-----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, JjwdAjt1jm8QYJ14JmFdSU+a1LFl7Ehjfcjy8z4BMH1t6+jLxDXHPPH3Ii03ea/R nqw1rDo+iZttBHHeeFZQbA== 0000355876-96-000018.txt : 19960807 0000355876-96-000018.hdr.sgml : 19960807 ACCESSION NUMBER: 0000355876-96-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960629 FILED AS OF DATE: 19960806 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GANDALF TECHNOLOGIES INC CENTRAL INDEX KEY: 0000355876 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 132991700 STATE OF INCORPORATION: A6 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12643 FILM NUMBER: 96604320 BUSINESS ADDRESS: STREET 1: 130 COLONNADE RD S CITY: NEPEAN ONTARIO CANAD STATE: A6 BUSINESS PHONE: 6137236500 MAIL ADDRESS: STREET 1: 130 COLONNADE RD S CITY: NEPEAN ONTARIO CANAD STATE: A6 10-Q 1 FORM 10-Q FOR QUARTER ENDED JUNE 29, 1996. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 29, 1996 Commission file number 0-12643 ------------- ------- GANDALF TECHNOLOGIES INC. ------------------------------------------------------------- (Exact name of registrant as specified in its charter) ONTARIO, CANADA NOT APPLICABLE -------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 130 COLONNADE ROAD SOUTH, NEPEAN, ONTARIO K2E 7M4 - ------------------------------------------ ---------------- (Address of principal executive offices) (Postal Code) Registrant' s telephone number, including area code (613) 274-6500 --------------- NOT APPLICABLE - ------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. *Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding as at July 31, 1996 was 43,295,857. GANDALF TECHNOLOGIES INC. INDEX Page No -------- PART I FINANCIAL INFORMATION Consolidated Balance Sheets- 3 Consolidated Statements of Income - 4 Consolidated Statements of Changes in Financial Position - 5 Consolidated Statements of Shareholders Equity - 6 Notes to Consolidated Financial Statements - 7 Management's Discussion and Analysis of Financial Condition and Results of Operations - 12 PART II OTHER INFORMATION 21 SIGNATURE PAGE 21
GANDALF TECHNOLOGIES INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Thousands of US dollars) June 29 March 31 1996 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 10,478 $ 13,602 Accounts receivable 22,231 28,694 Inventories (note 2) 16,906 13,491 Other 1,556 1,867 -------- -------- Total current assets 51,171 57,654 Fixed assets (note 3) 14,455 16,253 Goodwill, net of amortization of $3,225 (March 31, 1996: $3,172) 3,189 3,242 Other assets 2,175 2,226 -------- -------- Total assets $ 70,990 $ 79,375 ======== ======== LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Accounts payable and accrued liabilities (note 5) $ 21,202 $ 21,755 Deferred revenue 6,036 6,178 Current portion of long-term debt 417 360 -------- -------- Total current liabilities 27,655 28,293 Long-term debt 2,527 2,496 Shareholders equity: Capital stock: Common shares, 43,264,941 issued and outstanding (March 31, 1996: 42,939,523) (note 6) 55,364 54,198 Retained earnings (deficit) (note 6) (8,720) 260 Cumulative translation adjustment (5,836) (5,872) -------- -------- Total shareholders equity 40,808 48,586 -------- -------- Total liabilities and shareholders equity $ 70,990 $ 79,375 ======== ======== (See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Thousands of US dollars except per share amounts) 13 Weeks Ended June 29 -------------------- 1996 1995 -------- -------- Revenues: Product $ 10,917 $ 19,414 Service 7,420 9,236 -------- -------- 18,337 28,650 Operating expenses: Cost of product sales 6,431 9,663 Service expenses 5,307 5,869 Sales and marketing 7,294 8,198 Administration and general 2,278 2,071 Research and development 3,004 2,595 Restructuring costs (note 7) 3,010 - -------- -------- Income (loss) from operations (8,987) 254 Interest expense (47) (206) Interest income and foreign exchange 54 18 -------- -------- Net income (loss) for the period $ (8,980) $ 66 ======== ======== Basic earnings (loss) per share (note 8) $ (0.21) $ - ======== ======== Weighted average number of shares outstanding (thousands) 43,083 37,642 ======== ========
(See accompanying notes to consolidated financial statements) GANDALF TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (Unaudited) (Thousands of US dollars) 13 Weeks Ended June 29 -------------------- 1996 1995 -------- -------- Operating activities: Cash provided by (applied to) operations (note 9) $ (6,458) $ 1,576 Decrease (increase) in operating working capital (note 10) 2,693 (202) -------- -------- Cash provided by (applied to) operating activities (3,765) 1,374 -------- -------- Financing activities: Issue of capital stock 1,166 6,423 Conversion of debentures (note 11) - (6,197) Other 92 302 -------- -------- Cash provided by financing activities 1,258 528 -------- -------- Investing activities: Purchase of fixed assets (610) (674) Other 15 (34) -------- -------- Cash applied to investing activities (595) (708) -------- -------- Effect of exchange rate changes on cash balances (22) (81) -------- -------- Increase (decrease) in cash position in the period (3,124) 1,113 Cash position at beginning of period 13,602 5,963 -------- -------- Cash position at end of period $ 10,478 $ 7,076 ======== ======== Cash position is comprised of cash and cash equivalents net of any borrowings under bank operating lines. (See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (Unaudited) (Thousands of US dollars) 13 Weeks Ended June 29 ------------------------------------------------- 1996 1995 ------------------------ --------------------- Shares Dollars Shares Dollars ---------- --------- --------- --------- Capital Stock: Consisting of an unlimited number of common shares authorized, without par value Balance at beginning of period (note 6) 42,939,523 $ 54,198 35,238,064 $ 91,644 Issued: On conversion of debentures (note 11) - - 3,613,592 5,905 On exercise of stock options 325,418 1,166 82,633 226 ---------- --------- ---------- --------- Balance at end of period 43,264,941 $ 55,364 38,934,289 $ 97,775 ========== ========= ========== ========= Retained Earnings (Deficit): Balance at beginning of period (note 6) $ 260 $ (52,364) Net income (loss) (8,980) 66 --------- --------- Balance at end of period $ (8,720) $ (52,298) ========= ========= Cumulative Translation Adjustment: Balance at beginning of period $ (5,872) $ (4,838) Adjustment arising on translation of foreign subsidiaries financial statements to US dollars (110) 776 Adjustment relating to subsidiary loans designated as long-term investments 146 (885) --------- --------- Balance at end of period $ (5,836) $ (4,947) ========= ========= (See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) All amounts are stated in US dollars unless otherwise indicated. C$ refers to Canadian dollars. Tabular amounts are in thousands except per share data. References to years are to fiscal years ending March 31. 1. INTERIM FINANCIAL STATEMENTS The consolidated financial statements for the first quarter of the 1997 fiscal year which ended June 29, 1996, are unaudited and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim period. 2. INVENTORIES
June 29 March 31 1996 1996 -------- -------- Raw materials $ 3,675 $ 2,905 Work-in-process 4,400 3,821 Finished goods 8,831 6,765 -------- -------- $ 16,906 $ 13,491 ======== ========
3. FIXED ASSETS
June 29 March 31 1996 1996 -------- -------- Cost: Land $ 222 $ 218 Buildings 3,298 4,627 Equipment 58,984 58,336 Leasehold improvements 1,945 1,966 --------- -------- 64,449 65,147 Accumulated depreciation 49,994 48,894 -------- -------- Net book value $ 14,455 $ 16,253 ======== ========
4. BANK OPERATING LINES The Company's authorized bank operating lines at June 29, 1996 totaled $20.2 million. At that time, based on margin formulas, $13.8 million was available to, but not utilized by, the Company. Cash and cash equivalents held as of that date represented a further $10.5 million of available cash resources, and cash and unused credit lines totaled $24.3 million. The authorized lines are secured by certain of the accounts receivable, inventories and other assets of the Company and bear interest at the bank s prime rate plus 0.5% to 1.5%.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES June 29 March 31 1996 1996 -------- -------- Trade accounts payable $ 9,047 $ 7,376 Payroll, commissions and related taxes 2,811 3,873 Accrued restructuring charges 3,373 2,747 Other payables 4,698 6,434 Income and other taxes payable 1,273 1,325 -------- -------- $ 21,202 $ 21,755 ======== ========
6. REDUCTION IN STATED CAPITAL On August 10, 1995, during the second fiscal quarter of 1996, the shareholders of the Company passed a special resolution authorizing a reduction in statutory stated capital in respect of the common shares by $52,364,000. This resulted in a corresponding reduction in the accumulated deficit as shown on the consolidated balance sheets and the consolidated statements of shareholders' equity. 7. RESTRUCTURING COSTS Over the past several years the Company has undertaken significant restructuring activities in order to reposition the Company in line with its strategy, reduce costs and improve competitiveness. The size of the Company's workforce is currently less than 700 employees, approximately one-third the level of five years ago. Restructuring charges of $3.0 million recorded in the first quarter of 1997 included a write down following a review of the net carrying amount of the Company's manufacturing facilities in which it was determined, in conjunction with the decision to enter into an agreement with a third party to provide the Company with a high-volume manufacturing capability, that the net carrying amount exceeded the estimated net recoverable amount. Restructuring charges also included provisions for future lease costs on sales offices made redundant in connection with changing the Company s sales distribution model from direct sales to multiple channels of distribution including: national resellers, operating telephone companies, Internet service providers, OEMs, system partners and corporate accounts. 8. EARNINGS PER SHARE Basic earnings (loss) per share figures are presented on the consolidated statements of income. These figures are calculated using the monthly weighted average number of common shares outstanding during the period. Fully diluted earnings per share information has not been presented as potential conversions are anti-dilutive. For the first quarter of 1996 adjusted earnings per share is not materially different from the basic earnings per share figure. The calculation assumes that the conversion of debentures, which occurred during the first quarter of 1996, had occurred at the beginning of the quarter. 9. CASH PROVIDED BY OPERATIONS Cash provided by (applied to) operations is computed as follows:
13 Weeks Ended June 29 --------------------- 1996 1995 -------- -------- Income (loss) from operations $ (8,987) $ 254 Depreciation and amortization 1,152 1,497 Writedowns not involving an outlay of cash 1,370 - Interest paid (47) (193) Interest income and foreign exchange 159 18 Other (105) - -------- -------- $ (6,458) $ 1,576 ======== ========
10. DECREASE IN OPERATING WORKING CAPITAL The decrease (increase) in operating working capital is computed as follows:
13 Weeks Ended June 29 --------------------- 1996 1995 -------- -------- Accounts receivable $ 6,463 $ 657 Inventories (3,415) 330 Prepaid expenses 311 172 Accounts payable and accrued liabilities (501) (1,302) Income taxes payable (52) 20 Deferred revenue (142) (37) Foreign currency equity adjustment 29 (42) -------- -------- $ 2,693 $ (202) ======== ========
