<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 28, 1996 Commission file number 0-12643
------------------ -------
GANDALF TECHNOLOGIES INC.
- ----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
ONTARIO, CANADA NOT APPLICABLE
- ---------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 COLONNADE ROAD SOUTH, NEPEAN, ONTARIO K2E 7M4
- ----------------------------------------- ----------------
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (613) 274-6500
--------------
NOT APPLICABLE
- ----------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report.
*Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding as at October 31, 1996 was
43,356,270.
<PAGE>
GANDALF TECHNOLOGIES INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in
Financial Position 5
Consolidated Statements of Shareholders' Equity 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II OTHER INFORMATION 19
SIGNATURE PAGE 20
<PAGE>
<TABLE>
<CAPTION>
GANDALF TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of US dollars)
Sept 28 March 31
1996 1996
-------- --------
<C> <S> <S>
ASSETS
Current assets:
Cash and cash equivalents $ 6,519 $ 13,602
Accounts receivable 17,466 28,694
Inventories (note 2) 15,635 13,491
Other 1,120 1,867
-------- --------
Total current assets 40,740 57,654
Fixed assets (note 3) 14,207 16,253
Goodwill, net of amortization of $3,277
(March 31, 1996: $3,172) 3,137 3,242
Other assets 2,173 2,226
-------- --------
Total assets $ 60,257 $ 79,375
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank operating lines (note 4) $ 1,360 $ -
Accounts payable and accrued liabilities (note 5) 17,576 21,755
Deferred revenue 5,660 6,178
Current portion of long-term debt 540 360
-------- --------
Total current liabilities 25,136 28,293
Long-term debt 2,702 2,496
Shareholders' equity:
Capital stock:
Common shares, 43,349,604 issued and
outstanding (March 31, 1996: 42,939,523) (note 6) 55,637 54,198
Retained earnings (deficit) (note 6) (17,383) 260
Cumulative translation adjustment (5,835) (5,872)
-------- --------
Total shareholders' equity 32,419 48,586
-------- --------
Total liabilities and shareholders' equity $ 60,257 $ 79,375
======== ========
(See accompanying notes to consolidated financial statements)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GANDALF TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Thousands of US dollars except per share amounts)
13 Weeks Ended 26 Weeks Ended
September 28 September 28
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<C> <S> <S> <S> <S>
Revenues:
Product $ 8,082 $ 18,401 $ 18,999 $ 37,815
Service 7,145 8,956 14,565 18,192
-------- -------- -------- --------
15,227 27,357 33,564 56,007
Operating expenses:
Cost of product sales 5,873 8,572 12,304 18,235
Service expenses 4,942 5,910 10,249 11,779
Sales and marketing 7,740 7,659 15,034 15,857
Administration and general 2,203 2,142 4,481 4,213
Research and development 3,110 2,839 6,114 5,434
Restructuring costs (note 7) - - 3,010 -
-------- -------- -------- --------
Income (loss) from operations (8,641) 235 (17,628) 489
Interest expense (39) (136) (86) (342)
Interest income and foreign exchange 17 (64) 71 (46)
-------- -------- -------- --------
Net income (loss) for the period $ (8,663) $ 35 $(17,643) $ 101
======== ======== ======== ========
Basic earnings (loss) per share (note 8) $ (0.20) $ - $ (0.41) $ -
======== ======== ======== ========
Weighted average number of
shares outstanding (thousands) 43,319 39,553 43,202 38,592
======== ======= ======== ========
(See accompanying notes to consolidated financial statements)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GANDALF TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Unaudited)
(Thousands of US dollars)
13 Weeks Ended 26 Weeks Ended
September 28 September 28
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<C> <S> <S> <S> <S>
Operating activities:
Cash provided by (applied to)
operations (note 9) $ (7,608) $ 1,169 $(14,066) $ 2,745
Decrease (increase) in operating
working capital (note 10) 2,424 (125) 5,117 (327)
-------- -------- -------- --------
Cash provided by (applied to)
operating activities (5,184) 1,044 (8,949) 2,418
-------- -------- -------- --------
Financing activities:
Issue of capital stock 273 1,878 1,439 8,301
Conversion of debentures (note 11) - (1,802) - (7,999)
Other 293 149 385 451
-------- -------- -------- --------
Cash provided by financing activities 566 225 1,824 753
-------- -------- -------- --------
Investing activities:
Purchase of fixed assets (697) (484) (1,307) (1,158)
Other (22) (3) (7) (37)
