Gandalf Technologies Inc.
130 Colonnade Road South
Nepean, Ontario
K2E 7M4
January 26, 1996
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
December 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 Counse
<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 December 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) 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 December 31, 1995 was
42,749,830.
<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 16
<PAGE>
<TABLE>
<CAPTION>
GANDALF TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEET
(Thousands of U.S. dollars)
December 30 March 31
1995 1995
----------- --------
(Unaudited)
<C> <S> <S>
ASSETS
Current assets:
Cash and cash equivalents $ 14,611 $ 11,817
Accounts receivable 25,527 26,880
Inventories (note 2) 13,518 15,230
Other 1,373 2,268
-------- --------
Total current assets 55,029 56,195
Fixed assets (note 3) 16,902 18,619
Goodwill, net of amortization of $3,118
(March 31, 1995: $2,952) 3,296 3,462
Other assets 2,349 3,232
-------- --------
Total assets $ 77,576 $ 81,508
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank operating lines (note 4) $ 2,786 $ 5,854
Accounts payable and accrued liabilities (note 5) 17,756 21,369
Deferred revenue 5,872 7,758
Current portion of long-term debt 266 157
-------- --------
Total current liabilities 26,680 35,138
Long-term debt 2,297 1,877
8.5% convertible debentures, due 2002 (note 6) - 10,051
Shareholders' equity:
Capital stock:
Common shares, 42,749,830 issued and
outstanding (March 31, 1995: 35,238,064) (note 7) 53,683 91,644
Retained earnings (deficit) (note 7) 193 (52,364)
Cumulative translation adjustment (5,277) (4,838)
-------- --------
Total shareholders' equity 48,599 34,442
-------- --------
Total liabilities and shareholders' equity $ 77,576 $ 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 39 Weeks Ended
December 30 December 30
-------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
<C> <S> <S> <S> <S>
Revenues:
Product $ 19,326 $ 20,363 $ 57,141 $ 62,862
Service 8,845 9,388 27,037 27,267
-------- -------- -------- --------
28,171 29,751 84,178 90,129
Operating expenses:
Cost of product sales 9,179 10,661 27,414 32,651
Service expenses 6,096 5,754 17,875 17,364
Sales and marketing 7,892 7,854 23,749 24,598
Administration and general 2,102 1,957 6,315 5,793
Research and development 2,895 2,658 8,329 7,652
Restructuring costs - - - 685
-------- -------- -------- --------
Income from operations 7 867 496 1,386
Interest expense (108) (795) (450) (2,416)
Interest income and foreign exchange 193 58 147 203
Gain on sale of portfolio investment - 2,024 - 2,024
-------- -------- -------- --------
Net income for the period $ 92 $ 2,154 $ 193 $ 1,197
======== ======== ======== ========
Earnings per share (note 8):
Basic $ - $ 0.08 $ - $ 0.04
======== ======== ======== ========
Fully diluted $ 0.06
========
Weighted average number of
shares outstanding (thousands):
Basic 41,358 28,145 39,520 28,101
======== ======== ======== ========
Fully diluted 43,320
========
(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 39 Weeks Ended
December 30 December 30
--------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
<C> <S> <S> <S> <S>
Operating activities:
Cash provided by operations (note 9) $ 1,489 $ 1,612 $ 4,234 $ 3,262
Decrease (increase) in operating
working capital (note 10) (866) 2,482 (1,193) (485)
-------- --------- -------- --------
Cash provided by
operating activities 623 4,094 3,041 2,777
-------- --------- -------- --------
Financing activities:
Issue of capital stock 6,543 4 14,844 57
Conversion of 8.5% convertible
debentures (note 6) (2,337) - (10,336) -
Other 30 (72) 481 (432)
-------- --------- -------- --------
Cash provided by (applied to)
financing activities 4,236 (68) 4,989 (375)
-------- --------- -------- --------
Investing activities:
Purchase of fixed assets (782) (425) (1,940) (1,710)
Proceeds on disposal of investment - 2,594 - 3,857
Proceeds on disposal of fixed assets - 96 - 205
Other 22 168 (15) 75
-------- --------- -------- --------
Cash provided by (applied to)
investing activities (760) 2,433 (1,955) 2,427
-------- --------- -------- --------
Effect of exchange rate changes on