11. CONVERTIBLE DEBENTURES Shares Issued Aggregate Principal Amount % Upon Conversion - ---------------------------------------------------------------------- --------------- Balance at March 31, 1994 C$ 30,000 $ 21,681 100% Converted during the year (15,939) (11,533) (53) 6,782,519 Impact of foreign exchange - (97) - - ---------------------------------------------------------------------- Balance at March 31, 1995 C$ 14,061 $ 10,051 47 Converted during the year (14,061) (10,336) (47) 5,983,372 Impact of foreign exchange - 285 - - ---------------------------------------------------------------------- Balance at March 31, 1996 C$ - $ - - ======================================================================
In November 1992 the Company issued 8.5% convertible debentures with an aggregate principal amount of C$30.0 million which were due to mature in November 2002. At any time prior to maturity they were convertible into common shares of the Company at the option of the holder at a conversion price of C$2.35 (approximately $1.72) which would yield 425.53 common shares for each C$1,000 (approximately $732) of principal amount of debentures held. During 1995 debentures with an aggregate principal amount of $11,533,000 were converted into 6,782,519 common shares. During the first quarter of 1996 debentures with an aggregate principal amount of $6,197,000 were converted into 3,613,592 common shares. The resulting increase in capital stock of $5,905,000 was determined as the sum of the principal amount of the debentures converted ($6,197,000) plus interest accrued to the date of conversion ($95,000), net of the pro rata share of the associated unamortized deferred financing costs ($387,000). During the second and third quarters of 1996 all remaining debentures were converted into 2,369,780 common shares. 12. UNITED STATES ACCOUNTING PRINCIPLES The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada (Canadian GAAP) which in the case of the Company differ in the following material respects from those generally accepted in the United States (US GAAP). (a) Under US GAAP, financing and investing activities not involving a receipt or outlay of cash are excluded from the consolidated statements of changes in financial position. Accordingly, the following financing activities would not be presented in the consolidated statement of changes in financial position for the first quarter of 1996 but would be shown supplementally. Conversion of debentures $ (6,197) Issue of capital stock on conversion of debentures $ 6,197 (b) Under US GAAP, bank operating lines would not be included as a component of the cash position presented in the consolidated statements of changes in financial position. The change in bank operating lines would be presented as a financing activity and would therefore be included in the determination of the increase or decrease in cash position in the period. (c) Reductions in stated capital and deficit as described in note 6 do not fall within the definition of a quasi-reorganization under US GAAP and, accordingly, under US GAAP, capital stock and retained earnings (deficit) would not each be reduced by $52,364,000. (d) US GAAP requires the calculation of primary earnings per share. This figure is not materially different from the basic earnings per share figure calculated under Canadian GAAP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction - ------------ The consolidated financial statements for the first quarter ended June 29, 1996, 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 12 to the consolidated financial statements describes the impact, in the case of the Company, of differences between accounting principles generally accepted in Canada and the United States. All amounts are stated in US dollars unless otherwise indicated. References to years are to fiscal years ending March 31. Factors That May Affect Future Financial Performance - ---------------------------------------------------- The Company's quarterly and annual operating results are affected by various trends and factors including, but not limited to, competition, the Company's success in developing, introducing and gaining market acceptance for new products, the timing of orders from customers, the levels of inventory held by resellers and distributors, as well as factors such as changes in general economic conditions or conditions in the specific markets for the Company's products, government regulation, tariffing of carrier services, and industry consolidation. The networking industry is intensely competitive and subject to rapid change. As the market for the Company's products continues to develop, additional competitors are expected to enter the market and competition is anticipated to intensify. This may result in price reductions and margin erosion. Many of the Company' s current and potential competitors have larger technical staffs, more established and larger marketing and sales organizations, and significantly greater financial resources than does the Company. The Company also competes with other data networking vendors for access to distribution channels. The Company's success is substantially dependent upon its ability to manage changes in its operations. Over the past several years the Company has undertaken significant restructuring activities in order to reposition the Company in line with its strategy, reduce costs and improve competitiveness. During the past year, examples of such changes included the establishment of new marketing and distribution channels, the restructuring of international operations and the outsourcing of the delivery of field service maintenance. In addition, the successful establishment and implementation of relationships with strategic partners and distributors is critical to the future success of the Company. During the past year, the Company has changed the way it distributes its products by establishing multi-tiered distribution channels and entering into agreements with several large resellers and distributors in North America, Europe and the Asia Pacific region. These new distribution channels, while viewed by the Company as critical to its future success, also bring additional new risks. These include less predictability regarding product demand and ordering patterns, reduced gross margins on sales to indirect channels and the time associated with reseller training and increasing awareness for the Company's products. The Company's quarterly operating results fluctuate as a result of a number of factors including pricing, distributor ordering patterns, product returns and reserves, product mix, as well as the timing of new product announcements and introductions by the Company and its competitors. The Company's revenues are difficult to predict due to shipment patterns. A substantial portion of the Company s expenses are fixed, and consequently any significant fluctuations in revenue will impact earnings. Products are generally shipped as orders are received, and accordingly, the Company operates with a relatively small backlog. As a result, sales in any quarter are dependent on orders booked and shipped in that quarter. A high percentage of the Company's revenues are typically earned in the third month of each fiscal quarter and tend to be concentrated in the latter half of that month. Accordingly, quarterly financial results will be difficult to predict prior to the end of the quarter and a shortfall in shipments at the end of any particular quarter may cause the results of that quarter to fall significantly short of anticipated levels. At the end of each quarter, the Company's distributors typically hold significant inventories of the Company s products. The Company has established reserves for returns based on experience. New channel relationships introduce additional uncertainty in this area. Setting reserves involves making judgments about future competitive conditions, product acceptance and other factors which by their nature involve uncertainties at the time the reserves are established. Statements included in this Quarterly Report on Form 10-Q which are not historical facts, including statements about the Company's beliefs and strategies, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties and are not guarantees of future performance. The risks described herein and in the Company's other filings with the Securities and Exchange Commission could affect the Company's future results and could cause such results to differ materially from estimates expressed in any forward-looking statement included herein. Results of Operations - First Quarter Ended June 29, 1996 - --------------------------------------------------------- The Company experienced a significant decline in product revenues in the first quarter of 1997 attributed to difficulties experienced in implementing its new distribution model which has been underway for some period of time. The Company previously concluded it was necessary to accelerate the implementation of the new sales distribution infrastructure in the first quarter. The Company did not anticipate that accelerating the implementation of the new distribution model in the first quarter would adversely impact revenues. Service revenues also declined in the first quarter of 1997, representing a continuation of a trend in recent quarters. This decline has occurred as a result of lower revenues on products which the Company has traditionally derived the majority of its service revenues. The Company has been working through a period of transition for the past two years focusing on improving elements such as time- to-market, product support and quality while managing significant changes in its product lines. During this transitionary period, remote access products have increased from 25% of product revenues in 1994 to close to two-thirds of product revenues in the most recent fiscal year ended March 31, 1996. Changing the sales distribution model from direct to indirect has always been considered a necessary and significant next step in the Company's recovery plan in order to increase the sales volume from indirect channels. The Company shifted and acquired resources and skills supporting an historically direct sales model to one of multiple channels of distribution including: national resellers, operating telephone companies, Internet service providers, OEMs, system partners and corporate accounts. The Company continues to expand its support to these distribution channels through marketing programs, increased training, seminars, on-site representatives, brand recognition and distributor and reseller incentive programs. While accelerating implementation of the new distribution model adversely impacted revenues in the first quarter, the Company believes the anticipated benefits of the model and related programs supporting the channels will occur in later quarters. The following table sets forth items derived from the quarterly consolidated statements of income as a percentage of revenues for the quarter ended June 29, 1996 and for each of the preceding four quarters. The column in the table entitled "Percentage Change Quarter 1, 1997 vs 1996 " represents the percentage change, either favourable or (unfavourable), in the dollar amount of such items for the first quarter of 1997 compared with the first quarter of 1996.
