Gandalf Technologies Inc.
130 Colonnade Road South
Nepean, Ontario
K2E 7M4
November 14, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C.
USA 20549
Dear Sir/Madam:
Re: Gandalf Technologies Inc. -- Quarterly Report of Form 10-Q
Commission File No. 0-12643
Transmitted herewith in electronic format for filing with the
Securities and Exchange Commission is the Quarterly Report on
Form 10-Q for Gandalf Technologies Inc. for the quarter ended
September 30, 1995.
If you have any comments or questions with respect to the
foregoing, please contact the undersigned at (613) 274-6563.
Please acknowledge receipt of this letter and validation of
documents by means of Compuserve to:
User ID# 72741,124
CIK: 0000355876
Yours truly,
s/Diana Cianciusi
Corporate Counsel
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1995 Commission file number 0-12643
------------------ -------
GANDALF TECHNOLOGIES INC.
- ----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
ONTARIO, CANADA NOT APPLICABLE
- ---------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 COLONNADE ROAD SOUTH, NEPEAN, ONTARIO K2E 7M4
- ----------------------------------------- ----------------
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (613) 723-6500
--------------
NOT APPLICABLE
- ----------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report.
*Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding as at October 31, 1995 was 40,082,796.
<PAGE>
GANDALF TECHNOLOGIES INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Consolidated Balance Sheet 3
Consolidated Statement of Income 4
Consolidated Statement of Changes in
Financial Position 5
Consolidated Statement of Shareholders' Equity 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II OTHER INFORMATION 16
SIGNATURE PAGE 17
<PAGE>
<TABLE>
<CAPTION>
GANDALF TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEET
(Thousands of U.S. dollars)
Sept 30 March 31
1995 1995
-------- --------
(Unaudited)
<C> <S> <S>
ASSETS
Current assets:
Cash and cash equivalents $ 11,628 $ 11,817
Accounts receivable 26,218 26,880
Inventories (note 2) 14,754 15,230
Other 1,350 2,268
-------- --------
Total current assets 53,950 56,195
Fixed assets (note 3) 17,576 18,619
Goodwill, net of amortization of $3,063
(March 31, 1995: $2,952) 3,351 3,462
Other assets 2,611 3,232
-------- --------
Total assets $ 77,488 $ 81,508
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank operating lines (note 4) $ 3,855 $ 5,854
Accounts payable and accrued liabilities (note 5) 19,147 21,369
Deferred revenue 7,002 7,758
Current portion of long-term debt 300 157
-------- --------
Total current liabilities 30,304 35,138
Long-term debt 2,274 1,877
8.5% convertible debentures, due 2002 (note 6) 2,349 10,051
Shareholders' equity:
Capital stock:
Common shares, 40,056,196 issued and
outstanding (March 31, 1995: 35,238,064) (note 7) 47,220 91,644
Retained earnings (deficit) (note 7) 101 (52,364)
Cumulative translation adjustment (4,760) (4,838)
-------- --------
Total shareholders' equity 42,561 34,442
-------- --------
Total liabilities and shareholders' equity $ 77,488 $ 81,508
======== ========
(See accompanying notes to consolidated financial statements)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GANDALF TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Thousands of U.S. dollars except per share amounts)
13 Weeks Ended 26 Weeks Ended
September 30 September 30
--------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
<C> <S> <S> <S> <S>
Revenues:
Product $ 18,401 $ 21,754 $ 37,815 $ 42,499
Service 8,956 8,906 18,192 17,879
-------- ------- -------- --------
27,357 30,660 56,007 60,378
Operating expenses:
Cost of product sales 8,572 11,094 18,235 21,990
Service expenses 5,910 5,739 11,779 11,610
Sales and marketing 7,659 8,002 15,857 16,744
Administration and general 2,142 1,907 4,213 3,836
Research and development 2,839 2,581 5,434 4,994
Restructuring costs - - - 685
-------- ------- -------- --------
Income from operations 235 1,337 489 519
Interest expense (136) (823) (342) (1,621)
Interest income and foreign exchange (64) 88 (46) 145
-------- ------- -------- --------
Net income(loss) for the period $ 35 $ 602 $ 101 $ (957)
======== ======= ======== ========
Basic earnings (loss)
per share (note 8) $ - $ 0.02 $ - $ (0.03)
======== ======= ======== ========
Weighted average number of
