<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996
--------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
--------- ---------
Commission file number: 0-12643
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GANDALF TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
ONTARIO, CANADA NOT APPLICABLE
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130 COLONNADE ROAD SOUTH, NEPEAN, ONTARIO, CANADA K2E 7M4
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code:(613) 274-6500
----------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
[Cover page 1 of 2 pages]
<PAGE>
The aggregate market value of the common shares held by non-affiliates
of the registrant, based upon the closing sales price of the common
shares as reported on The Nasdaq Stock Market (National Market System)
on May 31, 1996 (the last trading day prior to June 1, 1996) was
approximately $592,724,210. This amount excludes 544,079 common
shares held by all executive officers, directors, and shareholders
holding over five percent of the outstanding common shares on that
date, as such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes. As of June 1, 1996, 43,262,941
common shares, without nominal or par value, were issued and outstanding.
All dollar amounts in the Annual Report on Form 10-K are in United States
dollars, except where indicated. C$ refers to Canadian dollars.
References to years are to fiscal years ended March 31.
DOCUMENTS INCORPORATED BY REFERENCE
PART I None
PART II
Item 5. Market for Registrant's Common Stock
and Related Security Holder Matters
Page 35 of the Annual Report to Shareholders
for the fiscal year ended March 31, 1996
(Exhibit 13).
Item 7 Management's Discussion and Analysis
of Financial Condition and Results of
Operations. Pages 28 to 34 of the
Annual Report to Shareholders for the
fiscal year ended March 31, 1996
(Exhibit 13).
Item 8. Financial Statements and Supplementary
Data. Pages 14 to 27 of the Annual Report
to Shareholders for the fiscal year ended
March 31, 1996 (Exhibit 13).
PART III None
[Cover page 2 of 2 pages}
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business 4
Industry Background 4
Business Environment and Risk Factors 5
The Company and Corporate Structure 6
Products and Services 6
Sales and Marketing 8
Research and Development 8
Manufacturing 9
Customers 9
Competition 10
Backlog 10
Intellectual Property and Proprietary Rights 10
Employees 11
Environmental Affairs 11
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote
of Security Holders 13
PART II
Item 5. Market for Registrant's Common Stock
and Related Security Holder Matters 13
Item 6. Selected Financial Data 13
Item 7 Management's Discussion and Analysis
of Financial Condition and Results of
Operations 14
Item 8. Financial Statements and Supplementary
Data 14
Item 9. Disagreements on Accounting and
Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers
of the Registrant 15
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain
Beneficial Owners and Management 25
Item 13. Certain Relationships and Related
Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 26
Signatures 30
<PAGE>
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
Industry Background
- -------------------
For many organizations, access to information is a strategic element of
business. A number of current factors have influenced the way
information is accessed, including the corporate trend towards moving the
business closer to the customer, spurring the creation of branch offices;
the provision of flexible work environments as a means to attract and
retain highly-skilled employees; the popularity of the Internet; and
government environmental legislation requiring the reduction of work-
related travel. All of these dynamics have resulted in a growing number
of teleworkers, business travelers and remote office users increasing the
demand for network infrastructure products and services.
Challenges associated with managing such a network infrastructure include
asset control in an increasingly distributed environment;
interoperability in a multivendor environment; technical skill shortages;
maximization of an installed base of legacy networking equipment; and
information security.
Gandalf Technologies Inc. and its subsidiaries (Gandalf or the Company)
participates in three areas of the networking market - the remote access
market, the wide area networking market and the network services market.
Remote access is defined as extending corporate network-based, or public
network-based resources to remote, distributed locations. Wide area
networks are defined as those networks designed to carry a variety of
traffic types (video, data, voice, fax, LAN) over private or public
networks. Network services are defined as the provision of value added
services, which are customized to meet specific customer needs and
designed to increase productivity, reduce costs, or add value through the
design and implementation of well-managed networks.
<PAGE>
Business Environment and Risk Factors
- -------------------------------------
The Company's future operating results may be affected by various trends
and factors that the Company must successfully address in order to
achieve favorable operating results. In addition, there are trends and
factors beyond the Company's control which affect its operations. Such
trends and factors include adverse changes in general economic
conditions, or conditions in the specific markets for the Company's
products, government regulation or intervention affecting networking,
fluctuations in foreign exchange rates and other factors including those
listed in other sections below.
