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]
<PAGE>
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]
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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 $180,000 per
claim for the Company and a nil deductible for the individual.
The individual directors and officers of the Company and its
subsidiaries are insured for losses arising from claims against
them for certain of their acts, errors or omissions as such. The
Company is insured against any loss arising out of any liability
to indemnify a director or officer.
Summary Compensation Table
--------------------------
The following table presented in accordance with current
regulations under the Securities Act (Ontario) sets forth all
compensation paid for the fiscal years ended March 31, 1994, 1993
and 1992, in respect of each of the individuals who were, at
March 31, 1994, the Chief Executive Officer and the other four
most highly compensated executive officers of the Company, and
three additional individuals who were executive officers of the
Company but were not serving at March 31, 1994. During fiscal
1992, the Company changed the date of its fiscal year end from
July 31 to March 31 and the compensation disclosed in the Summary
Compensation Table for the fiscal 1992 year covers an eight-month
period.
<PAGE>
<TABLE> SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------- --------------
Awards
--------------
Securities
Other Annual* Under Options All Other
Name and Principal Positions Year Salary Bonus Compensation Granted Compensation
($) ($) ($) (#) ($)
(a) (b) (c) (d) (e) (f) (j)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 ---
<FN>
* 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 $16,992.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
Market Value of
% of Total Securities
Options Underlying
Securities Granted to Options on the
Under Options Employees in Exercise or Base Price Date of Grant
Name Granted Financial Year ($/Security) ($/Security) Expiration
Date
(a) (b) (c) (d) (e) (f)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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) $3.75 Cdn.(2) August 11, 2003
Corporation
R.F. Jerd
<FN>
(1) Under terms of the stock options granted in fiscal 1994, executive officers may elect a discount of 15 percent
from the exercise price shown.
(2) The Market Value of the common shares underlying the options was the closing market price on the day prior to the
date of grant.
</FN>
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
Unexercised Options at
Securities Acquired Fiscal Year End
on Exercise Aggregate Value Realized (#)
Name (#) ($) Exercisable/Unexercisable
(a) (b) (c) (d)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
<FN>
(1) Expiry date of options was extended beyond fiscal 1994 year end.
</FN>
</TABLE>
<PAGE>
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.
<PAGE>
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%
<PAGE>
(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.
<PAGE>
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.
<PAGE>
(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).
<PAGE>
*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).
<PAGE>
*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.
<PAGE>
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)
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
_____________________________________________________________________________________
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
======================================================================
<FN>
(1) Balance at beginning of fiscal 1994 was restated to conform with current year
presentation.
(2) Amounts primarily relate to foreign exchange movement.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
_________________________________________________________________________________
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
===================================================================
<FN>
(1) Balance at beginning of fiscal 1994 was restated to conform with current year
presentation.
(2) Amounts primarily relate to foreign exchange movement.
</FN>
</TABLE>
<PAGE>
<TABLE>
GANDALF TECHNOLOGIES INC.
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
_________________________________________________________________________________
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
<FN>
(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.
</FN>
</TABLE>
<PAGE>
<TABLE>
GANDALF TECHNOLOGIES INC.
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
_____________________________________________________________________________________________
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%
</TABLE>
<PAGE>
(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).
<PAGE>
*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).
<PAGE>
*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).
<PAGE>
*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.
<PAGE>
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.
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.
<PAGE>
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
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 -
<PAGE>
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
-------------- --------------
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 -
<PAGE>
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
------------ ------------
(INSIDE FRONT COVER)
<TABLE>
<CAPTION>
Selected Financial Data
Thousands of U.S. dollars except per share amounts
<S> <C> <C> <C> <C> <C> <C>
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
<FN>
** Year ended March 31
* For eight months only, ended March 31, 1992
_ Year ended July 31
</FN>
</TABLE>
<PAGE>
(PAGE 12)
<TABLE>
<CAPTION>
Consolidated Balance Sheet
<S> <C> <C>
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
=========================================================================================================
<FN>
Commitments and contingencies (note 21)
</FN>
</TABLE>
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>
(PAGE 13)
<TABLE>
<CAPTION>
Consolidated Statements of Income and Retained Earnings
<S> <C> <C> <C> <C>
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
=============================================================================================================
<FN>
(See accompanying notes to consolidated financial statements)
</FN>
</TABLE>
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>
(PAGE 14)
<TABLE>
<CAPTION>
Consolidated Statement of Changes in Financial Position
<S> <C> <C> <C> <C>
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
===============================================================================================================
<FN>
(See accompanying notes to consolidated financial statements)
</FN>
</TABLE>
<PAGE>
(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.
