-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, oVwwSxXnTFjIuQQ1OEgkfQjptSdL76usyGo32yd/vDkDy8LBi4DxJt5c4BJltwOx 55s5ezGRDGOHo7w/fgjerA== 0000950112-94-001797.txt : 19940701 0000950112-94-001797.hdr.sgml : 19940701 ACCESSION NUMBER: 0000950112-94-001797 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GANDALF TECHNOLOGIES INC CENTRAL INDEX KEY: 0000355876 STANDARD INDUSTRIAL CLASSIFICATION: 3577 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: 94536462 BUSINESS ADDRESS: STREET 1: 130 COLONNADE RD S STREET 2: ZIP K2E 7M4 CITY: NEPEAN ONTARIO CANAD STATE: A6 BUSINESS PHONE: 6137236500 10-K 1 FORM 10-K FOR YEAR ENDED MARCH 31, 1994 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, 1994 ------------------ OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ------ ACT OF 1934 [NO FEE REQUIRED] For the transition period from to -------------- -------------- Commission file number: 0-12643 ----------------- GANDALF TECHNOLOGIES INC. (Exact name of registrant as specified in its charter) ONTARIO, CANADA NOT APPLICABLE (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 130 COLONNADE ROAD SOUTH, NEPEAN, ONTARIO, CANADA K2E 7M4 (Address of principal executive offices) (Postal Code) Registrant's telephone number, including area code: (613) 723-6500 --------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Shares (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] [Cover page 1 of 2 pages] The aggregate market value of the Common Shares held by non- affiliates of the registrant, based upon the closing sales price of the Common Shares as reported on The Nasdaq Stock Market (National Market System) on June 2, 1994 was approximately $14,165,313. This amount excludes 5,407,833 Common Shares held by all executive officers, directors, and shareholders holding over 5 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 2, 1994, 28,072,333 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. DOCUMENTS INCORPORATED BY REFERENCE PART I None PART II Item 5 Market for Registrant's Common Stock and Related Security Holder Matters. Page 30 of the Annual Report to Shareholders for the fiscal year ended March 31, 1994 (Exhibit 13). Item 6 Selected Financial Data. Inside front cover of the Annual Report to Shareholders for the fiscal year ended March 31, 1994 (Exhibit 13). Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. Pages 25 to 29 of the Annual Report to Shareholders for the fiscal year ended March 31, 1994 (Exhibit 13). Item 8 Financial Statements and Supplementary Data. Pages 12 to 24 of the Annual Report to Shareholders for the fiscal year ended March 31, 1994 (Exhibit 13). PART III None [Cover page 2 of 2 pages] TABLE OF CONTENTS Page ---- PART I Item 1. Description of Business 4 Industry Background 4 The Company 4 Products and Strategy 4 Sales and Marketing 7 Field Service and Customer Support 7 Research and Development 7 Manufacturing 8 Customers 8 Competition 9 Backlog 9 Patents and Trademarks 9 Employees 9 Environmental Affairs 10 Corporate Structure 10 Item 2. Properties 10 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters 12 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 8. Financial Statements and Supplementary Data 12 Item 9. Disagreements on Accounting and Financial Disclosure 12 PART III Item 10. Directors and Executive Officers 12 Item 11. Executive Compensation 15 Item 12. Security Ownership of Certain Beneficial Owners and Management 19 Item 13. Certain Relationships and Related Transactions 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 21 Signatures 24 PART I ITEM 1. DESCRIPTION OF BUSINESS Industry Background ------------------------------ Over 20 years, the marketplace for intelligent networking of computer system has developed from simple extension of the geographic distance separating users from centralized computing resources to complex, infrastructures that now link users, and organizations, together on premises (Local Area Networks) or over telephone services (Wide Area Networks). Increasingly, however, this distinction has become blurred as LAN's reach out to remote locations, and invisible access to any authorized resource becomes normal. The use of the telecommunications network now allows people to work from their homes with computers. Companies can hold meetings in different cities using video transmissions and important documents can be transmitted using facsimile equipment anywhere in the world. This increasing need for the transmission of information provides ever increasing opportunities for the supply of products that allow for continued, effortless communication to all parts of the world. The Company -------------------- Gandalf Technologies Inc. was incorporated on April 29, 1971 as Gandalf Data Communications Limited by articles of incorporation under the laws of the Province of Ontario. The terms "Gandalf" and "the Company" herein refer to Gandalf Technologies Inc. and its subsidiaries. The registered office of Gandalf Technologies Inc. is 130 Colonnade Road South, Nepean, Ontario, Canada K2E 7M4, in the metropolitan Ottawa area, telephone (613) 723-6500. On August 2, 1991 the Company acquired Infotron Systems Corporation, an American company incorporated in 1968, and merged its two U.S. subsidiaries under the name Gandalf Systems Corporation. Products and Strategy ----------------------------------- Gandalf's software and hardware products permit users to communicate between information sources originating from a variety of equipment supplied by different vendors, over distances ranging from inter-office local area networks to intercontinental wide area networks. The Company's products may be sold separately as discrete network components or they may be configured, integrated and serviced by the Company or its partners as value-added networks designed to interconnect multi- vendor computer, voice and video systems in geographically dispersed areas. The technologies contained within the range of Gandalf products provide users with choice of telecommunications technologies for the transmission of mixed media services over an array of different telecommunication services. The mixed media inputs may be voice, computer terminals, personal computers, local area networks, mainframe computers, facsimile machines and video equipment connected to transmission services, such as, Public Switched Telephone Network (PSTN), Integrated Services Digital Network (ISDN), X.25 digital networks, frame relay and private leased circuits from 1200 bits per second to digital circuits up to 34 megabits per second (E3). Using both direct and indirect sales channels through its subsidiaries in Canada, the United States, the United Kingdom, the Netherlands, France and Belgium, and selected distributors other geographical areas, Gandalf is able to bring to its customers a variety of telecommunication solutions. The Company also provides support services and uses a worldwide force of skilled employees to: . consult with the Company's customers; . design communications networks for the customer's specific needs; . manufacture or source the product components of that network; . install the equipment; . train the customer's employees on how to use and maintain the system; . stand by to diagnose the network and service the equipment should it be necessary. With its broad expertise in both the mixed media input of a telecommunications network and the connection to an array of transmission technologies, Gandalf is now focussing its efforts on the remote access segment of the telecommunications market. The remote access market, still a young and growing opportunity, has evolved as organizations have recognized the need to bring information to their users and customers at the furthest point of contact. This contact at the remote branch office, site or home provides the customer with access to information needed to make informed decisions and effectively understand the service or product being offered. For information regarding Gandalf's foreign and domestic operations, see note 23 to the Company's financial statements incorporated by reference herein. The Company markets an extensive product portfolio, many products of which have been newly introduced or substantially enhanced in fiscal 1994. Private Wide Area Networking -------------------------------------------- Private backbone networks are an important feature of many Gandalf customers and emerging users in international markets. Typically purchased to improve company costs when compared to using normal telephone services, the family comprises: Access 2120. Access 2120 branch hub combines technology integration and aggressive pricing to extend the benefits of multimedia networking to an enterprise's remote sites. Available for entry-level applications in large networks or for branch support in smaller branch and region networks, the Access 2120 aggregates voice, video and data or LAN traffic, reducing equipment costs and consolidating traffic over cost-effective, high bandwidth trunks. High performance voice compression and innovative LAN traffic management maximize cost efficiency. Gandalf 2300 Regional Concentrator. The Gandalf 2300 Regional Concentrator provides cost-effective voice, data, LAN and video integration for regional concentration of many 2120 locations. Supporting both circuit-switched traffic and frame relay concentration over private and public services, it maximizes the use of bandwidth up to and including T1/E1 services by innovative concentration of multiple frame relay branch circuits onto a smaller number of backbone connections. Access 2050. Access 2050 is a high performance Cell Switching network communications server, providing network processing, routing and transportation consolidation. The Access 2050 uses a patented high-speed multiple bus architecture for greater throughput and reliability. The Quic-Bus architecture offers integrated cell switching and circuit transport on the same platform for integration of voice, LAN, video and data networks. StarMaster --------------- The StarMaster system is a software-based local and wide area digital networking system, designed to link commonly used computers and terminals in a user friendly and secure operating environment. Within the StarMaster system, a number of sub- systems offer the physical and logical functions required within a network; to provide connectivity to terminal-based host systems, as well as gateways to LAN and wide area X.25 services. The product also features innovative digital ISDN and T1 services for use in Voice PBX and video conferencing applications. Multi location StarMaster networks are supported by a scalable, robust family of small statistical multiplexors (MUX 2000), transmission products and ISDN terminal adaptors. Xpressway --------------- A key focus for managed LAN-based networks, Xpressway was introduced in fiscal 1994 and delivers new functionality to Access Hub users. Key to its architecture is the ability to seamlessly integrate LAN's even when remotely connected, to on- premise computing facilities using cost effective, emerging digital switched telephone services such as ISDN. This architecture combines the best of LAN Hub, router and emerging LAN switching technologies, in a single, inexpensive approach to LAN user ubiquity. Key product introductions have been: Xpressway ISDN. A high performance Band Role (64K) ISDN subsystem for direct telephony channel connections for LANs, featuring Gandalf's patented data compression. This supports up to 248 remote locations per hub. Xpressway XBR. A high performance up to E1 (2.048 Mbps) mutliport compression bridge. Xpressway Prism. A multisegment (21) Ethernet LAN switching subsystem with Fibre Distributed Data Interchange (FDDI) functionally. A wide range of on-premise Ethernet and Token Ring connectivity options, as well as mutliprotocol routing functions, are also supported. These complement existing analog and gateway products including Access Router and Access 2590, and provide seamless conversion gateways for existing StarMaster and Infotron NP users. LANLine ------------ LANLine addresses the high performance LAN inter- connectivity market primarily through indirect channels. Its technology, and certain products, are also key elements of Xpressway networks when located at the remote end points of these networks. Development and marketing focusses upon fast time to market, and innovative designs which are extremely easy to install and use by a large population with little or no technical skill. This simplifies sale and reduces substantially the traditional costs of support and service of complex networking products. Products new in fiscal 1994 include: LANLine 5220. The LANLine 5220 Remote Bridge is now the world's largest selling Ethernet Bridge and combines Gandalf's patented data compression, RISC processor performance and aggressive pricing. This has been complemented by innovative models for specific segments. The LANLine 5225i and 5240i support remote, switched networks of Novell Netware users seamlessly without complex systems administration, over PSTN and ISDN services respectively. LANLine 5250. The LANLine 5250L is a high performance security and firewall local router. Gandalf has successfully pioneered ultra-low cost and easy to use segmentation of local LAN workgroups, through development of custom chips (ASICS) providing inter-bridging of workgroups in its LANLine 5210/11 family, at unit costs comparable to PC software. Extensive third party distribution worldwide has been achieved through effective marketing and integrated product family approval. Centralized Management and Control ---------------------------------------------------------- Gandalf has recently developed a new and extremely powerful end-to-end network management system, Gandalf Passport. Gandalf Passport is a standards-based graphics manager that combines the needs of Local Area Networks (LANs) with the more diverse Wide Area Backbone Networks (WANs) by constantly monitoring all activities within a network. Gandalf Passport is designed to identify problems, offer solutions and, if needed, rectify network failures for a network operator. This product was released in October 1993. Sales and Marketing ------------------------------ Gandalf markets its products and services through both direct and indirect channels through wholly-owned subsidiaries in the United States, Canada, United Kingdom, the Netherlands and France. The Company's international division also markets to over 75 other countries through local distributors. Field Service and Customer Support ------------------------------------------------------- The Company provides, through its field service staff, both technical support relating to the successful installation and interconnection of the Company's products with those of other manufacturers, and ongoing field service and maintenance support. The Company's field service and technical support staff consists of over 250 employees in the United States, Canada, the United Kingdom, and Continental Europe. The Company believes that providing network services and support to its large installed base of customers is fundamental to its continued growth. The Company, through its extensive field service organization, sells support services under contract to a significant percentage of its customers. The Company believes that the customer contacts generated through its field service organization provide the opportunity for sales of additional Gandalf products and enhance referrals for the sale of products to new customers. Research and Development ------------------------------------------ Success in the rapidly changing communications element of the information industry is dependent upon the ability to anticipate and respond to customer needs and to develop reliable, cost-effective products with expanded capabilities and performance. The Company intends to continue to focus its research and development in the areas of network design, high- speed digital communications and network management. The Company spent $16.8 million on product development in fiscal year 1991, $18.1 million in fiscal 1992 (8 months), $20.5 million in fiscal 1993 and $15.0 million in fiscal 1994. In recognition of the geographic diversity of its business, the Company operates a separate European Technology Centre in addition to its research and development facilities located in Canada and the United States. Manufacturing ---------------------- The manufacturing of Gandalf's products consists primarily of assembling and testing electronics assemblies. In addition, enclosures and racks are assembled complete with electrical power apparatus, interconnect wiring and cabling. Finally, electronics assemblies are integrated with the enclosures or racks, according to standard and customer-specific configurations, which are tested prior to shipment to customers. The Company manufactures electronics assemblies in Canada using a high degree of automation. All operations are conducted under procedures which are managed under the ISO 9002 quality management program. These standards provide a framework for Gandalf's ongoing quality improvement programs and they are widely recognized as the mark of a world-class manufacturer. Final assembly and testing are conducted at the Canadian factory as well as the distribution centre in the United Kingdom. In some cases, Gandalf subcontracts the entire manufacture of products to a single supplier. As well, whenever Gandalf designs components and subassemblies, a single-source supplier is used. Gandalf believes that the close working relationship with a single supplier enhances product quality, on-time delivery and a close control of costs. If necessary, all of these items could be sourced from other vendors at Gandalf's discretion. To assure product supply, it is the Company's policy to avoid designing with sole sources of components or subassemblies. However, even with multiple sources, from time to time the electronics industry has experienced shortages in the supply of certain semi-conductor and other components. To date, the Company has not experienced any significant production problems or delays of its shipping schedules for this reason. No assurances can be given that future shortages will not have an adverse effect on the Company's business. 