The Company's success depends in substantial part on the timely and
successful introduction of new products. An unexpected change in one or
more of the technologies affecting data networking or in market demand
for products based on a particular technology could have a material
adverse effect on the Company's operating results if the Company does not
respond quickly and effectively to such changes. Failure to keep pace
with such advances could negatively affect the Company's competitive
position and prospects for growth.
The market price of the Company's common stock has been, and may continue
to be, extremely volatile. Factors such as new product announcements by
the Company or its competitors, quarterly fluctuations in the Company's
operating results and general conditions in the networking market may
have a significant impact on the market price of the Company's common
stock. These conditions, as well as factors which generally affect the
market for stocks of high technology companies, could cause the price of
the Company's stock to fluctuate substantially over short periods.
See also Factors That May Affect Future Financial Performance
contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations and Volatility of Stock Prices
contained in Market for Registrant's Common Stock and Related
Security Holder Matters at page 29 and 35 respectively, of the Company's
Annual Report to Shareholders for the fiscal year ended March 31, 1996
incorporated by reference herein.
<PAGE>
The Company and Corporate Structure
- -----------------------------------
Gandalf Technologies Inc. was created by Articles of Amendment on July 22,
1981 as the continuation of Gandalf Data Communications Limited which was
incorporated on April 29, 1971 under the laws of the Province of Ontario,
Canada. The registered office of the Company is 130 Colonnade Road South,
Nepean, Ontario, Canada K2E 7M4, telephone (613) 274-6500. The Company's
common shares are traded on The Toronto Stock Exchange and The Nasdaq Stock
Market (National Market System).
The Company operates through six principal subsidiary companies: Gandalf
Canada Ltd., Gandalf Systems Corporation in the United States, Gandalf
Digital Communications Limited in the United Kingdom, Gandalf S.A. in France,
Gandalf Nederland B.V. and Gandalf International Limited. The Company's
operations are conducted through four distinct operating units: the North
America Group based in Nepean, Ontario and Delran, New Jersey covering
Canada, the United States and Mexico; the Europe, Middle East and Africa
Group, based in Bracknell, UK, consisting of the UK, France, Italy, Spain,
Eastern Europe, the Middle East and Africa (excluding South Africa); the
Northern Europe Group, located in Amsterdam, Netherlands, encompassing
the Netherlands, Belgium, Germany, Austria, Switzerland, Luxembourg,
Norway, Sweden, Finland and Denmark; and the Asia Pacific Group, located
in Tokyo, Japan which includes Japan, Korea, Singapore, Taiwan, Hong Kong,
China, Australia, New Zealand and South Africa. For information regarding
Gandalf's foreign and domestic operations, see Note 16 to the Company's
consolidated financial statements incorporated by reference herein.
Products and Services
- ---------------------
The Company's vision is to provide people with access to information
through technology. More specifically, the Company's vision is to
provide the most effective, efficient, user-friendly, advanced products
and services that provide its customers with needed and secure access to
information, while preserving and enhancing their investment.
The Company designs, supplies, markets and services equipment that is
designed to transport information in a manner that is efficient, cost
effective, secure and reliable. Gandalf creates value for its customers
through its ability to integrate a variety of technologies and a range of
telephone company services with its customers' information applications.
Gandalf accomplishes this through four lines of business -- Access,
Concentration, Backbone and Services.
Access and Concentration Products
Gandalf addresses the remote access market with two lines of business,
Access and Concentration, encompassing three families of products,
XpressConnect(R), XpressStack(R) and Xpressway(R).
<PAGE>
The XpressConnect line of high performance, internetworking access
products delivers the response time and performance of a local (LAN)
connection over a low speed, wide area network (WAN) facility. The
XpressConnect line comprises a range of access solutions for the mobile
or part-time teleworker, the full-time teleworker, the small or large
branch office user and Internet users.
The modular, stackable XpressStack line of concentration and
internetworking products can be deployed in an enterprise network to
concentrate a number of small and large branch offices and teleworkers,
or in an Internet service provider to deliver access concentration of
many subscribers over telephone services such as ISDN or switched 56K.
