademark registrations on its corporate name, GANDALF, and has either applied for, or obtained, trademark registrations on its product and services brand names. The Company holds a patent on proprietary compression technology, which, in the view of the Company, represents a significant competitive advantage. The Company utilizes non-disclosure and confidentiality agreements to disclose proprietary information to its resellers, distributors, customers and potential customers. The Company's products include proprietary software and firmware which is provided under license to customers and end users. Employees - --------- On March 31, 1996, the Company had 812 employees worldwide. Of these, 377 were sales, marketing and customer support personnel, 128 were engaged in engineering development, 191 were engaged in manufacturing and distribution and 116 held general administrative positions. On March 31, 1995 the Company had 897 employees and on March 31, 1994 the Company had 1,127 employees. Outsourcing to partners by the Company of the delivery of field service maintenance in the United States led to the majority of the reduction in employees from fiscal 1995 to fiscal 1996. Since March 31, 1996, the Company has also outsourced the delivery of field service maintenance in the United Kingdom and Canada, restructured certain aspects of its sales and marketing organization worldwide in accordance with its distribution channel strategy, consolidated the manufacturing distribution function in a single location and outsourced its manufacturing repair function in Europe. As a result of these changes the Company presently has fewer than 700 employees. Approximately two-thirds of these employees are located in North America and the remainder are employed in Europe and in the other 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. Environmental Affairs - --------------------- The Company is currently in the final stages of remediation of certain non- hazardous materials at the Company's former engineering, administration and distribution facility in Cherry Hill, New Jersey, in compliance with the State of New Jersey's Environmental Cleanup Responsibility Act. The Company continues to maintain 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. It is anticipated that the remediation will be completed during fiscal 1997 and, in the opinion of management, is not anticipated to have a material effect on future expenditures or earnings. ITEM 2. PROPERTIES Properties - ---------- The Company's head office is located in Nepean, Ontario, Canada, near Ottawa. The Company operates from three 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 leased building comprises 27,000 square feet and is occupied by certain engineering, sales and marketing and administrative staff of the Company. The Company owns a facility in Warrington, Cheshire, England (37,200 square feet) which contains office space and warehouse space which, until June 1996, had been used as a distribution and repair centre for the Company's products in Europe. It is management's belief that the existing principal properties described above are adequate for the Company's current needs. ITEM 3. LEGAL PROCEEDINGS The Company is a third party defendant in an action begun in April 1993 in the Ontario Court (General Division) by Deskin Inc. and a Quebec numbered company as plaintiffs against Digital Equipment of Canada Limited, Distribution Architects International Inc.(DAI) and D.A. Distribution Software Systems Ltd. (DAD) as defendants. The main action claims damages totaling C$2.6 million and unspecified damages for lost sales and profits of C$20.0 million relating to the design, supply and installation of a computer system. The third party claim brought by DAI and DAD alleges improper network design and selection of network hardware by the Company and seeks contribution and indemnity. Each of the defendants has defended the claim. The plaintiff has not sued the Company. Counsel for the Company believes the Company has a good defence to the third party claim on the merits, and that based on the information available to date and the Company's limited involvement in the project, the Company's liability, if any, should only be 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 35 of the 1996 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 1996* 1995* 1994* 1993* 1992** 1991*** - ------------------------------------------------------------------------------------------------------------------------ Income Statement Data: Revenues $116,533 $120,511 $131,323 $160,900 $119,181 $129,013 Gross margin 45.9% 44.4% 41.7% 43.7% 46.5% 49.4% Selling, general and administration 39,996 40,661 54,772 62,807 45,778 54,223 Research and development 11,524 10,197 14,316 17,279 13,679 13,788 Net income (loss) 260 1,406 (47,238) (19,507) (9,912) (5,869) Basic earnings (loss) per share 0.01 0.05 (2.27) (1.24) (0.63) (0.48) - ------------------------------------------------------------------------------------------------------------------------ Balance Sheet Data: Total assets 79,375 81,508 89,186 129,603 141,408 102,999 Fixed assets 16,253 18,619 20,214 30,768 38,416 22,761 Working capital 29,361 21,057 13,978 25,596 19,276 22,050 Current ratio 2.0 1.6 1.3 1.5 1.3 1.6 Cash and cash equivalents net of current bank debt 13,602 5,963 (5,239) (688) (17,918) (9,030) Long-term debt 2,496 1,877 2,020 22,980 23,729 5,548 Convertible debentures - 10,051 21,681 23,862 - - Shareholders' equity 48,586 34,442 19,109 34,308 55,491 59,363 * Year ended March 31 ** For eight months only, ended March 31, 1992 *** Year ended July 31
Acquisition - ----------- On August 2, 1991, the Company's subsidiary in the United States, Gandalf Data, Inc. completed a merger with Infotron, an international data communications company headquartered in Cherry Hill, New Jersey, U.S.A. Change in Reporting Currency - ---------------------------- During the fiscal 1992 period, the Company adopted the U.S. dollar as the unit of measurement for presentation in its consolidated financial statements. This change was made due to the significant increase in the Company's activities in the United States as a result of the merger with Infotron. The comparative figures for the fiscal year 1991 were restated in U.S. dollars using a translation method of convenience by which amounts previously stated in Canadian dollars were converted to U.S. dollars using the July 31, 1991 exchange rate of $0.8683, without any other effects on previous results stated in Canadian dollars. The results of operations for the eight month period ended March 31, 1992 were converted at the average exchange rate for the period of $0.8690. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For information relating to management's discussion and analysis of financial condition and results of operations, reference is made to pages 28 to 34 of the 1996 Annual Report to Shareholders, filed as Exhibit 13 hereto, which information is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For information relating to the Company's consolidated financial statements and supplementary data, reference is made to pages 14 to 27 of the 1996 Annual Report to Shareholders, filed as Exhibit 13 hereto, which information is incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table and the notes thereto set out, as of June 1, 1996, the name and age of each director of the Company and any nominees for director of the Company; his present principal occupation, business or employment; his principal occupation, business or employment during the past five years, the period during which he has served as a director of the Company, all other major positions and offices with the Company and significant affiliates thereof now held by him, if any.
BUSINESS EXPERIENCE DIRECTOR DURING THE PAST FIVE YEARS, NAME SINCE DIRECTORSHIPS AND OTHER INFORMATION __________________________________________________________________________________________________________________ Desmond Cunningham, 65 1971 Past Chairman and co-founder of the Company. Retiring, effective August 1, 1996. Alexander Curran, 69 1987 President, Alex Curran Consultant Inc. (management consultant) since December 1988. Retiring, effective August 1, 1996. John F. Gamba, 57 1995 Senior Vice President, Corporate Resources and Performance Assurance, Bell Atlantic Corporation (regional operating telephone company) since May 1994. Group President, Network Technologies & 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. Charles J. Gardner, 60 1981 Partner of Goldberg, Shinder, Gardner & Kronick (barristers & solicitors) since 1965. Donald M. Gleklen, 59 1991 President, Jocard Financial Services, Inc. (merchant banking), since October 1994. 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 1984 to February 1994. Barclay C. Isherwood, 50 Nominee President, B.C. Isherwood & Associates (consultant). From 1992 to March 1996, principal in Iles & Isherwood Inc., co- managing an investment fund specializing in technology companies. Prior to 1992, Vice President, Motorola Inc. Robert E. Keith, 54 1992 President, Technology Leaders Management Inc. (high technology venture capitalists) since December 1991 and Managing Director of Radnor Venture Partners, L.P. (high technology venture capitalists) since July 1989. Ian McLaren, 39 Nominee President, SHL Canada, since December 1995 (a wholly-owned subsidiary of MCI, providing systems integration and outsourcing services). From early 1994 to December 1995, Executive Vice President and General Manager of the Ottawa Region for SHL Canada. Prior to joining SHL Canada in 1994, Group Vice President, Finance, Professional and Public Administration Sector of Digital Equipment of Canada. A. Graham Sadler, 71 1994 President, Moreline Inc. (supplier of electronic and mechanical components and parts) since 1991. Retiring, effective August 1, 1996. Albert Sinyor, 49 1995 President, Amico Corporation (medical equipment manufacturing) since 1993. From 1988 to 1993, General Manager, Canadian Operations of Bell Atlantic Business Systems Services. Thomas A. Vassiliades, 60 1993 Chairman of the Company since May 1995, and President and Chief Executive Officer 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. Mihkel E. Voore, 41 Nominee Partner, since 1991, with the law firm of Stikeman, Elliott in Toronto practicing in the areas of corporate and securities law. Johnny Wai-Nang Wong, 48 Nominee Currently on sabbatical from the University of Waterloo, Waterloo, Ontario to the IBM Zurich Research Laboratory, as Visiting Scientist in the Department of Communication Systems. From 1985 to present, Professor, Department of Computer Science, University of Waterloo, with cross- appointment in the Department of Electrical and Computer Engineering. From 1989 to 1994 served as Associate Provost, Computing and Information Systems with the University of Waterloo.