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 have a material adverse affect on the Company. During the three-year period ended March 31, 1994, no customer accounted for 10 percent or more of the Company's revenues in any year. Competition ------------------- Competition in the telecommunications market is intense and marked by advances in technology which frequently result in the introduction of products with improved performance characteristics. Failure to keep pace with such advances could negatively affect the Company's competitive position and prospects for growth. The Company competes on the basis of price, product quality and communications reliability, various supporting services, product development capabilities and availability. The Company believes it is competitive in each of these respects. However, many of Gandalf's competitors have greater financial, technological, manufacturing, marketing and personnel resources than the Company. The Company competes with the local area networking (LAN) and wide area networking (WAN) companies who are attempting to address the LAN/WAN Internetworking marketplace. These include Ascom Timeplex, Cabletron Systems Inc., Cisco Systems Inc., General DataComm Industries Inc., SynOptics Communications Inc., 3COM Corporation and Wellfleet Communications Inc. Gandalf believes its worldwide coverage, its extensive customer base, its experienced direct sales force and its global technical support will allow it to compete successfully in its chosen markets. Backlog ------------- Gandalf 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. Patents and Trademarks ------------------------------------ The telecommunications industry is characterized by rapid technological advances and the Company believes that patents are of less significance than such factors as continuing innovative engineering and design efforts. The Company believes its trademark "GANDALF" is a valuable asset and the Company has obtained or applied for trademark registration in a number of countries. The Company's product trademarks are protected in sales markets where potential business is believed to warrant the expenditure for such trademark registrations. Employees ----------------- On March 31, 1994 Gandalf had 1,127 employees, of whom 294 were engaged in manufacturing, 149 were engaged in engineering development, 553 were sales, marketing and customer support personnel and 131 held general and administrative positions. For information with respect to restructuring actions taken in the fourth quarter of fiscal 1994, please see Note 14 of the Notes to the Consolidated Financial Statements included in Exhibit 13 hereto. On March 31, 1993 the Company had 1,366 employees and on March 31, 1992 the Company had 1,616 employees. Gandalf believes that its continued success will depend in part on its ability to attract and retain highly skilled technical, marketing and management personnel. To date, the Company has had no difficulty attracting and retaining qualified employees. The Company considers its relations with its employees to be satisfactory. Environmental Affairs --------------------------------- The Company's manufacturing facilities are subject to numerous laws and regulations designed to protect the environment from pollution which, to date, have not had a material effect on the capital expenditures or earnings of the Company. The Company posted a bond for $500,000 at the time of the merger with Infotron Systems Corporation, under the requirements of the New Jersey Environmental Cleanup Responsibility Act, in connection with Infotron's facilities in Cherry Hill, New Jersey to cover future cleanup costs that may be required to be paid by the Company under the legislation. Other than as described above, in the opinion of management environmental laws and regulations are not expected to have a material effect on future capital expenditures or earnings of the Company. Corporate Structure ----------------------------- The Company has a number of wholly-owned direct and indirect subsidiaries of which the following are deemed principal subsidiaries: * Gandalf Canada Ltd., Ontario, Canada * Gandalf Systems Corporation, Delaware, U.S.A. Gandalf International Limited, United Kingdom * Gandalf Digital Communications Limited, United Kingdom - Gandalf S.A., France - Gandalf Nederland B.V., Netherlands * Shares have been pledged as security to the Royal Bank of Canada pursuant to Credit Agreements. ITEM 2. PROPERTIES The Company operates from four leased premises in Nepean, Ontario, Canada. A research and administration facility (comprising 97,000 square feet) is located on land adjacent to the Company's manufacturing facility (comprising 58,000 square feet) in Nepean. Pursuant to an option agreement dated October 1, 1986, the Company sold to the builder of the research and administration facility both the manufacturing facility and the research and administration facility for a price of $11.6 million. Both facilities have been leased back to the Company for a 10-year term with four options to renew of five years each. In October 1988, the Company opened a 18,250 square foot printed circuit board manufacturing facility on land adjacent to the Company's other buildings in Nepean. In October 1988, the Company sold this building to the builder for a price of $2.6 million with a leaseback to the Company for a 20-year term. The Company also leases a 17,000 square foot computer services facility in Nepean, Ontario. The lease expires in 1996. In August 1991, as a result of the Infotron merger, the Company acquired a lease on a research, administrative and distribution facility in Cherry Hill, New Jersey, U.S.A. (comprising 183,000 square feet). In September 1992, the lease was amended to reduce the leased square footage to 123,000. The lease expires in 1995 and may be extended by the Company for an additional five (5) years. The Company is presently negotiating the termination of the lease in its entirety and is planning to relocate its Cherry Hill operations to a smaller facility in the area. The Company also leases approximately 62,000 square feet in a separate building in Cherry Hill, New Jersey which is not presently being occupied. The lease expires in 1995. The Company owns a facility in Warrington, Cheshire, England (comprising 37,200 square feet) used as a distribution centre and offices. It is management's belief that the existing principal properties described above are adequate for the Company's current needs. ITEM 3. LEGAL PROCEEDINGS An action was commenced in October 1987 against the Company in the Supreme Court of Ontario by CSS Communications Systems Services GmbH, a former distributor of Gandalf products. This claim is in the amount of approximately $2.5 million for an alleged breach of a distribution agreement. Based upon their review of the proceedings to date and the result of the pre-trial conference, counsel considers the Company has good defenses to the action on the merits. In August 1990, an action was initiated against the Company in the Trade Court of Brussels by Comtech SA, a distributor of Gandalf products in Belgium. Claims total approximately $1.8 million for an alleged termination of the distribution agreement and an alleged unlawful termination of negotiations for the purchase of Comtech SA. The Company has retained counsel to defend the action. Counsel has filed a brief stating that the Company has good defenses to the action. On December 26, 1991 the Company filed a complaint in the Superior Court of New Jersey for breach of contract against Graphnet, Inc., a customer of the Company, demanding judgement in the approximate amount of $2.0 million. On March 6, 1992 Graphnet filed an answer and a counterclaim for breach of contract claiming relief for an unspecified amount. In answers to interrogatories dated November 24, 1992, Graphnet asserted that it was seeking compensatory damages in this proceeding in an unspecified amount which it described as being in excess of $1.0 million and that it was also seeking punitive damages, interest, counsel fees and treble damages. On September 24, 1993, the Company, with leave of court, joined Netrix Corporation, the manufacturer of the equipment, as a third-party defendant on Graphnet's counterclaim, for, inter alia, contribution and indemnity. The Company believes that its complaint is meritorious and that it has good defenses to the counterclaim. On April 19, 1993, a third party claim was made against the Company in the Ontario Court (General Division) by Distribution Architects International, Inc. and D.A. Distribution Software Systems Ltd. who, among others, are defendants in an action commenced by 1110-0435 Quebec Inc. and Deskin Inc. for breach of contract and negligence as a result of the alleged failure of a computer system that was designed, supplied and installed by the defendants. The third party claim is for contribution and indemnity in respect of the claim made against the defendants, which is in the amount of $25 million (Cdn.). Counsel in the action has filed a statement of defense. The Company considers that it has good defenses to the third party claim on the merits. ITEM 4. SUBMISSION OF MATTERS TO A 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 30 of the 1994 Annual Report to Shareholders, filed as Exhibit 13 hereto, which information is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA For information relating to Gandalf's selected financial data, reference is made to the inside front cover of the 1994 Annual Report to Shareholders, filed as Exhibit 13 hereto, which information is incorporated herein by reference. 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 25 to 29 of the 1994 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 financial statements and supplementary data, reference is made to pages 12 to 24 of the 1994 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 2, 1994, 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, 63 1971 A founder of the Company; Chairman since August 1985 and Chief Executive Officer from October 1989 to October 1992. Director of Gandalf Systems Corporation, Gandalf Digital Communications Limited, Gandalf Nederland B.V. and Gandalf International Limited (subsidiaries of the Company). Alexander Curran, 67 1987 President, Alex Curran Consultant Inc. (management consulting) since December 1988. Charles J. Gardner, Q.C., 58 1981 Partner of Goldberg, Shinder, Gardner & Kronick (barristers and solicitors) since 1966. Donald M. Gleklen, 57 1991 Managing Partner of Brobyn Capital Partners (private venture capital firm) since March 1994. Senior Vice- President of MEDIQ Incorporated (health care services company) from September 1968 to February 1994. Brian R. Hedges, 41 1992 Management Consultant since April 1994. Chief Executive Officer of the Company from October 1992 until April 1994 and President from September 1992 to April 1994. Management Consultant from April 1992 to August 1992. Senior Vice- President of Finance, Teleglobe Inc. (telecommunications carrier) from December 1990 to March 1992 and Vice President of Finance, First Air (regional airline) from December 1989 to December 1990. Financial Consultant from August 1989 to November 1989. Director of the Company from September 1981 to August 1989 and Vice-President from June 1980 to July 1989. Robert E. Keith, 52 1992 President of Technology Leaders Management Inc. (high technology venture capitalists) and Managing Director of Radnor Venture Partners, L.P. (high technology venture capitalists) since July 1989. A. Graham Sadler President of Morline Inc. (suppliers of electronic and mechanical components and parts) since 1991. Executive with Northern Telecom (manufacturers of telecommunications products from 1962 to 1991, and President of Northern Telecom Electronics (subsidiary of Northern Telecom) responsible for managing custom silicon supply, hybrids, printed circuit boards, and manufacturing process development in North America and Asia, from 1987 to 1991. Thomas A. Vassiliades, 58 1993 President and Chief Executive Officer of the Company since May 1994. President and Chief Executive Officer of Avatar Management Services, Inc. (management and consulting services) since June 1993 and President and Chief Executive Officer of Bell Atlantic Business Systems Inc. (international independent computer and network services) from February 1990 to June 1993. From August 1988 to February 1990, Chief Executive Officer of Bell Atlantic Customer Services Inc. (independent computer services) and from July 1987 to December 1989, information systems oversight executive for the Bell Atlantic Enterprises' Corporation (the non-regulated business of Bell Atlantic - a regional Bell operating company). Mr. Hedges resigned from the Board as of June 6, 1994 and Dr. Sadler has been nominated for election to the Board of Directors at the upcoming meeting of shareholders on August 11, 1994. There are no family relationships between directors or executive officers of the Company. Under the provisions of the Ontario Business Corporations Act, 1982, a majority of the directors must be resident Canadians. The names, ages, positions with the Company and business experience of the executive officers of the Company, other than Mr. Vassiliades, are as follows: Alexander Brisbourne, 44, who has been Vice President of Marketing since January 1994. From August 1993 to January 1994, he was Vice President and General Manager, Premier, of Gandalf Canada Ltd. and from March 1993 to January 1994, he was General Manager, Premier. From June 1992 to March 1993, he was Vice President, Marketing Strategy of the Company and from September 1990 to June 1992, he was Director of International Marketing Operations. From October 1987 to September 1990, he was Director of Marketing of Gandalf Digital Communications Limited. Gatone A. Daniello, 49, who has been Vice President and Chief Technology Officer since June 1993. From March 1991 to May 1993, he was founder and President of Network Architects Inc., (software company specializing in the development of custom business applications). From May 1982 to March 1991, he was President and Chief Executive Officer of Datamedia Corp., (speciality microcomputer manufacturer). M. Gerald Gainer, 46, who has been Vice President of Manufacturing of Gandalf Canada Ltd. since April 1989. Walter R. MacDonald, 32, who has been Vice President of Finance and Chief Financial Officer since September 1993. From June 1992 to September 1993, he was Controller; from June 1991 to June 1992, he was Treasurer; and from January 1990 to June 1991, he was Assistant Treasurer of the Company. From May 1988 to December 1989, he was General Manager of Charlesfort Development Corporation (residential developer). William M. McKenzie, 52, who has been President of Gandalf Canada Ltd. since April 1994. Management consultant from May 1992 to April 1994. President and Chief Executive Officer of Memotec Data Inc./Teleglobe Inc. (telecommunications, networking and information processing company) from March 1983 to May 1992 and President and Chief Executive Officer of Teleglobe Canada Inc. (international telephone company) from July 1990 to May 1992. Judith M. Scott, 51, who has been Managing Director of Gandalf Digital Communications Limited since August 1990. From December 1987 to August 1990, she was Vice-President, Sales (U.K.) of the Company. ITEM 11. EXECUTIVE COMPENSATION Overview ------------- The Company currently has seven executive officers. The aggregate cash compensation, including amounts paid under the Executive Incentive Plan and excluding amounts paid on termination of employment, paid to all executive officers as a group (twelve persons) by the Company and its subsidiaries for services rendered during the fiscal year ended March 31, 1994 was $1,414,572. In addition, during the fiscal year ended March 31, 1994, executive officers were given the use of automobiles leased by the Company at an aggregate incremental cost to the Company and its subsidiaries of $62,351. The Company provides liability insurance for directors and officers of the Company and its subsidiaries. The premium (expressed in U.S. dollars) for the fiscal year ended March 31, 1994 was $93,246 which was paid for by the Company. The policy limit (expressed in U.S. dollars) is $30 million per year or $30 million per claim with an aggregate deductible of $180,000 per claim for the Company and a nil deductible for the individual. The individual directors and officers of the Company and its subsidiaries are insured for losses arising from claims against them for certain of their acts, errors or omissions as such. The Company is insured against any loss arising out of any liability to indemnify a director or officer. Summary Compensation Table -------------------------- The following table presented in accordance with current regulations under the Securities Act (Ontario) sets forth all compensation paid for the fiscal years ended March 31, 1994, 1993 and 1992, in respect of each of the individuals who were, at March 31, 1994, the Chief Executive Officer and the other four most highly compensated executive officers of the Company, and three additional individuals who were executive officers of the Company but were not serving at March 31, 1994. During fiscal 1992, the Company changed the date of its fiscal year end from July 31 to March 31 and the compensation disclosed in the Summary Compensation Table for the fiscal 1992 year covers an eight-month period. SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation ----------------------------- -------------- Awards -------------- Securities Other Annual* Under Options All Other Name and Principal Positions Year Salary Bonus Compensation Granted Compensation ($) ($) ($) (#) ($) (a) (b) (c) (d) (e) (f) (j) ------------------------------------------------------------------------------------------------------------------- Chief Executive Officer 1994 $147,455 --- --- 50,000 --- B.R. Hedges 1993 $ 65,787 (1) --- --- 75,000 --- 1992 --- --- --- --- --- Vice President Marketing 1994 $ 90,076 $ 65,496 --- 85,000 --- A. Brisbourne 1993 $ 92,709 --- --- 25,000 --- 1992 $ 68,183 $ 6,083 --- 9,000 --- Managing Director 1994 $101,860 $ 8,726 $ 15,920 (6) 50,000 --- Gandalf Digital 1993 $101,655 $ 44,297 --- 50,000 --- Communications Limited 1992 $ 63,915 $ 6,620 --- 1,500 --- J.M. Scott Vice President and Chief 1994 $111,493 (2) --- --- 125,000 --- Technology Officer 1993 --- --- --- --- --- G.A. Daniello 1992 --- --- --- --- --- Vice President Manufacturing 1994 $ 75,063 $ 8,404 $ 10,693 50,000 --- M.G. Gainer 1993 $ 77,226 $ 7,327 --- 40,000 --- 1992 $ 82,555 $ 14,946 --- --- --- Vice President Marketing 1994 $122,851 (3) $144,257 --- --- $ 27,694 (7) J.C.Hahn 1993 $113,625 $100,000 --- 50,000 --- 1992 $ 81,728 $ 50,000 --- 5,000 --- President 1994 $ 94,234 (4) $ 43,193 --- 75,000 $181,338 (7) Gandalf Systems Corporation 1993 --- --- --- --- --- R.F. Jerd 1992 --- --- --- --- --- President 1994 $ 80,156 (5) $ 8,989 $ 22,716 (8) --- --- Gandalf International Limited 1993 $106,630 $ 15,254 --- 40,000 --- M.F. McGrail 1992 $ 90,353 --- --- 25,000 --- * Perquisites and other personal benefits exceeding the lesser of $50,000 or 10 percent of the total annual salary and bonus for any of the named executive officers. (1) Mr. Hedges was employed for six months during fiscal 1993. (2) Mr. Daniello was employed for ten months during fiscal 1994. (3) Mr. Hahn was employed for nine months during fiscal 1994. (4) Mr. Jerd was employed for eight months during fiscal 1994. (5) Mr. McGrail was employed for nine months during fiscal 1994. (6) Includes automobile lease payments of $9,342 and payments of $4,074 for retirement benefits. (7) Amounts accrued or paid in respect of termination of employment. (8) Includes automobile lease payments of $16,992.