Percentage Fiscal 1996 Fiscal 1997 Change ------------------------------------------ ----------- Quarter 1 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 1997 vs. 1996 --------- --------- --------- --------- --------- ------------- (Thousands of dollars) Revenues $28,650 $27,357 $28,171 $32,355 $18,337 (36.0)% ======= ======= ======= ======= ======= ======= (Percentage of revenues) Revenues: Product 67.8% 67.3% 68.6% 68.6% 59.5% (43.8)% Service 32.2 32.7 31.4 31.4 40.5 (19.7) ------- ------- ------- ------- ------- 100.0% 100.0% 100.0% 100.0% 100.0% (36.0) ======= ======= ======= ======= ======= Gross Margin: Product 50.2% 53.4% 52.5% 51.8% 41.1% (54.0) Service 36.5 34.0 31.1 26.6 28.5 (37.2) Combined 45.8 47.1 45.8 45.3 36.0 (49.7) Expenses: Sales & marketing 28.6 28.0 28.0 25.3 39.8 11.0 Administration & general 7.2 7.8 7.5 5.4 12.4 (10.0) Research & development 9.1 10.4 10.3 9.9 16.4 (15.8) Restructuring costs - - - 4.7 16.4 ------- ------- ------- ------- ------- Income(loss)from operations 0.9 0.9 - - (49.0) Interest expense (0.7) (0.5) (0.4) (0.1) (0.3) Interest income and foreign exchange - (0.3) 0.7 0.3 0.3 ------- ------- ------- ------- ------- Net income (loss) 0.2% 0.1% 0.3% 0.2% (49.0)% ======= ======= ======= ======= =======
Revenues - -------- The following table sets forth product and service revenues by geographic segment for the quarter ended June 29, 1996 and for each of the preceding four quarters. The table also includes the change in revenues, expressed as a percentage, in the first quarter of 1997 compared to the corresponding period of 1996.
Percentage Fiscal 1996 Fiscal 1997 Change ------------------------------------------ ----------- Quarter 1 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 1997 vs. 1996 --------- --------- --------- --------- --------- ------------- (Thousands of dollars) Product Revenues: United States $ 5,733 $ 6,243 $ 6,361 $ 6,432 $ 2,669 (53.5)% Canada 3,438 3,642 3,474 4,479 1,408 (59.0) United Kingdom 4,905 3,783 4,361 5,491 2,676 (45.4) Holland/France 2,853 2,272 3,428 3,791 2,516 (11.8) Other 2,485 2,461 1,702 3,742 1,648 (33.7) ------- ------- ------- ------- ------- $19,414 $18,401 $19,326 $23,935 $10,917 (43.8)% ======= ======= ======= ======= ======= Service Revenues: United States $ 2,159 $ 2,078 $ 1,962 $ 1,790 $ 1,526 (29.3)% Canada 1,747 1,598 1,690 1,607 1,316 (24.7) United Kingdom 3,502 3,445 3,074 3,083 2,810 (19.8) Holland/France 1,828 1,835 2,119 1,940 1,768 (3.3) ------- ------- ------- ------- ------- $ 9,236 $ 8,956 $ 8,845 $ 8,420 $ 7,420 (19.7)% ======= ======= ======= ======= =======
The following table sets forth, for the thirteen weeks ended June 29, 1996 and for each of the two preceding full fiscal years, product revenues by geographic segment and product group expressed as a percentage of total product revenues. These amounts have been calculated assuming constant rates of exchange in the translation of foreign currency amounts to US dollars. Remote access products primarily include internetworking products sold under the names Gandalf Xpressway (TM), XpressStack (TM) and XpressConnnect (TM). Remote access products represent a subset of the Company s total LAN internetworking product line. The other three product groups shown below represent traditional product areas for the Company which include wide area networking (WAN) backbone products; modems, multiplexers and local connectivity products; and other products which primarily represent third party products.
Modems/ Multiplexers/ Remote WAN Local Years ending March 31 Access Backbone Connectivity Other Total - -------------------- ------- --------- ------------- ------- ------- 1997: (Quarter 1) United States 19% 1% 5% -% 25% Canada 8 - 5 - 13 United Kingdom 13 2 8 2 25 Holland/France 15 1 4 2 22 Other 8 5 2 - 15 --- --- --- --- --- 63% 9% 24% 4% 100% === === === === === 1996: United States 25% 1% 5% 1% 32% Canada 12 1 4 1 18 United Kingdom 11 2 7 3 23 Holland/France 9 1 2 2 14 Other 8 3 2 - 13 --- --- --- --- --- 65% 8% 20% 7% 100% === === === === === 1995: United States 15% 1% 8% 4% 28% Canada 9 2 7 1 19 United Kingdom 12 3 9 4 28 Holland/France 6 1 3 1 11 Other 7 3 2 2 14 --- --- --- --- --- 49% 10% 29% 12% 100% === === === === ===
Gross Margin - ------------ The gross margin on product revenues was 41% in the first quarter of 1997 compared to 50% in the first quarter a year ago. The gross margin on product revenues in the first quarter of 1997 was adversely impacted by lower sales volumes during the quarter, resulting in fixed manufacturing costs representing a larger percentage of product revenues. The gross margin on service revenues (service revenues less service expenses expressed as a percentage of service revenues) was 28.5% during the first quarter of 1997 compared to 36.5% in the same period a year ago. The decrease in service margin has occurred as a result of the continuing decline in service revenues which has more than offset the decrease in service expenses. Service expenses declined 9.6% in the first quarter of 1997 compared with the first quarter of 1996, as result of the outsourcing to partners for the delivery of field service maintenance, which has occurred since the end of the third quarter of 1996. Operating Expenses - ------------------ Expenses for sales and marketing, administration and general, and research and development totaled $12.6 million in the first quarter of 1997, compared to $12.9 million in the first quarter of 1996. In aggregate, these expenses declined primarily due to reduced variable sales expenses in the first quarter of 1997 compared to the first quarter a year ago, on lower product revenues. The reduction in operating expenses due to lower sales expenses was partially offset by higher spending on research and development. Restructuring charges of $3.0 million recorded in the first quarter of 1997 included a write down following a review of the net carrying amount of the Company's manufacturing facilities in which it was determined, in conjunction with the decision to enter into an agreement with a third party to provide the Company with a high-volume manufacturing capability, that the net carrying amount exceeded the estimated net recoverable amount. Restructuring charges also included provisions for future lease costs on sales offices made redundant in connection with changing the Company's sales distribution model from direct sales to multiple channels of distribution including: national resellers, operating telephone companies, Internet service providers, OEMs, system partners and corporate accounts. Since 1991 the Company has received funding of approximately $1.4 million and $2.6 million respectively under two projects approved through the Canadian federal government's Microelectronics and Systems Development Program (MSDP). While the repayment terms of the two projects differ slightly, both are tied to future sales, with the liability to repay the funding arising from product revenues earned following both the commercialization of the resulting technology and the completion of the MSDP project. The amount that is potentially repayable is calculated without interest as a royalty on revenues earned in the ten years following the project completion date and is limited to the amount of 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 June 29, 1996, $900,000 had been accrued related to these projects. Operating Loss - -------------- The Company reported a loss from operations, inclusive of restructuring charges, of $9.0 million for the first quarter of 1997 on revenues of $18.3 million. The loss from operations, before restructuring charges was $6.0 million. For the first quarter of 1996 the income from operations was $254,000 on revenues of $28.7 million. Net Loss - -------- The net loss for the first quarter of 1997 was $9.0 million or $0.21 per share. The net loss before restructuring charges was $6.0 million or $0.14 per share. Net income for the first quarter of 1996 was $66,000, or break-even on a per share basis. Liquidity and Capital Resources - ------------------------------- The Company's current ratio was 1.9:1 at June 29, 1996 compared to 2.0:1 at March 31, 1996. Inventories were $16.9 million at June 29, 1996 versus $13.5 million at the end of the previous quarter. Lower than anticipated product revenues during the first quarter of fiscal 1997 resulted in the increase in inventory levels and the Company has adjusted planned production levels accordingly for the second quarter of fiscal 1997. Accounts receivable were $22.2 million at June 29, 1996 compared to $28.7 million at March 31, 1996. The decline in accounts receivable occurred as a result of lower product revenues in the first quarter of fiscal 1997 compared with the fourth quarter of fiscal 1996. The Company recorded negative cash flow of $3.1 million during the first quarter of 1997. At June 29, 1996, the net cash position (cash and cash equivalents net of bank operating lines) was $10.5 million compared to $13.6 million at March 31, 1996. At the end of the first quarter of 1996, the net cash position was $7.1 million. The decrease in cash during the first quarter of 1997 occurred as a result of negative cash flow from operating activities of $3.8 million arising from the net loss for the period. The Company anticipates that the net loss reported for the first quarter of 1997 will also impact cash flow in the second quarter, primarily due to the lower level of accounts receivable at June 29, 1996. At June 29, 1996 the Company's authorized bank operating lines totaled $20.2 million under two committed credit facilities provided by a Canadian chartered bank which bear interest at the bank's prime rate plus 0.5% to 1.5%. The authorized amount includes $15.9 million under the Company's primary facility which was recently renewed until June 30, 1997. Any borrowings under the credit agreements are secured by certain of the accounts receivable, inventories and other assets of the Company. The amount available for borrowing at any time is based on margin formulas relating to levels of accounts receivable, inventories and other bank covenants. The Company obtained a waiver from the bank in July 1996 of a technical default under one of the credit agreements at June 29, 1996 which occurred as a result of the reported net loss for the first quarter of 1997 exceeding the maximum permitted quarterly net loss amount under the agreement. The Company is in full compliance with all other terms of its bank credit agreements. Based on the margin formulas, $13.8 million was available to, but not utilized by, the Company at June 29, 1996. Cash and cash equivalents held as of that date represented a further $10.5 million of cash resources available to the Company. Cash and unused credit lines totaled $24.3 million at June 29, 1996. 