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 as of June 1, 1996, other than Mr. Vassiliades, are as follows: Richard Busto, 52, has been Vice President, Strategy, Business Development and Network Services since January 1996. Mr. Busto joined the Company in October 1995 as Vice President of Networking Services, Education and Quality after 29 years of industry experience at the IBM Corporation of Armonk, New York. Before joining the Company, Mr. Busto was director of business development for IBM's services division. From 1990 to 1993, Mr. Busto was general manager for field service operations for the U.S. and has held various management positions throughout IBM's services organization, including director of networking services, director of service planning and director of finance. Michael Chawner, 49, has been Vice President, Product Operations and Chief Technology Officer since January 1996 and is responsible for product development, manufacturing and supply. Previously, Mr. Chawner was Vice President, Strategy and Business Development, a position which he held from February 1995 when he joined the Company. 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. Joceline Lemieux, 37, was appointed Vice President, Worldwide Marketing in January 1996. Her mandate encompasses corporate marketing, product line management and field marketing. Ms. Lemieux has been with the Company's sales organization since April 1986. From September 1995 to April 1996 she was Vice President, Canadian Sales and from April 1992 to September 1995 was the Regional Manager for the Eastern Canada region. Walter R. MacDonald, 34, has been Vice President, 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. John McGoldrick, 43, was appointed president of the Company's newly formed Asia Pacific Group in April 1996 located in Tokyo, Japan. From April 1995 to April 1996, Mr. McGoldrick was managing director for sales, services and marketing in Europe, the Middle East, Australasia and Africa. From January 1995 to April 1995, Mr. McGoldrick was Managing Director of Gandalf Digital Communications Limited, the Company's subsidiary in the United Kingdom, and from October 1994 to January 1995, was General Manager, European Direct for Gandalf Digital Communications Limited. 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. Peter Merrifield, 35, has been Managing Director, Europe, Middle East and Africa, since April 1996. Prior to April 1996, Mr. Merrifield was Regional Sales Director, Gandalf International Limited. Between 1984 and March 1996 he held various positions within Gandalf Digital Communications Limited and Gandalf International Limited including International Sales Support Director, Sales Support Manager and Product Line Manager. Kenneth Stess, 37, was appointed Vice President, North American Sales in April 1996. From January 1996 to April 1996, he was Vice President, Sales and Marketing, United States and from 1991 to 1996, Mr. Stess held various positions in the Company, including Vice President, North American Marketing; Vice President, Marketing of Gandalf Systems Corporation; Strategic Marketing (Remote Access) and Marketing Manager, New Business Development. Frank van der Poll, 31, has been Managing Director, Northern Europe, since April 1996. From March 1994 to April 1996, Mr. van der Poll was Managing Director, Gandalf Nederland B.V. From 1993 to February 1994, Mr. van der Poll was Sales Director, Gandalf Nederland B.V. From 1990 to 1993, Mr. van der Poll held positions with ICL Company. ITEM 11. EXECUTIVE COMPENSATION Overview - -------- The Company currently has 9 executive officers of whom two became executive officers subsequent to March 31, 1996 and whose compensation during fiscal 1996 does not form part of the amounts contained in this section. The aggregate cash compensation, including amounts paid under the Executive Incentive Plan paid to all executive officers as a group (9 persons, including two individuals who were executive officers during fiscal 1996, but were not serving at March 31, 1996) by the Company and its subsidiaries for services rendered during the fiscal year ended March 31, 1996 was $1,260,786. In addition, during the fiscal year ended March 31, 1996, executive officers were given the use of automobiles leased by the Company at an aggregate incremental cost to the Company and its subsidiaries of $45,348. Liability Insurance - ------------------- The Company provides liability insurance for directors and officers of the Company and its subsidiaries. Effective November 1, 1995 the Company had directors' and officers' liability insurance with policy limits of $18.3 million per loss with an annual aggregate of $18.3 million. The Company's annual deductible is $73,000 except $257,000 for claims originating in the United States, and no deductible to the individual. The premium for directors' and officers' liability insurance in respect of fiscal 1996 was $226,000. The individual directors and officers of the Company and its subsidiaries are insured for losses arising from claims against them for certain of their acts, errors or omissions. The Company is insured against any loss arising out of any liability to indemnify a director or officer. Summary Compensation Table - -------------------------- The following table presents information provided in accordance with regulations under the Securities Act (Ontario) which requires the disclosure of compensation paid during each of the years in the three year period ended March 31, 1996, in respect of the individuals serving as executive officers at March 31, 1996, who during fiscal 1996 held the position of chief executive officer of the Company or who were the other four most highly compensated executive officers of the Company. The table also includes two additional individuals who were executive officers during fiscal 1996, but were not serving at March 31, 1996. In addition, the Company has included information in respect of two other executive officers of the Company serving at March 31, 1996.
SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Awards ----------------------------------- ----------- Securities Under Name and Fiscal Other Annual Options All Other Principal Positions Year Salary Bonus Compensation Granted Compensation ($) ($) (#) (a) (b) (c) (d) (e) (f) (g) - ------------------------------------------------------------------------------------------------------- Executive officers serving with the Company as at June 1, 1996 - ------------------------------------------------------------------------------------------------------- T.A. Vassiliades 1996 $200,000 --- --- 800,000 --- Chairman, President and CEO 1995 $178,498 (1) --- --- 600,000 --- 1994 --- --- --- --- --- R. Busto 1996 $146,125 (2) --- --- 100,000 --- VP Strategy, Business 1995 --- --- --- --- --- Development and Network 1994 --- --- --- --- --- Services M. Chawner 1996 $ 89,903 --- --- 50,000 --- VP Product Operations and 1995 $ 10,228 (3) --- --- 75,000 --- Chief Technology Officer 1994 --- --- --- --- --- J. Lemieux 1996 $ 99,760 (4) --- --- 50,000 --- VP Worldwide Marketing 1995 --- --- --- --- --- 1994 --- --- --- --- --- W. R. MacDonald 1996 $ 89,536 $18,164 --- 64,000 --- VP Finance and CFO 1995 $ 84,443 --- --- 40,000 --- 1994 $ 71,287 --- --- 50,000 --- J. McGoldrick 1996 $103,376 $ 3,671 --- 50,000 --- President Asia Pacific 1995 62,240 (5) --- --- 50,000 --- Group 1994 --- --- --- --- --- K. Stess 1996 $169,751 (4) --- --- 35,000 --- VP North American Sales 1995 --- --- --- --- --- 1994 --- --- --- --- --- Executive officers no longer serving with the Company as at June 1, 1996 - ------------------------------------------------------------------------------------------------------ P. Beaumont 1996 $157,883 (6) --- --- 25,000 --- VP Sales, Services and 1995 $149,376 (4) --- --- 125,000 --- Marketing for the Americas 1994 --- --- --- --- --- G.A. Daniello 1996 $131,463 (7) $35,219 --- 25,000 --- VP Product Operations 1995 $137,478 --- --- 75,000 --- and Chief Technology Officer 1994 $111,493 (8) --- --- 125,000 --- (1) T.A. Vassiliades was appointed President and CEO on May 10, 1994. He held this office for ten months in fiscal 1995, and previously provided consulting services to the Company through Avatar Management Services, Inc., a company controlled by him. (2) R. Busto was employed by the Company for seven months during fiscal 1996. (3) M. Chawner was employed by the Company for one month during fiscal 1995. (4) Includes sales commissions. (5) J. McGoldrick was employed by the Company for five months during fiscal 1995. (6) P. Beaumont resigned from the Company March 31, 1996. (7) G.A. Daniello resigned from the Company on January 19, 1996. (8) G.A. Daniello was employed by the Company for ten months during fiscal 1994.