cash balances (47) (9) (213) 101
-------- --------- -------- --------
Increase in cash position
in the period 4,052 6,450 5,862 4,930
Cash position at beginning of period 7,773 (6,759) 5,963 (5,239)
-------- --------- -------- --------
Cash position at end of period $ 11,825 $ (309) $ 11,825 $ (309)
======== ========= ======== ========
Cash position is comprised of:
Cash and cash equivalents $ 14,611 $ 10,063 $ 14,611 $ 10,063
Bank operating lines (2,786) (10,372) (2,786) (10,372)
-------- --------- -------- --------
$ 11,825 $ (309) $ 11,825 $ (309)
======== ========= ======== ========
(See accompanying notes to consolidated financial statements)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GANDALF TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(Thousands of U.S. dollars)
13 Weeks Ended 39 Weeks Ended
December 30 December 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 40,056,196 $ 47,220 28,143,810 $ 79,864 35,238,064 $ 91,644 28,072,333 $ 79,811
Issued:
On conversion of debentures (note 6) 1,343,402 2,200 - - 5,983,372 9,839 - -
Exercise of stock options 1,221,834 2,859 - - 1,399,996 3,160 - -
Other 128,398 1,404 3,500 4 128,398 1,404 74,977 57
Reduction in stated capital (note 7) - - - - - (52,364) - -
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Balance at end of period 42,749,830 $ 53,683 28,147,310 $ 79,868 42,749,830 $ 53,683 28,147,310 $ 79,868
========== ========= ========== ========= ========== ========= ========== =========
Retained Earnings (Deficit):
Balance at beginning of period $ 101 $ (54,727) $ (52,364) $ (53,770)
Net income 92 2,154 193 1,197
Reduction in stated capital (note 7) - - 52,364 -
--------- --------- --------- ---------
Balance at end of period $ 193 $ (52,573) $ 193 $ (52,573)
========= ========== ========= =========
Cumulative Translation Adjustment:
Balance at beginning of period $ (4,760) $ (5,884) $ (4,838) $ (6,932)
Adjustment arising on translation of
foreign subsidiaries' financial
statements to U.S. dollars (850) (1,347) 675 144
Adjustment relating to subsidiary loans
designated as long-term investments 333 1,296 (1,114) 853
--------- ---------- ---------- ---------
Balance at end of period $ (5,277) $ (5,935) $ (5,277) $ (5,935)
========= ========== ========== =========
(See accompanying notes to consolidated financial statements)
</TABLE>
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 December 30, 1995
and for the thirteen and thirty-nine week 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>
December 30 March 31
1995 1995
----------- --------
<C> <S> <S>
Raw materials $ 3,558 $ 3,336
Work-in-process 3,223 4,591
Finished goods 6,737 7,303
-------- --------
$ 13,518 $ 15,230
======== ========
</TABLE>
3. FIXED ASSETS
<TABLE>
<CAPTION>
December 30 March 31
1995 1995
----------- --------
<C> <S> <S>
Cost:
Land $ 222 $ 232
Buildings 4,670 4,725
Equipment 57,897 55,879
Leasehold improvements 1,974 1,930
-------- --------
64,763 62,766
Accumulated depreciation 47,861 44,147
-------- --------
Net book value $ 16,902 $ 18,619
======== ========
</TABLE>
4. BANK OPERATING LINES
The Company's authorized bank operating lines at December
30, 1995 totalled $19.0 million. At that time, there was
sufficient margin available to borrow $13.9 million and $2.8
million was being utilized. Cash and short-term deposits
held as of that date represented a further $14.6 million of
available cash resources, and cash and unused credit lines
totalled $25.7 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>
December 30 March 31
1995 1995
----------- --------
Trade accounts payable $ 5,177 $ 7,341
Payroll, commissions and related taxes 3,685 4,072
Accrued restructuring charges 1,729 3,033
Other payables 5,808 5,266
Income and other taxes payable 1,357 1,657
-------- --------
$ 17,756 $ 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 period (14,061) (10,336) (47%) 5,983,372
Impact of foreign exchange - 285 -
- ----------------------------------------------------------------------
Balance at December 30, 1995 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
$733) 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 in accordance with the terms of the debentures.