-------- -------- -------- --------
Cash applied to investing activities (719) (487) (1,314) (1,195)
-------- -------- -------- --------
Effect of exchange rate changes on
cash balances 18 (85) (4) (166)
-------- -------- -------- --------
Increase (decrease) in cash position
in the period (5,319) 697 (8,443) 1,810
Cash position at beginning of period 10,478 7,076 13,602 5,963
-------- -------- -------- --------
Cash position at end of period $ 5,159 $ 7,773 $ 5,159 $ 7,773
======== ======== ======== ========
Cash position is comprised of:
Cash and cash equivalents $ 6,519 $ 11,628 $ 6,519 $ 11,628
Bank operating lines (1,360) (3,855) (1,360) (3,855)
-------- -------- --------- --------
$ 5,159 $ 7,773 $ 5,159 $ 7,773
======== ======== ======== ========
(See accompanying notes to consolidated financial statements)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GANDALF TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(Thousands of US dollars)
13 Weeks Ended 26 Weeks Ended
September 28 September 28
-------------------------------------------- --------------------------------------------
1996 1995 1996 1995
--------------------- -------------------- --------------------- ---------------------
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 (note 6) 43,264,941 $ 55,364 38,934,289 $ 97,775 42,939,523 $ 54,198 35,238,064 $ 91,644
Issued:
On exercise of stock options 45,932 81 95,529 75 371,350 1,247 178,162 301
On conversion of debentures (note 11) - - 1,026,378 1,734 - - 4,639,970 7,639
Other 38,731 192 - - 38,731 192 - -
Reduction in stated capital (note 6) - - - (52,364) - - - (52,364)
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Balance at end of period 43,349,604 $ 55,637 40,056,196 $ 47,220 43,349,604 $ 55,637 40,056,196 $ 47,220
========== ========= ========== ========= ========== ========= ========== =========
Retained Earnings (Deficit):
Balance at beginning of period $ (8,720) $ (52,298) $ 260 $ (52,364)
Net income (loss) (8,663) 35 (17,643) 101
Reduction in stated capital (note 6) - 52,364 - 52,364
--------- --------- --------- ---------
Balance at end of period $ (17,383) $ 101 $ (17,383) $ 101
========= ========= ========= =========
Cumulative Translation Adjustment:
Balance at beginning of period $ (5,836) $ (4,947) $ (5,872) $ (4,838)
Adjustment arising on translation of
foreign subsidiaries' financial
statements to US dollars 38 749 (72) 1,525
Adjustment relating to subsidiary loans
designated as long-term investments (37) (562) 109 (1,447)
--------- --------- --------- ---------
Balance at end of period $ (5,835) $ (4,760) $ (5,835) $ (4,760)
========= ========= ========= =========
(See accompanying notes to consolidated financial statements)
</TABLE>
<PAGE>
GANDALF TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
All amounts are stated in US dollars unless otherwise indicated. C$
refers to Canadian dollars. Tabular amounts are in thousands.
References to years are to fiscal years ending March 31.
1. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements at September 28, 1996 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.
2. INVENTORIES
<TABLE>
<CAPTION>
Sept 28 March 31
1996 1996
-------- --------
<C> <S> <S>
Raw materials $ 4,263 $ 2,905
Work-in-process 3,796 3,821
Finished goods 7,576 6,765
-------- --------
$ 15,635 $ 13,491
======== ========
</TABLE>
3. FIXED ASSETS
<TABLE>
Sept 28 March 31
1996 1996
-------- --------
<C> <S> <S>
Cost:
Land $ 223 $ 218
Buildings 3,316 4,627
Equipment 59,794 58,336
Leasehold improvements 1,946 1,966
--------- --------
65,279 65,147
Accumulated depreciation 51,072 48,894
-------- --------
Net book value $ 14,207 $ 16,253
======== ========
</TABLE>
4. BANK OPERATING LINES
At September 28, 1996 the Company's authorized bank lines totaled $20.9
million under two committed credit facilities provided by a Canadian
chartered bank which bear interest at the bank's prime rate plus 0.5% to
1.5%. The authorized credit lines are secured by certain of the accounts
receivable, inventories and other assets of the Company. The amount
available for borrowing at any time is based on margin formulas relating to
levels of accounts receivable, inventories and other bank covenants. Based
on the margin formulas, $12.2 million was available to the Company at
September 28, 1996 of which $1.3 million was being utilized. Cash and cash
equivalents held as of that date represented a further $6.5 million of cash
resources available to the Company. Cash and cash equivalents and unused
credit lines totaled $17.4 million at September 28, 1996.