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR % Market of Total Value of Options Securities Securities to Granted Underlying Under Employees Option on Name and Options Financial Exercise or the Date Expiration Principal Positions Granted Year Base Price of Grant (1) Date (#) ($/Security) ($/Security) (a) (b) (c) (d) (e) (f) Executive officers serving with the Company as at June 1, 1996 - ---------------------------------------------------------------------------------------------- T.A. Vassiliades 800,000 45.9% 800,000 @ $ 3.77 $ 3.77 April 7, 2005 Chairman, President and CEO R. Busto 100,000 5.7% 100,000 @ $ 7.65 $ 7.65 August 27, 2005 VP Strategy, Business Development and Network Services M. Chawner 50,000 2.8% 25,000 @ $ 4.77 (2) $ 4.77 May 10, 2005 VP Product Operations 25,000 @ $15.96 (2) $15.96 January 21, 2006 and Chief Technology Officer J. Lemieux 50,000 2.8% 5,000 @ $ 8.80 (2) $ 8.80 July 16, 2005 VP Worldwide 20,000 @ $ 5.50 (2) $ 5.50 October 31, 2005 Marketing 25,000 @ $13.39 (2) $13.39 January 10, 2006 W. R. MacDonald 64,000 3.7% 44,000 @ $ 4.77 (2) $ 4.77 May 10, 2005 VP Finance and CFO 20,000 @ $13.85 (2) $13.85 March 17, 2006 J. McGoldrick 50,000 2.8% 50,000 @ $ 4.72 (3) $ 4.72 May 10, 2002 President Asia Pacific Group K. Stess VP North American 35,000 2.0% 10,000 @ $ 8.85 $ 8.85 July 16, 2005 Sales 25,000 @ $15.70 $15.70 January 3, 2006 Executive officers no longer serving with the Company as at June 1, 1996 - ---------------------------------------------------------------------------------------------- P. Beaumont VP Sales, Services 25,000 1.4% 25,000 @ $ 4.72 (3) $ 4.72 May 10, 2002 and Marketing for the Americas G.A. Daniello 25,000 1.4% 25,000 @ $ 4.77 (2) $ 4.77 May 10, 2005 VP Product Operations and Chief Technology Officer (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=$0.7336. (3) Options were granted in pounds sterling. Translated at the year end exchange rate of 1 pound sterling=$1.5263
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION VALUES Value of Unexercised Unexercised in-the-Money Options Options at Fiscal at Fiscal Securities Aggregate Value of Year End (1)(#) Year End (2)($) Name and Acquired Securities Acquired Exercisable/ Excerciseable/ Principal Positions on Exercise on Exercise Unexerciseable Unexcerciseable (#) ($) (a) (b) (c) (d) (e) - ------------------------------------------------------------------------------------------------------------------ Executive officers serving with the Company as at June 1, 1995 - ------------------------------------------------------------------------------------------------------------------ T.A. Vassiliades 1,152,502 $12,008,388 266,665 Exercisable $2,930,649 Exercisable Chairman, President 10,833 Unexercisable $ 126,711 Unexercisable and CEO R. Busto --- --- 100,000 Unexercisable $ 711,000 Unexercisable VP Strategy, Business Development and Network Services M. Chawner --- --- 25,005 Exercisable $ 309,462 (3) Exercisable VP Product Operations and 99,995 Unexercisable $ 868,538 (3) Unexercisable Chief Technology Officer J. Lemieux --- --- 1,667 Exercisable $ 17,267 (3) Exercisable VP Worldwide Marketing 53,333 Unexercisable $ 283,768 (3) Unexercisable W. R. MacDonald --- --- 67,671 Exercisable $ 871,750 (3) Exercisable VP Finance and CFO 107,329 Unexercisable $1,061,147 (3) Exercisable J. McGoldrick 5,000 $ 52,021 11,667 Exercisable $ 157,073 (4) Exercisable President Asia Pacific 83,333 Unexercisable $ 950,662 (4) Unexercisable Group K. Stess 6,667 $ 91,837 48,333 Unexercisable $ 243,509 Unexercisable VP North American Sales Executive officers no longer serving with the Company as at June 1, 1996 - ------------------------------------------------------------------------------------------------------------------ P. Beaumont 41,666 $ 225,968 NIL (5) NIL VP Sales, Services and Marketing for the Americas G.A. Daniello 116,675 $1,214,670 NIL (6) NIL VP Product Operations and Chief Technology Officer (1) Includes options granted prior to appointment as an executive officer. (2) The market value of common shares underlying the options on March 31, 1996 was $14.76. (3) Options were granted in Canadian dollars. Translated at the year end exchange rate of C$1=0.7336. (4) Options were granted in pounds sterling. Translated at the year end exchange rate of 1 pound sterling=$1.5263. (5) P. Beaumont resigned from the Company on March 31, 1996. 108,334 options expired upon the Optionee ceasing to be employed by the Company. (6) G. Daniello resigned from the Company on January 19, 1996. 108,325 options expired upon the Optionee ceasing to be employed by the Company.
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 established objectives are achieved. Bonuses paid to executive officers during the fiscal year ended March 31, 1996 totaled $57,054. The Company has five stock option plans as set out below, of which only one is an active plan. All option grants made during the fiscal year ended March 31, 1996 were from the Stock Option Plan for Key Employees and Directors (formerly the Stock Option Plan for Executives and Directors). 1983 Stock Option Plan for Key Employees 1984 Stock Option Plan for Directors 1988 Stock Option Plan for Key Employees 1988 Stock Option Plan for Directors Stock Option Plan for Key Employees and Directors As at March 31, 1996, 1,859,225 Common Shares were subject to options at prices ranging from C$0.88 to C$23.00 and expiring at various dates between January 10, 1997 and March 17, 2006. Of such options, 1,167,165 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 of Directors 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, 1996, the following amounts were paid to directors of the Company in their capacity as directors, including amounts paid for Committee participation or special assignments: Desmond Cunningham C$10,660; Alexander Curran $11,100; John F. Gamba $6,096; Charles J. Gardner C$15,900; Donald M. Gleklen $11,000; Robert E. Keith $14,600; A. Graham Sadler C$10,700; Albert Sinyor C$6,417. Thomas A. Vassiliades was appointed Chairman on May 31, 1995 and President and Chief Executive Officer on May 10, 1994. Desmond Cunningham resigned as Chairman of the Company on May 31, 1995. Directors of the Company, are eligible to receive stock options under the Stock Option Plan for Key Employees and Directors. Pursuant to the terms of the Plan, as amended and ratified by the shareholders on August 10, 1995, directors are to be awarded stock options on 10,000 common shares of the Company on the date of their initial election, and stock options on 5,000 common shares of the Company on each subsequent re-election, up to a maximum of 50,000 unexercised stock options. On August 10, 1995, Mr. Gamba and Mr. Sinyor were elected directors of the Company and each received a stock option under the Stock Option Plan for Key Employees and Directors to purchase 10,000 common shares at an exercise price of $10.86 per common share (the equivalent of the Canadian market price on the date of grant), and C$14.75, respectively. The remaining directors of the Company each received option grants, effective May 31, 1995, at an exercise price equal to the market price on the date of grant. The number of stock options granted vary by individual director, in recognition of additional responsibilities undertaken for committee work as well as length of service as a director. Resident Canadian directors received option grants at an exercise price of C$7.50, as follows: Desmond Cunningham, 10,000; Alexander Curran, 15,000; Charles J. Gardner, 15,000; A. Graham Sadler, 10,000. United States resident directors received option grants at an exercise price of $5.48 (the equivalent of the Canadian market price on the date of grant), as follows: Donald M. Gleklen, 20,000; Robert E. Keith, 10,000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of June 1, 1996 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 (7) - ---------------------------------------------------------------------------------- Richard Busto - - Michael Chawner 34,640 (4) - Desmond Cunningham 83,693 (2) - Alexander Curran 18,917 (3) - John F. Gamba 800 - Charles J. Gardner 25,667 (4) - Donald M. Gleklen 75,668 (4) - Barclay C. Isherwood 287,200 Robert E. Keith 47,943 (4) - Joceline Lemieux 3,334 (3) - Ian McLaren - - John McGoldrick 10,337 (3) - A. Graham Sadler 3,250 (3) - Albert Sinyor - - Kenneth Stess 6,667 (3) - Walter R. MacDonald 95,673 (3) - Peter Merrifield 5,001 (3) - Frank van der Poll 5,001 (3) - Mihkel E. Voore - - Johnny Wai-Nang Wong - - Thomas A. Vassiliades 665,844 (4) (5) 1.5% All executive officers and directors as a group (21 persons) 1,369,635 (6) 3.1% FOOTNOTES (1) All shares are owned of record or beneficially and the sole investment and voting power is held by the person named, except as set forth below. (2) 81,692 shares are owned of record by Donosti Investments Inc., a corporation controlled by Desmond Cunningham, and the balance represent options currently exercisable (or exercisable within the next 60 days) by Desmond Cunningham. (3) Represents options (currently exercisable or exercisable within 60 days). (4) Includes options (currently exercisable or exercisable within 60 days) on the following shares: Michael Chawner 33,340 Charles J. Gardner 24,667 Donald M. Gleklen 25,668 Robert E. Keith 3,250 Thomas A. Vassiliades 1,250 (5) Includes 300,000 common shares held by Mr. Vassiliades wife. (6) Includes options (currently exercisable or exercisable within 60 days) on 238,356 common shares. (7) 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 Charles J. Gardner, a current Board member, and Mihkel E. Voore, a nominee to the Board, are each partners in law firms which provides legal services to the Company. Mr. Cunningham had a consulting arrangement under which he performed services for the Company during the fiscal year ended March 31, 1996. Mr. Vassiliades had a consulting arrangement with the Company prior to his becoming 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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report. (1) The following financial statements, included in the 1996 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, 1996 and March 31, 1995. Consolidated Statements of Income for the years ended March 31, 1996, March 31, 1995 and March 31, 1994. Consolidated Statements of Changes in Financial Position for the years ended March 31, 1996, March 31, 1995 and March 31, 1994. Consolidated Statements of Shareholders' Equity for the years ended March 31, 1996, March 31, 1995 and March 31, 1994. 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 Consulting Agreement dated as of February 21, 1994 between the Company and Thomas A. Vassiliades (filed as Exhibit 10.17 to the Form 10-K for the fiscal year ended March 31, 1994). *10.8 Consulting Agreement dated as of March 1, 1995 between Thomas A. Vassiliades and the Company (filed as Exhibit 10.11 to the Form 10-Q for the quarter ended July 1, 1995). *10.9 Credit Agreement dated as of May 30, 1995 between the Royal Bank of Canada and the Company (filed as Exhibit 10.12 to the Form 10-Q for the quarter ended July 1, 1995). *10.10 Credit Agreement, dated as of May 30, 1995 between the Royal Bank of Canada and Gandalf Canada Limited/Gandalf Technologies Inc. (filed as Exhibit 10.13 to the Form 10-Q for the quarter ended July 1, 1995). 13 Pages 14 to 34 of the Annual Report to Shareholders for the fiscal year ended March 31, 1996. 21 List of subsidiaries. 23 Consent of KPMG Peat Marwick Thorne. - ---------------------------------- *Incorporated herein by reference. (b) The Company did not file any reports on Form 8-K during the fourth quarter of the fiscal year ended March 31, 1996. 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 3, 1996 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 3, 1996 s/ALEXANDER CURRAN - ------------------ (Alexander Curran) Director June 3, 1996 s/JOHN F. GAMBA - --------------- (John F. Gamba) Director June 3, 1996 s/CHARLES J. GARDNER - -------------------- (Charles J. Gardner) Director June 3, 1996 s/DONALD M. GLEKLEN - ------------------- (Donald M. Gleklen) Director June 3, 1996 s/ROBERT E. KEITH - ----------------- (Robert E. Keith) Director June 3, 1996 s/WALTER R. MACDONALD - ---------------------- Vice President June 3, 1996 (Walter R. MacDonald) of Finance (Principal Financial and and Accounting Officer) s/A. GRAHAM SADLER - ------------------ (A. Graham Sadler) Director June 3, 1996 s/ALBERT SINYOR - --------------- (Albert Sinyor) Director June 3, 1996 s/THOMAS A. VASSILIADES - ------------------------ Director, Chairman, June 3, 1996 (Thomas A. Vassiliades) President, and Chief Executive Officer (Principal Executive Officer) Consolidated Financial Statements of Gandalf Technologies Inc. These financial statements are prepared in accordance with Canadian generally accepted accounting principles which in the case of the Company differ in certain respects from those in the United States. See note 17 to the consolidated financial statements. AUDITORS' REPORT ON SCHEDULE To the Board of Directors and Shareholders of Gandalf Technologies Inc. Under date of May 10, 1996, we reported on the consolidated balance sheets of Gandalf Technologies Inc. as at March 31, 1996 and 1995 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, 1996 as contained in the 1996 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the fiscal year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in item 14 of Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. s/KPMG PEAT MARWICK THORNE Chartered Accountants Ottawa, Canada May 10, 1996