During the thirty-nine week period ended December 30, 1995
all remaining debentures were converted into 5,983,372
common shares in accordance with the terms of the
debentures. The resulting increase in capital stock of
$9,839,000 was determined as the sum of the principal amount
of the debentures converted ($10,336,000) plus interest
accrued to the date of conversion ($135,000), net of the pro
rata share of the associated unamortized deferred financing
costs ($632,000).
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.
<PAGE>
8. EARNINGS PER SHARE
Basic earnings 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 in
those periods where potential conversions are anti-dilutive.
9. CASH PROVIDED BY OPERATIONS
Cash provided by operations is computed as follows:
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
December 30 December 30
-------------------- --------------------
1995 1994 1995 1994
-------- ------- -------- --------
<C> <S> <S> <S> <S>
Income from operations $ 7 $ 867 $ 496 $ 1,386
Depreciation and amortization 1,396 1,428 4,022 4,165
Interest paid (107) (741) (431) (2,286)
Interest income and foreign exchange 193 58 147 203
Other - - - (206)
-------- -------- -------- --------
$ 1,489 $ 1,612 $ 4,234 $ 3,262
======== ======== ======== ========
</TABLE>
10. DECREASE (INCREASE) IN OPERATING WORKING CAPITAL
The decrease (increase) in operating working capital is computed as follows:
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
December 30 December 30
-------------------- --------------------
1995 1994 1995 1994
-------- ------- -------- --------
<C> <S> <S> <S> <S>
Accounts receivable $ 691 $ 3,974 $ 1,353 $ 3,049
Inventories 1,236 1,611 1,712 5,099
Prepaid expenses (23) 436 895 533
Accounts payable and accrued
liabilities (1,367) (1,784) (3,185) (8,002)
Income taxes payable (23) (25) (301) 200
Deferred revenue (1,130) (1,093) (1,886) (1,654)
Foreign currency equity adjustment (250) (637) 219 290
-------- ------- -------- --------
$ (866) $ 2,482 $ (1,193) $ (485)
======== ======== ======== ========
</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 39 Weeks Ended
December 30 December 30
--------------------- -------------------
1995 1994 1995 1994
-------- -------- ------- --------
<C> <S> <S> <S> <S>
Conversion of 8.5% convertible
debentures $ (2,377) - $ (10,336) -
Issue of capital stock on
conversion of debentures $ 2,377 - $ 10,336 -
</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 third quarter
ended December 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 - Third Quarter Ended December 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 December 30, 1995 and for
each of the preceding four quarters. The column in the
table entitled "Percentage Change Quarter 3, 1996 vs 1995"
represents the percentage change, either favourable or
(unfavourable), in the dollar amount of such items for the
third quarter of 1996 compared with the third quarter of
1995.
<TABLE>
<CAPTION>
Percentage
Fiscal 1995 Fiscal 1996 Change
--------------------- ------------------------------- Quarter 3
Quarter 3 Quarter 4 Quarter 1 Quarter 2 Quarter 3 1996 vs.1995
---------- --------- --------- --------- --------- ------------
(Thousands of dollars)
<C> <S> <S> <S> <S> <S> <S>
Revenues $29,751 $30,382 $28,650 $27,357 $28,171 (5.3)%
======= ======= ======= ======= ======= =======
(Percentage of Revenues)
Revenues:
Product 68.4% 68.9% 67.8% 67.3% 68.6% (5.1)%
Service 31.6 31.1 32.2 32.7 31.4 (5.8)
------- ------- ------- ------- ------- -------
100.0% 100.0% 100.0% 100.0% 100.0% (5.3)%
======= ======= ======= ======= ======= =======
Gross Margin:
Product 47.6% 47.6% 50.2% 53.4% 52.5% 4.6 %
Service 38.7 37.0 36.5 34.0 31.1 (24.4)
Combined 44.8 44.3 45.8 47.1 45.8 (3.3)
Expenses:
Sales & marketing 26.4 28.1 28.6 28.0 28.0 0.5
Administration & general 6.6 5.7 7.2 7.8 7.5 7.4
Research & development 8.9 8.4 9.1 10.4 10.3 8.9
------- -------- ------- ------- -------
Income from operations 2.9 2.1 0.9 0.9 -
Interest expense (2.7) (1.8) (0.7) (0.5) (0.4)
Interest income and
foreign exchange 0.2 0.4 - (0.3) 0.7
Gain on sale of portfolio
investment 6.8 - - - -
------- ------- ------- ------- -------
Net income 7.2% 0.7% 0.2% 0.1% 0.3%
======= ======= ======= ======= =======
</TABLE>
<PAGE>
Revenues
- --------
The following two tables set forth product and service
revenues by geographic segment for the quarter ended
December 30, 1995 and for each of the preceding four
quarters. The table also includes the change in revenues,
expressed as a percentage, in the third quarter of 1996
compared to the corresponding period of 1995.