An XpressStack solution can be scaled upwards, in small increments, to
deliver a solution which is a precise cost fit to the requirements of
customers.
The Xpressway line of concentration and internetworking products is a
higher-density, chassis-based solution which allows enterprises and
service providers alike to concentrate great numbers of remote users onto
a single, robust system over telephone services such as ISDN, switched
56K, Frame Relay, and the public switched telephone network. A scaleable
design ensures that performance is consistent as additional remote users
are added to the system. In addition to concentration, a number of other
internetworking modules can be configured into an Xpressway system
(multiprotocol router, campus LAN switch, hub cards, terminal servers) to
enable a complete solution.
Backbone Products
Gandalf addresses the wide area market with its backbone line of
business. Gandalf's WAN 2000 family of multiplexers and concentrators is
designed to carry in a very efficient manner, a variety of traffic - LAN,
voice, fax, video, data - over a single leased line, saving customers
long distance charges and line costs by integrating their traffic.
The family has three products: the 2120, a modular feeder product which
can accommodate concentration at speeds of up to 24Kbps; the 2300, which
can grow up to 20 T1s (20 x 1.544Mbps) or 16 E1s (16 x 2.048Mbps) in
total capacity; and the 2050 network communications switch, which permits
switching capacity up to 80 T1s.
<PAGE>
Network Services and Support
The Company provides its customers with a suite of services ranging from
ongoing maintenance support to a full life cycle of services such as
network design, implementation, management and operations, asset
management and training. Services are sold as a complementary part of
the product sale. They are delivered with business partners and often
through distribution channels. Gandalf's services vision is to be best
of breed at satisfying the needs of its customers by providing the full
life cycle of support solution delivered by Gandalf and its business
partners.
Gandalf's end user service programs include the ServiStart Program for
network installation, the ServiStat Extended Warranty Program for
additional product coverage, and the ServiSelect Services for network
maintenance. Partner services include the Partner Program, for those
channel partners who want to enhance their own service capabilities, and
the Alliance Program for those channel partners who do not have their own
service organization. Teleworking services include RemoteConnect, a
turnkey, value-add, integrated services package encompassing
installation, projection management, line provisioning end user support,
designed to provide customers with a cost-effective solution for
deploying teleworking programs.
Sales and Marketing
- -------------------
Gandalf markets its products and services through both direct and
indirect channels through its wholly-owned subsidiaries in the United
States, Canada, United Kingdom, the Netherlands and France. The
Company's International subsidiary sells through local distributors
worldwide. The Company's sales and marketing model focuses on four
channels of distribution - national resellers, service providers,
corporate accounts and OEM (Original Equipment Manufacturer)
partnerships.
Research and Development
- ------------------------
The Company believes that success in the rapidly changing communications
segment of the information industry is dependent upon the ability to
anticipate and respond to customer needs and to develop reliable, cost-
effective products with expanded capabilities and performance.
The Company is engaged in research and development activities in both LAN
and WAN technologies. The Company spent $11.5 million on product
development in fiscal 1996, and $10.1 million in fiscal 1995 and $15.0
million in fiscal 1994.
<PAGE>
Manufacturing
- -------------
The Company's manufacturing operations consist of materials planning and
procurement, assembling and testing electronic assemblies.
The quality systems of Gandalf's manufacturing operation are managed to
the ISO 9002-1994 quality standard and are recognized under the Quality
Management Institute's (QMI's) registration program, registration number
000367. The Company's adherence to known international and national
quality standards provides one of the strongest assurances of
product/service quality available.
In some cases, the Company may subcontract part of the manufacturing
process, or the entire manufacturing, of a product to a single supplier.
Also, a single source supplier may be used in instances when the Company
designs components and sub-assemblies. As a corporation, the Company
believes that the close working relationship with a single supplier
enhances product quality, delivery and cost control. However, there can
be no assurance that in the future the Company's suppliers will be able
to meet the Company's demand for components in a timely and cost-
effective manner. The Company's operating results and customer
relationships could be adversely affected by either an increase in prices
for, or an interruption or reduction in supply of, any key components.