Schedule II: Valuation and qualifying accounts and reserves. (Thousands of United States dollars) - ------------------------------------------------------------------------------- Col. A Col. B Col. C Col. D Col. E Additions --------------------- (1) (2) Charged to Balance at Charged to other Balance beginning costs and accounts Deductions at end Description of year expenses - describe(1) - describe of year - ------------------------------------------------------------------------------- Year ended March 31, 1996 - ----------- Reserve for bad debts deducted in the balance sheet from amounts receivable ....... $ 4,430 $ 836 $ (364) $ - $ 4,902 Year ended March 31, 1995 - ----------- Reserve for bad debts deducted in the balance sheet from amounts receivable ...... $ 4,414 $ 519 $ (503) $ - $ 4,430 (1) Relates to accounts receivable charged directly against reserve for bad debts.
EX-13 2 FINANCIAL STATEMENTS
Consolidated Balance Sheets (Thousands of U.S. dollars) As at March 31 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 13,602 $ 11,817 Accounts receivable 28,694 26,880 Inventories (note 2) 13,491 15,230 Other 1,867 2,268 - ---------------------------------------------------------------------------------------------------------------- Total current assets 57,654 56,195 Fixed assets (note 3) 16,253 18,619 Goodwill, net of accumulated amortization of $3,172 (1995 - $2,952) 3,242 3,462 Other assets 2,226 3,232 - ---------------------------------------------------------------------------------------------------------------- Total assets $ 79,375 $ 81,508 ================================================================================================================ Liabilities and Shareholders' Equity Current liabilities: Bank operating lines (note 4) $ - $ 5,854 Accounts payable and accrued liabilities (note 5) 21,755 21,369 Deferred revenue 6,178 7,758 Current portion of long-term debt (note 6) 360 157 - ---------------------------------------------------------------------------------------------------------------- Total current liabilities 28,293 35,138 Long-term debt (note 6) 2,496 1,877 Convertible debentures (note 7) - 10,051 Shareholders' equity: Capital stock (notes 8 and 9) Common shares, 42,939,523 issued and outstanding (1995 - 35,238,064) 54,198 91,644 Retained earnings (note 8) 260 (52,364) Cumulative translation adjustment (5,872) (4,838) - ---------------------------------------------------------------------------------------------------------------- Total shareholders' equity 48,586 34,442 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 79,375 $ 81,508 ================================================================================================================ Commitments and contingencies (note 15) On behalf of the Board of Directors: s/THOMAS A. VASSILIADES s/D.M. GLEKLEN T.A. Vassiliades, Director D.M. Gleklen, Director See accompanying notes to consolidated financial statements
Consolidated Statements of Income (Thousands of U.S. dollars, except per share amounts) Years Ended March 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Revenues: Product $ 81,076 $ 83,801 $ 90,813 Service 35,457 36,710 40,510 - ------------------------------------------------------------------------------------------------------------ 116,533 120,511 131,323 Operating expenses: Cost of product sales 38,941 43,630 49,509 Service expenses 24,053 23,316 27,024 Sales and marketing 31,942 33,148 43,678 Administration and general 8,054 7,513 11,094 Research and development 11,524 10,197 14,316 Restructuring and other costs (note 10) 1,531 685 28,662 - ------------------------------------------------------------------------------------------------------------ Income (loss) from operations 488 2,022 (42,960) Gain on sale of portfolio investment - 2,024 - Interest expense (487) (2,969) (4,127) Interest income and foreign exchange 259 329 991 Income taxes (note 11) - - (1,142) - ------------------------------------------------------------------------------------------------------------ Net income (loss) for the year $ 260 $ 1,406 $ (47,238) ============================================================================================================ Basic earnings (loss) per share (note 12) $ 0.01 $ 0.05 $ (2.27) ============================================================================================================ Weighted average number of common shares outstanding (thousands) 40,359 28,589 20,802 ============================================================================================================ 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, 1996 and 1995 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, 1996. 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, 1996 and 1995 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, 1996, in accordance with generally accepted accounting principles. s/KPMG PEAT MARWICK THORNE Chartered Accountants Ottawa, Canada May 10 1996
Consolidated Statements of Changes in Financial Position (Thousands of U.S. dollars) Years Ended March 31 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Operating activities: Cash provided by (applied to) operations (note 13) $ 5,687 $ 4,958 $ (14,395) Decrease (increase) in operating working capital (note 14) (785) 4,212 775 - ---------------------------------------------------------------------------------------------------------------- Cash provided by (applied to) operating activities 4,902 9,170 (13,620) - ---------------------------------------------------------------------------------------------------------------- Financing activities: Issue of capital stock 15,273 12,242 34,226 Conversion of debentures (note 7) (10,336) (11,533) - Long-term debt incurred 1,020 - - Long-term debt retired (251) (446) (20,841) - ---------------------------------------------------------------------------------------------------------------- Cash provided by financing activities 5,706 263 13,385 - ---------------------------------------------------------------------------------------------------------------- Investing activities: Purchase of fixed assets (2,671) (2,919) (4,411) Proceeds on disposal of investments - 3,857 1,158 Proceeds on disposal of fixed assets - 298 1,088 Other 39 293 (2,041) - ---------------------------------------------------------------------------------------------------------------- Cash provided by (applied to) investing activities (2,632) 1,529 (4,206) - ---------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash balances (337) 240 (510) - ---------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash position in the year 7,639 11,202 (4,951) Cash position at beginning of year 5,963 (5,239) (288) - ---------------------------------------------------------------------------------------------------------------- Cash position at end of year $ 13,602 $ 5,963 $ (5,239) ================================================================================================================ Cash position is comprised of: Cash and cash equivalents $ 13,602 $ 11,817 $ 5,273 Bank operating lines - (5,854) (10,512) - ---------------------------------------------------------------------------------------------------------------- $ 13,602 $ 5,963 $ (5,239) ================================================================================================================ See accompanying notes to consolidated financial statements
Consolidated Statements of Shareholders' Equity (Thousands of U.S. dollars) Years Ended March 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ 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 35,238,064 $ 91,644 28,072,333 $ 79,811 15,864,833 $ 45,585 Issued: On conversion of debentures (note 7) 5,983,372 9,839 6,782,519 11,124 - - On public offering, net of share issue costs - - - - 12,000,000 33,863 Exercise of stock options (note 9) 1,582,685 3,531 182,214 354 207,500 363 Other 135,402 1,548 200,998 355 - - Reduction in stated capital (note 8) - (52,364) - - - - - ------------------------------------------------------------------------------------------------------------------ Balance at end of year 42,939,523 $ 54,198 35,238,064 $ 91,644 28,072,333 $ 79,811 ================================================================================================================== Retained Earnings: Balance at beginning of year $(52,364) $(53,770) $ (6,532) Net income (loss) 260 1,406 (47,238) Reduction in stated capital (note 8) 52,364 - - - ------------------------------------------------------------------------------------------------------------------ Balance at end of year $ 260 $(52,364) $(53,770) ================================================================================================================== Cumulative Translation Adjustment: Balance at beginning of year $ (4,838) $ (6,932) $ (4,745) Adjustment arising on translation of foreign subsidiaries' financial statements to U.S. dollars 549 1,091 (3,122) Adjustment relating to subsidiary loans designated as long-term investments (1,583) 1,003 935 - ------------------------------------------------------------------------------------------------------------------ Balance at end of year $ (5,872) $ (4,838) $ (6,932) ================================================================================================================== See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements All amounts are stated in U.S. dollars unless otherwise indicated. C$ refers to Canadian dollars. Tabular amounts are in thousands except per share data. References to years are to fiscal years ended March 31. 1. Summary of Accounting Principles These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada. These principles are also generally accepted in the United States in all material respects except as disclosed in note 17. 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. (g) Research and Development Costs Research costs are expensed as incurred. Development costs are expensed in the year incurred unless management believes a development project meets the generally accepted accounting criteria for deferral and amortization. (h) Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired of subsidiary companies and is amortized using the straight-line method over a period not exceeding 20 years. When warranted by events or circumstances that might indicate that recoverability is impaired, management will evaluate recoverability by use of the undiscounted cash flow method. (i) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Inventories
As at March 31 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Raw materials $ 2,905 $ 3,336 Work-in-process 3,821 4,591 Finished goods 6,765 7,303 - ------------------------------------------------------------------------------------------------------------------- $ 13,491 $ 15,230 ===================================================================================================================
3. Fixed Assets
As at March 31 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Cost: Land $ 218 $ 232 Buildings 4,627 4,725 Equipment 58,336 55,879 Leasehold improvements 1,966 1,930 - -------------------------------------------------------------------------------------------------------------------- 65,147 62,766 Accumulated depreciation 48,894 44,147 - -------------------------------------------------------------------------------------------------------------------- Net book value $ 16,253 $ 18,619 ====================================================================================================================