shares outstanding (thousands) 39,553 28,088 38,592 28,080
======== ======= ======== ========
(See accompanying notes to consolidated financial statements)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GANDALF TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
(Unaudited)
(Thousands of U.S. dollars)
13 Weeks Ended 26 Weeks Ended
September 30 September 30
--------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
<C> <S> <S> <S> <S>
Operating activities:
Cash provided by operations (note 9) $ 1,169 $ 2,164 $ 2,745 $ 1,650
Increase in operating working
capital (note 10) (125) (797) (327) (2,967)
-------- -------- -------- --------
Cash provided by (applied to)
operating activities 1,044 1,367 2,418 (1,317)
-------- -------- -------- --------
Financing activities:
Issue of capital stock 1,878 - 8,301 -
Conversion of 8.5% convertible
debentures (note 6) (1,802) - (7,999) -
Other 149 (42) 451 (307)
-------- -------- -------- --------
Cash provided by (applied to)
financing activities 225 (42) 753 (307)
-------- -------- -------- --------
Investing activities:
Purchase of fixed assets (484) (611) (1,158) (1,285)
Proceeds on disposal of investment - - - 1,263
Proceeds on disposal of fixed assets - 109 - 109
Other (3) (94) (37) (93)
-------- -------- -------- --------
Cash applied to investing activities (487) (596) (1,195) (6)
-------- -------- -------- --------
Effect of exchange rate changes on
cash balances (85) 41 (166) 110
-------- -------- -------- --------
Increase (decrease) in cash position
in the period 697 770 1,810 (1,520)
Cash position at beginning of period 7,076 (7,529) 5,963 (5,239)
-------- -------- -------- --------
Cash position at end of period $ 7,773 $ (6,759) $ 7,773 $ (6,759)
======== ======== ======== ========
Cash position is comprised of:
Cash and cash equivalents $ 11,628 $ 5,845 $ 11,628 $ 5,845
Bank operating lines (3,855) (12,604) (3,855) (12,604)
-------- -------- -------- --------
$ 7,773 $ (6,759) $ 7,773 $ (6,759)
======== ======== ======== ========
(See accompanying notes to consolidated financial statements)
</TABLE>
<TABLE>
<CAPTION>
GANDALF TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(Thousands of U.S. dollars)
13 Weeks Ended 26 Weeks Ended
September 30 September 30
-------------------------------------------- --------------------------------------------
1995 1994 1995 1994
--------------------- ------------------- --------------------- ---------------------
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
---------- --------- --------- --------- ---------- -------- ---------- ---------
<C> <S> <S> <S> <S> <S> <S> <S> <S>
Capital Stock:
Consisting of an unlimited
number of common shares
authorized, without par value
Balance at beginning of period 38,934,289 $ 97,775 28,072,333 $ 79,811 35,238,064 $ 91,644 28,072,333 $ 79,811
Issued:
On conversion of debentures
(note 6) 1,026,378 1,734 - - 4,639,970 7,639 - -
On exercise of stock options 95,529 75 71,477 53 178,162 301 71,477 53
Reduction in stated capital
(note 7) - (52,364) - - - (52,364) - -
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Balance at end of period 40,056,196 $ 47,220 28,143,810 $ 79,864 40,056,196 $ 47,220 28,143,810 $ 79,864
========== ========= ========== ========= ========== ========= ========== =========
Retained Earnings (Deficit):
Balance at beginning of period $ (52,298) $ (55,329) $ (52,364) (53,770)
Net income (loss) 35 602 101 (957)
Reduction in stated capital
(note 7) 52,364 - 52,364 -
--------- -------- -------- ---------
Balance at end of period $ 101 $ (54,727) $ 101 $ (54,727)
========= ======== ======== =========
Cumulative Translation Adjustment:
Balance at beginning of period $ (4,947) $ (6,191) $ (4,838) $ (6,932)
Adjustment arising on
translation of foreign
subsidiaries' financial
statements to U.S. dollars 749 1,051 1,525 1,489
Adjustment relating to subsidiary
loans designated as long-term
investments (562) (744) (1,447) (441)
--------- --------- --------- ----------
Balance at end of period $ (4,760) $ (5,884) $ (4,760) $ (5,884)
========= ========= ========= ==========
(See accompanying notes to consolidated financial statements)
</TABLE>
<PAGE>
GANDALF TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
All amounts are stated in U.S. dollars unless otherwise indicated. C$
refers to Canadian dollars. Tabular amounts are in thousands.
1. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements at September 30, 1995 and for the
three and six month periods then ended are unaudited and reflect all
adjustments which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for
the interim periods. All such adjustments are of a normal recurring
nature.
2. INVENTORIES
<TABLE>
<CAPTION>
Sept 30 March 31
1995 1995
-------- --------
<C> <S> <S>
Raw materials $ 3,990 $ 3,336
Work-in-process 3,536 4,591
Finished goods 7,228 7,303
-------- --------
$ 14,754 $ 15,230
======== ========
</TABLE>
3. FIXED ASSETS
<TABLE>
<CAPTION>
Sept 30 March 31
1995 1995
-------- --------
<C> <S> <S>
Cost:
Land $ 226 $ 232
Buildings 4,746 4,725
Equipment 57,876 55,879
Leasehold improvements 1,966 1,930
--------- --------
64,814 62,766
Accumulated depreciation 47,238 44,147
-------- --------
Net book value $ 17,576 $ 18,619
======== ========
</TABLE>
4. BANK OPERATING LINES
The Company's authorized bank operating lines at September 30, 1995
totalled $19.2 million. At that time, there was sufficient margin
available to borrow $14.3 million and $3.9 million was being utilized.
Cash and short-term deposits held as of that date represented a further
$11.6 million of available cash resources, and cash and unused credit
lines totalled $22.0 million. Cash and unused credit lines at March 31,
1995 were $20.8 million. The authorized lines include two committed
credit facilities with a Canadian chartered bank and a demand facility
with a bank in the United Kingdom. They are secured by certain of the
accounts receivable, inventories and other assets of the Company and
bear interest at rates ranging from 0.5% to 2.5% above the respective
banks' prime or base rates.
<PAGE>
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
<C> <S> <S>
Sept 30 March 31
1995 1995
-------- --------
Trade accounts payable $ 7,247 $ 7,341
Payroll, commissions and related taxes 3,360 4,072
Accrued restructuring charges 2,210 3,033
Other payables 4,949 5,266
Income and other taxes payable 1,381 1,657
-------- --------
$ 19,147 $ 21,369
======== ========
</TABLE>
6. 8.5% CONVERTIBLE DEBENTURES
<TABLE>
<CAPTION>
Shares Issued
Aggregate Principal Amount % Upon Conversion
- ---------------------------------------------------------------------- ---------------
<C> <S> <S> <S> <S>
Balance at March 31, 1994 C$ 30,000 $ 21,681 100%
Converted during the year (15,939) (11,533) (53%) 6,782,519
Impact of foreign exchange - (97) -
- ----------------------------------------------------------------------
Balance at March 31, 1995 14,061 10,051 47%
Converted during the quarter (8,492) (6,197) (28%) 3,613,592
Impact of foreign exchange 201
- ----------------------------------------------------------------------
Balance at July 1, 1995 5,569 4,055 19%
Converted during the quarter (2,412) (1,802) (8%) 1,026,378
Impact of foreign exchange 96
- ----------------------------------------------------------------------
Balance at September 30, 1995 C$ 3,157 $ 2,349 11%
======================================================================
</TABLE>
In November 1992 the Company issued 8.5% convertible debentures with an
aggregate principal amount of C$30.0 million which mature in November
2002. At any time prior to maturity they are convertible into common
shares of the Company at the option of the holder at a conversion price
of C$2.35 (approximately $1.75) which would yield 425.53 common shares
for each C$1,000 (approximately $740) of principal amount of debentures
held. During the fourth quarter of fiscal 1995 approximately 53% of the
original amount of debentures were converted into common shares.
During the first two quarters of fiscal 1996 debentures with an
aggregate principal amount of $7,999,000 were converted into 4,639,970
common shares. The resulting increase in capital stock of $7,639,000
was determined as the sum of the principal amount of the debentures
converted ($7,999,000) plus interest accrued to the date of conversion
($135,000), net of the pro rata share of the associated unamortized
deferred financing costs ($495,000).