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. II - OTHER INFORMATION - ---------------------- Item 6(a) - Exhibits - -------------------- 10.11 Credit Agreement dated as of June 11, 1996 between the Royal Bank of Canada and the Company. Item 6(b) - Report on Form 8-K - ------------------------------ There were no reports on Form 8-K filed for the quarter ended June 29, 1996. SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GANDALF TECHNOLOGIES INC. August 1, 1996 s/T.A. VASSILIADES - ----------------------- ------------------ Date Thomas A. Vassiliades Chairman, President and Chief Executive Officer August 1, 1996 s/W.R. MACDONALD - ---------------------- ---------------- Date Walter R. MacDonald Vice President, Finance and Chief Financial Officer EX-10.11 2 June 11, 1996 Private & Confidential Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Attention:Mr. Walter MacDonald Vice-President, Finance Dear Sir: Royal Bank of Canada (the Bank) is pleased to offer Gandalf Technologies Inc. (the Borrower ) the following credit facilities (the Credit Facility), which, upon your acceptance shall supersede and cancel the credit facilities provided to the Borrower in our letter agreement of May 30, 1995. The Credit Facility shall be governed by the following terms and conditions: 1. Definitions: The definitions attached hereto in Schedule A are incorporated in this agreement by reference as if set out in full herein and unless otherwise provided, all accounting terms herein shall be interpreted in accordance with GAAP. 2. Credit Facility: The Credit Facility is available in the following segments as follows: (1) Foreign exchange forward contracts (FEF Contracts). (2) (a) Royal Bank US Base Rate based loans in US Dollars ( RBUSBR Loans), (a) Royal Bank Prime based loans in Canadian Dollars (RBP Loans), (b) Libor based loans in US Dollars (Libor Loans), (c) Bankers Acceptances in Canadian Dollars (B/As), and (d) Letters of Credit in Canadian or US Dollars (L/Cs). Each use of the Credit Facility by way of any of the foregoing methods is referred to as a Borrowing. The face amount of each Borrowing outstanding shall be used to determine the amount of Borrowings outstanding under the Credit Facility at any time with the exception that the amount of Borrowings ascribed to FEF Contracts shall be determined by the Bank, in its sole discretion, from time to time and advised to the Borrower upon request. 3. Amount(s): (1) $6,750,000 or the Equivalent Amount in US Dollars. (2) The lesser of: (a) US$16,500,000 or the Equivalent Amount in Canadian Dollars, (b) the Margin Requirement. 4. Purpose: The Borrower shall use the Credit Facility for the purpose of accommodating: (1) Foreign exchange hedging activities. (2) General operating requirements. 5. Availability: Borrowings under the Credit Facility are available on any Business Day through the Branch of Account. During the term of the Credit Facility, the Borrower may borrow, repay and reborrow hereunder at any time, unless otherwise provided. FEF Contracts may not have maturities exceeding one year. After the Maturity Date, the Credit Facility shall convert to a demand facility, the Bank may cancel any undrawn portion of the Amount at any time and all Borrowings outstanding shall be due and payable on demand by the Bank. 6. Interest Rates and Fees: (a) Royal Bank Prime (RBP) plus 1/4%. (b) Royal Bank US Base Rate (RBUSBR) plus 1/4%. (c) Libor (Libor) plus 1%. (d) Royal Bank Prime Acceptance Fees (RBPAF) plus 1/4%. (e) L/C fees to be quoted by the Bank at time of issue of each L/C. 7. Calculation and Payment of Interest and Fees: (a) RBP and RBUSBR Loans: The Borrower shall pay interest on each RBP Loan in Canadian Dollars and interest on each RBUSBR Loan in US Dollars monthly in arrears on the first Business Day following the 24th of each month. Such interest will accrue and be computed daily on the daily closing balance on the basis of a year of 365 days. Any change in RBP or RBUSBR shall be effective as of the opening of business on the day such change takes place. (b) Libor Loans: The Borrower shall pay interest on each Libor Loan in US Dollars in arrears on each Libor Interest Date. Such interest will accrue and be computed daily on the basis of a year of 360 days. (c) B/As: The Borrower shall pay acceptance fees in Canadian Dollars at the rates provided for above in advance on the date of issue of each B/A. Acceptance fees shall be calculated on the face amount of the B/A issued and based upon the number of days in the term thereof and a year of 365 days. (d) L/C Fees: The Borrower shall pay an L/C fee on the date of issuance of such L/C in the currency in which such L/C is issued. Such fee shall be calculated on the face amount of the L/C issued and based on the number of days in the term thereof and a year of 365 days. (e) Operation of Account Fee: The Borrower shall pay fees of $100 and US$100 payable monthly in arrears on the first day of each month to compensate the Bank for the expense of revolving the Borrower's accounts. (f) Standby Fee: A standby fee equal to 3/16 of 1% per annum calculated on the unused portion of Segment (2) is payable monthly in arrears within the first five business days of each month. (g) Interest Act (Canada): The annual rates of interest or fees to which the rates calculated in accordance with this Agreement are equivalent, are the rates so calculated multiplied by the actual number of days in the calendar year in which such calculation is made and divided by 365 or, in the case of Libor Loans, 360. (h) Financial Tests Fee: The Borrower shall pay a fee if it fails to meet any of the Financial Tests as at the end of any fiscal quarter, as determined by the Bank based on the Borrower s financial statements in respect of the affected fiscal quarter. Such fee shall be calculated at the rate of 1/4% per annum on the daily average aggregate principal amount outstanding under Segment (2) of this Agreement during the affected fiscal quarter and shall be in addition to any other interest and fees payable to the Bank hereunder. Such fees shall be paid quarterly in arrears in respect of the affected fiscal quarter, no later than five business days following receipt by the Bank of the Borrower s quarterly financial statements. 8. Time and Place of Payment: Payments of principal, interest, fees and all other amounts payable by the Borrower pursuant to this Agreement shall be paid at the Branch of Account in immediately available funds in Canadian Dollars except as otherwise herein provided. Each payment under this Agreement shall be made for value on the day such payment is due, provided that if any such day is not a Business Day such payment shall be deemed for all purposes of this Agreement to be due on the Business Day next following such day and all interest and other fees shall continue to accrue until payment. Interest and fees payable under this Agreement are payable both before and after any or all of default, demand and judgment. 9. Withholding Taxes: All payments required under this Credit Facility shall be made free and clear of and without any withholding on account of any taxes or other charges of any nature or kind whatsoever. If any such taxes or charges are required to be withheld from any payment made hereunder, the Borrower shall pay an additional amount such that the net amount received by the Bank shall be equal to the amount which would have been received if no such withholding were required to be made. 10. Exchange Rate Fluctuations: If, in the sole determination of the Bank, due to exchange rate fluctuations or for any other reason, the value of Borrowings outstanding under the Credit Facility, when converted to Canadian Dollars, exceeds the Amount as of the 25th day of any month, the Borrower shall either repay or otherwise retire the outstanding Borrowings to the extent of the amount of such excess, or shall secure the amount of such excess in a manner which is satisfactory to the Bank. 11. Repayment: Borrowings are repayable on the later of the Maturity Date or the date of any demand by the Bank, provided that on or prior to the Maturity Date the Bank may demand repayment pursuant to Section 24 hereof, and in such event, Borrowings shall be payable upon such demand. After the Maturity Date, all Borrowings made hereunder shall be due and payable on demand by the Bank. Upon any demand by the Bank hereunder, the Borrower shall pay all amounts outstanding hereunder including, without limitation, an amount equal to the aggregate of the face amounts of all B/As and L/Cs and the amount advised by the Bank, pursuant to Section 2 hereof, with respect to FEF Contracts which are unmatured or unexpired, which amount shall be held by the Bank as collateral security for the Borrower s obligations to the Bank with respect thereto. With respect to such unmatured or unexpired B/As and L/Cs and FEF Contracts, the Borrower will have the further obligation to execute such security documents as the Bank may reasonably require. 12. Conversion: The Borrower may convert a Borrowing into another basis of Borrowing provided that no Event of Default has occurred and is continuing and that the conditions for borrowing by way of such instruments are fulfilled. Libor Loans may only be converted on the last day of the relevant Libor Interest Period, B/As may only be converted on their respective maturity dates and L/Cs may only be converted on their expiry dates or such earlier date as agreed by the Borrower, Bank and the beneficiary thereof. 13. Prepayment: Libor Loans may only be prepaid on the last day of the relevant Libor Interest Period and B/As may only be prepaid on their respective maturity dates. 