4. Bank Operating Lines At March 31, 1996 the Company's authorized bank operating lines totaled $20.8 million. These committed credit facilities are provided by a Canadian chartered bank and bear interest at the banks prime rate plus 0.5% to 1.5%. 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, $17.3 million was available to, but not utilized by, the Company at March 31, 1996. Cash and cash equivalents held as of that date represented a further $13.6 million of cash resources available to the Company. Cash and unused credit lines totaled $30.9 million at March 31, 1996, compared to $20.8 million at March 31, 1995. 5. Accounts Payable and Accrued Liabilities
As at March 31 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Trade accounts payable $ 7,376 $ 7,341 Payroll, commissions and related taxes 3,873 4,072 Accrued restructuring costs 2,747 3,033 Other payables 6,434 5,266 Income and other taxes payable 1,325 1,657 - -------------------------------------------------------------------------------------------------------------------- $ 21,755 $ 21,369 ====================================================================================================================
6. Long-term Debt
As at March 31 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Interest Description Rates Security - ------------------------------------------------------------------------------------------------------------------- Various capital lease 8%-12.9% Certain equipment and $ 2,856 $ 2,034 obligations denominated in facilities Canadian dollars, lease terms ending 1999 - 2009 Classified as current (360) (157) - ------------------------------------------------------------------------------------------------------------------- $ 2,496 $ 1,877 ===================================================================================================================
The aggregate amount of long-term debt scheduled to be repaid in the five years ending March 31, 2001 is $1,359,000, with the balance of $1,497,000 due thereafter. 7. Convertible Debentures
Shares Issued Aggregate Principal Amount % Upon Conversion - --------------------------------------------------------------------------------------------------------------- Balance at March 31, 1994 C$ 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 during year (14,061) (10,336) (47) 5,983,372 Impact of foreign exchange - 285 - - -------------------------------------------------------------------------------------------- Balance at March 31, 1996 C$ - $ - - ============================================================================================
In November 1992 the Company issued 8.5% convertible debentures with an aggregate principal amount of C$30.0 million which were due to mature in November 2002. At any time prior to maturity they were convertible into common shares of the Company at the option of the holder at a conversion price of C$2.35 (approximately $1.72) which would yield 425.53 common shares for each C$1,000 (approximately $732) of principal amount of debentures held. During 1995 debentures with an aggregate principal amount of $11,533,000 were converted into 6,782,519 common shares. During 1996 all remaining debentures were converted into 5,983,372 common shares. The resulting increase in capital stock of $9,839,000 was determined as the sum of the principal amount of the debentures converted ($10,336,000) plus interest accrued, but unpaid to the date of conversion ($135,000), net of the pro rata share of the associated unamortized deferred financing costs ($632,000). 8. Reduction in Stated Capital On August 10, 1995 the shareholders of the Company passed a special resolution authorizing a reduction in statutory stated capital in respect of the common shares by $52,364,000. This resulted in a corresponding reduction in the accumulated deficit as shown on the consolidated balance sheets and the consolidated statements of shareholders equity. 9. Stock Options The following table summarizes the activity for the stock option plans in effect during the year ended March 31, 1996 and for each of the preceding two years.
Shares Available Outstanding for Grant Options - ------------------------------------------------------------------------------------------------------------------ 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 Reserved for issuance 3,000,574 - Granted (1,743,000) 1,743,000 Terminated 640,876 (640,876) Exercised - (1,582,685) - ------------------------------------------------------------------------------------------------------------------ Balance at March 31, 1996 1,983,410 1,859,225 ==================================================================================================================
The options to purchase common shares granted under the above stock option plans expire between January 10, 1997 and March 17, 2006. Of the 1,859,225 options outstanding at March 31, 1996, 583,857 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 prices for outstanding options granted on or before March 31, 1995 range from C$0.88 to C$6.00 (approximately $0.65 to $4.40) per share. The exercise price for options granted during the year ended March 31, 1996 range from C$5.25 to C$23.00 (approximately $3.85 to $16.87) per share. Directors and executive officers as a group held 1,167,165 options as at March 31, 1996. 10. Restructuring and Other Costs
Years Ended March 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Restructuring $ 1,531 $ 685 $ 15,760 Other - - 12,902 - ------------------------------------------------------------------------------------------------------------------- $ 1,531 $ 685 $ 28,662 ===================================================================================================================
Over the past several years the Company has undertaken significant restructuring activities in order to reposition the Company in line with its strategy, reduce costs and improve competitiveness. The size of the Company's workforce, after taking into account restructuring activities which were accrued in 1996, is now less than 700 employees, approximately one-third the level of five years ago. Restructuring charges in the fourth quarter of 1996 were recorded in connection with certain consolidation and outsourcing activities carried out since the end of the third quarter in the areas of manufacturing distribution and repair in Europe, outsourcing to partners for the delivery of field service maintenance, and changes in the sales structure to continue the implementation of the Company's distribution channel strategy. These charges primarily related to severance and facilities costs. Restructuring costs recorded in 1995 represented severance costs associated with the elimination of approximately 70 positions at the end of the first fiscal quarter in connection with an internal functional realignment. Restructuring costs recorded in 1994 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. 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 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. 11. Income Taxes
Years Ended March 31 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- 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 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Expected tax rate 44.6% 44.3% 44.3% Expected tax expense (recovery) $ 116 $ 623 $(20,420) Utilization of losses not previously recorded (116) (623) - Losses for which no tax benefit has been recorded - - 20,420 Other - - (1,142) - ---------------------------------------------------------------------------------------------------------------- $ - $ - $ (1,142) ================================================================================================================
At March 31, 1996, the Company had available, subject to audit and certain restrictions, accumulated accounting losses of approximately $70 million, the potential tax benefit of which has not been recorded in the consolidated financial statements. These include loss carry forwards for income tax purposes of approximately $50 million ($39 million related to U.S. operations) which begin to expire after the 1999 fiscal year. The remaining amount relates to items expensed in the consolidated financial statements which have not yet been claimed for income tax purposes. The Company also had available at March 31, 1996, 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 2006. 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 be unlikely to result in a material adverse effect on the Company's consolidated financial position or its future results of operations. The loss before income taxes attributable to all foreign operations for the year ended March 31, 1996 was $1,933,000 (1995 - $735,000; 1994 -$31,074,000). At March 31, 1996 the balance of unremitted earnings of subsidiaries was $9,599,000 (1995 - $11,113,000; 1994 - $7,761,000). The Company does not currently anticipate repatriating earnings of foreign subsidiaries where such repatriation would give rise to withholding taxes. 12. Earnings Per Share Basic earnings (loss) per share figures are presented on the consolidated statements of income. These figures are calculated using the monthly weighted average number of common shares outstanding during the year. Fully diluted earnings per share information has not been presented as potential conversions are anti-dilutive. Adjusted earnings per share for 1996 was $0.01 (1995 - $0.07). The calculation assumes that the conversion of debentures, which occurred during 1996 and 1995, had occurred at the beginning of each applicable fiscal year. 13. Cash Provided By Operations Cash provided by (applied to) operations is computed as follows:
Years Ended March 31 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- Income (loss) from operations $ 488 $ 2,022 $ (42,960) Depreciation and amortization 5,408 5,616 9,658 Reserves and writedowns not involving an outlay of cash - - 22,004 Interest paid (468) (2,803) (3,546) Interest received and foreign exchange 259 329 991 Other - (206) (542) - --------------------------------------------------------------------------------------------------------------- $ 5,687 $ 4,958 $ (14,395) ===============================================================================================================
14. Changes in Operating Working Capital The decrease (increase) in operating working capital is computed as follows:
Years Ended March 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Accounts receivable $ (1,814) $ 3,302 $ 4,103 Inventories 1,739 5,647 1,750 Other current assets 401 78 73 Accounts payable and accrued liabilities 513 (6,160) (1,132) Deferred revenue (1,580) 334 (1,075) Foreign currency translation adjustment (44) 1,011 (2,944) - ------------------------------------------------------------------------------------------------------------------- $ (785) $ 4,212 $ 775 ===================================================================================================================
15. Commitments and Contingencies (a) The Company has entered into various commitments under leases and other contracts. At March 31, 1996, the minimum amounts payable under such commitments in future fiscal years were as follows: 1997 $ 12,793 1998 10,674 1999 2,059 2000 1,926 2001 1,733 Thereafter 6,689 -------- $ 35,874 ======== (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 ten years following the project completion date and is limited to the amount of the funding received. The Company commenced accruing royalties during 1996 upon completion of each project and expects that the funding will be fully repaid within three to five years. At March 31,1996, $785,000 had been accrued related to these projects. (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. 16. Segmented Information The Company operates in one business segment, providing networking solutions to customers through designing, manufacturing, marketing and servicing a broad line of computerized communications systems. The Company has defined five geographic regions for the segments in which it operates: the United States, Canada, the United Kingdom, Holland/France and other international markets. The following table sets forth information concerning these geographic segments for each of the years in the three year period ended March 31, 1996.