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR Market Value of % of Total Securities Options Underlying Securities Granted to Options on the Under Options Employees in Exercise or Base Price Date of Grant Name Granted Financial Year ($/Security) ($/Security) Expiration Date (a) (b) (c) (d) (e) (f) ---------------------------------------------------------------------------------------------------------------------- Chief Executive Officer 50,000 3.7% 25,000 @ $4.15 Cdn.(1) $4.15 Cdn.(2) June 1, 2003 B.R. Hedges 3.7% 25,000 @ $4.25 Cdn.(1) $4.25 Cdn.(2) November 10, 2003 Vice President Marketing 85,000 5.1% 35,000 @ $4.25 Cdn.(1) $4.25 Cdn.(2) November 10, 2003 A. Brisbourne 7.4% 50,000 @ $1.80 Cdn.(1) $1.80 Cdn.(2) February 9, 2004 Managing Director 50,000 7.4% $1.80 Cdn.(1) $1.80 Cdn.(2) February 9, 2001 Gandalf Digital Communications Limited J.M. Scott Vice President and Chief 125,000 11.0% 75,000 @ $4.15 Cdn.(1) $4.15 Cdn.(2) June 1, 2003 Technology Officer 7.4% 50,000 @ $1.80 Cdn.(1) $1.80 Cdn.(2) February 9, 2004 G.A. Daniello Vice President 50,000 7.4% $1.80 Cdn.(1) $1.80 Cdn.(2) February 9, 2004 Manufacturing M.G. Gainer President Gandalf Systems 75,000 10.8% $3.75 Cdn.(1) $3.75 Cdn.(2) August 11, 2003 Corporation R.F. Jerd (1) Under terms of the stock options granted in fiscal 1994, executive officers may elect a discount of 15 percent from the exercise price shown. (2) The Market Value of the common shares underlying the options was the closing market price on the day prior to the date of grant.
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR Unexercised Options at Securities Acquired Fiscal Year End on Exercise Aggregate Value Realized (#) Name (#) ($) Exercisable/Unexercisable (a) (b) (c) (d) ---------------------------------------------------------------------------------------------------------------------- Chief Executive Officer --- --- 58,333 Exercisable B.R. Hedges 41,667 Unexercisable Vice President Marketing 6,000 $9,300 Cdn. 11,335 Exercisable A. Brisbourne 101,665 Unexercisable Managing Director, --- --- 41,667 Exercisable Gandalf Digital 83,333 Unexercisable Communications Limited J.M. Scott Vice President and Chief --- --- 25,000 Exercisable Technology Officer 100,000 Unexercisable G.A. Daniello Vice President --- --- 33,333 Exercisable Manufacturing 76,667 Unexercisable M.G. Gainer President --- --- 25,000 Exercisable (1) Gandalf Systems Corporation 50,000 Unexercisable (1) R.F. Jerd (1) Expiry date of options was extended beyond fiscal 1994 year end.
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 which determines the amount that may be paid to executive officers as a bonus during the year. The criteria used to determine the amount awarded reflects the position held by the executive officer in the Company, the level of responsibility, and the degree to which objectives are achieved. The aggregate cash compensation paid to executive officers during the fiscal year ended March 31, 1994 included $134,807 distributed under this plan. The Company has five stock option plans as follows: 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 Executives and Directors As at June 2, 1994, 1,392,500 Common Shares were subject to options at prices ranging from Cdn.$5.25 to Cdn.$1.35 and expiring at various dates to April 14, 2004. Of such options, 944,000 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. Directors resident in Canada receive $7,500 (Cdn.) per annum. Directors resident in the United States receive $7,000 (U.S.) per annum. In addition to the annual retainer referred to above, each director receives an attendance fee of $400 (in local currency) for meetings of shareholders, the Board of Directors and committees of the Board (if he is a member thereof), with the exception that members receive $800 for each Executive Committee meeting attended. Directors are entitled to reimbursement by the Company for all reasonable expenses incurred in attending such meetings. The Board of Directors held thirteen meetings, the Audit Committee held four meetings, the Compensation Committee held two meetings, the Executive Committee held two meetings and the Nominating Committee held one meeting during the fiscal year ended March 31, 1994. During the fiscal year ended March 31, 1994, the following amounts were paid to directors of the Company in their capacity as directors, including amounts paid for committee participation or special assignments: Alexander Curran $10,925; Charles J. Gardner, Q.C. $11,536; Donald M. Gleklen $14,200; Robert E. Keith $13,800; David N. Koffsky $4,117; Warren V. Musser $ 3,317; Patrick J. Suddick $3,588; and Thomas A. Vassiliades $8,897. The Company has two stock option plans for directors under which non-employee directors are each awarded stock options on 5,000 common shares on the date of their initial election or re- election as directors, provided they do not hold stock options at that time under any of the Company's stock option plans. On August 12, 1993, Mr. Vassiliades, a director of the Company, received a stock option under the 1988 Stock Option Plan for Directors to purchase 5,000 common shares at an exercise price of Cdn. $3.24 per share. Directors also participate in the Stock Option Plan for Executives and Directors. On November 11, 1993 an option to purchase 25,000 common shares at an exercise price of $4.25 per share was granted under this Plan to each of Messrs. Cunningham, Curran, Gardner, Gleklen, Hedges, Keith and Vassiliades, directors of the Company. Mr. Charles J. Gardner is a member of a law firm that provides legal services to the Company. During the fiscal year ended March 31, 1994, Mr. Gardner's firm was paid $101,153 in legal fees by the Company and its subsidiaries. Messrs. Cunningham and Vassiliades each had consulting arrangements during fiscal 1994 under which they were compensated by the Company and its subsidiaries. During the fiscal year ended March 31, 1994, the amount paid to each was as follows: Mr. Cunningham $112,995 and Mr. Vassiliades $46,000. Mr. Robert E. Keith and Mr. Warren V. Musser (a former director of the Company) are executives of Radnor Venture Partners, L.P., and Safeguard Scientifics (Delaware), Inc. which are parties to a loan agreement with the Company. During the fiscal year ended March 31, 1994, the Company and its subsidiaries repaid $201,000 of the outstanding balance. During the year interest on this loan amounted to $47,869. Mr. David N. Koffsky, a former director of the Company, is a member of a patent, trademark and copyright firm that provides legal services to the Company. During the fiscal year ended March 31, 1994, Mr. Koffsky's firm was paid $14,045 by the Company and its subsidiaries. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of June 2, 1994 with respect to (1) all shareholders known by 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 BENEFICIALLY PERCENT OF NAME OWNED (1) CLASS (7) ----------------------------------------------------------------- Ontario Municipal Employees 1,974,700 7.0% Retirement Board One University Avenue, Suite 1000 Toronto, Ontario M5J 2P1 Desmond Cunningham 1,743,092 (2) 6.2% 130 Colonnade Road South Nepean, Ontario K2E 7M4 Mackenzie Financial Corporation 1,607,700 (3) 5.7% 150 Bloor Street West Toronto, Ontario M5S 3B5 Alexander Brisbourne 11,333 (4) (8) Alexander Curran 2,500 (4) (8) Gatone A. Daniello 25,000 (4) (8) M. Gerald Gainer 37,133 (5) (8) Charles J. Gardner 5,000 (4) (8) Donald M. Gleklen 33,750 (5) (8) Brian R. Hedges 93,333 (5) (8) Robert E. Keith 10,000 (5) (8) A. Graham Sadler 21,550 (8) Judith M. Scott 47,708 (5) (8) Thomas A. Vassiliades 1,250 (4) (8) All executive officers and directors as a group (13 persons) 2,017,099 (6) 7.1% (1) All shares are owned of record and beneficially and the sole investment and voting power is held by the person named, except as set forth below. (2) Shares are owned of record by Donosti Investments Inc., a corporation controlled by Desmond Cunningham. (3) These securities are beneficially owned by various mutual funds and client accounts managed by Mackenzie Financial Corporation. For purposes of the reporting requirements of the Exchange Act, Mackenzie Financial Corporation is deemed to be a beneficial owner of such securities; however, Mackenzie Financial Corporation expressly disclaims that it maintains beneficial ownership over these shares. (4) Represents options (currently exercisable or exercisable within 60 days). (5) Includes options (currently exercisable or exercisable within 60 days) on the following common shares: M. Gerry Gainer 33,333 Donald M. Gleklen 3,750 Brian R. Hedges 58,333 Robert E. Keith 2,500 Judith M. Scott 41,667 (6) Includes options (currently exercisable or exercisable within 60 days) on 191,666 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. (8) Amount beneficially owned represents less than one percent of the total outstanding common shares. Statements contained in the table as to securities beneficially owned by directors, officers and certain shareholders or over which they exercise control or direction are, in each instance, based upon information obtained from such directors, executive officers and shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Charles J. Gardner, Q.C., a director of the Company, is a member of a law firm that provides legal services to the Company. Messrs. Cunningham and Vassiliades have consulting arrangements under which they performed services for the Company during the fiscal year ended March 31, 1994. Other than as described above, there are no material relationships and related transactions with directors and executive officers of the Company. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents included in the 1994 Annual Report to Shareholders are incorporated by reference into this report: (1) Auditors' Report. (2) Consolidated Financial Statements of Gandalf Technologies Inc. including: Consolidated Balance Sheets at March 31, 1994 and March 31, 1993. Consolidated Statements of Income and Retained Earnings for the years ended March 31, 1994 and March 31, 1993, the eight months ended March 31, 1992 and the year ended July 31, 1991. Consolidated Statement of Changes in Financial Position for the years ended March 31, 1994 and March 31, 1993, the eight months ended March 31, 1992 and the year ended July 31, 1991. Notes to Consolidated Financial Statements. (b) Financial Statement Schedules. The following financial statement Schedules supporting the Consolidated Financial Statements and Auditors' Report on Schedules which are filed as part of this report are as follows: (1) Auditors' Report on Schedules (2) Schedule V: Property, plant and equipment. Schedule VI: Accumulated depreciation, depletion and amortization of property, plant and equipment. Schedule VIII: Valuation and qualifying accounts. Schedule IX: Short-term borrowings. Note: Schedules other than those listed above are omitted as not applicable, not required, or the information is included in the consolidated financial statements thereto. (4) 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 $1,125,000 (Cdn.) 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 $402,000 (Cdn.) per annum with four options 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 $3,000,000 (Cdn.) subject to a lease-back to the Company for 20 years at a basic rent of $420,000 (Cdn.) per annum; and providing the Company with an exclusive option to re-purchase the lands for $3,500,000 (Cdn.) within 10 years or $4,000,000 (Cdn.) 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 Management consulting agreement dated October 2, 1989 between Alex Curran, Alex Curran Consultant Inc. and the Company (filed as Exhibit 10.11 to the Form 10-K for the fiscal year ended July 31, 1990). *10.5 Agreement and Plan of Merger dated as of May 10, 1991, among the Company, Gandalf Data, Inc. and Infotron Systems Corporation (filed as Exhibit 2 to the Form 10-Q for the quarter ended April 27, 1991). *10.6 Consulting agreement dated April 4, 1991, between the Company and Donald R. Gibbs (filed as Exhibit 19(d) to the Form 10-Q for the quarter ended April 27, 1991). *10.7 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). *10.8 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). *10.9 Employment Agreement, dated January 1, 1989, between Infotron Systems International Limited and Michael F. McGrail (filed as Exhibit 10.45 to the Form 10-K for the fiscal year ended July 31, 1991). *10.10 Lease dated December 15, 1980 between Gandalf Systems Corporation and Ingerman Ginsburg Partnership (filed as Exhibit 10.50 to the Form 10-K for the fiscal year ended July 31, 1991). *10.11 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). *10.12 Trust Indenture dated as of November 10, 1992 between The R-M Trust Company and the Company (filed as Exhibit 10.26 to the Form 10-K for the fiscal year ended March 31, 1993). *10.13 Special Note Indenture dated November 10, 1992 between The R-M Trust Company and the Company (filed as Exhibit 10.27 to the Form 10-K for the fiscal year ended March 31, 1993). *10.14 Underwriting Agreement (Canadian) dated as of October 20, 1993 among Wood Gundy Inc., Deacon Barclays de Zoete Wedd Limited, Gordon Capital Corporation and Richardson Greenshields of Canada Limited and the Company (filed as Exhibit 10.1 to the Form 10-Q for the quarter ended January 1, 1994). *10.15 Credit Agreement dated as of January 7, 1994 between the Royal Bank of Canada and the Company (filed as Exhibit 10.2 to the Form 10-Q for the quarter ended January 1, 1994). *10.16 Credit Agreement dated as of January 7, 1994 between the Royal Bank of Canada and the Company (filed as Exhibit 10.3 to the Form 10-Q for the quarter ended January 1, 1994). 10.17 Consulting agreement dated as of February 21 , 1994 between the Company and Thomas A. Vassiliades. 10.18 Waiver of Default dated April 14, 1994 related to Credit Agreements, dated as of January 7, 1994, between the Royal Bank of Canada and the Company. 10.19 Waiver of Default dated June 1, 1994 related to Credit Agreements, dated as of January 7, 1994, between the Royal Bank of Canada and the Company. 13 Inside front cover and pages 12 to 30 of the Annual Report to Shareholders for the fiscal year ended March 31, 1994. 21 List of subsidiaries. 23 Consent of KPMG Peat Marwick Thorne. ________________________________ *Incorporated herein by reference. (b) The Company did not file any reports on Form 8-K during the last quarter of the fiscal year ended March 31, 1994. 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: THOMAS A. VASSILIADES ----------------------------------- (Thomas A. Vassiliades) President Dated: June 2, 1994 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 ------------------------ ----- -------- DESMOND CUNNINGHAM ----------------------- (Desmond Cunningham) Director and Chairman June 2, 1994 ALEXANDER CURRAN ----------------------- (Alexander Curran) Director June 2, 1994 CHARLES J. GARDNER ----------------------- (Charles J. Gardner) Director June 2, 1994 DONALD M. GLEKLEN ----------------------- (Donald M. Gleklen) Director June 2, 1994 BRIAN R. HEDGES ----------------------- (Brian R. Hedges) Director June 2, 1994 ROBERT E. KEITH ----------------------- (Robert E. Keith) Director June 2, 1994 WALTER R. MACDONALD Vice President June 2, 1994 ----------------------- of Finance (Walter R. MacDonald) (Principal Financial and Accounting Officer THOMAS A. VASSILIADES Director, President, June 2, 1994 ----------------------- and Chief Executive (Thomas A. Vassiliades) Officer (Principal Executive Officer) AUDITORS' REPORT ON SCHEDULES To the Board of Directors and Shareholders of Gandalf Technologies Inc. Under date of May 27, 1994, we reported on the consolidated balance sheets of Gandalf Technologies Inc. as at March 31, 1994 and 1993 and the consolidated statements of income and retained earnings and changes in financial position for each of the years ended March 31, 1994 and 1993, and the eight months ended March 31, 1992 and the year ended July 31, 1991 as contained in the 1994 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 year 1994. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in item 14 of Form 10-K. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK THORNE ------------------------------ Ottawa, Canada KPMG Peat Marwick Thorne May 27, 1994 Chartered Accountants
GANDALF TECHNOLOGIES INC. Schedule V: Property, plant and equipment. (Thousands of United States dollars) _____________________________________________________________________________________ Col. A Col. B Col. C Col. D Col. E Col. F Classifi- Balance at Additions Retirements Other Balance at cation beginning of at cost changes(2) end of year(1) year _____________________________________________________________________________________ Fiscal 1994 (Year ended March 31, 1994) Land $ 216 $ - $ - $ (3) $ 213 Buildings 4,756 - - (221) 4,535 Equipment 72,185 4,255 (20,114) (2,986) 53,340 Leasehold 4,056 156 (2,301) (132) 1,779 Improvements _______________________________________________________________________ TOTAL $81,213 $ 4,411 $(22,415) $ (3,342) $ 59,867 ======================================================================= Fiscal 1993 (Year ended March 31, 1993) Land $ 248 $ - $ - $ (32) $ 216 Buildings 6,415 (679) 5,736 Equipment 73,101 3,077 (1,539) (2,454) 72,185 Leasehold 3,290 852 (86) 4,056 Improvements _____________________________________________________________________________________ TOTAL $83,054 $ 3,929 $(1,539) $(3,251) $82,193 ====================================================================== (1) Balance at beginning of fiscal 1994 was restated to conform with current year presentation. (2) Amounts primarily relate to foreign exchange movement.