Financial covenants contained in one of the bank credit agreements measure
on a quarterly basis, among other things, the tangible net worth, the ratio
of liabilities to tangible net worth and the current ratio of the Company.
Subsequent to the end of the second quarter of 1997, the bank retroactively
amended one of the financial covenants at September 28, 1996 measuring the
tangible net worth of the Company, which resulted in the Company remaining
compliant with this covenant. In addition, the Company obtained waivers
from the bank of a technical default under one of the credit agreements at
September 28, 1996, and the resulting cross-default under the other
agreement, which occurred as a result of the reported net loss for the
second quarter of 1997 exceeding the maximum permitted quarterly net loss
amount. The bank had previously provided a waiver under the same sections
of the agreements in respect of the reported net loss for the first quarter
of 1997. The Company is in full compliance with all other terms of its
bank credit agreements.
<PAGE>
<TABLE>
<CAPTION>
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<C> <S> Sept 28 <S> March 31
1996 1996
-------- --------
Trade accounts payable $ 6,208 $ 7,376
Payroll, commissions and related taxes 2,714 3,873
Accrued restructuring charges 2,742 2,747
Other payables 4,362 6,434
Income and other taxes payable 1,550 1,325
-------- --------
$ 17,576 $ 21,755
======== ========
</TABLE>
6. REDUCTION IN STATED CAPITAL
On August 10, 1995, during the second fiscal quarter of 1996, the
shareholders of the Company passed a special resolution authorizing a
reduction in statutory stated capital in respect of the common shares
by $52,364,000. This resulted in a corresponding reduction in the
accumulated deficit as shown on the consolidated balance sheets and the
consolidated statements of shareholders' equity.
7. RESTRUCTURING COSTS
Over the past several years the Company has undertaken significant
restructuring activities in order to reposition the Company in line with
its strategy, reduce costs and improve competitiveness. The size of the
Company's workforce is currently less than 700 employees, approximately
one-third the level of five years ago.
Restructuring charges of $3.0 million recorded in the first quarter of
1997 included a write down following a review of the net carrying amount
of the Company's manufacturing facilities in which it was determined, in
conjunction with the decision to enter into an agreement with a third
party to provide the Company with a high-volume manufacturing
capability, that the net carrying amount exceeded the estimated net
recoverable amount. Restructuring charges also included provisions for
future lease costs on sales offices made redundant in connection with
changing the Company's sales distribution model from direct sales to
multiple channels of distribution including: national resellers,
operating telephone companies, Internet service providers, OEMs, system
partners and corporate accounts.
<PAGE>
8. EARNINGS PER SHARE
Basic earnings (loss) per share figures are presented on the
consolidated statements of income. These figures are calculated using
the monthly weighted average number of common shares outstanding during
the period. Fully diluted earnings per share information has not been
presented as potential conversions are anti-dilutive.
For the 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 1996, had occurred at
the beginning of the year.
9. CASH PROVIDED BY OPERATIONS
Cash provided by (applied to) operations is computed as follows:
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
September 28 September 28
-------------------- --------------------
1996 1995 1996 1995
-------- ------- --------- --------
<C> <S> <S> <S> <S>
Income (loss) from operations $ (8,641) $ 235 $ (17,628) $ 489
Depreciation and amortization 1,055 1,129 2,207 2,626
Writedowns not involving an
outlay of cash - - 1,370 -
Interest paid (39) (131) (86) (324)
Interest income and
foreign exchange 17 (64) 71 (46)
-------- -------- --------- -------
$ (7,608) $ 1,169 $ (14,066) $ 2,745
======== ======== ========= ========
</TABLE>
<PAGE>
10. DECREASE IN OPERATING WORKING CAPITAL
The decrease (increase) in operating working capital is computed as follows:
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
September 28 September 28
-------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<C> <S> <S> <S> <S>
Accounts receivable $ 4,765 $ 5 $ 11,228 $ 662
Inventories 1,271 146 (2,144) 476
Prepaid expenses 436 746 747 918
Accounts payable and accrued
liabilities (3,903) (516) (4,404) (1,818)
Income taxes payable 275 (298) 223 (278)
Deferred revenue (376) (719) (518) (756)
Foreign currency equity adjustment (44) 511 (15) 469
-------- -------- -------- --------
$ 2,424 $ (125) $ 5,117 $ (327)
======== ======== ======== ========
</TABLE>
11. 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 year (14,061) (10,336) (47) 5,983,372
Impact of foreign exchange - 285 -
- ----------------------------------------------------------------------
Balance at March 31, 1996 C$ - $ - -%
======================================================================
</TABLE>
In November 1992 the Company issued 8.5% convertible debentures with an
aggregate principal amount of C$30.0 million which were due to mature in
November 2002. At any time prior to maturity they were convertible into
common shares of the Company at the option of the holder at a conversion
price of C$2.35 (approximately $1.72) which would yield 425.53 common
shares for each C$1,000 (approximately $732) of principal amount of
debentures held. During 1995 debentures with an aggregate principal
amount of $11,533,000 were converted into 6,782,519 common shares.