Customers
- ---------
Gandalf's target customers are end users of data processing equipment and
include major corporations, institutions, carriers and governments in all
of its major geographic markets.
The Company's business is not seasonal. The Company is not dependent
upon a single customer or a few customers, and the loss of any one or
more would not be anticipated to have a material adverse effect on the
Company. During the three-year period ended March 31, 1996, no customer
accounted for 10 percent or more of the Company's revenues in any year.
<PAGE>
Competition
- -----------
The networking industry has become increasingly competitive, and the
Company's results may be adversely affected by the actions of existing or
future competitors. Such actions may include the development or
acquisition of new technologies, the introduction of new products and the
reduction of prices by competitors to gain or retain market share.
Industry consolidation or alliances may also affect the competitive
environment.
The Company's competitors vary depending upon the sector of the network
being identified and include networking vendors as well as independent
systems integrators. Principal competitors include companies such as
3Com Corporation, Ascend Communications, Inc., Bay Networks Inc., and
Cisco Systems Inc. These and other competitors and potential competitors
may have greater financial, technological, manufacturing, marketing and
personnel resources than the Company. Gandalf believes its worldwide
coverage, its technology leadership, its operational support excellence
and its market driven management system will allow it to compete
effectively in its chosen markets.
Backlog
- -------
The Company attempts to manufacture inventory in quantities sufficient to
provide timely delivery of its products. Because of the short delivery
cycle, backlog is not considered to be a meaningful indication of future
revenues.
Intellectual Property and Proprietary Rights
- --------------------------------------------
The Company believes that intellectual property constitutes a valuable asset
of the Company and protects its intellectual property through certain patents
and trademarks on a worldwide basis. The Company holds international
trademark registrations on its corporate name, GANDALF, and has either
applied for, or obtained, trademark registrations on its product and services
brand names. The Company holds a patent on proprietary compression
technology, which, in the view of the Company, represents a significant
competitive advantage. The Company utilizes non-disclosure and
confidentiality agreements to disclose proprietary information to its
resellers, distributors, customers and potential customers. The Company's
products include proprietary software and firmware which is provided under
license to customers and end users.
<PAGE>
Employees
- ---------
On March 31, 1996, the Company had 812 employees worldwide. Of these,
377 were sales, marketing and customer support personnel, 128 were
engaged in engineering development, 191 were engaged in manufacturing and
distribution and 116 held general administrative positions. On March 31,
1995 the Company had 897 employees and on March 31, 1994 the Company had
1,127 employees. Outsourcing to partners by the Company of the delivery
of field service maintenance in the United States led to the majority of
the reduction in employees from fiscal 1995 to fiscal 1996.
Since March 31, 1996, the Company has also outsourced the delivery of
field service maintenance in the United Kingdom and Canada, restructured
certain aspects of its sales and marketing organization worldwide in
accordance with its distribution channel strategy, consolidated the
manufacturing distribution function in a single location and outsourced
its manufacturing repair function in Europe. As a result of these
changes the Company presently has fewer than 700 employees.
Approximately two-thirds of these employees are located in North America
and the remainder are employed in Europe and in the other International
operations.
While the attrition rate in the Company is within acceptable norms, the
Company has experienced the loss of some employees with valuable skills.
The Company continues to recruit and hire qualified and skilled
employees.
Environmental Affairs
- ---------------------
The Company is currently in the final stages of remediation of certain non-
hazardous materials at the Company's former engineering, administration and
distribution facility in Cherry Hill, New Jersey, in compliance with the
State of New Jersey's Environmental Cleanup Responsibility Act. The Company
continues to maintain a letter of credit in the amount of $500,000 with the
Royal Bank of Canada to secure its clean-up obligations under New Jersey law.
It is anticipated that the remediation will be completed during fiscal 1997
and, in the opinion of management, is not anticipated to have a material
effect on future expenditures or earnings.
<PAGE>
ITEM 2. PROPERTIES
Properties
- ----------
The Company's head office is located in Nepean, Ontario, Canada, near Ottawa.