Years Ended March 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ Sales to customers: United States $ 32,758 $ 32,547 $ 35,157 Canada 21,675 22,473 23,341 United Kingdom 31,644 37,939 39,309 Holland/France 20,066 16,052 15,441 Other 10,390 11,500 18,075 Segment transfers: United States - 964 5,360 Canada 27,601 22,822 24,702 United Kingdom 1,031 977 2,385 Holland/France 6 9 476 Eliminations (28,638) (24,772) (32,923) - ------------------------------------------------------------------------------------------------------------------ Total revenues $ 116,533 $ 120,511 $ 131,323 ================================================================================================================== Segment operating profit: United States $ 6,416 $ 4,739 $ (1,621) Canada 3,433 1,764 (226) United Kingdom 5,722 8,242 6,908 Holland/France 4,276 3,527 2,550 Other (1,107) (65) 2,574 - ------------------------------------------------------------------------------------------------------------------- Total segment operating profit 18,740 18,207 10,185 - ------------------------------------------------------------------------------------------------------------------- Expenses: Research and development 11,524 10,197 14,316 General corporate 5,197 5,303 10,167 Restructuring and other costs 1,531 685 28,662 Gain on sale of portfolio investment - (2,024) - Interest expense 487 2,969 4,127 Interest income and foreign exchange (259) (329) (991) Income taxes - - 1,142 - ------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 260 $ 1,406 $ (47,238) =================================================================================================================== Identifiable assets: United States $ 10,845 $ 10,015 $ 14,919 Canada 31,530 27,376 33,440 United Kingdom 21,201 24,315 23,336 Holland/France 10,727 10,800 7,308 Other 5,072 9,002 10,183 - ------------------------------------------------------------------------------------------------------------------- Total assets $ 79,375 $ 81,508 $ 89,186 ===================================================================================================================
17. United States Accounting Principles The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada (Canadian GAAP) which in the case of the Company differ in the following material respects from those generally accepted in the United States(U.S. GAAP) (a) Under U.S. GAAP, financing and investing activities not involving a receipt or outlay of cash are excluded from the consolidated statements of changes in financial position. Accordingly, the following financing activities would not be presented in the consolidated statement of changes in financial position for the years ended March 31, 1996 and 1995 but would be shown supplementally.
1996 1995 - ------------------------------------------------------------------------------------------------------------------- Issue of capital stock on conversion of debentures $ 10,336 $ 11,533 Conversion of convertible debentures $ (10,336) $ (11,533)
(b) Under U.S. GAAP, bank operating lines would not be included as a component of the cash position presented in the consolidated statements of changes in financial position. The change in bank operating lines would be presented as a financing activity and would therefore be included in the determination of the increase or decrease in cash position in the year. (c) The Company follows the deferral method of accounting for income taxes. Under U.S. GAAP the asset and liability method is used. In the case of the Company the application of the asset and liability method does not result in a difference in the amount of the deferred tax asset. U.S. GAAP also requires the disclosure of the tax effect of temporary differences that give rise to deferred tax assets and liabilities. This information is provided in the following table. 1996 1995 -------------------------------------------------------------------------------------------------------------- Operating loss carry-forwards $ 20,300 $ 21,600 Depreciation 1,700 2,500 Restructuring reserves 200 800 Investment tax credits 11,000 11,000 Other 4,800 2,900 -------------------------------------------------------------------------------------------------------------- 38,000 38,800 Valuation allowance (37,496) (38,296) -------------------------------------------------------------------------------------------------------------- Net non-current deferred tax asset $ 504 $ 504 ==============================================================================================================
(d) Reductions in stated capital and deficit as described in note 8 do not fall within the definition of a quasi-reorganization under U.S. GAAP and, accordingly, under U.S. GAAP, capital stock and retained earnings would not each be reduced by $52,364,000 as shown in the consolidated statements of shareholders' equity. (e) U.S. GAAP requires the calculation of primary earnings per share. This figure is not materially different from the basic earnings per share figure calculated under Canadian GAAP. Quarterly Financial Information (Unaudited) Quarterly unaudited financial information for each of the years ended March 31, 1996 and 1995 is as follows:
First Second Third Fourth 1996 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------ Revenues: Product $ 19,414 $ 18,401 $ 19,326 $ 23,935 Service 9,236 8,956 8,845 8,420 - ------------------------------------------------------------------------------------------------------------------ 28,650 27,357 28,171 32,355 - ------------------------------------------------------------------------------------------------------------------ Operating expenses: Cost of product sales 9,663 8,572 9,179 11,527 Service expenses 5,869 5,910 6,096 6,178 Sales and marketing 8,198 7,659 7,892 8,193 Administration and general 2,071 2,142 2,102 1,739 Research and development 2,595 2,839 2,895 3,195 Restructuring costs - - - 1,531 - ------------------------------------------------------------------------------------------------------------------ Income (loss) from operations 254 235 7 (8) Interest expense (206) (136) (108) (37) Interest income and foreign exchange 18 (64) 193 112 - ------------------------------------------------------------------------------------------------------------------ Net income $ 66 $ 35 $ 92 $ 67 ================================================================================================================== Basic earnings per share $ - $ - $ - $ - ================================================================================================================== 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 exchange 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 ==================================================================================================================
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, 1996. 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 17 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 Company reported net income for the 1996 fiscal year of $260,000 or $0.01 per share on revenues of $116.5 million, compared to net income of $1.4 million or $0.05 per share on revenues of $120.5 million for the fiscal year ended March 31, 1995. The 1995 results included a one-time gain of $2.0 million on the sale of a portfolio investment. Income before restructuring charges for 1996 was $1.8 million, representing $0.04 per share. Income for 1995, exclusive of restructuring charges and a one-time gain on the sale of a portfolio investment, was $67,000, break even on a per share basis. Restructuring charges of $1.5 million were recorded in 1996 in connection with certain consolidation and outsourcing activities carried out in the areas of manufacturing distribution and repair in Europe, outsourcing to partners for the delivery of field service maintenance, and changes in the sales structure to continue the implementation of the Company's distribution channel strategy. The Company operates in one business segment, providing a broad range of internetworking products and services. Within this segment the Company derives revenue from four main product areas: remote access products; modems, multiplexers and local connectivity products; wide area networking (WAN) backbone products; and other. The majority of new product introductions and enhancements during 1996 occurred in the remote access area. Revenues from the sale of these products in 1996 increased more than 25% compared to 1995 and represented 65% of total product revenue compared to 49% in 1995 and 25% in 1994. The combined gross margin on product and service revenues improved in 1996 to 45.9% compared to 44.4% in 1995 and 41.7% in 1994. Operating expenses for sales and marketing, and administration and general expenses, declined approximately 2% in 1996 compared to 1995 after declining close to 26% in 1995 compared to 1994. Research and development expenses increased 13% in 1996 compared to 1995, and during the three year period 1994 to 1996 the Company has made expenditures on research and development which on average have been in excess of 14% of its annual revenues derived from the sale of products. The Company's net cash position more than doubled during 1996, from $6.0 million at March 31, 1995 to $13.6 million at March 31, 1996. Cash and unused credit lines were $30.9 million at March 31, 1996, an increase of 49% over the balance of $20.8 million at March 31, 1995. In addition, all remaining debentures issued in 1992 were converted to common shares of the Company in accordance with the terms of the debentures. Factors That May Affect Future Financial Performance The Company's quarterly and annual operating results are affected by various trends and factors including, but not limited to, competition, the Company's success in developing, introducing and gaining market acceptance for new products, the timing of orders from customers, the levels of inventory held by resellers and distributors, as well as factors such as changes in general economic conditions or conditions in the specific markets for the Company's products, government regulation, tariffing of carrier services, and industry consolidation. The networking industry is intensely competitive and subject to rapid change. As the market for the Company's products continues to develop, additional competitors are expected to enter the market and competition is anticipated to intensify. This may result in price reductions and margin erosion. Many of the Company's current and potential competitors have larger technical staffs, more established and larger marketing and sales organizations, and significantly greater financial resources than does the Company. The Company also competes with other data networking vendors for access to distribution channels. The Company's success is substantially dependent upon its ability to manage changes in its operations. Over the past several years the Company has undertaken significant restructuring activities in order to reposition the Company in line with its strategy, reduce costs and improve competitiveness. During the most recent fiscal year, examples of such changes included the establishment of new marketing and distribution channels, the restructuring of international operations and the outsourcing of the delivery of field service maintenance. In addition, the successful establishment and implementation of relationships with strategic partners and distributors is critical to the future success of the Company. During the past year, the Company has changed the way it distributes its products by