During the first two quarters of 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). During the third quarter of 1996
all remaining debentures were converted into 1,343,402 common shares.
<PAGE>
12. UNITED STATES ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada ("Canadian
GAAP") which in the case of the Company differ in the following material
respects from those generally accepted in the United States ("US GAAP").
(a) Under US GAAP, financing and investing activities not involving
a receipt or outlay of cash are excluded from the consolidated
statements of changes in financial position. Accordingly, the
following financing activities would not be presented in the
consolidated statements of changes in financial position for
the thirteen and twenty-six week periods ended September 28,
1995 but would be shown supplementally.
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
September 28, 1995 September 28, 1995
------------------ ------------------
<C> <S> <S>
Conversion of debentures $ (1,802) $ (7,999)
Issue of capital stock on
conversion of debentures $ 1,802 $ 7,999
</TABLE>
(b) Under US GAAP, bank operating lines would not be included as a
component of the cash position presented in the consolidated
statements of changes in financial position. The change in bank
operating lines would be presented as a financing activity and
would therefore be included in the determination of the increase
or decrease in cash position in the period.
(c) Reductions in stated capital and deficit, as described in note 6 do
not fall within the definition of a quasi-reorganization under US
GAAP and, accordingly, under US GAAP, capital stock and retained
earnings (deficit) would not each be reduced by $52,364,000.
(d) US GAAP requires the calculation of primary earnings per share.
This figure is not materially different from the basic earnings
per share figure calculated under Canadian GAAP.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
- ------------
The consolidated financial statements for the second quarter ended
September 28, 1996, together with accompanying notes, should be read as an
integral part of this review. These consolidated financial statements have
been prepared by management in accordance with accounting principles
generally accepted in Canada. Note 12 to the consolidated financial
statements describes the impact, in the case of the Company, of differences
between accounting principles generally accepted in Canada and the United
States. All amounts are stated in US dollars unless otherwise indicated.
References to years are to fiscal years ending March 31.
Factors That May Affect Future Financial Performance
- ----------------------------------------------------
The Company's quarterly and annual operating results are affected by
various trends and factors including, but not limited to, competition, the
Company's success in developing, introducing and gaining market acceptance
for new products, the timing of orders from customers, the levels of
inventory held by resellers and distributors, as well as factors such as
changes in general economic conditions or conditions in the specific
markets for the Company's products, government regulation, tariffing of
carrier services, and industry consolidation.
The networking industry is intensely competitive and subject to rapid
change. As the market for the Company's products continues to develop,
additional competitors are expected to enter the market and competition is
anticipated to intensify. This may result in price reductions and margin
erosion. Many of the Company's current and potential competitors have
larger technical staffs, more established and larger marketing and sales
organizations, and significantly greater financial resources than does the
Company. The Company also competes with other data networking vendors for
access to distribution channels.
The Company's success is substantially dependent upon its ability to manage
changes in its operations. Over the past several years the Company has
undertaken significant restructuring activities in order to reposition the
Company in line with its strategy, reduce costs and improve
competitiveness. During the past year, examples of such changes included
the establishment of new marketing and distribution channels, the
restructuring of international operations and the outsourcing of the
delivery of field service maintenance. In addition, the successful
establishment and implementation of relationships with strategic partners
and distributors is critical to the future success of the Company. During
the past year, the Company has changed the way it distributes its products
by establishing multi-tiered distribution channels and entering into
agreements with several large resellers and distributors in North America,
Europe and the Asia Pacific region. These new distribution channels, while
viewed by the Company as critical to its future success, also bring
additional new risks. These include less predictability regarding product
demand and ordering patterns, reduced gross margins on sales to indirect
channels and the time associated with reseller training and increasing
awareness for the Company's products.