<TABLE>
<CAPTION>
Percentage
Fiscal 1995 Fiscal 1996 Change
--------------------- --------------------------------- Quarter 3
Quarter 3 Quarter 4 Quarter 1 Quarter 2 Quarter 3 1996 vs. 1995
----------- --------- --------- --------- --------- -------------
(Thousands of dollars)
<C> <S> <S> <S> <S> <S> <S>
Product Revenues:
United States $ 6,048 $ 5,578 $ 5,733 $ 6,243 $ 6,361 5.2 %
Canada 3,491 3,443 3,438 3,642 3,474 (0.5)
United Kingdom 5,129 6,474 4,905 3,783 4,361 (15.0)
Holland/France 2,774 2,350 2,853 2,272 3,428 23.6
International markets 2,921 3,094 2,485 2,461 1,702 (41.7)
------- ------- ------- ------- -------
$20,363 $20,939 $19,414 $18,401 $19,326 (5.1)%
======= ======= ======= ======= =======
Service Revenues:
United States $ 2,261 $ 2,370 $ 2,159 $ 2,078 $ 1,962 (13.2)%
Canada 1,943 1,676 1,747 1,598 1,690 (13.0)
United Kingdom 3,519 3,704 3,502 3,445 3,074 (12.6)
Holland/France 1,665 1,693 1,828 1,835 2,119 27.3
------- ------- ------- ------- -------
$ 9,388 $ 9,443 $ 9,236 $ 8,956 $ 8,845 (5.8)%
======= ======= ======= ======= =======
</TABLE>
The following three tables set forth, for the thirty-nine
weeks ended December 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 1 5 1 19
United Kingdom 12 2 6 2 22
Holland/France 8 1 3 2 14
International markets 7 2 3 - 12
--- --- --- --- ---
64% 8% 22% 6% 100%
=== === === === ===
</TABLE>
Gross Margin
- ------------
The gross margin on product revenues (product revenues minus
the cost of product sales expressed as a percentage of
product revenues) was 52.5% in the third quarter of 1996
compared with 47.6% in the third 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 primarily due to a reduction in the volume of
third-party product sales, has resulted in improvements
since 1994 in the gross margin earned on product revenues.
However, the Company anticipates that it will continue to
experience quarterly fluctuations in the gross margin on
product revenues such as those that have been experienced
during the first three quarters of 1996.
The gross margin on service revenues (service revenues less
service expenses expressed as a percentage of service
revenues) was 33.9% during the thirty-nine weeks ended
December 30, 1995 compared to 36.3% during the same period a
year ago. This decline has occurred as a result of a 4.0%
decline in service revenues in the first three quarters of
the current fiscal year versus the same period a year ago,
when applying constant exchange rates for translation
purposes for both periods. Service expenses, when
translated in the same way, declined 0.3% during the first
three quarters of 1996 compared to 1995. The gross margin
on service revenue during the third quarter of 1996 was
31.1%, down from 38.7% during the third quarter of 1995.
This decline, when comparing the two periods, occurred as a
result of the combined effect of lower service revenues and
higher associated expenses.
<PAGE>
Operating Expenses
- ------------------
Sales and marketing, and administration and general expenses
were $10.0 million in the third quarter of 1996, compared
to $9.8 million in the third quarter a year ago. For the
first three quarters of 1996, sales and marketing, and
administration and general expenses were $30.1 million, a
decrease of $0.3 million over the corresponding period in
the prior fiscal year.