The Company operates from three leased premises at this location. A research
and administration facility (97,000 square feet) is located on land adjacent
to the Company's manufacturing facility (58,000 square feet) in Nepean. Both
facilities were sold to the builder upon completion in 1987 and leased back
to the Company for a 10-year term with four options to renew of five years
each. The Company also occupies an 18,250 square foot printed circuit board
manufacturing facility on land adjacent to the Company's other buildings in
Nepean. In 1988, this building was sold to the builder and leased back to
the Company for a 20-year term.
The Company's principal property in the United States is located in Delran,
New Jersey. The leased building comprises 27,000 square feet and is occupied
by certain engineering, sales and marketing and administrative staff of the
Company.
The Company owns a facility in Warrington, Cheshire, England (37,200 square
feet) which contains office space and warehouse space which, until June 1996,
had been used as a distribution and repair centre for the Company's products
in Europe.
It is management's belief that the existing principal properties described
above are adequate for the Company's current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is a third party defendant in an action begun in April 1993 in
the Ontario Court (General Division) by Deskin Inc. and a Quebec numbered
company as plaintiffs against Digital Equipment of Canada Limited,
Distribution Architects International Inc.(DAI) and D.A. Distribution
Software Systems Ltd. (DAD) as defendants. The main action claims damages
totaling C$2.6 million and unspecified damages for lost sales and profits of
C$20.0 million relating to the design, supply and installation of a computer
system. The third party claim brought by DAI and DAD alleges improper
network design and selection of network hardware by the Company and seeks
contribution and indemnity. Each of the defendants has defended the claim.
The plaintiff has not sued the Company. Counsel for the Company believes the
Company has a good defence to the third party claim on the merits, and that
based on the information available to date and the Company's limited
involvement in the project, the Company's liability, if any, should only
be for a nominal portion of the amount claimed in the main action.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
For information relating to the registrant's common stock and
related shareholder matters, reference is made to page 35 of
the 1996 Annual Report to Shareholders, filed as Exhibit 13
hereto, which information is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Thousands of U.S. dollars except per share amounts
<C> <S> <S> <S> <S> <S> <S>
1996* 1995* 1994* 1993* 1992** 1991***
- ------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Revenues $116,533 $120,511 $131,323 $160,900 $119,181 $129,013
Gross margin 45.9% 44.4% 41.7% 43.7% 46.5% 49.4%
Selling, general and administration 39,996 40,661 54,772 62,807 45,778 54,223
Research and development 11,524 10,197 14,316 17,279 13,679 13,788
Net income (loss) 260 1,406 (47,238) (19,507) (9,912) (5,869)
Basic earnings (loss) per share 0.01 0.05 (2.27) (1.24) (0.63) (0.48)
- ------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Total assets 79,375 81,508 89,186 129,603 141,408 102,999
Fixed assets 16,253 18,619 20,214 30,768 38,416 22,761
Working capital 29,361 21,057 13,978 25,596 19,276 22,050
Current ratio 2.0 1.6 1.3 1.5 1.3 1.6
Cash and cash equivalents net of current bank debt 13,602 5,963 (5,239) (688) (17,918) (9,030)
Long-term debt 2,496 1,877 2,020 22,980 23,729 5,548
Convertible debentures - 10,051 21,681 23,862 - -
Shareholders' equity 48,586 34,442 19,109 34,308 55,491 59,363
<FN>
* Year ended March 31
** For eight months only, ended March 31, 1992
*** Year ended July 31
</FN>
</TABLE>
<PAGE>
Acquisition
- -----------
On August 2, 1991, the Company's subsidiary in the United States,
Gandalf Data, Inc. completed a merger with Infotron, an international
data communications company headquartered in Cherry Hill, New Jersey,
U.S.A.