14. Evidence of Indebtedness: The Bank shall open and maintain at the Branch of Account accounts and records evidencing the Borrowings made available to the Borrower by the Bank under this Agreement. The Bank shall record the principal amount of each Borrowing, the payment of principal and interest and all other amounts owing to the Bank. The Banks accounts and records constitute, in the absence of manifest error, conclusive evidence of the indebtedness of the Borrower to the Bank. The Borrower authorizes and directs the Bank to automatically debit any bank account of the Borrower for all amounts payable by the Borrower to the Bank including, without limitation, the repayment of all amounts due under this Agreement and all charges for the keeping of such bank account. This provision shall be interpreted as a separate contract between the parties, independent of all other terms of this Agreement and shall remain in full force and effect notwithstanding that this Agreement shall have otherwise ceased to have any force or effect. 15. Operating Account: Pursuant to a central banking offset agreement dated on or about April 1, 1993 between the Borrower, Gandalf Canada Ltd. (GCL) and the Bank, the Bank shall establish an account in each of Canadian Dollars and US Dollars (each a Group Account). If the balance in a Group Account: (a) is a credit, the Bank may apply at any time in its discretion, the amount of such credit or any part thereof, rounded to the nearest $100,000, or US$100,000, as applicable as a repayment of Borrowings outstanding under Segment (2) hereunder, or (b) is a debit, the Bank shall, provided that Borrowings under Segment (2) hereunder are available, make available a Borrowing by way of an RBP or RBUSBR Loan in an amount, rounded to the nearest $100,000 or US$100,000, as applicable, as required to place the affected Group Account at not less the balance set out in this paragraph. In either instance, a minimum net credit balance of $100,000 or US$100,000, as applicable as adjusted from time to time will be maintained in each Group Account. 16. Libor Loan Conditions: The Borrower may borrow by way of Libor Loan subject to the following conditions: (a) Libor Loans shall be made in minimum amounts of US$1,000,000, as applicable or larger whole multiples of US$100,000, as applicable; (b) the Borrower may select the Libor Interest Period applicable to any Libor Loan and shall notify the Bank of such Libor Interest Period when giving notice pursuant to Schedule B ; (c) if the Borrower fails to select and to notify the Bank of the Libor Interest Period applicable to any Libor Loan, the Borrower shall be deemed to have selected a 3 month Libor Interest Period; (d) the Borrower shall indemnify the Bank against any loss, cost or expense (including without limitation, any loss incurred by the Bank in liquidating or redeploying deposits acquired to fund or maintain any Libor Loan) incurred by the Bank as a result of: (i) repayments, prepayments, conversions or rollovers of a Libor Loan other than on the last day of the Libor Interest Period applicable to such Libor Loan, or (ii) failure to draw down a Libor Loan on the requested date; (e) if the Bank determines, which determination is final, conclusive and binding upon the Borrower, that: (i) adequate and fair means do not exist for ascertaining the rate of interest on a Libor Loan, (ii) the making or the continuance of a Libor Loan has become impracticable by reason of circumstances which materially and adversely affect the London interbank market, (iii) deposits in US Dollars, as applicable, are not available to the Bank in the London interbank market in sufficient amounts in the ordinary course of business for the applicable Libor Interest Period to make or maintain a Libor Loan during such Libor Interest Period, or (iv) the cost to the Bank of making or maintaining a Libor Loan does not accurately reflect the effective cost to the Bank thereof and if the costs to the Bank are increased or the income receivable by the Bank is reduced in respect of a Libor Loan, then the Bank shall promptly notify the Borrower of such determination and the Borrower shall, prior to the next Interest Determination Date, notify the Bank as to the basis of Borrowing it has selected in substitution for such Libor Loan. If the Borrower has not so notified the Bank, such Libor Loan will automatically be converted into an RBUSBR Loan on the expiry of the then current Libor Interest Period. 17. B/A Conditions: The Borrower may borrow by way of B/A subject to the following conditions: (a) B/As shall be issued and mature on a Business Day and shall be issued in minimum face amounts of $100,000 for terms of not less than 30 and not more than 365 days with each issue being for an aggregate face amount of $500,000 or such larger amount as is a whole multiple of $100,000; (b) the Bank may, in its sole discretion, refuse to accept the Borrower s drafts or limit the amount of any B/A issued at any time; (c) the Borrower shall, by no later than 12:00 (noon) on the day on which a B/A becomes payable, pay to the Bank at the Branch of Account an amount equal to the face amount of such B/A; (d) if any maturing B/A is paid by the Bank with its own funds, then as of the date of such payment, the B/A will be deemed to be converted into an RBP Loan hereunder in the face amount of such B/A; (e) in the event that there is any inconsistency at any time between the terms of this Agreement and the terms of the B/A Undertaking, the terms hereof shall govern. 18. L/C Conditions: The Borrower may borrow by way of L/C subject to the following conditions: (a) the Bank may, in its sole discretion, refuse to issue L/Cs at any time; (b) each L/C shall expire on a Business Day and shall have a term of not more than 365 days; (c) prior to the issue of an L/C, the Borrower shall execute a duly authorized application with respect thereto in form and substance satisfactory to the Bank, and each L/C shall be governed by the terms and conditions of the relevant application for such instrument; (d) the Borrower shall, by no later than 12:00 (noon) on any day on which a drawing is made under an L/C, pay to the Bank at the Branch of Account an amount equal to the face amount of such drawing, and if the Borrower fails to make such payment, the face amount of such drawing shall be converted, at the option of the Bank into a loan with interest at either RBP or RBUSBR; (e) an L/C can only be revoked prior to its expiry date with consent of the Borrower, Bank and the beneficiary thereof; (f) in the event that there is any inconsistency at any time between the terms of this Agreement and the terms of the application for L/C, the terms thereof shall govern. 19. Increased Costs: If, in the reasonable opinion of the Bank, the Bank is now or hereafter becomes subject to, or there is a change in: (a) any reserve, special deposit, deposit insurance, or similar requirement against assets of, or deposits in or for the account of, or credit extended by, or any acquisition of funds by, the Bank; (b) any reserve, special deposit, or similar requirement with respect to all or any of the Borrowings or the undrawn portion of all or any part of the Credit Facility; (c) taxation of, or the basis of, taxation of any payments due to the Bank hereunder (except for taxes on the overall net income of the Bank) or taxation on reserves or deemed reserves with respect to all or any part of the Credit Facility; (d) any requirement relating to capital adequacy, or (e) any other condition imposed by Applicable Law or any interpretation of Applicable Law by an entity charged with the administration thereof or any other condition with which financial institutions operating in Canada are accustomed to comply or have generally complied, whether or not having the force of law, and the result of any of the foregoing, in the sole determination of the Bank, is to increase the cost to, or to reduce any amount received or receivable by, the Bank hereunder, or to reduce the Bank's effective return hereunder to a level below that which the Bank could have otherwise achieved (using any reasonable averaging and attribution method), the Bank shall determine that amount of money which shall compensate it for such increase in cost or reduction in income or reduction in rate of return on the Bank's capital, and the Borrower shall pay to the Bank upon demand such amount in respect of such increased cost or reduction as the Bank may determine to be required to compensate the Bank. The Bank's determination of such increased cost or reduction shall be conclusive absent manifest error. 20. Illegality: If the introduction of or any change in Applicable Law makes it unlawful, or prohibited for the Bank, in its sole opinion, to perform its obligations under this Agreement, the Bank may, by written notice to the Borrower, terminate its obligations under this Agreement, and the Borrower shall prepay the Borrowings immediately or at the end of such period as the Bank may agree, together with all interest and fees which have accrued to the date of payment. 21. Conditions Precedent to Disbursement: (a) The obligation of the Bank to make available any Borrowing is subject to and conditional upon the receipt in form and substance satisfactory to the Bank, of: (i) a duly executed copy of this Agreement; (ii) the following documents (the Security Documents): (a) a general security agreement (the GSA) on the Bank's standard form signed by the Borrower and representing a first charge on all assets of the Borrower other than real estate and purchase money security interests (PMSIs), save for PMSIs over the Borrowers inventory; (b) a general assignment of debts on the Bank's standard form signed by the Borrower; (c) assignment by the Borrower of all of its shares in Gandalf Systems Corporation (GSC), Gandalf Digital Communications Ltd. (GDCL) and GCL; (d) assignment by the Borrower of all patents, trademarks and licenses; (e) a general assignment of leases signed by the Borrower covering 130 Colonnade Rd. S. and 40 Concourse Gate, both in Nepean, Ontario; (f) a general security agreement on the Bank's standard form signed by GSC and representing a first charge on all assets of GSC other than real estate; (g) a guarantee & postponement of claim on the Bank's standard form in the principal amount of not less than US $16,500,000 plus interest and fees, signed by GSC; (h) assignment by GSC of all patents, trademarks, copyrights and licenses; (i) a guarantee & postponement of claim on the Bank's standard form in the principal amount of $3,000,000 plus interest and fees signed by GCL; (j) a guarantee & postponement of claim on the Bank's standard form in the principal amount of not less than US $15,000,000 plus interest and fees signed by GCL; (k) a general security agreement on the Bank's standard form signed by GCL and representing a first charge on all assets of GCL other than real estate and PMSIs over GCL's inventory; (l) a general assignment of debts on the Bank's standard form signed by GCL; (m) a general hypothecation signed by the Borrower with respect to any Liquid Collateral Security; (n) assignment of insurance policies covering inventory of GSC; all of which shall have been duly registered in all appropriate jurisdictions in order to perfect and maintain the security created by the Security Documents; (iii) a duly executed B/A Undertaking; and (iv) a review of all documentation by legal counsel to the Bank; and (v) confirmation in writing from GCL acknowledging cancellation of its credit facility dated May 30, 1995 with the Bank for C$15,000,000; and (vi) such other documents as the Bank may reasonably request. 