GANDALF TECHNOLOGIES INC. Schedule VI: Accumulated depreciation, depletion and amortization of property, plant and equipment. (Thousands of United States dollars) _________________________________________________________________________________ Col. A Col. B Col. C Col. D Col. E Col. F Description Balance at Additions Retirements Other Balance beginning charged to changes(2) at end of year(1) costs and of expenses year _________________________________________________________________________________ Fiscal 1994 (Year ended March 31, 1994) Buildings $ 1,569 $ 178 $ - $ (45) $ 1,702 Equipment 47,484 6,447 (13,905) (2,735) 37,291 Leasehold 1,392 620 (1,337) (15) 660 Improvements ___________________________________________________________________ TOTAL $ 50,445 $ 7,245 $(15,242) $ (2,795) $ 39,653 =================================================================== Fiscal 1993 (Year ended March 31, 1993) Buildings $ 1,565 $ 224 $ - $ (143) $ 1,646 Equipment 42,254 8,693 (1,543) (1,920) 47,484 Leasehold 819 564 9 1,392 Improvements ___________________________________________________________________ TOTAL $ 44,638 $ 9,481 $ (1,543) $(2,054) $ 50,522 =================================================================== (1) Balance at beginning of fiscal 1994 was restated to conform with current year presentation. (2) Amounts primarily relate to foreign exchange movement.
GANDALF TECHNOLOGIES INC.
Schedule VIII: 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 at beginning costs and accounts Deductions end of Description of year expenses -describe(1) -describe(2) year _________________________________________________________________________________ Fiscal 1994 (Year ended March 31, 1994) ----------- Reserve for bad debts deducted in the balance sheet from amounts receivable ...... $ 3,797 $ 2,235 $(1,345) $ (273) $ 4,414 Fiscal 1993 (Year ended March 31, 1993) ----------- Reserve for bad debts deducted in the balance sheet from amounts receivable ....... $ 3,392 $ 1,591 $(1,186) $ - $ 3,797 (1) Relates to accounts receivable charged directly against reserve for bad debts. (2) Balance deducted represents a reserve recorded in the accounts of a subsidiary which was sold in the fiscal year.
GANDALF TECHNOLOGIES INC.
Schedule IX: Short-term borrowings. (Thousands of United States dollars) _____________________________________________________________________________________________ Col. A Col. B Col. C Col. D Col. E Col. F Weighted Maximum Average Average Category of Weighted amount amount interest aggregate Balance average outstanding outstanding rate short-term at end of interest during the during the during the borrowings year rate year year year _____________________________________________________________________________________________ Bank Operating Lines Year ended March 31/94 $10,512 7.9% $13,380 $ 8,867 7.0% Year ended March 31/93 $10,025 6.5% $16,038 $14,063 7.7% Bank Term Indebtedness Year ended March 31/94 $ - - $20,382 $13,247 7.5% Year ended March 31/93 $20,382 7.3% $31,993 $28,806 7.9%
(4) 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 $1,125,000 (Cdn.) 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 $402,000 (Cdn.) per annum with four options 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 $3,000,000 (Cdn.) subject to a lease-back to the Company for 20 years at a basic rent of $420,000 (Cdn.) per annum; and providing the Company with an exclusive option to re-purchase the lands for $3,500,000 (Cdn.) within 10 years or $4,000,000 (Cdn.) 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 Management consulting agreement dated October 2, 1989 between Alex Curran, Alex Curran Consultant Inc. and the Company (filed as Exhibit 10.11 to the Form 10-K for the fiscal year ended July 31, 1990). *10.5 Agreement and Plan of Merger dated as of May 10, 1991, among the Company, Gandalf Data, Inc. and Infotron Systems Corporation (filed as Exhibit 2 to the Form 10-Q for the quarter ended April 27, 1991). *10.6 Consulting agreement dated April 4, 1991, between the Company and Donald R. Gibbs (filed as Exhibit 19(d) to the Form 10-Q for the quarter ended April 27, 1991). *10.7 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). *10.8 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). *10.9 Employment Agreement, dated January 1, 1989, between Infotron Systems International Limited and Michael F. McGrail (filed as Exhibit 10.45 to the Form 10-K for the fiscal year ended July 31, 1991). *10.10 Lease dated December 15, 1980 between Gandalf Systems Corporation and Ingerman Ginsburg Partnership (filed as Exhibit 10.50 to the Form 10-K for the fiscal year ended July 31, 1991). *10.11 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). *10.12 Trust Indenture dated as of November 10, 1992 between The R-M Trust Company and the Company (filed as Exhibit 10.26 to the Form 10-K for the fiscal year ended March 31, 1993). *10.13 Special Note Indenture dated November 10, 1992 between The R-M Trust Company and the Company (filed as Exhibit 10.27 to the Form 10-K for the fiscal year ended March 31, 1993). *10.14 Underwriting Agreement (Canadian) dated as of October 20, 1993 among Wood Gundy Inc., Deacon Barclays de Zoete Wedd Limited, Gordon Capital Corporation and Richardson Greenshields of Canada Limited and the Company (filed as Exhibit 10.1 to the Form 10-Q for the quarter ended January 1, 1994). *10.15 Credit Agreement dated as of January 7, 1994 between the Royal Bank of Canada and the Company (filed as Exhibit 10.2 to the Form 10-Q for the quarter ended January 1, 1994). *10.16 Credit Agreement dated as of January 7, 1994 between the Royal Bank of Canada and the Company (filed as Exhibit 10.3 to the Form 10-Q for the quarter ended January 1, 1994). 10.17 Consulting agreement dated as of February 21 , 1994 between the Company and Thomas A. Vassiliades. Provided as part of this electronic transmission. 10.18 Waiver of Default dated April 14, 1994 related to Credit Agreements, dated as of January 7, 1994, between the Royal Bank of Canada and the Company. Provided as part of this electronic transmission. 10.19 Waiver of Default dated June 1, 1994 related to Credit Agreements, dated as of January 7, 1994, between the Royal Bank of Canada and the Company. Provided as part of this electronic transmission. 13 Inside front cover and pages 12 to 30 of the Annual Report to Shareholders for the fiscal year ended March 31, 1994. Provided as part of this electronic transmission. 21 List of subsidiaries. Provided as part of this electronic transmission. 23 Consent of KPMG Peat Marwick Thorne. Provided as part of this electronic transmission. EX-10.17 2 EXHIBIT 10.17 Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Canada Tel: 613-723-6500 Telex: 053-4728 Fax: 613-226-1717 February 21, 1994 Mr. Thomas A. Vassiliades President and Chief Executive Officer Avatar Management Services P.O. Box 423 Malvern, Pennsylvannia 19355 Dear Mr. Vassiliades: Re: Consulting Services Agreement Mr. Brian R. Hedges, President and Chief Executive Officer, has asked me to prepare a management consulting services agreement for your consideration, the general terms of which are as follows: * Services will be on an as required basis at the invitation of a senior officer of the company. * Consulting time will be at the rate of $1,000 (U.S.) per day or $125 (U.S.) per hour. * Travelling time will be paid at the above hourly rate whenever it is not feasible to travel within the normal eight hour business day. * Accommodation and travel costs while on Gandalf business will be paid by the company direct or reimbursed to you on submission of expense forms and receipts. * Automobile mileage will be paid for travel on Gandalf business at the company's prevailing rate for employees. Thomas A. Vassiliades Page 2. * A Bell Canada calling card will be issued to you on request. * Invoices and expense forms are to be submitted by you at regular intervals summarizing your professional services. * The agreement will be effective from January 16, 1994 until notified by any change. If you are in agreement with the above terms, would you please sign and return the enclosed copy of this letter. Yours very truly, D.F. MacMillan Corporate Secretary DFM:vgm cc: B.R. Hedges ACCEPTED THIS 9th DAY OF MARCH, 1994. ----------- s/THOMAS A. VASSILIADES --------------------------------------------------------- Thomas A. Vassiliades EX-10.18 3 EXHIBIT 10.18 ROYAL BANK ----------------------------------------------------------------- L.James Blattman Royal Bank of Canada Senior Account Manager Business Banking Centre Advanced Technology 90 Sparks Street, P.O. Box 746, Station B Tel.: (613) 564-4898 Ottawa, Ontario K1P 5T6 Transit 01196 April 14, 1994 Fax: (613) 564-4527 Toll Free: 1-800-267-0305 Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 AND Gandalf Canada Ltd. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Attention: Mr. Walter MacDonald Vice-President, Finance & CFO ----------------------------- Dear Sirs: Royal Bank of Canada (the "Bank") refers to a letter agreement dated January 7, 1994 between Gandalf Technologies Inc. ("GTI") and the Bank (the "GTI Agreement") and to a letter agreement also dated Janaury 7, 1994 between Gandalf Canada Ltd. ("GCL") adn the Bank (the "GCL Agreement"), collectively referred toherein as the Gandalf Agreements. The Bank hereby acknowledges notice from GTI of its expected breach of Sections 23(a), 23(b), 23(c) and 24(h) of the GTI Agreement and Sections 24(a), 24(b), 24(c) and 25(h) of the GCL Agreement for the fiscal quarter ended March 1994. Specifically, Tangible Net Worth 1.01:1 and the loss for the fiscal quarter $21,846,000. The Bank hereby waives its rights in respect of such breach for the period March 31, 1994 to July 31, 1994 inclusive provided no further deterioration occurs in any of Sections 23(a), 23(b), and 23(c) of the GTI Agreement ----------------------------------------------------------------- - 1 - April 15, 1994 Gandalf Technologies Inc. & Gandalf Canada Ltd. ---------------------------------------- and Sections 24(a), 24(b), and 24(c) of the GCL Agreement as at the fiscal quarter ending June 25, 1994. This waiver is granted only in respect of the aforementioned breach and only for the aforementioned period and is further subject to the following paragraph. As long as any of the aforementioned sections of the Gandalf Agreements remain in breach, GTI agrees with the Bank as follows: a. To provide the Bank with the following information within 15days of the end of each month: i. Internally prepared consolidated financial statements. ii. A consolidated summary of bookings, billings and backlog. iii. A consolidated cash flow and margin forecast for the following 13 weeks. b. To pay to the Bank a risk premium calculated as 1/8 of 1% per month on the aggregate of average outstanding balances under the GCL Agreement and Segment (3) of the GTI Agreement, subject to a monthly minimum payment of US $5,000. The risk premium will be calculated and is payable monthly by the fifth day of each month. Please acknowledge your acceptance of the above terms and conditions by signing the attached copy of this letter in the space provided and return it to the undersigned no later than April 20, 1994. Yours truly. s/L.J.BLATTMAN WE ACKNOWLEDGE AND ACCEPT THE TERMS AND CONDITIONS GANDALF TECHNOLOGIES INC. GANDALF CANADA LTD. Per: s/W.MacDonald, V.P. Finance Per: s/W.MacDonald, V.P. Finance GTI Per: s/A.Gordon, Corp.Controller Per: s/A.Gordon, Corp. Controller GTI Date: April 20, 1994 Date: April 20, 1994 -------------- -------------- EX-10.19 4 EXHIBIT 10.19 ROYAL BANK ----------------------------------------------------------------- L.James Blattman Royal Bank of Canada Senior Account Manager Business Banking Centre Advanced Technology 90 Sparks Street, P.O. Box 746, Station B Tel.: (613) 564-4898 Ottawa, Ontario K1P 5T6 Transit 01196 June 1, 1994 Fax: (613) 564-4527 Toll Free: 1-800-267-0305 Gandalf Technologies Inc. 130 Colonnade Road South Nepean, Ontario K2E 7M4 AND Gandalf Canada Ltd. 130 Colonnade Road South Nepean, Ontario K2E 7M4 Attention: Mr. Walter MacDonald Vice-President, Finance & CFO ----------------------------- Dear Sirs: Royal Bank of Canada (the "Bank") refers to a letter agreement dated January 7, 1994 between Gandalf Technologies Inc. ("GTI") and the Bank (the "GTI Agreement") and to a letter agreement also dated January 7, 1994 between Gandalf Canada Ltd. ("GCL") and the Bank (the "GCL Agreement"), collectively referred to herein as the Gandalf Agreements. The Bank hereby acknowledges notice from GTI of its expected breach of Sections 23(a), 23(b), 23(c) and 24(h) of the GTI Agreement and Sections 24(a), 24(b), 24(c) and 25(h) of the GCL Agreement for the fiscal quarter ended March 1994. Specifically, Tangible Net Worth is expected to be $40,000,000, the Current Ratio 1.30:1, the ratio of Total Liabilities to Tangible Net Worth 1.15:1 and the loss for the fiscal quarter $37,000,000. The Bank hereby waives its rights in respect of such breach for the period March 31, 1994 to July 31, 1994 inclusive provided no further deterioration occurs in any of Sections 23(a), 23(b) and 23(c) of the GTI Agreement and Sections 24(a), 24(b) and 24(c) of the GCL Agreement as at the fiscal quarter ending June 25, 1994. This waiver is granted only in respect of the aforementioned ----------------------------------------------------------------- - 1 - June 1, 1994 Gandalf Technologies Inc. & Gandalf Canada Ltd. --------------------------- breach and only for the aforementioned period and is further subject to the following paragraph. As long as any of the aforementioned sections of the Gandalf Agreement remain in breach, GTI agrees with the Bank as follows: a. To provide the Bank with the following information within 15 days of the end of each month: i. Internallyy prepared consolidated financial statements. ii. A consolidated summary of bookings, billings and backlog . iii. A consolidated cash flow and margin forecast for the following 13 weeks. b. To pay to the Bank a risk premium calculated as 1/8 of 1% per month on the aggregate of average outstanding balances under the GCL Agreement and Segment (3) of the GTI Agreement, subject to a monthly minimum payment of US $5,000. The risk premium will be calculated and is payable monthly by the fifth day of each month. This letter supersedes our tolerance letter dated April 14, 1994. Please acknowledge your acceptance of the above terms and conditions by signing the attached copy of this letter in the space provided and returning it to the undersigned no later than June 3, 1994. Yours truly, ORIGINAL SIGNED BY L.J.BLATTMAN WE ACKNOWLEDGE AND ACCEPT THE TERMS AND CONDITIONS GANDALF TECHNOLOGIES INC. GANDALF CANADA LTD. Per: s/W.MacDonald, V.P. Finance Per: s/W.MacDonald, V.P. Finance GTI Per: s/A.Gordon, Corp.Controller Per: s/A.Gordon, Corp. Controller GTI Date: June 2, 1994 Date: June 2, 1994 ------------ ------------ EX-13 5 FINANCIAL STATEMENTS (INSIDE FRONT COVER)
Selected Financial Data Thousands of U.S. dollars except per share amounts 1994** 1993** 1992* 1991_ 1990_ 1989_ --------------------------------------------------------------------------------------------------------------------------- Income Statement Data: Revenues $131,323 $160,900 $119,181 $129,013 $140,366 $145,326 Research and development 14,316 17,279 13,679 13,788 13,702 13,618 Net income (loss) (47,238) (19,507) (9,912) (5,869) (9,190) 325 Basic earnings (loss) per share (2.27) (1.24) (0.63) (0.48) (0.75) 0.03 --------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data: Total assets 89,186 129,603 141,408 102,999 110,754 115,998 Fixed assets 20,214 30,768 38,416 22,761 27,074 29,642 Working capital 13,978 25,596 19,276 22,050 32,673 36,498 Current ratio 1.3 1.5 1.3 1.6 1.9 2.0 Bank indebtedness, net of cash and short-term deposits 5,239 20,670 38,357 9,030 3,196 9,339 Other long-term debt 2,020 2,998 3,290 5,548 5,330 5,336 Convertible debentures 21,681 23,862 - - - - Shareholders' equity 19,109 34,308 55,491 59,363 67,425 74,564 ** Year ended March 31 * For eight months only, ended March 31, 1992 _ Year ended July 31
(PAGE 12)
Consolidated Balance Sheet March 31 March 31 1994 1993 --------------------------------------------------------------------------------------------------------- (Thousands of U.S. dollars) Assets Current assets: Cash and short-term deposits $ 5,273 $ 9,737 Accounts receivable 30,182 35,950 Inventories (note 3) 20,877 25,898 Other 4,022 2,464 --------------------------------------------------------------------------------------------------------- Total current assets 60,354 74,049 Fixed assets (note 4) 20,214 30,768 Goodwill, net of accumulated amortization of $2,734 (1993-$2,441) 3,680 3,973 Other assets (note 5) 4,938 20,813 --------------------------------------------------------------------------------------------------------- Total assets $ 89,186 $ 129,603 ========================================================================================================= Liabilities and Shareholders' Equity Current liabilities: Bank operating lines (note 6) $ 10,512 $ 10,025 Accounts payable and accrued liabilities (note 7) 27,854 28,802 Deferred revenue 7,424 8,932 Current portion of long-term debt (note 8) 586 694 --------------------------------------------------------------------------------------------------------- Total current liabilities 46,376 48,453 Long-term debt (note 8) 2,020 22,980 8.5% convertible debentures (note 9) 21,681 23,862 Shareholders' equity: Capital stock (notes 9, 10 and 11) Common shares, 28,072,333 issued and outstanding (1993 - 15,864,833) 79,811 45,585 Retained earnings (deficit) (53,770) (6,532) Cumulative translation adjustment (note 12) (6,932) (4,745) --------------------------------------------------------------------------------------------------------- Total shareholders' equity 19,109 34,308 --------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 89,186 $ 129,603 ========================================================================================================= Commitments and contingencies (note 21)