establishing multi-tiered distribution channels and entering into agreements with several large resellers and distributors in North America, Europe and the Asia Pacific region. These new distribution channels, while viewed by the Company as critical to its future success, also bring additional new risks. These include less predictability regarding product demand and ordering patterns, reduced gross margins on sales to indirect channels and the time associated with reseller training and increasing awareness for the Company's products. The Company's quarterly operating results fluctuate as a result of a number of factors including pricing, distributor ordering patterns, product returns and reserves, product mix, as well as the timing of new product announcements and introductions by the Company and its competitors. The Company's revenues are difficult to predict due to shipment patterns. A substantial portion of the Company's expenses are fixed, and consequently any significant fluctuations in revenue will impact earnings. Products are generally shipped as orders are received, and accordingly, the Company operates with a relatively small backlog. As a result, sales in any quarter are dependent on orders booked and shipped in that quarter. A high percentage of the Company's revenues are typically earned in the third month of each fiscal quarter and tend to be concentrated in the latter half of that month. Accordingly, quarterly financial results will be difficult to predict prior to the end of the quarter and a shortfall in shipments at the end of any particular quarter may cause the results of that quarter to fall significantly short of anticipated levels. At the end of each quarter, the Company's distributors typically hold significant inventories of the Company's products. The Company has established reserves for returns based on experience. New channel relationships introduce additional uncertainty in this area. Setting reserves involves making judgments about future competitive conditions, product acceptance and other factors which by their nature involve uncertainties at the time the reserves are established. Results of Operations The following table sets forth items derived from the consolidated statements of income, expressed as a percentage of revenues, for the year ended March 31, 1996 and for each of the preceding two years.
Years Ended March 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ (Percentage of Revenues) Product 69.6% 69.5% 69.2% Service 30.4 30.5 30.8 - ------------------------------------------------------------------------------------------------------------------ 100.0% 100.0% 100.0% ================================================================================================================== Gross margin: Product 52.0% 47.9% 45.5% Service 32.2 36.5 33.3 Combined 45.9 44.5 41.7 Expenses: Sales and marketing 27.4 27.5 33.3 Administration and general 6.9 6.2 8.4 Research and development 9.9 8.4 10.9 Restructuring and other costs 1.3 0.6 21.8 - ----------------------------------------------------------------------------------------------------------------- Income (loss) from operations 0.4 1.7 (32.7) Gain on sale of portfolio investment - 1.7 - Interest expense (0.4) (2.5) (3.1) Interest income and foreign exchange 0.2 0.3 0.7 Income taxes - - (0.9) - ----------------------------------------------------------------------------------------------------------------- Net income (loss) 0.2% 1.2% (36.0)% =================================================================================================================
Revenues The following three tables set forth, for the year ended March 31, 1996 and for each of the two preceding fiscal years, product revenues by geographic segment and product group expressed as a percentage of total product revenues. These amounts have been calculated assuming constant rates of exchange in the translation of foreign currency amounts to U.S. dollars. Remote access products primarily include internetworking products sold under the names Gandalf Xpressway, XpressStack and XpressConnect. Remote access products represent a subset of the Company's total LAN internetworking product line. The other three product groups shown below represent traditional product areas for the Company which include wide area networking (WAN) backbone products; modems, multiplexers and local connectivity products; and other products which primarily represent third-party products.
Modems/ Multiplexers/ Remote WAN Local Years Ended March 31 Access Backbone Connectivity Other Total ------- --------- ------------ ----- ----- 1996 United States 25% 1% 5% 1% 32% Canada 12 1 4 1 18 United Kingdom 11 2 7 3 23 Holland/France 9 1 2 2 14 Other 8 3 2 - 13 --- --- --- --- --- 65% 8% 20% 7% 100% === === === === === 1995 United States 15% 1% 8% 4% 28% Canada 9 2 7 1 19 United Kingdom 12 3 9 4 28 Holland/France 6 1 3 1 11 Other 7 3 2 2 14 --- --- --- --- --- 49% 10% 29% 12% 100% === === === === === 1994 United States 7% 3% 9% 7% 26% Canada 5 1 9 2 17 United Kingdom 6 6 10 5 27 Holland/France 3 1 4 3 11 Other 4 7 5 3 19 --- --- --- --- --- 25% 18% 37% 20% 100% === === === === ===
Revenues in the fiscal year ended March 31, 1996 were $116.5 million compared to $120.5 million in 1995 and $131.3 million during 1994. Approximately 70% of revenues in 1996 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. Product revenues for the year ended March 31, 1996 were $81.1 million. For 1995 and 1994 such revenues were $83.8 million and $90.8 million respectively. Revenues from the Company's remote access products showed growth of 26% in 1996 compared to 1995 and represented 65% of product revenues in 1996 compared to 49% in 1995 and 25% in 1994. A decline in sales during 1995 and 1996 of other products sold by the Company, including third-party products, more than offset the growth in remote access products during this two year period, resulting in a decline in total product revenues of 3.3% in 1996 compared to 1995, and 7.7% in 1995 compared to 1994. Revenues from services were $35.5 million in 1996 compared to $36.7 million in 1995 and $40.5 million in 1994. Service revenues declined in 1996 compared to 1995 and 1994 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 Margin The combined gross margin (total revenues minus cost of product sales and service expenses expressed as a percentage of total revenues) was 45.9% in 1996 compared to 44.4% in 1995 and 41.7% in 1994. The improvement in the combined gross margin in 1996 compared to 1995 largely mitigated the reduction in revenues of $4.0 million from 1995 to 1996. The combined gross profit (total revenues minus cost of product sales and service expenses) in 1996 was $53.5 million on revenues of $116.5 million compared to $53.6 million on revenues of $120.5 million in 1995. The gross margin on product revenues (product revenues minus cost of product sales expressed as a percentage of product revenues) improved to 52.0% in 1996, compared to 47.9% in 1995 and 45.5% in 1994. In general, the combined effect of lower manufacturing costs following restructuring actions taken in the fourth quarter of 1994 and the first quarter of 1995 and a more favourable product mix, primarily due to a reduction in the volume of third-party product sales, has resulted in improvements since 1994 in the gross margin earned on product revenues. However, the Company anticipates that it will continue to experience quarterly fluctuations in the gross margin on product revenues such as those that were experienced in 1996, during which the gross margin on product revenues fluctuated in a range between 50.2% and 53.4% over the four fiscal quarters. The gross margin on service revenues (service revenues minus service expenses expressed as a percentage of service revenues) was 32.2% in 1996, 36.5% in 1995 and 33.3% in 1994. The decline in 1996 compared to 1995 occurred as a result of a 6% decline in service revenues in 1996 compared to 1995, when applying constant exchange rates for translation purposes for both periods. Service expenses, when translated in the same way, were unchanged in 1996 compared to 1995. Operating Expenses Sales and marketing, and administration and general expenses were $40.0 million in 1996, compared to $40.7 million in 1995 and $54.8 million in 1994. Reductions in these operating expenses in 1996 and 1995 related to restructuring and downsizing actions undertaken between 1993 and 1995. Research and development expenses in 1996 were $11.5 million, 13.0% higher than in 1995. Research and development expenses have averaged more than 14% of product revenues during the three years 1994 to 1996. 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). This funding is repayable, without interest, as a royalty on revenues earned in the ten years following the project completion date and is limited to the amount of funding received. The Company commenced accruing royalties during 1996 upon completion of each project and expects that the funding will be fully repaid within three to five years. At March 31, 1996 $785,000 had been accrued related to these projects. Restructuring charges of $1.5 million in the fourth quarter of 1996 were recorded in connection with certain consolidation and outsourcing activities carried out in the areas of manufacturing distribution and repair in Europe, outsourcing to partners for the delivery of field service maintenance, and changes in the sales structure to continue the implementation of the Company's distribution channel strategy. These charges primarily relate to severance and facilities costs. 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. 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. 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 and the benefit of these tax credits will instead be recorded in the financial statements as they are utilized to reduce federal income taxes payable in Canada. Other costs in 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 the carrying value of assets held for disposal to their estimated net realizable value. Income From Operations The Company reported income from operations, net of restructuring charges, of $488,000 in 1996 compared to income from operations of $2.0 million in 1995 and a loss from operations of $43.0 million in 1994. Income from operations, before restructuring charges, was $2.0 million in 1996 and $2.7 million in 1995, compared to a loss from operations, before restructuring charges and other costs, of $14.3 million in 1994. Net Financial Expenses Interest expense was $487,000 in 1996 compared with $3.0 million in 1995 and $4.1 million in 1994. Interest expense declined in 1996 compared to 1995 and 1994 as a result of the conversion of interest- bearing debentures to common shares during 1996 and 1995 and lower utilization of bank operating lines. Net Income Net income for the year ended March 31, 1996 was $260,000 or $0.01 per share compared to net income of $1.4 million or $0.05 per share in 1995. Income before restructuring charges in 1996 was $1.8 million, representing $0.04 per share. Income for 1995, exclusive of restructuring charges and a one-time gain on the sale of a portfolio investment, was $67,000, break even on a per share basis. Segment Operating Results Note 16 to the consolidated financial statements contains information concerning the geographic segments in which the Company operates. The following table sets forth supplemental information regarding product and service revenues by geographic segment for the year ended March 31, 1996 and for each of the preceding two years.