22. Representations and Warranties of the Borrower: The Borrower represents and warrants to the Bank, which representations and warranties are repeated as of the time of each Borrowing and as of the time at which each payment of interest or fees is due hereunder, that: (a) the Borrower is a corporation validly incorporated and existing under the laws of Ontario and are duly registered or qualified to carry on business in all jurisdictions where the nature of its properties, assets or business makes such registration or qualification necessary or desirable; (b) the execution and delivery of this Agreement and the Security Documents have been duly authorized by all necessary actions and do not (i) violate any law, regulation or rule by which the Borrower is bound, (ii) violate any provision of its constating documents, by-laws or any unanimous shareholders agreement to which it is subject, (iii) result in a breach of, or a default under, any agreement or instrument to which either it is a party or by which it or any of its properties or assets may be bound or affected, or (iv) result in the creation of any encumbrance on any of its properties or assets, except as contemplated herein; (c) its most recent audited, consolidated financial statements are correct and complete in all material respects; (d) no Event of Default has occurred and no event has occurred which constitutes, or which with giving of notice, lapse of time or the occurrence of any other condition would constitute a default having a material adverse effect on its financial condition under or in respect of any agreement, undertaking or instrument to which the Borrower or any of its properties or assets may be subject; (e) it is in compliance with all Applicable Laws, including, without limitation, those dealing with the environment; (f) the Borrower has filed all material income tax returns which were required to be filed, paid or made provision for payment of all material taxes (including interest and penalties) which are due and payable, and provided adequate reserves for payment of any tax, the payment of which is being contested; (g) no consent, approval, order, authorization, licence, exemption or designation of or by any governmental body or person is required in connection with the execution, delivery and performance of this Agreement or the Security Documents or the transactions contemplated hereby on behalf of the Borrower and no registration, qualification, designation, declaration or filing with any governmental body is necessary to enable or empower either of them to perform their respective obligations under this Agreement, except such as have been made or obtained, which are in full force and effect. The representations and warranties made in this Section shall continue in effect until payment and performance of all debts, liabilities and obligations under this Agreement. 23. Covenants: Without affecting or limiting in any way the right of the Bank to terminate its commitment and demand all Borrowings under the Credit Facility after the Maturity Date, the Borrower covenants and agrees with the Bank, while this Agreement is in effect or any Borrowings are outstanding: (a) to maintain as at the end of any fiscal quarter Tangible Net Worth on a consolidated basis of not less than US $40,000,000; (b) not to permit its Current Ratio on a consolidated basis to be less than 1.60:1 as at the end of any fiscal quarter; (c) not to permit its Total Liabilities to Tangible Net Worth Ratio on a consolidated basis to exceed .90:1 as at the end of any fiscal quarter; (d) to provide the Bank with the following: (i) quarterly consolidated and non-consolidated unaudited financial statements within 45 days of the end of each fiscal quarter, accompanied by a certificate in the form of Schedule C hereto; (ii) quarterly consolidated analysis of bookings, billings and backlog within 45 days of the end of each fiscal quarter; (iii) annual consolidated audited financial statements of the Borrower within 90 days of each fiscal year end; (iv) details of securities pledged as Liquid Collateral Security determined in accordance with Schedule D, each of the above financial statements to be accompanied by a certificate in form satisfactory to the Bank. (e) to give the Bank prompt notice upon acquiring knowledge of any Event of Default or any event which, with notice or lapse of time or both, would constitute an Event of Default; (f) not to do anything to affect the ranking of this debt; (g) to maintain its corporate existence as a validly existing corporate entity; (h) to provide the Bank with access to its business and records as may be requested from time to time including, without limitation, its annual financial forecasts and plans; (i) to insure and to keep insured with insurers acceptable to the Bank all properties customarily insured by companies carrying on similar business in similar locations against all risks, including but not limited to business interruption, with loss payable to the Bank as loss payee or mortgagee, as the case may be; (j) to file all income tax returns which are to be filed from time to time, to pay or make provision for payment of all taxes (including interest and penalties) and Potential Preferred Claims which are or will become due and payable and to provide adequate reserves for the payment of any tax, the payment of which is being contested; (k) to comply with all Applicable Laws including, without limitation, those dealing with the environment and to hold the Bank harmless for any costs or expenses which it incurs for any environment-related liabilities which exist now or in the future with respect to the Borrower s property; (l) not to grant, create, assume or suffer to exist any mortgage, charge, lien, pledge, security interest or other encumbrance affecting any of its properties, assets or other rights, without the prior written consent of the Bank; (m) during any fiscal year of the Borrower, not to sell, transfer, convey, lease, assign or otherwise dispose of any part of its undertaking, property, assets or rights with an aggregate value exceeding US $5,000,000, other than inventory in the ordinary course of business and on commercially reasonable terms, without the prior written consent of the Bank; (n) not to change its name or merge, amalgamate, consolidate or otherwise enter into any other form of business combination with any other person without the prior written consent of the Bank, such consent not to be unreasonably withheld; (o) not to make any capital expenditures in any fiscal year of the Borrower except those as may be set out in the Borrower's operating budgets as provided to the Bank from time to time, plus an allowance of 20%, without the Bank's prior written consent; (p) not to directly or indirectly, guarantee or otherwise provide for on a direct or indirect contingent basis, the payment of any monies or performance of any obligations by any third party, other than wholly owned Subsidiaries, for an amount in excess of US $5,000,000 in the aggregate, except as may be consented to in writing by the Bank from time to time; (q) to refrain from making investments in, or acquiring the shares of, any third party exceeding US $3,000,000 in aggregate in any fiscal year without the prior written consent of the Bank such consent not to be unreasonably held. This provision does not extend to existing Affiliates. 24. Events of Default: During the Term Period if any one or more of the following events has occurred and is continuing: (a) the non-payment when due of principal, interest, fees or any other amounts due under this Agreement; (b) the breach by the Borrower or its Affiliates of any provision of this Agreement or any other agreement with the Bank or any of the Bank's Subsidiaries; (c) the default by the Borrower or its Affiliates under any obligation to repay borrowed money in excess of $1,000,000, other than amounts due under this Agreement, or in the performance or observance of any agreement or condition in respect of such borrowed money where, as a result of such default, the maturity of such obligation is accelerated; (d) if any representation or warranty made or deemed to have been made herein shall be false or inaccurate in any materially adverse respect; (e) if in the opinion of the Bank there is a material adverse change in the financial condition, ownership or operation of the Borrower or any of its Material Subsidiaries; (f) if proceedings for the bankruptcy, receivership, dissolution, liquidation, winding-up, reorganization or readjustment of debt of the Borrower or its Affiliates or for the suspension of the operations of the Borrower or its Affiliates are commenced, unless such proceedings are being actively and diligently contested in good faith; (g) if the Borrower or any of its Affiliates is insolvent, or is adjudged or declared bankrupt or insolvent, or makes an assignment for the benefit of its creditors, or petitions or applies to any tribunal for the appointment of a receiver or trustee for it or for any substantial part of its property, or commences any proceedings relating to it under any reorganization, arrangement, readjustment of debt, dissolution, liquidation or other similar proceeding under Applicable Law, or by any act or failure to act indicates its consent to, approval of, or acquiescence in, any such proceeding for it or any substantial part of its property, or suffers the appointment of any receiver or trustee; (h) if the Borrower should incur a loss exceeding US $5,000,000 in any fiscal quarter, then in such event the ability of the Borrower to make further Borrowings under the Credit Facility shall immediately terminate and the Bank may, by written notice to the Borrower, declare the Borrowings outstanding hereunder to be immediately due and payable. After the Maturity Date, nothing in this Agreement shall be construed to affect or limit in any way the right of the Bank to terminate its commitment and demand all Borrowings under the Credit Facility. 