<PAGE>
The Company's quarterly operating results fluctuate as a result of a number
of factors including pricing, distributor ordering patterns, product
returns and reserves, product mix, as well as the timing of new product
announcements and introductions by the Company and its competitors. The
Company's revenues are difficult to predict due to shipment patterns. A
substantial portion of the Company's expenses are fixed, and consequently
any significant fluctuations in revenue will impact earnings. Products are
generally shipped as orders are received, and accordingly, the Company
operates with a relatively small backlog. As a result, sales in any
quarter are dependent on orders booked and shipped in that quarter. A high
percentage of the Company's revenues are typically earned in the third
month of each fiscal quarter and tend to be concentrated in the latter half
of that month. Accordingly, quarterly financial results will be difficult
to predict prior to the end of the quarter and a shortfall in shipments at
the end of any particular quarter may cause the results of that quarter to
fall significantly short of anticipated levels.
At the end of each quarter, the Company's distributors typically hold
significant inventories of the Company's products. The Company has
established reserves for returns based on experience. New channel
relationships introduce additional uncertainty in this area. Setting
reserves involves making judgments about future competitive conditions,
product acceptance and other factors which by their nature involve
uncertainties at the time the reserves are established.
Statements included in this Quarterly Report on Form 10-Q which are not
historical facts, including statements about the Company's beliefs and
strategies, are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties and are not guarantees of future performance. The risks
described herein and in the Company's other filings with the Securities and
Exchange Commission could affect the Company's future results and could
cause such results to differ materially from estimates expressed in any
forward-looking statement included herein.
Results of Operations - Second Quarter Ended September 28, 1996
- ---------------------------------------------------------------
The Company has been working through a period of transition for over two
years which has included positive changes in product development, services,
manufacturing and marketing and is now transforming its sales distribution
model from direct to indirect. Difficulties experienced in the
implementation of the new sales distribution model have resulted in an
unexpected and significant decline in product revenues in the first half of
the 1997 fiscal year. In addition, revenues have continued to decline in
the Company's mature product lines. While the Company believes that the
right actions have been and are being taken to address the problems in the
implementation of the sales distribution model the situation is taking
longer to correct than the Company had originally anticipated. Service
revenues have declined in the first two quarters of 1997, representing a
continuation of a trend in recent quarters. This decline has occurred as a
result of lower revenues on products which the Company has traditionally
derived the majority of its service revenues. Aggressive hiring and
training in sales and marketing, combined with the generation of sales
support and marketing programs, seminars, on-site representatives, brand
recognition, and distributor and reseller incentive programs, are beginning
to generate opportunities for Gandalf's sales development. Products
scheduled to ship in the second quarter of 1997 were on target and new
products scheduled to ship in the third quarter are anticipated to give
Gandalf further access to new and existing markets.
<PAGE>
The following table sets forth items derived from the quarterly
consolidated statements of income as a percentage of revenues for the
quarter ended September 28, 1996 and for each of the preceding four
quarters. The column in the table entitled "Percentage Change Quarter 2,
1997 vs 1996" represents the percentage change, either favourable or
(unfavourable), in the dollar amount of such items for the second quarter
of 1997 compared with the second quarter of 1996.
<TABLE>
<CAPTION>
Percentage
Fiscal 1996 Fiscal 1997 Change
------------------------------- -------------------- Quarter 2
Quarter 2 Quarter 3 Quarter 4 Quarter 1 Quarter 2 1997 vs. 1996
--------- --------- --------- --------- --------- -------------
(Thousands of dollars)
<C> <S> <S> <S> <S> <S> <S>
Revenues $27,357 $28,171 $32,355 $18,337 $15,227 (44.3)%
======= ======= ======= ======= ======= =======
(Percentage of Revenues)
Revenues:
Product 67.3% 68.6% 74.0% 59.5% 53.1% (56.1)%
Service 32.7 31.4 26.0 40.5 46.9 (20.2)
------- ------- ------- ------- -------
100.0% 100.0% 100.0% 100.0% 100.0% (44.3)
======= ======= ======= ======= =======
Gross Margin:
Product 53.4% 52.5% 51.8% 41.1% 27.3% (77.5)
Service 34.0 31.1 26.6 28.5 30.8 (27.7)
Combined 47.1 45.8 45.3 36.0 29.0 (65.7)
Expenses:
Sales & marketing 28.0 28.0 25.3 39.8 50.8 (1.1)
Administration & general 7.8 7.5 5.4 12.4 14.5 (2.7)
Research & development 10.4 10.3 9.9 16.4 20.4 (9.6)
Restructuring costs - - 4.7 16.4 -
------- ------- ------- ------- -------
Income (loss)
from operations 0.9 - - (49.0) (56.7)
Interest expense (0.5) (0.4) (0.1) (0.3) (0.3)
Interest income and
foreign exchange (0.3) 0.7 0.3 0.3 0.1
------- ------- ------- ------- -------
Net income (loss) 0.1% 0.3% 0.2% (49.0)% (56.9)%
======= ======= ======= ======= =======
</TABLE>
<PAGE>
Revenues
- --------
The following table sets forth product and service revenues by geographic
segment for the quarter ended September 28, 1996 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 1997 compared to the
corresponding period of 1996.