Years ended March 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- Product Revenues: United States $ 24,769 $ 23,341 $ 24,177 Canada 15,033 15,539 15,431 United Kingdom 18,540 24,059 24,602 Holland/France 12,344 9,362 8,528 Other 10,390 11,500 18,075 - ----------------------------------------------------------------------------------------------------------------- $ 81,076 $ 83,801 $ 90,813 ================================================================================================================= Service Revenues: United States $ 7,989 $ 9,206 $ 10,980 Canada 6,642 6,934 7,910 United Kingdom 13,104 13,880 14,707 Holland/France 7,722 6,690 6,913 - ----------------------------------------------------------------------------------------------------------------- $ 35,457 $ 36,710 $ 40,510 =================================================================================================================
Product and service revenues in North America (United States and Canada) were $54.4 million in 1996, compared to $55.0 million in 1995 and $58.5 million in 1994. The Company's European direct sales markets (United Kingdom, Holland and France) reported total revenues of $51.7 million in 1996, compared to $54.0 million in 1995 and $54.8 million in 1994. Other international markets represented revenues of $10.4 in 1996, $11.5 million in 1995 and $18.1 million in 1994. Segment operating profit for North America (United States and Canada) in 1996, expressed as a percentage of revenues, was 18.1% compared to 11.8% in 1995. In 1994, the segment operating loss in North America represented 3.2% of revenues. The improvement in operating performance for this segment between 1994 and 1996 is primarily attributable to a reduced cost infrastructure and an improved product mix. Segment operating profit, expressed as a percentage of revenues, for the Company's operations in the United Kingdom, Holland and France was 19.3% in 1996, 21.8% in 1995 and 17.3% in 1994. The decrease in operating profit in Europe during 1996 is primarily attributable to a 30% decline in traditional product revenues in the United Kingdom. The Company's other international markets reported a segment operating loss of 10.7% of revenues in 1996 compared to a segment operating loss of 0.6% of revenues in 1995, and a segment operating income of 13.8% of revenues in 1994. This reduction in profitability is primarily due to the combined effect of a change in product mix and the higher costs associated with developing these markets. Liquidity and Capital Resources The Company recorded positive cash flow of $7.6 million during 1996. At March 31, 1996 the net cash position (cash and cash equivalents net of bank operating lines) was $13.6 million compared to $6.0 million a year ago. The increase in cash included positive cash flow from operating activities of $4.9 million. Non-operating sources of cash in 1996 included net proceeds of $4.9 million from the issue of capital stock, primarily from the exercise of stock options and shares issued under the employee stock purchase plan. At March 31, 1996 the Company's authorized bank operating lines totaled $20.8 million. These committed facilities are provided by a Canadian chartered bank and bear interest at the bank's prime rate plus 0.5% to 1.5%. 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, $17.3 million was available to, but not utilized by, the Company at March 31, 1996. Cash and cash equivalents held as of that date represented a further $13.6 million of cash resources available to the Company. Cash and unused credit lines totaled $30.9 million at March 31, 1996, compared to $20.8 million at March 31, 1995. During 1995 and 1996 all outstanding 8.5% convertible debentures, issued in November 1992, were converted to common shares of the Company in accordance with the terms of the debentures. 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 currently anticipates that its long-term cash requirements will be satisfied through future operating cash flows. Capital spending was $2.7 million in 1996, $2.9 million in 1995 and $4.4 million in 1994. The Company believes it must continue to invest in its capital asset base at 1996 or moderately higher levels. The ratio of term debt to shareholders' equity at March 31, 1996 was 0.05:1. The corresponding figure at March 31, 1995 was 0.35:1. The Company's current ratio improved to 2.0:1 at March 31, 1996 compared to 1.6:1 at March 31, 1995. 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 1996 High 23 27 - 3/8 17.00 13 - 3/8 | 17 - 1/8 20 - 1/16 12 - 1/8 9 - 3/4 Low 16 - 5/8 6 - 3/8 7 - 4/8 4.85 | 12 - 3/32 4 - 7/8 5 - 5/8 3 - 1/2 Volume (000's) 8,705 33,241 15,958 24,240 | 93,368 168,536 89,217 69,536 - ------------------------------------------------------------------------------------------------------------------------ Fiscal 1995 High 6 - 7/8 2.33 1.58 1.74 | 4 - 7/8 1 - 11/16 1 - 3/16 1 - 3/8 Low 1.80 1.26 0.85 0.75 | 1 - 1/4 7/8 9/16 1/2 Volume (000's) 52,236 8,886 9,765 10,037 | 49,876 2,478 1,475 2,810 - ------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------
Volatility of Stock Prices The market price of the Company's common stock has been, and may continue to be, extremely volatile. The Company believes that the market price for the Company's stock at any particular time is heavily dependent on expectations in the market, including analysts' expectations, of future performance and growth which may be based on trends existing generally in industry. There can be no assurance that the Company's performance will meet such expectations, and accordingly, a shortfall in earnings in any given period can be expected to have an immediate and significant adverse effect on the trading price of the Company's common stock. Factors such as new product announcements by the Company or its competitors, strategic alliances, mergers or acquisitions announced by the Company's competitors, general conditions in the data networking market, the general volatility of stocks of high technology companies and other factors that may be unrelated to the performance of the Company may also have a significant impact on the market price of the Company's common stock. Shareholders As at June 1, 1996, there were 43,262,941 shares issued and outstanding with 1,867 record holders. The stock closed on The Toronto Stock Exchange at C$19.35 on May 31, 1996, and on The Nasdaq Stock Market at $13 56/64. Dividends Individuals and corporations resident in the United States are subject generally to a 15 percent withholding tax on dividends, and individuals and corporations resident in countries that do not have a treaty with Canada are subject to a 25% withholding tax. For United States corporations only, however, the United States/Canada Tax Treaty reduces the withholding tax to 10 percent if the United States corporation owns at least 10 percent of the Company's voting shares. It is the Company's present policy not to pay cash dividends and to retain its earnings to finance expansion and growth. Future dividends if any, would be expected to be paid in Canadian dollars. Payment of future dividends will be at the discretion of the Board of Directors and will be dependent on earnings, capital requirements and the financial condition of the Company. Capital gains derived in Canada from the sale or exchange of the Company's shares by an individual or corporation resident in the United States and without a permanent establishment in Canada are exempt from taxation in Canada with limited exceptions. 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 Amsterdam, Netherlands Gandalf S.A. France 16, Burospace route de Gisy 91572 Bievres Cedex France Jurisdiction of Name Incorporation - ------------------------------------- ----------------- Gandalf Systems Belgium N.V. Belgium Heizel Esplanade, P.O. Box 6, 1020 Brussels Infotron Puerto Rico, Inc. Delaware, United States 501 Delran Parkway Delran, New Jersey 08075-1249 T3-Inc. Delaware, United States 501 Delran Parkway Delran, New Jersey 08075-1249 Infotron Belgium N.V. Belgium Heizel Esplande P.O. Box 6 1020 Brussels Belgium Infotron Systems Foreign Virgin Islands 5 Kronprindsens Gade P.O. Box 8560, Charlotte Amalie St Thomas, Virgin Islands 00801-8080 Infotron Systems Worldwide Inc. Delaware, United States 103 Springer Building 3411 Silver Side Road Wilmington, Delaware 19810 USA Infotron Systems Italia, S.r.l. Italy Via Del Grana, Di Nervi, 42 00142 Roma, Italy EX-23 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, No. 033-58691, No. 033-64375, No. 333-00783 and No. 333-02677); 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 10, 1996 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/KPMG PEAT MARWICK THORNE - -------------------------- Chartered Accountants Ottawa, Ontario May 10, 1996 -----END PRIVACY-ENHANCED MESSAGE-----