At September 30, 1995 approximately 11% of the original principal amount
of debentures remained outstanding which, if converted, would result in
a maximum of 1,343,404 additional common shares being issued. The
remaining outstanding debentures represent an unsecured direct
obligation of the Company. After November 10, 1995 any outstanding
debentures are redeemable by the Company provided that for the 20
trading days ending with the fifth trading day preceding the date on
which the notice of redemption is first given, the weighted average
market price at which the shares have traded on the TSE and NASDAQ is
not less than 125% of the conversion price. The Company has filed a
notice of its intention to redeem all outstanding debentures on November
13, 1995.
<PAGE>
7. REDUCTION IN STATED CAPITAL
On August 10, 1995 the shareholders of the Company passed a special
resolution authorizing a reduction in statutory stated capital in
respect of the common shares by $52,364,000. This resulted in a
corresponding reduction in the accumulated deficit as shown on the
consolidated balance sheet and the consolidated statement of
shareholders' equity.
8. EARNINGS PER SHARE
Basic earnings (loss) per share figures are presented on the
consolidated statement of income. These figures are calculated using
the monthly weighted average number of common shares outstanding during
the period. Fully diluted earnings per share information has not been
presented as potential conversions are anti-dilutive.
For the six month period ended September 30, 1995 adjusted earnings per
share were not materially different from the basic earnings per share
figure. The calculation assumes that the conversion of debentures,
which occurred during the first two quarters of fiscal 1996, had
occurred at the beginning of the year.
9. CASH PROVIDED BY OPERATIONS
Cash provided by operations is computed as follows:
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
September 30 September 30
-------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
<C> <S> <S> <S> <S>
Income from operations $ 235 $ 1,337 $ 489 $ 519
Depreciation and amortization 1,129 1,527 2,626 2,737
Interest paid (131) (788) (324) (1,545)
Interest income and foreign exchange (64) 88 (46) 145
Other - - - (206)
-------- -------- -------- --------
$ 1,169 $ 2,164 $ 2,745 $ 1,650
======== ======== ======== ========
</TABLE>
<PAGE>
10. INCREASE IN OPERATING WORKING CAPITAL
The increase in operating working capital is computed as follows:
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
September 30 September 30
--------------------- ------------------
1995 1994 1995 1994
-------- -------- -------- --------
<C> <S> <S> <S> <S>
Accounts receivable $ 5 $ (505) $ 662 $ (925)
Inventories 146 1,720 476 3,488
Prepaid expenses 746 238 918 97
Accounts payable and accrued
liabilities (516) (2,217) (1,818) (6,218)
Income taxes payable (298) 47 (278) 225
Deferred revenue (719) (630) (756) (561)
Foreign currency equity adjustment 511 550 469 927
-------- -------- -------- --------
$ (125) $ (797) $ (327) $ (2,967)
======== ======== ======== ========
</TABLE>
<PAGE>
11. UNITED STATES ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada ("Canadian
GAAP") which in the case of the Company differ in the following material
respects from those generally accepted in the United States ("U.S.
GAAP").
(a) Under U.S. GAAP, financing and investing activities not
involving a receipt or outlay of cash are excluded from the
consolidated statement of changes in financial position.
Accordingly, the following financing activities would not be
presented in the consolidated statement of changes in financial
position but would be shown supplementally.
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
September 30 September 30
--------------------- ------------------
1995 1994 1995 1994
-------- -------- -------- --------
<C> <S> <S> <S> <S>
Conversion of 8.5% convertible
debentures $ (1,802) - $ (7,999) -
Issue of capital stock on
conversion of debentures $ 1,802 - 7,999 -
</TABLE>
(b) Under U.S. GAAP, bank operating lines would not be included as a
component of the cash position presented in the consolidated
statement of changes in financial position. The change in bank
operating lines would be presented as a financing activity and
would therefore be included in the determination of the increase
or decrease in cash position in the period.
(c) U.S. GAAP requires the calculation of primary earnings per
share. This figure is not materially different from the basic
earnings per share figure calculated under Canadian GAAP.
(d) Reductions in stated capital and deficit, as described under note 7
are not recorded under U.S. GAAP.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
- ------------
The consolidated financial statements for the second quarter ended
September 30, 1995, together with accompanying notes, should be read as an
integral part of this review. These financial statements have been
prepared by management in accordance with accounting principles generally
accepted in Canada.