25. Expenses: The Borrower shall pay the reasonable fees (including, without limitation, all documentation fees charged by the Bank for use of its internal legal counsel) and expenses incurred by the Bank in connection with the preparation, negotiation, documentation and operation of the Credit Facility and the Security Documents, including the enforcement of the Banks rights under the Credit Facility whether or not any amounts are advanced hereunder. 26. Indemnity: The Borrower shall indemnify the Bank from and against all losses, damages, expenses and liabilities (including legal fees on a solicitor and client basis) which the Bank sustains or incurs as a consequence of any breach by the Borrower under any of the provisions of this Agreement or of any document or instrument delivered in connection hereunder. 27. Limit on Rate of Interest: The Borrower shall not be obliged to pay any interest under or in connection with this Agreement to the extent such interest exceeds the effective annual rate of interest on the credit advanced hereunder that would be lawfully permitted under the Criminal Code. For purposes of this section, interest and credit advanced have the meanings ascribed to such terms in the Criminal Code, and the effective annual rate of interest shall be calculated in accordance with generally accepted actuarial practices and principles. 28. Judgment Currency: If for the purpose of obtaining judgment in any court in any jurisdiction with respect to this Agreement, it is necessary to convert into the currency of such jurisdiction (the Judgment Currency) any amount due hereunder in any currency other than the Judgment Currency, then such conversion shall be made at the rate of exchange prevailing on the Business Day before the day on which judgment is given. For this purpose rate of exchange means the rate at which the Bank will, on the relevant date, sell such currency in Toronto, Ontario against the Judgment Currency. In the event that there is a change in the rate of exchange prevailing between the Business Day before the day on which the judgment is given and the date of payment of the amount due, the Borrower will, on the date of payment, pay such additional amounts (if any) or be entitled to receive reimbursement of such amount, if any, as may be necessary to ensure that the amount paid on such date is the amount in the Judgment Currency which, when converted at the rate of exchange prevailing on the date of payment, is the amount then due under this Agreement in such other currency. Any additional amount due from the Borrower under this Section will be due as a separate debt and shall not be affect by judgment being obtained for any other sums due under or in respect of this Agreement. 29. Notices: Any notice or demand hereunder shall be given in writing by telecopier or letter, in each case addressed to an officer of the receiving party. A telecopier communication shall be deemed received on the date of transmission provided such transmission is received prior to 5:00 p.m. on a day on which the receiving party s office is open for normal business, and otherwise on the next such day. A letter shall be deemed received when hand-delivered to the receiving party, at the address shown herein or at such other address as the receiving party may notify the other from time to time. Each party shall be bound by any notice given hereunder and entitled to act in accordance therewith, unless otherwise agreed. The addresses of the parties for the purpose hereof shall be: as to the Borrower: Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Attention: Vice-President, Finance Telecopier: (613) 274-6505 as to the Bank: Royal Bank of Canada 90 Sparks Street Ottawa, Ontario K1P 5T6 Attention: Senior Manager, Advanced Technology Telecopier: (613) 564-4527 or such other address for delivery as each party from time to time may notify the other as aforesaid. 30. Assignment: This Agreement shall be binding upon and enure to the benefit of the Bank and the Borrower and their respective successors and permitted assigns. The Borrower cannot assign or transfer all or any of its rights and obligations hereunder without the prior written consent of the Bank. 31. Set-Off: The Bank is authorized (but not obligated), at any time and without notice, to apply any credit balance (whether or not then due) to which the Borrower is then beneficially entitled on any account (in any currency) at any branch or office of the Bank in or towards satisfaction of the obligations and liabilities of the Borrower due to the Bank under this Agreement. For that purpose, the Bank is authorized to use all or any part of any such credit balance to buy such other currencies as may be necessary to effect such application. 32. Waivers and Amendments: No failure to exercise and no delay in exercising on the part of the Bank, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other right, power or privilege. No amendment, modification or waiver of any provision of this Agreement or consent to any departure by the Borrower from any provision of this Agreement will in any event be effective unless it is in writing signed by the Borrower and the Bank, and then the amendment, modification, waiver or consent will be effective only in the specific instance, for the specific purpose and for the specific length of time for which it is given by the Bank. 33. Counterparts: This Agreement may be executed in any number of counterparts, each of which when executed and delivered is an original but all of which taken together constitute one and the same instrument, and any party may execute this Agreement by signing any counterpart of it. 34. Further Assurances: The Borrower shall from time to time promptly upon the request of the Bank take such action and execute and deliver such further documents, as shall be reasonably required in order to fully perform the terms of, and to carry out the intention of, this Agreement. 35. Severability: If any provision of this Agreement is or becomes prohibited or unenforceable in any jurisdiction, such prohibition or unenforceability shall not invalidate, affect or impair any of the remaining provisions hereof or invalidate or render unenforceable the provision concerned in any other jurisdiction. 36. Governing Law and Submission to Jurisdiction: This Agreement shall be construed in accordance with and governed by the laws of the Province of Ontario and of Canada applicable therein. The Borrower irrevocably submits to the non-exclusive jurisdiction of the courts of such Province and acknowledges the competence of such courts and irrevocably agrees to be bound by a judgment of any such court. 37. Periodic Review: The Credit Facility is subject to an annual review by the Bank on or before the Maturity Date. The Bank may, in its sole discretion, terminate the Credit Facility following such annual review without limiting or affecting the Bank s rights pursuant to Section 24 hereof. 38. Whole Agreement: This Agreement and any agreements delivered pursuant to or referred to in this Agreement constitute the whole and entire agreement between the parties in respect of the Credit Facility, and cancel and supersede any prior written or verbal agreements including undertakings, declarations or representations made with respect thereto. 39. Effective Date: Except as otherwise provided in this Agreement, the date on which this Agreement becomes effective is the date the offer is accepted by the Borrower. 40. Expiry Date: This offer is open for acceptance until close of business at the Branch of Account on June 30, 1996 unless extended in writing by the Bank. Please acknowledge your acceptance of the above terms and conditions by signing the attached copy of this letter in the space provided below and returning it to the undersigned. Yours truly, s/L. J. BLATTMAN - ---------------- We acknowledge and accept the terms and conditions of this Agreement on the 11th day of June, 1996. THE BORROWER: GANDALF TECHNOLOGIES INC. By: s/W.R. MACDONALD ---------------- Name/Title: Walter R. MacDonald Vice President, Finance and Chief Financial Officer By: s/M. RENNIE ------------------ Name/Title Michael Rennie Director of Finance SCHEDULE A Schedule A to the Agreement dated as of the 11th day of June, 1996 between Gandalf Technologies Inc. as Borrower and Royal Bank of Canada as the Bank. DEFINITIONS: Affiliate of a person means any person which directly or indirectly, controls or is controlled by or is under common control with such first mentioned person, and for the purposes of this definition, control (including with correlative meanings the terms controlled by and under common control with) means the power to direct or cause the direction of the management and policies of any person, whether through the ownership of shares or by contract or otherwise, and without restricting the above, one corporate body shall be deemed to be affiliated with another corporate body if one of them is the Subsidiary of the other or both are Subsidiaries of the same corporate body; Agreement means collectively this agreement and all schedules attached hereto; Applicable Law means, in respect of any person, property, transaction or event, all present or future applicable laws, statutes, regulations, treaties, judgments and decrees and (whether or not having the force of law) all applicable official directives, rules, guidelines, orders and policies of any governmental body having jurisdiction; B/A Undertaking means the Bank's standard form of undertaking in respect of bankers acceptances issued by borrowers and accepted by the Bank; Branch of Account means the Bank's branch at 90 Sparks Street, Ottawa, Ontario; Business Day means a day, excluding Saturday, Sunday, and any other day which shall be in the City of Toronto, Ontario a legal holiday or a day on which