On behalf of the Board of Directors: s/D.CUNNINGHAM s/D.M.GLEKLEN D. Cunningham, Director D.M. Gleklen, Director (See accompanying notes to consolidated financial statements) (PAGE 13)
Consolidated Statements of Income and Retained Earnings Year Year 8 Months Year Ended Ended Ended Ended March 31 March 31 March 31 July 31 1994 1993 1992 1991 ------------------------------------------------------------------------------------------------------------- (Thousands of U.S. dollars, except per share amounts) Income Revenues: Product revenue $ 90,813 $ 113,877 $ 88,339 $ 104,289 Service revenue 40,510 47,023 30,842 24,724 ------------------------------------------------------------------------------------------------------------- 131,323 160,900 119,181 129,013 Operating expenses: Cost of product sales 49,509 61,237 45,828 48,480 Service expenses 27,024 29,333 17,925 16,776 Selling and distribution 43,678 47,928 35,777 41,869 Administration and general 11,094 14,879 10,001 12,354 Research and development (note 13) 14,316 17,279 13,679 13,788 Restructuring and other costs (note 14) 28,662 5,547 3,678 686 ------------------------------------------------------------------------------------------------------------- Loss from operations (42,960) (15,303) (7,707) (4,940) Interest expense (note 15) (4,127) (4,653) (2,715) (1,337) Interest income and foreign exchange 991 449 510 814 Income taxes (note 16) (1,142) - - (406) ------------------------------------------------------------------------------------------------------------- Net loss for the period $ (47,238) $ (19,507) $ (9,912) $ (5,869) ============================================================================================================= Basic loss per share (note 17) $ (2.27) $ (1.24) $ (0.63) $ (0.48) Weighted average number of common shares outstanding (thousands) 20,802 15,702 15,658 12,195 ============================================================================================================= Retained Earnings Balance at beginning of period $ (6,532) $ 12,975 $ 23,585 $ 29,454 Net loss for the period (47,238) (19,507) (9,912) (5,869) Share issue costs - - (698) - ------------------------------------------------------------------------------------------------------------- Balance at end of period $ (53,770) $ (6,532) $ 12,975 $ 23,585 ============================================================================================================= (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, 1994 and 1993 and the consolidated statements of income and retained earnings and changes in financial position for each of the years ended March 31, 1994 and 1993, the eight months ended March 31, 1992 and the year ended July 31, 1991. 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, 1994 and 1993 and the results of its operations and the changes in its financial position for each of the years ended March 31, 1994 and 1993, the eight months ended March 31, 1992 and the year ended July 31, 1991 in accordance with generally accepted accounting principles. s/KPMG PEAT MARWICK THORNE Ottawa, Canada Chartered Accountants May 27, 1994 (PAGE 14)
Consolidated Statement of Changes in Financial Position Year Year 8 Months Year Ended Ended Ended Ended March 31 March 31 March 31 July 31 1994 1993 1992 1991 --------------------------------------------------------------------------------------------------------------- (Thousands of U.S. dollars) Operating activities: Cash applied to operations (note 19) $ (13,925) $ (3,083) $ (2,376) $ (1,254) Decrease (increase) in operating working capital requirements (note 20) 305 4,532 (2,136) 4,766 --------------------------------------------------------------------------------------------------------------- Cash provided by (applied to) operating activities (13,620) 1,449 (4,512) 3,512 --------------------------------------------------------------------------------------------------------------- Financing activities: Issue of capital stock (note 10) 34,226 343 7,703 - Bank term debt retired (20,382) (11,791) - - Bank term debt incurred - 792 8,987 - Increase (decrease) in bank operating lines 487 (783) (850) 2,847 Other long-term debt incurred (retired) (459) (198) (2,977) 328 Issue of 8.5% convertible debentures - 21,665 - - --------------------------------------------------------------------------------------------------------------- Cash provided by financing activities 13,872 10,028 12,863 3,175 --------------------------------------------------------------------------------------------------------------- Investing activities: Purchase of fixed assets (4,411) (3,929) (2,606) (3,362) Disposal of fixed assets 2,246 - 3,399 - Software development costs deferred (note 13) (1,986) (3,012) (2,640) - Other (55) 1,338 350 (3,461) Investments (note 22) - - (7,408) (2,350) --------------------------------------------------------------------------------------------------------------- Cash applied to investing activities (4,206) (5,603) (8,905) (9,173) --------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash in the period (3,954) 5,874 (554) (2,486) Effect of currency translation adjustments on cash flows (510) 31 (949) (501) Cash and short-term deposits, beginning of period 9,737 3,832 5,335 8,322 --------------------------------------------------------------------------------------------------------------- Cash and short-term deposits, end of period $ 5,273 $ 9,737 $ 3,832 $ 5,335 =============================================================================================================== (See accompanying notes to consolidated financial statements)
(PAGE 15) Notes to Consolidated Financial Statements All amounts are stated in U.S. dollars unless otherwise indicated. 1. Summary of Accounting Principles These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada, the application of which, in the case of the Company, conforms in all material respects for the years presented with accounting principles generally accepted in the United States. The significant accounting principles are outlined below. (a) Basis of Consolidation and Reporting Currency The consolidated financial statements include the accounts of Gandalf Technologies Inc. and its subsidiaries. All significant intercompany transactions and balances are eliminated. 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 Systems Corporation ("Infotron") on August 2, 1991. 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. As a result of this change, the Company considers that for translation purposes, operations using a unit of measurement and presentation other than the U.S. dollar are foreign operations. (b) Foreign Currency Translation The assets and liabilities of self-sustaining foreign operations are translated into U.S. dollars at period-end exchange rates and the resulting unrealized exchange gains or losses are included in a separate component of shareholders' equity. The income statements of such operations are translated at exchange rates prevailing during the period. (c) Revenue Recognition Revenue from the sale of products is recognized at the time goods are shipped to customers. Revenue from service is recognized at the time services are rendered. Billings in advance of services are included in deferred revenue. (d) 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. (e) Fixed Assets Fixed assets are recorded at cost net of government grants and investment tax credits. Prior to the 1993 fiscal year, equipment was depreciated and amortized using the straight-line method over five years. During fiscal 1993, the Company reviewed the estimated service life of certain such assets and determined based on experience that the estimated useful life exceeds five years. As a result of this change in the estimated period of benefit, the Company is now amortizing the cost of certain equipment, from fiscal 1993 onward, using the declining balance method at an annual rate of 20% (see note 24). Service spares and related equipment are depreciated using the straight-line method over 3-5 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. (f) Research and Development Cost 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. Computer software development costs for products where the technological feasibility has been established are deferred and amortized over the economic life of the underlying products. No other development costs have met all the criteria for deferral and amortization, and accordingly, all such costs have been expensed as incurred. (g) 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. (h) Comparative Figures Prior year financial statements have been reclassified to conform with the current year's presentation. (PAGE 16) Notes (Cont'd) 2. Change in Fiscal Year During the 1992 fiscal period, the Company changed the date on which its fiscal year ends from July 31 to March 31. Accordingly, results of operations for the transition period which ended March 31, 1992 covered an eight-month period. The following are selected financial data for the fiscal 1992 transition period. Unaudited financial data has also been presented for the nine months ended April 27, 1991, representing the closest practicable date in the previous year for purposes of comparison to the 1992 fiscal period. The comparability of the two periods presented is limited by the impact of the acquisition of Infotron on the results for the 1992 fiscal period.
8 Months 9 Months Ended Ended March 31 April 27 1992 1991 --------------------------------------------------------------------------------------------- (Unaudited) (Thousands of dollars) Revenues: Product revenue $ 88,339 $ 78,982 Service revenue 30,842 18,486 --------------------------------------------------------------------------------------------- 119,181 97,468 ============================================================================================= Gross profit: Product 42,511 43,480 Service 12,917 5,983 --------------------------------------------------------------------------------------------- 55,428 49,463 Operating expenses including restructuring and other costs 63,135 51,524 --------------------------------------------------------------------------------------------- Loss from operations (7,707) (2,061) Net financial expenses (2,205) (298) Income taxes - 322 --------------------------------------------------------------------------------------------- Net loss $ (9,912) $ (2,037) ============================================================================================= Basic loss per share $ (0.63) $ (0.17) ============================================================================================= Weighted average number of common shares outstanding (thousands) 15,658 12,195 =============================================================================================
3. Inventories
March 31 March 31 1994 1993 --------------------------------------------------------------------------------------------- (Thousands of dollars) Raw materials $ 5,587 $ 7,167 Work-in-process 4,007 3,271 Finished goods 11,283 15,460 --------------------------------------------------------------------------------------------- $ 20,877 $ 25,898 =============================================================================================
4. Fixed Assets
March 31 March 31 1994 1993 ---------------------------------------------------------------------------------------- (Thousands of dollars) Cost: Land $ 213 $ 216 Buildings 4,535 4,756 Equipment 53,340 72,185 Leasehold improvements 1,779 4,056 ---------------------------------------------------------------------------------------- 59,867 81,213 Accumulated depreciation 39,653 50,445 ---------------------------------------------------------------------------------------- Net book value $ 20,214 $ 30,768 ======================================================================================== Reductions in the cost of equipment and leasehold improvements and accumulated depreciation during fiscal 1994 primarily relate to writedowns associated with restructuring (note 14). 5. Other Assets March 31 March 31 1994 1993 ---------------------------------------------------------------------------------------- (Thousands of dollars) Software development costs (notes 13 and 14) $ 847 $ 5,437 Deferred financing costs 1,541 2,122 Other 2,046 2,388 Deferred income taxes (notes 14 and 16) 504 8,381 Assets held for disposal - 2,485 ---------------------------------------------------------------------------------------- $ 4,938 $ 20,813 ========================================================================================
6. Bank Operating Lines At March 31, 1994, the Company's authorized bank operating lines totalled $17.9 million. Of this amount, $15.3 million related to two committed credit facilities with a Canadian chartered bank up to July 31, 1994 (the annual review date when the loan agreements mature), bearing interest at the bank's prime rate plus 1.375%. The other authorized amount of $2.6 million related to a demand facility with a bank in the United Kingdom bearing interest at 2.5% above the bank's prime rate. These 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 these facilities is determined based on margin formulas relating to levels of accounts receivable, inventories and other bank covenants. Under such formulas, $15.4 million was available to the Company at March 31, 1994 and $10.5 million was being utilized, all of which related to the Canadian operating lines. Cash and short-term deposits held as of that date represented a further $5.3 million in cash resources available to the Company. At March 31, 1994 the (PAGE 17) Company was not in compliance with certain financial covenants contained in the bank loan agreements with the Canadian chartered bank. These financial covenants measure among other items the tangible net worth of the Company, the current ratio and the debt to tangible net worth ratio. The breach of these financial covenants constitutes an event of default under the terms of the loan agreements for which the Company obtained a waiver from the bank for the balance of the committed period. Upon maturity of the Canadian operating loans on July 31, 1994, the outstanding borrowings convert to facilities which are repayable on demand unless a renewal of the committed operating facility is agreed between the Company and the bank. While the Company currently believes that the facilities will be renewed at satisfactory levels, there can be no assurance that such renewal will occur since the future availability of these credit facilities will in part be determined by future operating performance. 7. Accounts Payable and Accrued Liabilities
March 31 March 31 1994 1993 ------------------------------------------------------------------------------------------------------------ (Thousands of dollars) Trade accounts payable $ 9,784 $ 14,989 Payroll, commissions and related taxes 3,594 5,055 Other payables including accrued restructuring charges 13,012 8,502 Income and other taxes payable 1,464 256 ------------------------------------------------------------------------------------------------------------ $ 27,854 $ 28,802 ============================================================================================================ 8. Long-term Debt March 31 March 31 Description Interest Rate Security 1994 1993 ------------------------------------------------------------------------------------------------------------ (Thousands of dollars) Obligation under capital lease 12.9% Printed Circuit Board $ 2,078 $ 2,235 denominated in Canadian dollars; Manufacturing Facility, lease term ending during 2009. Nepean, Ontario Other Various Various 528 1,057 Bank loans - 20,382 ------------------------------------------------------------------------------------------------------------ 2,606 23,674 Classified as current 586 694 ------------------------------------------------------------------------------------------------------------ $ 2,020 $ 22,980 ============================================================================================================ The aggregate amount of long-term debt scheduled to be repaid in the five fiscal years ending March 31, 1999 is $943,000 with the balance of $1,663,000 due thereafter.