<TABLE>
<CAPTION>
Percentage
Fiscal 1996 Fiscal 1997 Change
------------------------------- --------------------- Quarter 2
Quarter 2 Quarter 3 Quarter 4 Quarter 1 Quarter 2 1997 vs. 1996
--------- --------- --------- --------- --------- -------------
(Thousands of dollars)
<C>
Product Revenues: <S> <S> <S> <S> <S> <S>
United States $ 6,243 $ 6,361 $ 6,432 $ 2,669 $ 2,930 (53.1)%
Canada 3,642 3,474 4,479 1,408 709 (80.5)
United Kingdom 3,783 4,361 5,491 2,676 1,869 (50.6)
Holland/France 2,272 3,428 3,791 2,516 1,522 (33.0)
Other 2,461 1,702 3,742 1,648 1,052 (57.3)
------- ------- ------- ------- -------
$18,401 $19,326 $23,935 $10,917 $ 8,082 (56.1)%
======= ======= ======= ======= =======
Service Revenues:
United States $ 2,078 $ 1,962 $ 1,790 $ 1,526 $ 1,416 (31.9)%
Canada 1,598 1,690 1,607 1,316 1,454 (9.0)
United Kingdom 3,445 3,074 3,083 2,810 2,727 (20.8)
Holland/France 1,835 2,119 1,940 1,768 1,548 (15.6)
------- ------- ------- ------- -------
$ 8,956 $ 8,845 $ 8,420 $ 7,420 $ 7,145 (20.2)%
======= ======= ======= ======= =======
</TABLE>
<PAGE>
The following table sets forth, for the twenty-six weeks ended September
28, 1996 and for each of the two preceding full fiscal years, product
revenues by geographic segment and product group expressed as a percentage
of total product revenues. These amounts have been calculated assuming
constant rates of exchange in the translation of foreign currency amounts
to US dollars. Remote access products primarily include internetworking
products sold under the names Gandalf Xpressway (TM), XpressStack (TM) and
XpressConnnect (TM). Remote access products represent a subset of the
Company's total LAN internetworking product line. The other three product
groups shown below represent traditional product areas for the Company
which include wide area networking (WAN) backbone products; modems,
multiplexers and local connectivity products; and other products which
primarily represent third party products.
<TABLE>
<CAPTION>
Modems/
Multiplexers/
Remote WAN Local
Years ending March 31 Access Backbone Connectivity Other Total
- --------------------- ------- --------- ------------- ------- -------
<C> <S> <S> <S> <S> <S>
1997: (Quarter 1 & 2)
United States 24% 2% 3% 1% 30%
Canada 6 1 4 - 11
United Kingdom 14 2 6 2 24
Holland/France 15 - 4 1 20
Other 8 3 4 - 15
--- --- --- --- ---
67% 8% 21% 4% 100%
=== === === === ===
1996:
United States 25% 1% 5% 1% 32%
Canada 12 1 4 1 18
United Kingdom 11 2 7 3 23
Holland/France 9 1 2 2 14
Other 8 3 2 - 13
--- --- --- --- ---
65% 8% 20% 7% 100%
=== === === === ===
1995:
United States 15% 1% 8% 4% 28%
Canada 9 2 7 1 19
United Kingdom 12 3 9 4 28
Holland/France 6 1 3 1 11
Other 7 3 2 2 14
--- --- --- --- ---
49% 10% 29% 12% 100%
=== === === === ===
</TABLE>
<PAGE>
Gross Margin
- ------------
The gross margin on product revenues (product revenues minus the cost of
product sales expressed as a percentage of product revenues) was 27% in the
second quarter of 1997 compared with 53% in the second quarter of 1996 and
41% in the first quarter of 1997. The gross margin on product revenues in
the first half of 1997 was adversely impacted by lower sales volumes during
the period, resulting in fixed manufacturing costs representing a larger
percentage of product revenues. The gross margin in the second quarter of
1997 was also adversely impacted by higher adverse manufacturing volume
variances as a result of lower production levels in order to reduce
inventories from the end of the first quarter of 1997.