banking institutions are closed and, with respect to a Libor Loan, Business Day means a day with the foregoing characteristics which is also a day on which dealings in US Dollar deposits by and between leading banks in the London interbank market may be conducted; Canadian Dollars and the symbols Cdn$, C$ and $ each means lawful money of Canada; Current Ratio of a person means the ratio of that person's current assets to that person's current liabilities, net of bank loans against cash on hand; Equivalent Amount determines the amount of availability only and means on any date, the amount of Canadian Dollars required to convert from Canadian Dollars to US Dollars at the rate of 1.35 Canadian Dollars for 1.00 US$; The Equivalent amount will be amended by the Bank from time to time to reflect changes in the rate of exchange and such amendments will be advised to the Borrower in writing; SCHEDULE A (CONTD.) Event of Default means each of the events listed in the section entitled Events of Default; Financial Tests mean: (a)A current ratio of 2.7:1 or higher; (b)A ratio of total liabilities to Tangible Net Worth of not greater than .5:1; GAAP means generally accepted accounting principles in effect from time to time in Canada applied in a consistent manner from period to period; Interest Determination Date means, with respect to a Libor Loan, the date which is 2 Business Days prior to the first day of the Libor Interest Period applicable to such Libor Loan; Letter of Credit or L/C each means a documentary credit issued by the Bank on behalf of the Borrower for the purpose of providing security to a third party that the Borrower will perform a contractual obligation owed to such third party; Libor means, with respect to each Libor Interest Period applicable to a Libor Loan, the annual rate of interest (rounded upwards, if necessary, to the nearest whole multiple of one sixteenth of one percent (1/16th%)), at which the Bank, in accordance with its normal practice, would be prepared to offer to leading banks in the London interbank market for delivery on the first day of such Libor Interest Period and for a period equal to such Libor Interest Period, deposits in US Dollars of amounts comparable to such Libor Loan to be outstanding during such Libor Interest Period, at or about 10:00 a.m. (Toronto time) on the Interest Determination Date; Libor Interest Date means, with respect to any Libor Loan, the last day of each Libor Interest Period and, if the Borrower selects a Libor Interest Period longer than 3 months, the Libor Interest Date shall be the date falling every 3 months after the beginning of such Libor Interest Period as well as the last day of such Libor Interest Period; Libor Interest Period means, with respect to any Libor Loan, a period (subject to availability) of approximately 1 month (or longer whole multiples of 1 month to and including 12 months as selected by the Borrower and notified to the Bank) commencing with the date on which such Libor Loan is made, the date on which another method of Borrowing is converted to such Libor Loan or the last day of the immediately prior Libor Interest Period; Liquid Collateral Security means the liquid collateral security determined in accordance with Schedule D; Margin Requirement means the total amount of Borrowings available under this Agreement, which amount may not exceed the sum of (i) 75% of the aggregate of trade accounts receivable of GTI, GCL and GSC each as reported in their unaudited non- consolidated financial statements as at the end of the most recent fiscal quarter, (ii) to a maximum of US $8,000,000, 50% of the book value of inventory owned by GCL and located in the Province of Ontario and (iii) Liquid Collateral Security; SCHEDULE A (CONT D.) Material Subsidiary means any Subsidiary of the Borrower now or hereinafter located in Canada, the United States, the United Kingdom, France or the Netherlands, as well as any Subsidiary of the Borrower which is identified as being a Material Subsidiary by the Bank in writing to the Borrower from time to time and Material Subsidiaries means any such Subsidiaries of the Borrower; Maturity Date means June 30, 1997; Potential Preferred Claims means amounts accrued or owing for wages, vacation pay, employee benefits or pensions, municipal tax, corporate tax, sales tax, Canadian goods and services tax, source deductions and remittances (including income tax, Canada Pension Plan and unemployment insurance obligations), Government royalties, purchase money security interests and any other statutory preferred claims as well as the aggregate of the next three months rent payments for each rental property of the Borrower; Royal Bank Prime (in this Agreement,RBP) means the annual rate of interest announced by the Bank from time to time as being a reference rate then in effect for determining interest rates on Canadian Dollar commercial loans made in Canada; Royal Bank Prime Acceptance Fee (in this Agreement,RBPAF) means the annual rate announced by the Bank from time to time as being a reference rate then in effect for determining fees on Canadian Dollar bankers acceptances accepted by the Bank in Canada; Royal Bank US Base Rate(in this Agreement,RBUSBR) means the annual rate of interest announced by the Bank from time to time as being a reference rate then in effect for determining interest rates on US Dollar commercial loans made in Canada; Subsidiary of a person means (i) any corporation of which the person and/or any one or more of its Affiliates, holds, directly or beneficially, other than by way of security only, securities to which are attached more than 50% of the votes that may be cast to elect directors of such corporation, or (ii) a corporation of which such person has through operation of law or otherwise, the ability to elect or cause the election of a majority of the directors of such corporation and Subsidiaries of such person mean all such corporations; Tangible Net Worth of a person means its shareholders equity less the aggregate of its goodwill, deferred income taxes, deferred software costs (all as defined and set out on the person's audited annual financial statements), and other assets that the Bank deems to be intangible. For the purpose of calculating shareholders'equity, items on the balance sheet of the relevant person under the heading foreign exchange translation amount shall be deemed to be zero; Term Period means the period of time from the date of this Agreement to and including the Maturity Date; SCHEDULE A (CONT D.) Total Liabilities of any person means all liabilities appearing on the balance sheet of that person, net of bank loans against cash on hand; Total Liabilities to Tangible Net Worth Ratio of a person means the ratio of that person's Total Liabilities to that person's Tangible Net Worth; US Dollars and US$ each means lawful money of the United States of America in same day immediately available funds or, if such funds are not available, the form of money of the United States of America that is customarily used in the settlement of international banking transactions on the day payment is due hereunder. SCHEDULE B Schedule B to the Agreement dated as of the 11th day of June, 1996 between Gandalf Technologies Inc. as Borrower and Royal Bank of Canada as the Bank. Notice Requirements for Drawdowns and Conversions RBP LOANS AND RBUSBR LOANS Amount: Prior Notice; Under Cdn$ or US$10,000,000 by 12:00 (noon) on the day of drawdown or conversion Cdn$ or US$10,000,000,up to and including the Amount by 12:00 (noon) 1 Business Day prior to drawdown or conversion B/As Amount Prior Notice Under Cdn$10,000,000 by 12:00 (noon) on the day of drawdown or conversion Cdn$10,000,000 up to and including the Amount by 12:00 (noon) 1 Business Day prior to drawdown or conversion Libor Loans Amount Prior Notice Under US$10,000,000 or the by 10:00am on the Interest Equivalent Amount in Pounds Determination Date Sterling US$10,000,000 up to and by 10:00am 1 Business Day including the Amount or the prior to the Interest Equivalent Amount in Pounds Determination Date Sterling SCHEDULE C Schedule C to the Agreement dated as of the 11th day of June, 1996 between Gandalf Technologies Inc. as Borrower and Royal Bank of Canada as the Bank. OFFICER'S COMPLIANCE CERTIFICATE We, , of the City of and the City of , respectively in the Province of Ontario, and hereby certify as follows: 1.That we are the [office] and [office], respectively of Gandalf Technologies Inc. (the Borrower) 2.That we have read the provisions of the letter agreement (the Agreement) dated June 11, 1996 between the Borrower and Royal Bank of Canada (the Bank) which are relevant to this compliance certificate and have made such examination or investigation as is reasonably necessary to enable us to express an informed opinion on the matters contained in this certificate. Terms defined in the Agreement have the same meanings where used in this certificate. As of the date of this certificate: (a)the representations and warranties contained in the Agreement are true and correct; (b)no Event of Default or event which would with lapse of time or the happening of some further condition constitute an Event of Default has occurred and is continuing; and (c)the covenants contained in the Agreement have not been breached and during the next fiscal quarter of the Borrower there is no reason to believe that any of such covenants will be breached. SCHEDULE D Schedule D to the Agreement dated as of the 11th day of June, 1996 between Gandalf Technologies Inc. as Borrower and Royal Bank of Canada as the Bank. LIQUID COLLATERAL SECURITY LIQUID COLLATERAL SECURITY LIQUID COLLATERAL SECURITY APPLICABLE LOANING VALUE (7) Canada Savings Bonds, 100% of par value and Savings Bonds redeemable at par issued by Provincial Governments; Province of British Columbia Parity Bonds redeemable at par and fully guaranteed by the Province of British Columbia, issued in the names of Provincial Crown Corporations. 95% of market value (8)Government of Canada or Government of Canada guaranteed bonds and Treasury Bills except as indicated in (a) above. 95% of market value (c)Provincial Government or Provincial Government guaranteed bonds and Treasury Bills except as indicated in (a) above 95% of market value. (d)Bankers acceptances or similar investments effectively assigned to the Bank. LIQUID COLLATERAL SECURITY -----END PRIVACY-ENHANCED MESSAGE-----