9. 8.5% Convertible Debentures The 8.5% convertible debentures have an aggregate principal amount of $30.0 million (Cdn.) and are unsecured direct obligations of the Company. They mature in November, 2002 and are convertible at any time into common shares of the Company at the option of the holder at the rate of approximately 426 common shares for each $1,000 (Cdn.) of principal amount of debentures held. The maximum number of common shares which could be issued if all the debentures were converted is 12,765,957, representing approximately 30% of the shares of the Company at March 31, 1994 on a fully diluted basis. The debentures are redeemable by the Company after November 10, 1995 provided certain conditions are met relating to the trading price of the Company's common stock during a period prior to the redemption date. (PAGE 18) Notes (Cont'd) 10. Capital Stock The authorized capital stock of the Company consists of an unlimited number of common shares without par value. During the third quarter of fiscal 1994, the Company completed the sale of 12,000,000 common shares through a public offering. An analysis of the capital stock account for the year ended March 31, 1994 and each of the preceding three periods is as follows:
Shares Dollars ---------------------------------------------------------------------------------------- (Thousands) Balance July 31, 1990 and 1991 12,195,375 $ 37,539 Issued upon merger with Infotron 3,476,532 7,703 ---------------------------------------------------------------------------------------- Balance March 31, 1992 15,671,907 45,242 Issued for cash 198,000 354 Cancelled (5,074) (11) ---------------------------------------------------------------------------------------- Balance March 31, 1993 15,864,833 45,585 Issued for cash, net of share issue costs 12,207,500 34,226 ---------------------------------------------------------------------------------------- Balance March 31, 1994 28,072,333 $ 79,811 ======================================================================================== 11. Stock Options The Company had five stock option plans in effect at March 31, 1994. The following table summarizes the activity in the plans during the year ended March 31, 1994 and each of the preceding three periods. Shares Available Outstanding for Grant Options ---------------------------------------------------------------------------------------- Balance July 31, 1990 401,582 572,878 Granted (6,000) 6,000 Terminated 125,047 (125,047) ---------------------------------------------------------------------------------------- Balance July 31, 1991 520,629 453,831 Granted (918,000) 918,000 Terminated 475,831 (475,831) ---------------------------------------------------------------------------------------- Balance March 31, 1992 78,460 896,000 Reserved for issuance 600,000 - Granted (575,000) 575,000 Terminated 125,000 (125,000) Exercised - (198,000) ---------------------------------------------------------------------------------------- Balance 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 March 31, 1994 904,460 1,264,500 ======================================================================================== The options to purchase common shares granted under the above stock option plans expire between April 15, 1994 and March 17, 2004. Of the 1,264,500 options outstanding at March 31, 1994, 461,168 were exercisable as of that date, and the prices at which the outstanding options may be exercised approximated market value at the dates of grant and average $3.10 (Cdn.) per share. Options held by all directors and executive officers as a group comprise 912,000 of the outstanding options.
12. Cumulative Translation Adjustment The following table summarizes the change in the cumulative translation adjustment for each of the years ended March 31, 1994 and 1993.
March 31 March 31 1994 1993 ---------------------------------------------------------------------------------------- (Thousands of dollars) Balance at beginning of year $ (4,745) $ (2,726) Adjustment arising on translation of foreign subsidiaries' financial statements to U.S. dollars (1,252) (1,524) Adjustment relating to subsidiary loans designated as long-term investments (935) (495) ---------------------------------------------------------------------------------------- Balance at end of year $ (6,932) $ (4,745) ========================================================================================
(PAGE 19) Notes (Cont'd) 13. Research and Development
Year Year 8 Months Year Ended Ended Ended Ended March 31 March 31 March 31 July 31 1994 1993 1992 1991 -------------------------------------------------------------------------------------------------------- (Thousands of dollars) Research and development expenditures $ 14,980 $ 20,504 $ 18,078 $ 16,841 Investment incentives (798) (2,028) (1,759) (3,053) Software development costs: Amortized 2,120 1,815 - - Deferred (1,986) (3,012) (2,640) - -------------------------------------------------------------------------------------------------------- $ 14,316 $ 17,279 $ 13,679 $ 13,788 ======================================================================================================== 14. Restructuring and Other Costs Year Year 8 Months Year Ended Ended Ended Ended March 31 March 31 March 31 July 31 1994 1993 1992 1991 -------------------------------------------------------------------------------------------------------- (Thousands of dollars) Restructuring $ 15,760 $ 5,547 $ 2,806 $ 686 Other 12,902 - 872 - -------------------------------------------------------------------------------------------------------- $ 28,662 $ 5,547 $ 3,678 $ 686 ========================================================================================================
The Company has undertaken downsizing and restructuring activities in each of the last four fiscal years. Three significant reductions in the size of the Company's workforce have occurred since the August 1991 merger with Infotron, the largest of which occurred in the fourth quarter of fiscal 1994. Restructuring costs recorded in fiscal 1994 relate to decisions made by the Company in February 1994 to reduce its workforce by approximately 300 positions worldwide and consolidate its North American operations under a single organization structure. Restructuring costs include $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 equipment and spare parts inventory in North America to their estimated net realizable value. During fiscal 1994, other costs include a writedown of $7.5 million in deferred tax assets which primarily relate to investment tax credits earned in Canada prior to the third quarter of fiscal 1993 on research and development expenditures. These tax credits remain available to the Company to reduce future federal income taxes payable in Canada and the benefit of these tax credits will instead be recognized in the financial statements as they are utilized through future profitable operations. For financial reporting purposes, as a result of sustaining several consecutive years of losses, including incurring significantly higher operating losses in the second half of fiscal 1994 compared to the first half, management believes that the accounting criteria for continuing to recognize these amounts as an asset are no longer met. Other costs also include a writedown of $4.5 million in deferred software development costs relating to the Company's wide-area networking products which are not expected to be recovered in the future. This followed a comprehensive review by management in the fourth quarter of fiscal 1994 of revised revenue projections for these products as a result of performance in the third quarter. Other costs also include a $0.9 million writedown of assets held for disposal to their net realizable value. 15. Interest Expense Interest expense appearing on the consolidated statement of income relates only to bank operating lines, bank term debt and convertible debentures. It does not include interest on the capital lease obligation for the manufacturing facility or, where applicable in fiscal periods prior to 1993, mortgage interest. Such interest is considered to be a cost of occupancy which is allocated to operating expenses. Total interest expense, including these amounts, during the year ended March 31, 1994 amounted to $4,402,000 (1993 - $4,952,000; 1992 (8 months) - $3,072,000; 1991 - $2,003,000). Of this amount, $3,578,000 (1993 - $3,568,000; 1992 - $2,371,000; 1991 - $666,000) represented interest on indebtedness initially incurred for a term of more than one year. (PAGE20) Notes (Cont'd) 16. Income Taxes
Year Year 8 Months Year Ended Ended Ended Ended March 31 March 31 March 31 July 31 1994 1993 1992 1991 --------------------------------------------------------------------------------------------------------- (Thousands of dollars) Current: Canadian $ (342) $ - $ - $ (345) Foreign (800) - - (1,036) Deferred: Canadian - - - 43 Foreign - - - 932 --------------------------------------------------------------------------------------------------------- $ (1,142) $ - $ - $ (406) =========================================================================================================
The income tax expense reported differs from the amount computed by applying the Canadian tax rates to the loss before income taxes. This is primarily due to the non-recognition of tax benefits related to the losses in these fiscal periods. At March 31, 1994, the Company had available, in certain jurisdictions and subject to certain restrictions, accumulated accounting losses of approximately $76.0 million the potential tax benefit of which have not been recognized in the consolidated financial statements. These include loss carry-forwards for income tax purposes of approximately $53.0 million which begin to expire after the 1999 fiscal year. The remaining amount relates to items expensed in the consolidated financial statements which have not yet been claimed for income tax purposes. Included in the loss carry-forwards for income tax purposes are approximately $37.0 million of net operating loss carry-forwards ("NOLs") in the United States. The Company's ability to use these NOLs to offset future taxable income is subject to restrictions enacted in the United States Internal Revenue Code of 1986 as amended (the "Code"). These restrictions would limit the Company's future use of its NOLs when certain stock ownership changes described in the Code have occurred. These ownership changes may arise from the public sale of securities. As a result of the sale of the shares by the Company during fiscal 1994 the Company is currently determining what restrictions, if any, would exist on future use of NOLs. The Company, for reporting purposes, has adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109") "Accounting for Income Taxes" effective April 1, 1993 on a prospective basis. SFAS 109 requires the Company to account for income taxes using the asset and liability method for purposes of generally accepted accounting principles in the United States ("U.S. GAAP"). There was no cumulative effect, or effect on current results, as a consequence of adopting SFAS 109. The following table shows the tax effect of temporary differences and credits that give rise to deferred tax assets and liabilities under U.S. GAAP.
(Thousands of dollars) Operating loss carry-forwards $ 20,000 Depreciation 2,700 Restructuring reserves 3,200 Investment tax credits 11,000 Other 2,500 --------------------------------------------------------------------------- 39,400 Valuation allowance (38,896) --------------------------------------------------------------------------- $ 504 ===========================================================================
At March 31, 1994 the balance of unremitted earnings of subsidiaries that would be subject to foreign withholding tax on repatriation was $7,761,000 (1993 - $9,676,000; 1992 - $10,928,000; 1991 - $10,412,000). No provision has been made for withholding taxes on such earnings. 17. Basic Loss Per Share Fully diluted earnings per share information has not been presented as potential conversions are anti-dilutive. Basic loss per share figures are calculated using the monthly weighted average number of common shares outstanding during the fiscal period. (PAGE 21) Notes (Cont'd) 18. Supplementary Expense Information to Consolidated Statement of Income
Year Year 8 Months Year Ended Ended Ended Ended March 31 March 31 March 31 July 31 1994 1993 1992 1991 ---------------------------------------------------------------------------------------------------------- (Thousands of dollars) Advertising $ 1,360 $ 1,283 $ 991 $ 1,859 ========================================================================================================== Depreciation and amortization $ 9,658 $ 11,675 $ 8,255 $ 7,893 ========================================================================================================== 19. Cash Applied to Operations Cash applied to operations is computed as follows: Year Year 8 Months Year Ended Ended Ended Ended March 31 March 31 March 31 July 31 1994 1993 1992 1991 ---------------------------------------------------------------------------------------------------------- (Thousands of dollars) Loss from operations $ (42,960) $ (15,303) $ (7,707) $ (4,940) Depreciation and amortization 9,658 11,675 8,255 7,893 Other reserves and writedowns not involving an outlay of cash 22,004 6,182 872 - Gain on disposal of assets (542) - - - Interest paid (3,546) (4,653) (2,715) (1,337) Interest received and foreign exchange 991 449 510 814 Income taxes 470 (1,433) (1,591) (3,684) ---------------------------------------------------------------------------------------------------------- $ (13,925) $ (3,083) $ (2,376) $ (1,254) ==========================================================================================================
20. Changes in Operating Working Capital The decrease (increase) in operating working capital requirements is computed as follows:
Year Year 8 Months Year Ended Ended Ended Ended March 31 March 31 March 31 July 31 1994 1993 1992 1991 ---------------------------------------------------------------------------------------------------------- (Thousands of dollars) Accounts receivable $ 4,103 $ 3,775 $ 1,146 $ 6,120 Inventories 1,750 2,488 (2,462) 929 Other current assets 73 8 (289) 402 Accounts payable and accrued liabilities (1,602) (3,462) (2,371) (2,459) Deferred revenue (1,075) 2,271 1,263 887 Foreign currency translation adjustment (2,944) (548) 577 (1,113) ----------------------------------------------------------------------------------------------------------- $ 305 $ 4,532 $ (2,136) $ 4,766 ===========================================================================================================
(PAGE 22) Notes (Cont'd) 21. Commitments and Contingencies The Company has entered into various lease commitments primarily for office premises and automobiles. At March 31, 1994, the minimum amounts payable under such leases in future fiscal years are as follows: (Thousands of dollars) 1995 $ 7,400 1996 6,000 1997 4,700 1998 3,000 1999 1,900 Thereafter 5,600 -------- $ 28,600 ======== The Company has provided guarantees totalling approximately $1.2 million (1993 - $1.5 million) pursuant to certain contracts and agreements. Tax authorities in the Netherlands have advised the Company's Dutch subsidiary that as a result of an audit it proposes to disallow substantial amounts which have been deducted for income tax purposes in prior years. The income tax returns in the years involved have not yet been reassessed and the Company is vigorously contesting the proposed adjustments. It is not possible at this time to make an estimate of the amount, if any, of income taxes which may result and accordingly, no provision has been made for any additional income taxes. If the Company is not completely successful, any additional taxes will be accounted for as a prior period adjustment. Since 1991, the Company has received grants of approximately $3.9 million under the Canadian Federal Government's Microelectronics and Systems Development Program ("MSDP") of which $1.1 million was received in fiscal 1994. This funding is required to be repaid if certain conditions are met relating to the commercialization of resulting technology. The Company believes these conditions were substantially met during fiscal 1994 and accordingly this funding will be required to be repaid in the future following completion of the approved programs, which is expected to occur during fiscal 1995. Repayment of annual amounts will be accrued in the form of a royalty based on revenue and will be paid in the following year. During fiscal 1994, a third party claim in the amount of $25 million (Cdn.) for contribution and indemnity was made against the Company by defendants in a breach of contract and negligence action arising from an alleged failure of a computer system designed, supplied and installed by such defendants. The Company believes that it has good defences in such third party claim. However, at this time, the outcome of this claim is not determinable. 22. 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.. Concurrent with the merger the subsidiary was renamed Gandalf Systems Corporation ("GSC"). The acquisition equation, used in applying the purchase method of accounting to the transaction, is as follows: Consideration paid: (Thousands of dollars) Issuance of 3,476,532 Gandalf common shares $ 7,703 Pre-merger loan to Infotron, converted to equity in GSC upon merger 3,002 Merger-related expenses 2,479 -------------------------------------------------------------------- $ 13,184 ==================================================================== Net assets acquired, represented by: Cash $ 945 Non-cash working capital 6,091 Fixed assets at assigned value 22,398 Other non-current assets 5,486 Long-term debt (21,736) -------------------------------------------------------------------- $ 13,184 ==================================================================== 23. Geographic Segment Information The Company has one line of business, providing networking solutions to customers through designing, manufacturing, marketing and servicing a broad line of computerized communications systems. The Company has defined five geographic regions for the segments in which it operates: the United States of America, the United Kingdom, Canada, Holland/France and other international markets. The following table sets forth information concerning these geographic segments for each of the years ended March 31, 1994 and 1993, the eight months ended March 31, 1992 and the year ended July 31, 1991. Notes (Cont'd)