The gross margin on service revenues (service revenues less service
expenses expressed as a percentage of service revenues) was 31% compared
with 34% in the second quarter a year ago. The decrease in service margin
has occurred as a result of the continuing decline in service revenues
which has more than offset the decrease in service expenses. Service
expenses declined 16% in the second quarter of 1997 compared with the
second quarter of 1996, as a result of the outsourcing to partners for the
delivery of field service maintenance, which has occurred since the end of
the third quarter of 1996.
Operating Expenses
- ------------------
Operating expenses (sales and marketing, general and administration and
research and development) totaled $13.1 million in the second quarter of
fiscal compared to $12.6 million in the second quarter of 1996. The
increase in these expenses has occurred as a result of higher spending on
research and development, and marketing in the second quarter of 1997
compared to the second quarter a year ago. The increase in these expenses
was partially offset by reduced variable sales expenses in the second
quarter of 1997 compared to the first quarter a year ago due to lower
product revenues.
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 governments Microelectronics and Systems Development
Program ("MSDP"). While the repayment terms of the two projects differ
slightly, both are tied to future sales, with the liability to repay the
funding arising from product revenues earned following both the
commercialization of the resulting technology and the completion of the
MDSP project. The amount that is potentially repayable is calculated
without interest as a royalty on revenues earned in the ten years following
the project completion date and is limited to the amount of funding
received.
The Company commenced accruing royalties during 1996 upon completion of
each project and expects that the funding will be fully repaid within three
to five years. To date, royalties of approximately $1.0 million have been
accrued related to these projects.
<PAGE>
Operating loss
- --------------
The Company reported a loss from operations of $8.6 million for the second
quarter of 1997 on revenues of $15.2 million. For the second quarter of
1996, income from operations was $235,000 on revenues of $27.4 million.
Net loss
- --------
The net loss for the second quarter of 1997 was $8.7 million or $0.20 per
share. Net income for the second quarter of 1996 was $35,000 or break even
on a per share basis. The net loss for the twenty-six weeks ended
September 28, 1996 was $17.6 million or $0.41 per share on revenues of
$33.6 million. The corresponding half-year figures for the previous fiscal
year were net income of $101,000 or break-even on a per share basis on
revenues of $56.0 million.
Liquidity and Capital Resources
- -------------------------------
The Company's current ratio was 1.6:1 at September 28, 1996 compared to
2.0:1 at March 31, 1996. Accounts receivable were $17.5 million at
September 28, 1996 compared to $28.7 million at March 31, 1996. The
decline in accounts receivable primarily occurred as a result of lower
revenues in the second quarter of 1997 compared to the fourth quarter of
1996. Inventories were $15.6 million at September 28, 1996 compared to
$16.9 million at June 29, 1996 and $13.5 million at March 31, 1996. Lower
than anticipated product revenues in the first quarter of 1997 resulted in
an increase in inventory levels. The Company adjusted production levels in
the second quarter of 1997 to reduce inventories from the level at the end
of the first quarter and planned production levels for the third quarter of
1997 have similarly been adjusted.
The Company recorded negative cash flow of $5.3 million during the second
quarter of 1997. At September 28, 1996 the net cash position (cash and
cash equivalents net of bank operating lines) was $5.2 million compared to
$10.5 million at the end of the first quarter on June 29, 1996. At March
31, 1996 the net cash position was $13.6 million. The decrease in the net
cash position during the second quarter of 1997 occurred as a result of
negative cash flow from operating activities of $5.2 million arising from
the combined effect of the net loss for the second quarter and the reduced
level of accounts receivable at June 29, 1996 compared to March 31, 1996 in
connection with the net loss reported for the first quarter of 1997. The
Company anticipates that the net loss reported for the second quarter of
1997 will also adversely impact cash flow in the third quarter primarily
due to the further reduced level of accounts receivable at September 28,
1996 compared to the end of the first quarter of 1997.
At September 28, 1996 the Company's authorized bank lines totaled $20.9
million under two committed credit facilities provided by a Canadian
chartered bank which bear interest at the bank's prime rate plus 0.5% to
1.5%. The authorized credit lines are secured by certain of the accounts
receivable, inventories and other assets of the Company. The amount
available for borrowing at any time is based on margin formulas relating to
levels of accounts receivable, inventories and other bank covenants. Based
on the margin formulas, $12.2 million was available to the Company at
September 28, 1996 of which $1.3 million was being utilized. Cash and cash
equivalents held as of that date represented a further $6.5 million of cash
resources available to the Company. Cash and cash equivalents and unused
credit lines totaled $17.4 million at September 28, 1996.