Note 11 to the consolidated financial statements describes the impact, in
the case of the Company, of differences between accounting principles
generally accepted in Canada and the United States. All amounts are stated
in U.S. dollars unless otherwise indicated. C$ refers to Canadian dollars.
References to years are to fiscal years ended March 31.
Results of Operations - Second Quarter Ended September 30, 1995
- ---------------------------------------------------------------
The following table sets forth items derived from the quarterly
consolidated statements of income as a percentage of revenues for the
quarter ended September 30, 1995 and for each of the preceding four
quarters. The column in the table entitled "Percentage Change Quarter 2,
1996 vs 1995" represents the percentage change, either favourable or
(unfavourable), in the dollar amount of such items for the second quarter
of 1996 compared with the second quarter of 1995.
<TABLE>
<CAPTION>
Percentage
Fiscal 1995 Fiscal 1996 Change
------------------------------- -------------------- Quarter 2
Quarter 2 Quarter 3 Quarter 4 Quarter 1 Quarter 2 1996 vs. 1995
--------- --------- --------- --------- --------- -------------
(Thousands of dollars)
<C> <S> <S> <S> <S> <S> <S>
Revenues $30,660 $29,751 $30,382 $28,650 $27,357 (10.8)%
======= ======= ======= ======= ======= =======
(Percentage of Revenues)
Revenues:
Product 71.0% 68.4% 68.9% 67.8% 67.3% (15.4)%
Service 29.0 31.6 31.1 32.2 32.7 0.6
------- ------- ------- ------- -------
100.0% 100.0% 100.0% 100.0% 100.0% (10.8)
======= ======= ======= ======= =======
Gross Margin:
Product 49.0% 47.7% 47.6% 50.2% 53.4% (7.8)
Service 35.6 38.7 37.0 36.5 34.0 (3.8)
Combined 45.1 44.8 44.3 45.8 47.1 (6.9)
Expenses:
Sales & marketing 26.1 26.4 28.1 28.6 28.0 (4.3)
Administration & general 6.2 6.6 5.7 7.2 7.8 12.3
Research & development 8.4 8.9 8.4 9.1 10.4 9.9
------- ------- ------- ------- -------
Income from operations 4.4 2.9 2.1 0.9 0.9
Gain on sale of portfolio
investment - 6.8 - - -
Interest expense (2.7) (2.7) (1.8) (0.7) (0.5)
Interest income and
foreign exchange 0.3 0.2 0.4 - (0.3)
------- ------- ------- ------- -------
Net income 2.0% 7.2% 0.7% 0.2% 0.1%
======= ======= ======= ======= =======
</TABLE>
<PAGE>
Revenues
- --------
The following two tables set forth product and service revenues by
geographic segment for the quarter ended September 30, 1995 and for each of
the preceding four quarters. The table also includes the change in
revenues, expressed as a percentage, in the second quarter of 1996 compared
to the corresponding period of 1995.
<TABLE>
<CAPTION>
Percentage
Fiscal 1995 Fiscal 1996 Change
------------------------------- --------------------- Quarter 2
Quarter 2 Quarter 3 Quarter 4 Quarter 1 Quarter 2 1996 vs. 1995
--------- --------- --------- --------- --------- -------------
(Thousands of dollars)
<C> <S> <S> <S> <S> <S> <S>
Product Revenues:
United States $ 5,804 $ 6,048 $ 5,578 $ 5,733 $ 6,243 7.6%
Canada 4,665 3,491 3,443 3,438 3,642 (21.9)
United Kingdom 6,717 5,129 6,474 4,905 3,783 (43.7)
Holland/France 1,759 2,774 2,350 2,853 2,272 29.2
International markets 2,809 2,921 3,094 2,485 2,461 (12.4)
------- ------- ------- ------- -------
$21,754 $20,363 $20,939 $19,414 $18,401 (15.4)%
======= ======= ======= ======= =======
Service Revenues:
United States $ 2,281 $ 2,261 $ 2,370 $ 2,159 $ 2,078 (8.9%)
Canada 1,519 1,943 1,676 1,747 1,598 5.2
United Kingdom 3,469 3,519 3,704 3,502 3,445 (0.7)
Holland/France 1,637 1,665 1,693 1,828 1,835 12.1
------- ------- ------- ------- -------
$ 8,906 $ 9,388 $ 9,443 $ 9,236 $ 8,956 0.6%
======= ======= ======= ======= =======
</TABLE>
The following three tables set forth, for the twenty-six weeks ended
September 30, 1995 and for each of the two preceding full fiscal years,
product revenues by geographic segment and product group expressed as a
percentage of total product revenues. These amounts have been calculated
assuming constant rates of exchange in the translation of foreign currency
amounts to U.S. dollars. Remote access products primarily include
internetworking products sold under the names Gandalf Xpressway (TM),
XpressStack (TM) and XpressConnnect (TM) LANLine. Remote access products
represent a subset of the Company's total LAN internetworking product line.