Year Year 8 Months Year Ended Ended Ended Ended March 31 March 31 March 31 July 31 1994 1993 1992 1991 ---------------------------------------------------------------------------------------------------------- (Thousands of dollars) Sales to customers: United States $ 35,157 $ 45,347 $ 35,125 $ 30,636 United Kingdom 39,309 41,996 30,795 28,650 Canada 23,341 32,887 26,665 39,142 Holland/France 14,867 19,327 12,334 23,544 Other International 18,649 21,343 14,262 7,041 Segment transfers: United States 5,360 3,573 2,670 1,968 United Kingdom 2,385 7,387 5,637 6,129 Canada 24,702 20,846 11,076 14,832 Holland/France 476 938 271 081 Eliminations (32,923) (32,744) (19,654) (23,010) ---------------------------------------------------------------------------------------------------------- Total revenue $ 131,323 $160,900 $ 119,181 $ 129,013 ========================================================================================================== Segment operating profit (loss): United States $ (1,621) $ 603 $ 4,446 $ 2,229 United Kingdom 6,908 8,488 6,467 3,339 Canada (226) 4,802 3,855 6,562 Holland/France 2,550 4,200 2,534 8,013 Other International 2,574 1,627 (409) 208 ---------------------------------------------------------------------------------------------------------- Total segment operating profit 10,185 19,720 16,893 20,351 ========================================================================================================== Expenses: Research and development 14,316 17,279 13,679 13,788 General corporate 10,167 12,197 7,243 10,817 Restructuring and other costs 28,662 5,547 3,678 686 Interest expense 4,127 4,653 2,715 1,337 Interest income and foreign exchange (991) (449) (510) (814) Income taxes 1,142 - - 406 ---------------------------------------------------------------------------------------------------------- Net loss $ (47,238) $ (19,507) $ (9,912) $ (5,869) ========================================================================================================== Identifiable assets: United States $ 14,919 $ 35,086 $ 43,987 $ 16,975 United Kingdom 23,336 25,560 30,217 19,347 Canada 33,440 58,718 55,337 51,898 Holland/France 7,308 8,869 10,072 13,350 Other International 10,183 1,370 1,795 1,429 ---------------------------------------------------------------------------------------------------------- Total assets $ 89,186 $ 129,603 $ 141,408 $ 102,999 ==========================================================================================================
(PAGE 24) Notes (Cont'd) 24. Quarterly Financial Information (Unaudited)
Quarterly unaudited financial information for each of the years ended March 31, 1994 and 1993 is as follows: Year Ended March 31, 1994 First Quarter Second Quarter Third Quarter Fourth Quarter --------------------------------------------------------------------------------------------------------------- (Thousands of dollars, except per share amounts) Revenues: Product revenue $ 23,453 $ 24,632 $ 20,301 $ 22,427 Service revenue 10,720 10,386 9,965 9,439 --------------------------------------------------------------------------------------------------------------- 34,173 35,018 30,266 31,866 --------------------------------------------------------------------------------------------------------------- Operating expenses: Cost of product sales 11,820 12,639 11,295 13,755 Service expenses 6,837 6,769 6,963 6,455 Selling and distribution 10,577 11,176 11,274 10,651 Administration and general 2,679 2,434 2,825 3,156 Research and development 3,083 3,359 4,204 3,670 Restructuring and other costs - - - 28,662 --------------------------------------------------------------------------------------------------------------- Loss from operations (823) (1,359) (6,295) (34,483) Interest expense (1,298) (1,160) (1,010) (659) Interest income and foreign exchange 174 172 517 128 Income taxes - - - (1,142) --------------------------------------------------------------------------------------------------------------- Net loss $ (1,947) $ (2,347) $ (6,788) $ (36,156) =============================================================================================================== Basic loss per share $ (0.12) $ (0.15) $ (0.29) $ (1.29) =============================================================================================================== During the fourth quarter of fiscal 1994 the Company recorded additional inventory provisions of $1.5 million on mature product lines, which were included in the caption "Cost of product sales". Restructuring and other costs of $28.7 million in the fourth quarter of fiscal 1994 are described in Note 14 to the consolidated financial statements. Quarterly earnings per share figures are calculated based on the weighted average shares outstanding in the quarter.
Year Ended March 31, 1994 First Quarter Second Quarter Third Quarter Fourth Quarter --------------------------------------------------------------------------------------------------------------- (Thousands of dollars, except per share amounts) Revenues: Product revenue $ 28,474 $ 29,250 $ 29,365 $ 26,788 Service revenue 11,184 12,216 11,926 11,697 -------------------------------------------------------------------------------------------------------------- 39,658 41,466 41,291 38,485 -------------------------------------------------------------------------------------------------------------- Operating expenses: Cost of product sales 13,630 19,118 14,569 13,920 Service expenses 7,095 7,497 7,378 7,363 Selling and distribution 12,885 12,891 11,323 10,829 Administration and general 3,536 5,479 3,073 2,791 Research and development 5,064 4,935 3,671 3,609 Restructuring and other costs - 5,547 - - -------------------------------------------------------------------------------------------------------------- Income (loss) from operations (2,552) (14,001) 1,277 (27) Interest expense (984) (1,017) (1,395) (1,257) Interest income and foreign exchange (56) 70 126 309 -------------------------------------------------------------------------------------------------------------- Net income (loss) $ (3,592) $ (14,948) $ 8 $ (975) ============================================================================================================== Basic loss per share $ (0.23) $ (0.95) $ - $ (0.06) ============================================================================================================== During the fourth quarter of fiscal 1993 the Company recorded an adjustment of $3.0 million to reduce depreciation charges for the year based on revisions made to the estimated useful lives of certain classes of equipment (see note 1(e)). Approximately 75% of this amount can be attributed to depreciation charges that were recorded during the first three quarters of the 1993 fiscal year. The Company increased its provisions for inventory and other reserves during the second quarter of fiscal 1993 to reflect current and expected future levels of revenue. These additional reserves of $6.2 million were included in determining the loss from operations in the second quarter, with $4.3 million included under the caption "Cost of product sales" and the remaining amount of $1.9 million included under "Administration and general".
(PAGE 25) Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction The consolidated financial statements together with accompanying notes and supplementary data, should be read as an integral part of this review. These financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada, the application of which, in the case of the Company, conform in all material respects for the periods presented with accounting principles generally accepted in the United States. All amounts are stated in U.S. dollars unless otherwise indicated. "C$" refers to Canadian dollars. During the 1992 fiscal period, the Company changed its fiscal year end from July 31 to March 31 and accordingly the fiscal period ended March 31, 1992 was eight months in duration. Fiscal 1994 represented a year of transition for the Company from selling traditional product lines, which are primarily sold directly to end user customers, to a series of LAN internetworking products introduced by the Company in fiscal 1994 which are intended to be sold through multiple channels of distribution. The Company had not anticipated that quarterly revenues in the final three quarters of fiscal 1994 would fall below the level of $34.2 million achieved in the first quarter of fiscal 1994. However, an unexpected 18% decline in product revenue in the third quarter of fiscal 1994 compared with the second quarter led to a previously unplanned significant restructuring and downsizing of the Company's operations in the fourth quarter, particularly in North America. The Company has undertaken downsizing and restructuring activities in each of the last four fiscal years. Three significant reductions in the size of the Company's workforce have occurred since the August 1991 merger with Infotron Systems Corp. (Infotron), the largest of which occurred in the fourth quarter of fiscal 1994. At the time of the merger, the combined workforce was approximately 1,950 employees. Following the completion of notice periods associated with the terminations in the fourth quarter of fiscal 1994, the Company anticipates the workforce will be approximately 1,000 employees. Results of Operations The following table sets forth items derived from the consolidated statement of income, expressed as a percentage of revenues for the fiscal year ended March 31, 1994 and each of the preceding three fiscal periods.
Year Year 8 Months Year Ended Ended Ended Ended March 31 March 31 March 31 July 31 Percentage of Revenues 1994 1993 1992 1991 ---------------------------------------------------------------------------------------------------------- Revenues: Product revenue 69.2% 70.8% 74.1% 80.8% Service revenue 30.8 29.2 25.9 19.2 ---------------------------------------------------------------------------------------------------------- 100.0% 100.0% 100.0% 100.0% ========================================================================================================== Gross profit: Product 45.5% 46.2% 48.1% 53.5% Service 33.3 37.6 41.9 32.1 Combined 41.7 43.7 46.5 49.4 Expenses: Selling and distribution 33.3 29.8 30.0 32.4 Administration and general 8.4 9.2 8.4 9.6 Research and development 10.9 10.7 11.5 10.7 Restructuring and other costs 21.8 3.5 3.1 0.5 ---------------------------------------------------------------------------------------------------------- Loss from operations (32.7) (9.5) (6.5) (3.8) Financial expense (2.4) (2.6) (1.8) (0.4) Income taxes (0.9) - - (0.3) ---------------------------------------------------------------------------------------------------------- Net loss (36.0)% (12.1)% (8.3)% (4.5)% ==========================================================================================================
(PAGE 26) Management's Discussion and Analysis (Cont'd) Restructuring and Other Costs During the fourth quarter of fiscal 1994 the Company recorded a $28.7 million charge for restructuring and other costs which do not form part of the Company's ongoing operations. The Company's financial results during the third quarter ended January 1, 1994 were weaker than the first two quarters of fiscal 1994 and were significantly below management's expectations. These poor results occurred primarily as a result of accelerated declines in the revenues from the Company's traditional product lines and weak operating margins in North America. In response, a number of restructuring initiatives were undertaken in the final quarter of fiscal 1994 designed to reduce operating costs in future periods. These initiatives will reduce the Company's workforce by approximately 300 positions worldwide and consolidate its North American operations under a single infrastructure at its corporate headquarters near Ottawa, Canada. In addition the Company reassessed the carrying value of certain intangible assets in response to revised revenue forecasts. This reassessment resulted in the decision to writedown the carrying value of deferred tax assets and deferred software costs. Restructuring charges of $15.8 million includes $5.3 million relating to severance, $4.2 million in provisions for redundant facilities and $6.3 million in fixed asset writedowns. The provision for redundant facilities represents the estimated future lease costs and the unamortized balance of leasehold improvements for vacant facilities worldwide, including the facility of approximately 120,000 square feet in Cherry Hill, New Jersey which had been the former corporate headquarters of Infotron. After consolidating the North American manufacturing, distribution and administrative functions near Ottawa, Canada, the Company's remaining U.S. operation will be relocated to a facility of approximately 25,000 square feet. The writedown of fixed assets will adjust the book value of equipment and spare parts inventory in North America to estimated net realizable value. It is the Company's intention to sell fixed assets that are no longer required in the Company's ongoing operations. Other costs recorded in the fourth quarter of fiscal 1994 include the writedown of $7.5 million in deferred tax assets which primarily relate to investment tax credits earned in Canada prior to the third quarter of fiscal 1993 on research and development expenditures. These tax credits remain available to the Company in order to reduce federal income taxes payable in Canada and the benefit of these tax credits will instead be recognized in the financial statements as they are utilized through future profitable operations. However, for financial reporting purposes, as a result of sustaining several consecutive years of losses for tax purposes in Canada, including incurring significantly higher operating losses in the second half of fiscal 1994 compared to the first half, management believes that the accounting criteria for continuing to recognize these amounts as an asset are no longer met. At March 31, 1994, the Company had available subject to audit unused investment tax credits totalling approximately $11.0 million. Other costs also include a writedown of $4.5 million in deferred software development costs incurred in prior years relating to the Company's wide-area networking products. Declining revenue trends for these products, which were more pronounced in the third quarter of fiscal 1994, led to a comprehensive review by management of revenue projections for these products. Following review of these projections management determined that the carrying value of the associated deferred software development costs would not be recovered through future cash flows and accordingly its carrying value was written down to nil. Other costs also include a $0.9 million writedown of the carrying value of assets held for disposal to their estimated net realizable value. Restructuring costs of $5.5 million recorded in fiscal 1993 related to severance costs associated with the elimination of positions within the Company and the estimated future cost of leased property which had become redundant. In fiscal 1992, severance costs of $2.8 million were recorded. In addition, in fiscal 1992, the Company recorded a charge to income of $0.7 million, representing excess professional fees incurred in arranging financing for the Infotron merger. (PAGE 27) Management's Discussion and Analysis (Cont'd) Revenues The following table sets forth revenues by geographic segment for the year ended March 31, 1994 and each of the three preceding fiscal periods. Year Year 8 Months Year Ended Ended Ended Ended March 31 March 31 March 31 July 31 1994 1993 1992 1991 --------------------------------------------------------------------- (Millions of dollars) United States $ 35.2 $ 45.4 $ 35.1 $ 30.6 United Kingdom 39.3 42.0 30.8 28.7 Canada 23.3 32.9 26.7 39.1 Holland/France 14.9 19.3 12.3 23.6 Other International 18.6 21.3 14.3 7.0 --------------------------------------------------------------------- $ 131.3 $ 160.9 $ 119.2 $ 129.0 ===================================================================== Revenues in the fiscal year ended March 31, 1994 were $131.3 million compared to $160.9 million in fiscal 1993 and $119.2 million during the eight-month period ended March 31, 1992. Approximately 70% of revenues in fiscal 1994 were derived from the sale of products with the balance represented by service revenue. This proportion was not significantly different from fiscal 1993 but was lower than the 74% figure for product sales in fiscal 1992. The downward trend in the proportion of revenues derived from the sale of products has occured as a result of larger year-over-year percentage declines in product revenue than those which have occurred in service revenue since fiscal 1992. Service revenue was $40.5 million in fiscal 1994 compared with $47.0 million in fiscal 1993 and $46.3 million (annualized) in