Financial covenants contained in one of the bank credit agreements measure
on a quarterly basis, among other things, the tangible net worth, the ratio
of liabilities to tangible net worth and the current ratio of the Company.
Subsequent to the end of the second quarter of 1997, the bank retroactively
amended one of the financial covenants at September 28, 1996 measuring the
tangible net worth of the Company, which resulted in the Company remaining
compliant with this covenant. In addition, the Company obtained waivers
from the bank of a technical default under one of the credit agreements at
September 28, 1996, and the resulting cross-default under the other
agreement, which occurred as a result of the reported net loss for the
second quarter of 1997 exceeding the maximum permitted quarterly net loss
amount. The bank had previously provided a waiver under the same sections
of the agreements in respect of the reported net loss for the first quarter
of 1997. The Company is in full compliance with all other terms of its
bank credit agreements.
<PAGE>
In addition to providing the waivers and amendment described above the bank
further amended the financial covenants contained in the credit agreements,
reducing the minimum required levels for the current ratio and tangible net
worth and increasing the maximum permitted ratio of liabilities to tangible
net worth, until June 1997, representing the balance of the committed term.
The Company believes that its current financial base together with
available credit facilities can provide sufficient financial resources to
meet its short-term operating requirements. Any non-compliance with the
financial covenants would represent a technical default under the credit
agreements for which the Company would seek a waiver from the bank. While
to date the Company has been successful in obtaining a waiver or amendment
from the bank under such circumstances, there can be no assurance that the
Company will continue to be successful in this regard in the future, if
required. While the Company currently anticipates that the credit
facilities will remain available to the Company, it believes that its
ability to obtain future waivers or amendments, if required, will depend,
among other things, on future operating performance. If continued
unrestricted access to the bank credit lines, subject to the margin
formulas, was no longer available to the Company, it would likely be
necessary for the Company to seek other additional sources of financing.
While the Company believes that such financing could be arranged, there can
be no assurance that such financing would be available if and when it
became required.
II - OTHER INFORMATION
- ----------------------
Item I - Legal Proceedings
- --------------------------
In August 1996, an action was instituted in the Superior Court of the State
of New Jersey, Law Division, for Burlington County against the Company
certain of its officers and directors, and one former director, by Michael
Wagnerman purportedly on behalf of all persons who purchased or otherwise
acquired shares of the Company's stock from November 6, 1995 through July
2, 1996. The plaintiff's claim is for common law negligent
misrepresentation and common law fraud allegedly arising from certain press
releases and public statements purportedly made by the Company and certain
of its officers during the period in question relating to its business.
The plaintiff seeks to recover monetary damages in an unspecified amount,
including punitive damages, and unspecified injunctive relief. The Company
believes that it has complied with all of its obligations under the
securities laws of the United States and Canada, and does not believe that
any of the Company's conduct or the conduct of any of its officers or
directors resulted in any negligent misrepresentations. Accordingly, the
Company intends to vigorously defend against the plaintiff's allegations
and considers such allegations to be groundless and without merit.
<PAGE>
Item 4 - Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------------------
At the Annual Meeting of Shareholders held August 1, 1996, resolutions were
adopted for
(a) the election of directors as follows:
Name For Withheld
John F. Gamba 29,346,374 220,116
Charles J. Gardner 29,346,974 219,516
Donald M. Gleklen 29,346,529 219,961
Barclay C. Isherwood 29,347,524 218,966
Robert E. Keith 29,347,524 218,966
Ian McLaren 29,340,249 226,241
Albert Sinyor 29,340,249 226,241
Thomas A. Vassiliades 29,345,724 220,766
Mihkel E. Voore 29,340,249 226,241
Johnny Wai-Nang Wong 29,340,249 226,241
(b) the appointment of KPMG Peat Marwick Thorne as auditors, (votes for -
29,444,026; withheld - 54,115),
(c) amendments to the Employee Stock Purchase Plan to reserve for issuance
an additional 200,000 shares of the Company, (votes for - 26,986,907;
against - 769,422; withheld - 7,350),
Item 6(b) - Report on Form 8-K
- ------------------------------
There were no reports on Form 8-K filed for the quarter ended September 28,
1996.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GANDALF TECHNOLOGIES INC.
November 7, 1996 BY: s/THOMAS A. VASSILIADES
- ------------------------- ----------------------------
Date Thomas A. Vassiliades
Chairman and
Chief Executive Officer
November 7, 1996 BY: s/WALTER R. MACDONALD
- -------------------------- ---------------------------
Date Walter R. MacDonald
Vice President, Finance and
Chief Financial Officer