The other three product groups shown below represent traditional product
areas for the Company which include wide area networking (WAN) backbone
products; modems, multiplexers and local connectivity products; and other
products which primarily represent third party products.
<TABLE>
<CAPTION>
Modems/
Multiplexers/
Remote WAN Local
Access Backbone Connectivity Other Total
------- --------- ------------- ------- -------
<C> <S> <S> <S> <S> <S>
Fiscal 1994:
United States 7% 3% 9% 7% 26%
Canada 5 1 9 2 17
United Kingdom 6 6 10 5 27
Holland/France 3 1 4 3 11
International markets 4 7 5 3 19
--- --- --- --- ---
25% 18% 37% 20% 100%
=== === === === ===
<PAGE>
Modems/
Multiplexers/
Remote WAN Local
Access Backbone Connectivity Other Total
------- --------- ------------- ------- -------
Fiscal 1995:
United States 15% 1% 8% 4% 28%
Canada 9 2 7 1 19
United Kingdom 12 3 9 4 28
Holland/France 6 1 3 1 11
International markets 7 3 2 2 14
--- --- --- --- ---
49% 10% 29% 12% 100%
=== === === === ===
Fiscal 1996 (Year to Date):
United States 25% 2% 5% 1% 33%
Canada 12 2 5 - 19
United Kingdom 11 2 7 3 23
Holland/France 7 1 2 2 12
International markets 7 2 4 - 13
--- --- --- --- ---
62% 9% 23% 6% 100%
=== === === === ===
</TABLE>
Sales of the Company's remote access products in the United States
market during the second quarter of 1996 were $5.2 million, 34% higher
than the first quarter of 1996 and 92% higher than the second quarter a
year ago. Remote access products represented more than 80% of revenues
from the sale of products in the U.S. market during the second quarter
of 1996. The corresponding figures for the full 1995 and 1994 fiscal
years were 55% and 26% respectively.
Revenues in the United Kingdom during the first half of 1996 have been
affected by a decline in sales in the three traditional product areas,
as described in the paragraph preceding the three tables above.
Revenues from the sale of these products, representing more than half of
product revenues in this market during 1995, declined 51% from the
second quarter of 1995 to the second quarter of 1996.
Gross Margin
- ------------
The gross margin on product revenues (product revenues minus the cost of
product sales expressed as a percentage of product revenues) was 53.4%
in the second quarter of 1996 compared with 49.0% in the second quarter
of 1995. In general, the combined effect of lower manufacturing costs
following restructuring actions taken in the fourth quarter of 1994 and
the first quarter of 1995 and a more favourable product mix, has
resulted in an improvement in the gross margin earned on product
revenues. However, quarterly fluctuations, such as the improvement in
the gross margin on product revenues in both the first and second
quarters of 1996 compared to the four quarters of 1995 may not be
indicative of a trend in future performance.
The gross margin on service revenues (service revenues less service
expenses expressed as a percentage of service revenues) was 34.0% in the
second quarter of 1996 and 35.6% in the second quarter a year ago.
Quarterly fluctuations in the level of service revenues during fiscal
1995 and 1996 have been the primary factor influencing changes in the
gross margin on service revenues.
The combined gross profit (total revenues minus cost of product sales
and service expenses) was $12.9 million in the second quarter of 1996,
compared to $13.8 million reported in the second quarter of 1995.