fiscal 1992. Service revenue declined in fiscal 1994 compared to fiscal 1993 and fiscal 1992 as a result of declining product revenue during the last two fiscal years. The decrease in revenues in fiscal 1994 compared to fiscal 1993 of 18% is attributable to a decline in demand for the Company's traditional products in the areas of wide-area networking, data switching and data transmission. This decline was the continuation of a trend that also existed in fiscal 1993 when revenues were 10% lower than revenues for fiscal 1992 on an annualized basis. Revenues from the Company's LAN connection products, representing approximately one third of total product revenue in fiscal 1994, grew 65% in fiscal 1994 compared to fiscal 1993. However, revenues from the Company's traditional product lines declined 27% in fiscal 1994 compared to fiscal 1993. In addition, approximately 40% of the Company's product revenue in fiscal 1994 were sold through indirect channels of distribution compared to approximately 30% in fiscal 1993. These general trends also occurred within the individual quarters of fiscal 1994. The Company anticipates that in fiscal 1995, growth will continue in the LAN connection products, sales of traditional products will continue to decline and a greater proportion of sales will occur through indirect channels of distribution. The Company believes that making greater use of multiple channels of distribution provides opportunities for revenue growth. Revenues in each of the Company's major markets declined in fiscal 1994 compared to fiscal 1993. Revenues in North America (United States and Canada) were $58.5 million in fiscal 1994, down 25.3% from fiscal 1993 and 36.9% from the annualized level of fiscal 1992. These trends led to restructuring the North American operations during the fourth quarter of fiscal 1994 to significantly reduce operating costs in future periods. The Company's European direct sales markets (United Kingdom, Holland and France) reported revenues of $54.2 million in fiscal 1994, 11.6% lower than in fiscal 1993 and 16.2% below the annualized level in fiscal 1992. Revenues in the Company's other international markets were $18.6 million in fiscal 1994, $21.3 million in fiscal 1993 and $21.5 million (annualized) in fiscal 1992. Gross Profit The gross margin on revenues (revenues less cost of product sales and service expenses expressed as a percentage of revenues) was 41.7% in fiscal 1994 compared with 43.7% in fiscal 1993 and 46.5% in fiscal 1992. The gross margin on total revenues declined in both fiscal 1994 and fiscal 1993 compared to the previous year as a result of lower margins earned on both product revenue and service revenue and a trend to a higher proportion of total revenue being derived from service which has inherently lower margins than product revenue. The gross margin on product revenue (product revenue less cost of product sales expressed as a percentage of product revenue) was 45.5% in fiscal 1994, 46.2% in fiscal 1993 and 48.1% in fiscal 1992. The gross margin on product revenue in both fiscal 1994 and 1993 was adversely affected by additional inventory reserves on mature product lines of $1.6 million and $4.3 million respectively, taken in the fourth quarter of fiscal 1994 and the second quarter of fiscal 1993. Exclusive of these additional provisions, the gross margin on product revenue was 47.2% in fiscal 1994 and 50.0% in fiscal 1993. (PAGE 28) Management's Discussion and Analysis (Cont'd) The gross margin on service revenue (service revenue less service expenses expressed as a percentage of service revenue) was 33.3% in fiscal 1994, 37.6% in fiscal 1993 and 41.9% in fiscal 1992. The decline in the margin earned on service revenue during fiscal 1994 resulted from service revenue declining at a faster rate than service expenses. Service revenue declined 13.9% in fiscal 1994 compared to fiscal 1993 while service expenses declined 7.9% during the same period. The decline in service margin during fiscal 1993 compared to fiscal 1992 occurred as a result of higher costs involved in servicing the existing customer base. Restructuring actions undertaken in North America during the fourth quarter of fiscal 1994 reduced overhead and infrastructure costs associated with manufacturing, distribution and service. As a result of these actions, management anticipates the gross margin on product and service revenue will show improvement in fiscal 1995 compared to fiscal 1994. In addition, the Company's LAN internetworking products introduced in fiscal 1994 earned product margins that were higher than the average margin for all products sold. The Company is anticipating an improvement in product margins in the future based on continuing the trend in 1994 to derive a higher proportion of revenues from these products. Operating Expenses Operating expenses in fiscal 1994 were $97.8 million compared to $85.6 million in fiscal 1993. Fiscal 1994 operating expenses included $28.7 million of restructuring and other costs which do not form part of the Company's ongoing operations. Restructuring costs included in 1993 operating expenses were $5.5 million. Selling and distribution, administration and general and research and development costs were $69.1 million in fiscal 1994, 13.7% lower than the $80.1 million expended in these areas during fiscal 1993. However, as a result of lower revenues in fiscal 1994, these expenses represented 52.6% of revenues in fiscal 1994 compared to 49.8% of revenues in fiscal 1993. In fiscal 1992, these expenses were $89.2 million (annualized) or 49.9% of revenues. Since the 1991 merger with Infotron, the Company has continued to reduce staff in these areas with significant reductions in personnel occurring in the first quarter of fiscal 1992, the second quarter of fiscal 1993 and most recently in the fourth quarter of fiscal 1994. As a result of changes in the fourth quarter of fiscal 1994, the sales management, order administration and finance activities for North America are all centrally located at the Company's headquarters near Ottawa, Canada. Since 1991, the Company has received grants of aproximately $3.9 million under the Canadian Federal Government's Microelectronics and Systems Development Program ("MSDP") of which $1.1 million was received in fiscal 1994. This funding is required to be repaid if certain conditions are met relating to the commercialization of resulting technology. The Company believes these conditions were substantially met during fiscal 1994 and accordingly this funding will be required to be repaid in the future following completion of the approved programs, which is expected to occur during fiscal 1995. Repayment of annual amounts will be accrued in the form of a royalty based on revenue and will be paid in the following year. Operating Loss The Company reported an operating loss of $43.0 million in fiscal 1994. The respective operating losses in fiscal 1993 and 1992 (8 months) were $15.3 million and $7.7 million. The operating loss for the first half of fiscal 1994 was $2.2 million on revenue of $69.2 million. The operating loss and revenue figures for the second half of fiscal 1994 were $40.8 million and $62.1 million respectively. The operating loss for the second half included $28.7 million of restructuring and other costs. The majority of the restructuring actions in fiscal 1994 were not taken until late in the fourth quarter and accordingly did not significantly impact operating expenses in the final quarter. Reduced operating expenses and associated improved operating performance are anticipated in fiscal 1995 as a result of the downsizing and restructuring actions taken late in fiscal 1994. Financial Expense Interest expense was $4.1 million in fiscal 1994 compared with $4.7 million in fiscal 1993 and $2.7 million in fiscal 1992 (8 months). Interest expense was significantly lower in the second half of fiscal 1994 following the November 1993 public issue of common shares by the Company which raised funds which were used to retire $19.7 million in term bank loans and repay outstanding borrowings under the Company's short-term bank credit lines. As a result of the retirement of the term bank loans during fiscal 1994, the Company anticipates financial expenses will decline in fiscal 1995 compared to 1994. Net Loss The Company reported a net loss of $47.2 million in fiscal 1994 which included $28.7 million in restructuring and other charges. The respective net loss figures for fiscal 1993 and fiscal 1992 (8 months) were $19.5 million and $9.9 million. (PAGE 29) Management's Discussion and Analysis (Cont'd) Liquidity and Capital Resources Cash and short-term deposits declined during fiscal 1994 from $9.7 million at March 31, 1993 to $5.3 million at March 31, 1994. Borrowings under bank operating lines increased from $10.0 million at March 31, 1993 to $10.5 million at March 31, 1994. Negative cash flow from operations during fiscal 1994 of $13.6 million related primarily to the loss of $18.6 million before restructuring charges. Cash provided by financing activities was $13.9 million. Financing activities included the sale of 12,000,000 common shares through a public offering during the third quarter of fiscal 1994 which yielded proceeds of C$45.1 million (approximately $33.8 million) net of underwriters' fees and before deducting expenses of the issue. Term bank indebtedness of $19.7 million was retired from the proceeds of the share issue representing the full amount outstanding under these loans. The balance of the proceeds of approximately $13.5 million following payment of expenses of the issue was retained for working capital purposes. This latter amount was initially applied in November 1993 to eliminate the utilization of short-term bank operating lines thereby making those lines available for future working capital purposes and reducing interest costs to the Company. At the end of the third quarter of fiscal 1994 the Company was borrowing $1.2 million under these lines, net of cash and short-term deposits of $1.8 million. At March 31, 1994, utilization of these operating lines on a net basis was $5.2 million, representing negative cash flow of $4.0 million during the fourth quarter of fiscal 1994 which occurred primarily as a result of the net loss sustained in the third quarter. At March 31, 1994, the Company's authorized bank operating lines totalled $17.9 million. Of this amount, $15.3 million related to two committed credit facilities with a Canadian chartered bank up to July 31, 1994 (the annual review date when the loan agreements mature) bearing interest at the bank's prime rate plus 1.375%. The other authorized amount of $2.6 million related to a demand facility with a bank in the United Kingdom bearing interest at 2.5% above the bank's prime rate. These 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 these facilities is determined based on margin formulas relating to levels of accounts receivable, inventories and other bank covenants. Under such formulas, $15.4 million was available to the Company at March 31, 1994 and $10.5 million was being utilized (all of which related to the Canadian operating line). Cash and short-term deposits held as of that date represented a further $5.3 million in cash resources available to the Company. At March 31, 1994 the Company was not in compliance with certain financial covenants contained in the bank loan agreements with the Canadian chartered bank. These financial covenants measure among other items the tangible net worth of the Company, the current ratio and the debt to tangible net worth ratio. The breach of these financial covenants constitutes an event of default under the terms of the loan agreements for which the Company obtained a waiver from the bank for the balance of the committed period. Upon maturity of the Canadian operating loans on July 31, 1994, the outstanding borrowings convert to facilities which are repayable on demand unless a renewal of the committed operating facility is agreed between the Company and the bank. While the Company currently believes that the facilities will be renewed at satisfactory levels, there can be no assurance that such renewal will occur since the future availability of these credit facilities will in part be determined by future operating performance. The Company believes that its current financial base together with currently available credit facilities can provide sufficient financial resources for continued operations in the short-term. Negative cash flow from operations is anticipated during the first half of fiscal 1995 primarily as a result of restructuring actions taken in the fourth quarter of fiscal 1994. As a result of this restructuring the Company believes that the adjusted break even levels for annual revenues is approximately $130 million. The Company's ability to generate positive cash flow is ultimately dependent on its ability to attain this break even revenue level. Capital spending was $4.4 million in fiscal 1994, $3.9 million in fiscal 1993 and $2.6 million in fiscal 1992 (8 months). The Company believes it must continue to invest in its capital asset base at fiscal 1994 or moderately higher levels. Accounts receivable and inventories at March 31, 1994 were $51.1 million (accounts receivable - $30.2 million; inventories - $20.9 million) versus $61.8 million at March 31, 1993 (accounts receivable - $35.9 million; inventories - $25.9 million). The decrease is primarily attributable to lower revenue levels in fiscal 1994 than 1993, thereby reducing working capital requirements. The additional inventory provisions of $1.5 million taken in the fourth quarter of fiscal 1994 also contributed to the decrease in inventory levels. The Company's current ratio was 1.3:1 at March 31, 1994 compared to 1.5:1 at March 31, 1993. The decline in the current ratio is primarily due to the accrued restructuring costs recorded in the fourth quarter of fiscal 1994. (PAGE 30) 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 1994 High 3.75 4.60 4.00 4.60 | 3 3 - 1/2 3 - 1/4 3 - 19/32 Low 0.95 3.40 2.85 3.60 | 13/16 2 - 1/2 2 - 1/8 2 - 3/4 Volume (000's) 20,284 9,167 1,633 3,008 | 1,418 798 453 605 ---------------------------------------------------------------------------------------------------- Fiscal 1993 High 5.50 4.10 3.35 3.65 | 4 - 1/2 3 - 1/4 2 - 7/8 3 - 1/8 Low 3.90 1.85 2.25 2.50 | 3 1 - 1/2 1 - 3/4 2 - 1/8 Volume (000's) 6,356 4,266 417 1,161 | 1,393 826 459 920 ---------------------------------------------------------------------------------------------------- Fiscal 1992 High n/a 3.90* 3.00 3.45 | n/a 3- 3/8 * 2- 5/8 3- 1/8 Low n/a 2.50* 1.50 2.70 | n/a 2* 1- 1/8 2- 1/4 Volume (000's) n/a 1,042* 1,083 357 | n/a 1,217* 815 639 --------------------------------------------------------------------------------------------------- * 9 weeks
Shareholders As at June 2, 1994, there were 28,072,333 shares issued and outstanding with 2,197 record holders. The stock closed on The Toronto Stock Exchange at $0.98 (Cdn.) on June 2, 1994, and on The Nasdaq Stock Market at $0.625. Dividends Individuals and corporations resident in the United States are subject generally to a 15 percent withholding tax on dividends, and individuals and corporations resident in countries that do not have a treaty with Canada are subject to a 25 percent withholding tax. For United States corporations only, however, the United States/Canada Tax Treaty reduces the withholding tax to 10 percent if the United States corporation owns at least 10 percent of the Company's voting shares. It is the Company's present policy not to pay cash dividends and to retain its earnings to finance expansion and growth. 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 6 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. 9 North Olney Avenue Cherry Hill, New Jersey 08003 USA Gandalf International Limited United Kingdom Coworth Park House Coworth Park Ascot, Berkshire SL5 7SL Gandalf Nederland B.V. Holland Kruisweg 609 2132 NA Hoofddorp Postbus 3084 2130 KB Hoofddorp Gandalf S.A. France 16, Burospace route de Gisy 91572 Bievres Cedex France Jurisdiction of Name Incorporation ------------------------------------------ --------------- Gandalf Systems Belgium N.V. Belgium Koningin Fabiolalaan 25 1810 Wemmel, Belgium Infotron Puerto Rico, Inc. Delaware, United States 9 North Olney Cherry Hill, New Jersey 08003 USA T3-Inc. Delaware, United States 200 Fairbrook Drive Suite 202 Herndon, VA 22070 USA Infotron Belgium N.V. Belgium Konigin Fabiolalaan 25 1810 Wemmel, Belgium Infotron Singapore Pte. Ltd. Singapore Telescience (Singapore) Pte. Ltd. 126 Joo Seng Road #09-04 Gold Pine Industrial Building Singapore 1336 Infotron Systems Foreign Sales Corporation Virgin Islands No. 24-25 Kongensgade Charlotte Amalie St Thomas, Virgin Islands 00801 USA Infotron Systems Worldwide Inc. Delaware, United States 103 Springer Building 3411 Silver Road Wilmington, Delaware 19810 USA Infotron Systems Italia, S.r.l. Italy Via Del Grana, Di Nervi, 42 00142 Roma, Italy Infotron Systems Limited England Systems House Poundbury Road Dorchester, England Jurisdiction of Name Incorporation ------------------------------------------ --------------- Infotron France S.A.R.L. France 58 rue Jean Bleuzen 92178 Vances Cedex France Infotron Systems France S.A. France 58 rue Jean Bleuzen 92178 Vances Cedex France Infotron Systems Sweden A.B. Sweden Nytorpsvagen 7 S-183 63 TABY Sweden REPORT DATE: JUNE 2, 1994 EX-23 7 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 and No. 33-50017); 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 27, 1994 on the consolidated financial statements and schedules 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 --------------------- Ottawa, Ontario KPMG Peat Marwick Thorne May 27, 1994 -----END PRIVACY-ENHANCED MESSAGE-----