<PAGE>
(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>
(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.
<TABLE>
<CAPTION>
8 Months 9 Months
Ended Ended
March 31 April 27
1992 1991
---------------------------------------------------------------------------------------------
(Unaudited)
(Thousands of dollars)
<S> <C> <C>
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
=============================================================================================
</TABLE>
3. Inventories
<TABLE>
<CAPTION>
March 31 March 31
1994 1993
---------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C>
Raw materials $ 5,587 $ 7,167
Work-in-process 4,007 3,271
Finished goods 11,283 15,460
---------------------------------------------------------------------------------------------
$ 20,877 $ 25,898
=============================================================================================
</TABLE>
<PAGE>
4. Fixed Assets
<TABLE> <CAPTION>
March 31 March 31
1994 1993
----------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C>
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
========================================================================================
<FN>
Reductions in the cost of equipment and leasehold improvements and accumulated depreciation during fiscal 1994
primarily relate to writedowns associated with restructuring (note 14).
</FN>
<CAPTION>
5. Other Assets
March 31 March 31
1994 1993
----------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C>
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
========================================================================================
</TABLE>
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>
(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
<TABLE> <CAPTION>
March 31 March 31
1994 1993
------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C>
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
<CAPTION>
March 31 March 31
Description Interest Rate Security 1994 1993
------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
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
============================================================================================================
<FN>
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.
</FN>
</TABLE>
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>
(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:
<TABLE> <CAPTION>
Shares Dollars
----------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C>
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.
<CAPTION>
Shares Available Outstanding
for Grant Options
----------------------------------------------------------------------------------------
<S> <C> <C>
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
========================================================================================
<FN>
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.
</FN>
</TABLE>
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.
<TABLE><CAPTION>
March 31 March 31
1994 1993
----------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C>
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)
========================================================================================
</TABLE>
<PAGE>
(PAGE 19)
Notes (Cont'd)
13. Research and Development
<TABLE> <CAPTION>
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
--------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
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
<CAPTION>
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Thousands of dollars)
Restructuring $ 15,760 $ 5,547 $ 2,806 $ 686
Other 12,902 - 872 -
--------------------------------------------------------------------------------------------------------
$ 28,662 $ 5,547 $ 3,678 $ 686
========================================================================================================
</TABLE>
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.
<PAGE>
(PAGE20)
Notes (Cont'd)
16. Income Taxes
<TABLE> <CAPTION>
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
---------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Current:
Canadian $ (342) $ - $ - $ (345)
Foreign (800) - - (1,036)
Deferred:
Canadian - - - 43
Foreign - - - 932
---------------------------------------------------------------------------------------------------------
$ (1,142) $ - $ - $ (406)
=========================================================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
(Thousands of dollars)
<S> <C>
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
===========================================================================
</TABLE>
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>
(PAGE 21)
Notes (Cont'd)
18. Supplementary Expense Information to Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(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:
<CAPTION>
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
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)
==========================================================================================================
</TABLE>
20. Changes in Operating Working Capital
The decrease (increase) in operating working capital requirements is
computed as follows:
<TABLE>
<CAPTION>
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
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
===========================================================================================================
</TABLE>
<PAGE>
(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.
<PAGE>
Notes (Cont'd)
<TABLE>
<CAPTION>
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
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
==========================================================================================================
</TABLE>
<PAGE>
(PAGE 24)
Notes (Cont'd)
24. Quarterly Financial Information (Unaudited)
<TABLE> <CAPTION>
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)
<S> <C> <C> <C> <C>
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)
===============================================================================================================
<FN>
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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31, 1994 First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------------------------------------------------------------------------------------------------
(Thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C>
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)
==============================================================================================================
<FN>
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 $1.9 million included under "Administration and
general".
</FN>
</TABLE>
<PAGE>
(PAGE 25)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Introduction
The consolidated financial statements together with accompanying notes and
supplementary data, should be read as an integral part of this review.
These financial statements have been prepared by management in accordance
with accounting principles generally accepted in Canada, the application of
which, in the case of the Company, conform in all material respects for the
periods presented with accounting principles generally accepted in the
United States. All amounts are stated in U.S. dollars unless otherwise
indicated. "C$" 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.
<TABLE>
<CAPTION>
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
Percentage of Revenues 1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)%
==========================================================================================================
</TABLE>
<PAGE>
(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>
(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>
(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>
(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>
(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).
<TABLE>
<CAPTION>
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
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
---------------------------------------------------------------------------------------------------
<FN>
* 9 weeks
</FN>
</TABLE>
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.
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
<PAGE>
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
<PAGE>
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
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