<PAGE>
Operating Expenses
- ------------------
Sales and marketing, and administration and general expenses were $9.8
million in the second quarter of 1996, compared to $9.9 million reported
in the second quarter a year ago. For the first two quarters of 1996,
sales and marketing, and administration and general expenses were $20.0
million, a decrease of $0.5 million over the corresponding period in the
prior fiscal year. This decrease occurred primarily as a result of
expense reductions following a functional realignment at the end of the
first quarter of 1995.
Research and development expenses increased by 9.9% from the second
quarter of 1995 to the second quarter of 1996. This increase is
primarily attributable to accruals established for the repayment of
government funding under the MSDP program as described below.
Since 1991, the Company has received funding of approximately $1.4
million and $2.6 million respectively under two projects approved
through the Canadian federal government's Microelectronics and Systems
Development Program ("MSDP"). The amount that is potentially repayable
is calculated without interest as a royalty on revenues earned in the 10
years following the project completion date and is limited to the amount
of funding received.
The first MSDP project was completed on March 31, 1995 and the Company
began accruing the corresponding royalty at the beginning of the current
fiscal year. The royalty for this project is 2% of consolidated gross
revenues from the resulting products. The second MSDP project was
completed on September 30, 1995 and the Company will commence accruing
the corresponding royalty in October 1995. The royalty for this project
is 1% of the Canadian subsidiary's total product revenues. The royalty
payments are due annually between three and six months after the
anniversary of the project completion date. The Company expects that the
funding will be fully repaid within three to five years.
During the first quarter of fiscal 1995, the company recorded
restructuring costs of $0.7 million which were associated with the
elimination of approximately 70 positions in connection with an internal
functional realignment.
Income from Operations
- ----------------------
The Company reported income from operations of $0.2 million on revenues
of $27.4 million for the second quarter of 1996. For the second quarter
of 1995 the Company reported income from operations of $1.3 million on
revenues of $30.1 million. Income from operations for the twenty-six
weeks ended September 30, 1995 was $0.5 million, essentially unchanged
from the same period in the previous fiscal year.
Interest Expense
- ----------------
Interest expense for the second quarter of 1996 was $0.1 million
compared with $0.8 million in the second quarter of 1995. Interest
expense has declined primarily as a result of the conversion to common
shares of 8.5% convertible debentures during the period from the fourth
quarter of 1995 to the second quarter of 1996. The Company's obligation
to pay interest is limited only to those debentures which are
outstanding as of the semi-annual interest payment dates on May 10 and
November 10 each year. The Company has filed a notice of its intention
to redeem all outstanding debentures on November 13, 1995. Lower
utilization of bank operating lines in the second quarter of 1996
compared to the second quarter a year ago has also contributed to the
year-over-year decrease in interest expense.
Net Income
- ----------
Net income for the second quarter of 1996 was $35,000, or breakeven on a
per share basis, versus net income of $602,000 or $0.02 per share in the
second quarter a year ago. The Company reported net income of $0.1
million for the twenty-six weeks ended September 30, 1995, compared to a
net loss of $1.0 million for the corresponding period in 1995.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company recorded positive cash flow of $0.7 million during the
second quarter of 1996. During the fifteen month period since July 1,
1994 (represented by the final three quarters of 1995 and the first two
quarters of 1996) the Company has reported positive cash flow of $15.3
million of which $14.2 million has been provided by operating
activities. At September 30, 1995 the net cash position (cash and cash
equivalents net of bank operating lines) was $7.8 million compared with
a net cash position of $6.0 million at March 31, 1995 and net bank
borrowings (bank operating lines net of cash and cash equivalents) of
$6.8 million at September 30, 1994.
At September 30, 1995, the Company's authorized bank operating lines
totalled $19.2 million. This included $15.6 million from two committed
credit facilities with a Canadian chartered bank bearing interest at the
bank's prime rate plus 0.5%. The additional authorized amount of $3.6
million related to a demand facility with a bank in the United Kingdom.
The interest rate varies depending on borrowing levels and ranges from
0.5% to 2.5% above the bank's base rate.