Research and development expenses increased by 8.9% from the
third quarter of 1995 to the third 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 began accruing the
corresponding royalty in the third quarter of the current
fiscal year. 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.
Income from Operations
- ----------------------
The Company reported income from operations of $7,000 on
revenues of $28.2 million for the third quarter of 1996.
For the third quarter of 1995 the Company reported income
from operations of $867,000 on revenues of $29.8 million.
Income from operations for the thirty-nine weeks ended
December 30, 1995 was $0.5 million, compared to $1.4 million
in the same period in the previous fiscal year.
Interest Expense
- ----------------
Interest expense for the third quarter of 1996 was $0.1
million compared with $0.8 million in the third quarter of
1995. Interest expense has declined primarily as a result
of the conversion to common shares of all outstanding 8.5%
convertible debentures during the period from the fourth
quarter of 1995 to the third quarter of 1996. Lower
utilization of bank operating lines in the third quarter of
1996 compared to the third quarter a year ago has also
contributed to the year-over-year decrease in interest
expense.
Net Income
- ----------
Net income for the third quarter of 1996 was $92,000, or
breakeven on a per share basis, versus net income of $2.2
million or $0.08 per share in the third quarter a year ago.
The Company reported net income of $0.2 million for the
thirty-nine weeks ended December 30, 1995, compared to net
income of $1.2 million for the corresponding period in 1995.
Net income for the thirteen weeks and thirty-nine weeks
ended December 30, 1994 included a $2.0 million gain on the
sale of a portfolio investment.
<PAGE
Liquidity and Capital Resources
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The Company recorded positive cash flow of $4.1 million
during the third quarter of 1996, which included cash
provided by operating activities of $0.6 million, cash
provided by financing activities of $4.2 million, and cash
applied to investing activities of $0.7 million. Cash
provided by financing activities of $4.2 million during the
third quarter of 1996 was primarily related to the issue of
capital stock as a result of the exercise of stock options
and the purchase of common shares under the employee share
purchase plan.
During the eighteen month period since July 1, 1994
(represented by the final three quarters of 1995 and the
first three quarters of 1996) the Company has reported
positive cash flow of $19.4 million of which $14.9 million
has been provided by operating activities. At December 30,
1995 the net cash position (cash and cash equivalents net of
bank operating lines) was $11.8 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 $0.3 million at December 30, 1994.
At December 30, 1995, the Company's authorized bank
operating lines totalled $19.0 million. This included $15.5
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 $3.5 million
related to a demand facility with a bank in the United
Kingdom. The interest rate on this credit facility 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, $13.9 million was available
to the Company at December 30, 1995 and $2.8 million was
being utilized. Cash and cash equivalents held as of that
date represented a further $14.6 million of cash resources
available to the Company. Cash and unused credit lines
totalled $25.7 million at December 30, 1995, compared to
$20.8 million at March 31, 1995 and $14.5 million at
December 30, 1994.
During January 1996, the Company accepted an offer from the
chartered bank in Canada to expand the existing relationship
to include a committed credit facility for the Company's
United Kingdom subsidiary which will replace the existing
facility with the U.K. bank. The new facility, which has an
authorized amount of $4.3 million, bears interest at prime
plus 1.5% and is subject to the same margin formulas as the
Canadian facilities. Applying these margin formulas on a
pro-forma basis to the December 30, 1995 levels of accounts
receivable and inventory, $4.3 million would have been
available to the Company under the new facility,
representing an increase of $2.5 million over the amount
available at that time under the existing U.K. facility.
During the fourth quarter of 1995 and the first three
quarters of 1996 all outstanding 8.5% convertible
debentures, issued in November 1992, were converted to
common shares of the Company in accordance with the terms of
the debentures.
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
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Item 6(b) - Report on Form 8-K
- ------------------------------
There were no reports on Form 8-K filed for the quarter
ended December 30, 1995.
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.
January 24, 1996 BY: s/THOMAS A. VASSILIADES
- ------------------------- ---------------------------
Date Thomas A. Vassiliades
Chairman, President and
Chief Executive Officer
January 24, 1996 BY: s/WALTER R. MACDONALD
- -------------------------- --------------------------
Date Walter R. MacDonald
Vice President, Finance and
Chief Financial Officer