The bank operating lines are secured by certain of the accounts
receivable, inventories and other assets of the Company. The amount
available for borrowing at any time under the facilities is based on
margin formulas relating to levels of accounts receivable, inventories
and other bank covenants. Under such formulas, $14.3 million was
available to the Company at September 30, 1995 and $3.9 million was
being utilized. Cash and cash equivalents held as of that date
represented a further $11.6 million of cash resources available to the
Company. Cash and unused credit lines totalled $22.0 million at
September 30, 1995, compared to $20.8 million at March 31, 1995 and
$10.5 million at September 30, 1994.
During the fourth quarter of 1995 and the first two quarters of 1996
approximately 89% of the original principal amount of the 8.5%
convertible debentures, issued in November 1992, were converted to
common shares of the Company in accordance with the terms of the
debentures. At September 30, 1995 approximately 11% of the original
principal amount of debentures remained outstanding which, if converted,
would result in a maximum of 1,343,404 additional common shares being
issued. The remaining outstanding debentures represent an unsecured
direct obligation of the Company. After November 10, 1995 any
outstanding debentures are redeemable by the Company provided that for
the 20 trading days ending with the fifth trading day preceding the date
on which the notice of redemption is first given, the weighted average
market price at which the shares have traded on the TSE and NASDAQ is
not less than 125% of the conversion price. The Company has filed
notice with the trustee under the debenture indenture to redeem all
remaining outstanding debentures on November 13, 1995. The Company's
common shares have recently traded at more than three times the
conversion price associated with the debentures and, accordingly, the
Company anticipates that the remaining outstanding will likely be
submitted for conversion rather than redemption.
The Company believes that its current financial base together with
available credit facilities provides sufficient financial resources to
meet its short-term operating requirements. The Company currently
anticipates that its long-term cash requirements will be satisfied
through future operating cash flows.
<PAGE>
II - OTHER INFORMATION
- ----------------------
Item 4 - Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------------------
At the Annual Meeting of Shareholders held August 10, 1995, resolutions
were adopted for
(a) the election of directors as follows:
Name For Withheld
Desmond Cunningham 27,173,382 20,467
Alex Curran 27,189,382 4,467
John Gamba 27,185,932 7,917
Charles Gardner 27,190,382 3,467
Donald Gleklen 27,179,437 14,412
Robert Keith 27,191,382 2,467
A. Graham Sadler 27,191,382 2,467
Albert Sinyor 27,186,532 7,317
Thomas A. Vassiliades 27,190,382 3,467
(b) the appointment of KPMG Peat Marwick Thorne as auditors, (votes for -
27,162,575; withheld - 29,196),
(c) amendments to quorum requirements reducing the quorum for the
transaction of business at any meeting of the shareholders from 2
persons not holding less than 50% of the outstanding shares of the
Company to 2 persons not holding less than 30% of the outstanding
shares of the Company, (votes for - 14,247,341; against - 737,328),
(d) amendments to Stock Option Plan for Executives and Directors (votes
for - 13,264,158; against - 2,024,443) to:
increase by 1,800,000 common shares to 5,234,020 the maximum
aggregate number of commons shares of the Company that may be
issued under the stock option plan;
grant 960,000 options to purchase common shares to eleven members
of the Company's senior management;
grant each director of the Company 10,000 options to purchase
common shares upon their initial election to the Board, and a
further 5,000 options upon re-election, to a maximum of 50,000
options per director;
grant 80,000 optioned shares to the members of the Board of
Directors,
(e) amendments to the Employee Stock Purchase Plan to remove the limit of
10% of issued capital on shares reserved for issuance under this plan
and to reserve for issuance an additional 200,000 shares of the
Company, (votes for - 13,531,831; against - 1,464,923),
(f) special resolution approving the reduction of stated capital by
$52,364,000 and as a consequence, eliminating the accumulated deficit
of the Company, (votes for - 14,845,055; against - 147,101).
Item 6(b) - Report on Form 8-K
- ------------------------------
There were no reports on Form 8-K filed for the quarter ended September 30,
1995.
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GANDALF TECHNOLOGIES INC.
November 9, 1995 BY: s/THOMAS A. VASSILIADES
- ------------------------- ----------------------------
Date Thomas A. Vassiliades
Chairman, President and
Chief Executive Officer
November 9, 1995 BY: s/WALTER R. MACDONALD
- -------------------------- ---------------------------
Date Walter R. MacDonald
Vice President, Finance and
Chief Financial Officer