Change in Reporting Currency
- ----------------------------
During the fiscal 1992 period, the Company adopted the U.S. dollar as
the unit of measurement for presentation in its consolidated financial
statements. This change was made due to the significant increase in
the Company's activities in the United States as a result of the merger
with Infotron. The comparative figures for the fiscal year 1991
were restated in U.S. dollars using a translation method of convenience
by which amounts previously stated in Canadian dollars were converted to
U.S. dollars using the July 31, 1991 exchange rate of $0.8683, without
any other effects on previous results stated in Canadian dollars. The
results of operations for the eight month period ended March 31, 1992
were converted at the average exchange rate for the period of $0.8690.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For information relating to management's discussion and analysis of
financial condition and results of operations, reference is made to
pages 28 to 34 of the 1996 Annual Report to Shareholders, filed as
Exhibit 13 hereto, which information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information relating to the Company's consolidated financial statements
and supplementary data, reference is made to pages 14 to 27 of the 1996
Annual Report to Shareholders, filed as Exhibit 13 hereto, which
information is incorporated herein by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and the notes thereto set out, as of June 1, 1996, the
name and age of each director of the Company and any nominees for director of
the Company; his present principal occupation, business or employment; his
principal occupation, business or employment during the past five years, the
period during which he has served as a director of the Company, all other
major positions and offices with the Company and significant affiliates
thereof now held by him, if any.
<TABLE>
<CAPTION>
<C> <S> <S>
BUSINESS EXPERIENCE
DIRECTOR DURING THE PAST FIVE YEARS,
NAME SINCE DIRECTORSHIPS AND OTHER INFORMATION
__________________________________________________________________________________________________________________
Desmond Cunningham, 65 1971 Past Chairman and co-founder of the
Company. Retiring, effective August 1,
1996.
Alexander Curran, 69 1987 President, Alex Curran Consultant Inc.
(management consultant) since December
1988. Retiring, effective August 1, 1996.
John F. Gamba, 57 1995 Senior Vice President, Corporate
Resources and Performance Assurance,
Bell Atlantic Corporation (regional
operating telephone company) since May
1994. Group President, Network
Technologies & Systems of Bell Atlantic
Network Services, Inc. from March 1992
to May 1994. Executive Vice President,
Bell Atlantic Network Services from
April 1990 to March 1992.
Charles J. Gardner, 60 1981 Partner of Goldberg, Shinder, Gardner
& Kronick (barristers & solicitors) since
1965.
Donald M. Gleklen, 59 1991 President, Jocard Financial Services,
Inc. (merchant banking), since October
1994. Special Counsel to Robert J.
Brobyn & Associates, Attorneys at Law,
from February 1994 to October 1994.
Senior Vice President of MEDIQ
Incorporated (health care services
company) from September 1984 to February
1994.
Barclay C. Isherwood, 50 Nominee President, B.C. Isherwood & Associates
(consultant). From 1992 to March 1996,
principal in Iles & Isherwood Inc., co-
managing an investment fund specializing
in technology companies. Prior to 1992,
Vice President, Motorola Inc.
<PAGE>
Robert E. Keith, 54 1992 President, Technology Leaders Management
Inc. (high technology venture
capitalists) since December 1991 and
Managing Director of Radnor Venture
Partners, L.P. (high technology venture
capitalists) since July 1989.
Ian McLaren, 39 Nominee President, SHL Canada, since December
1995 (a wholly-owned subsidiary of
MCI, providing systems integration
and outsourcing services). From early
1994 to December 1995, Executive Vice
President and General Manager of the
Ottawa Region for SHL Canada. Prior to
joining SHL Canada in 1994, Group Vice
President, Finance, Professional and
Public Administration Sector of Digital
Equipment of Canada.
A. Graham Sadler, 71 1994 President, Moreline Inc. (supplier of
electronic and mechanical components and
parts) since 1991. Retiring, effective
August 1, 1996.
Albert Sinyor, 49 1995 President, Amico Corporation (medical
equipment manufacturing) since 1993.
From 1988 to 1993, General Manager,
Canadian Operations of Bell Atlantic
Business Systems Services.
Thomas A. Vassiliades, 60 1993 Chairman of the Company since May 1995,
and President and Chief Executive
Officer since May 1994. President
and Chief Executive Officer of Avatar
Management Services, Inc. (management
and consulting services) since June
1993. President and Chief Executive
Officer of Bell Atlantic Business
Systems Inc. (international independent
computer and network services) from
February 1990 to June 1993.
Mihkel E. Voore, 41 Nominee Partner, since 1991, with the law firm
of Stikeman, Elliott in Toronto
practicing in the areas of corporate and
securities law.
Johnny Wai-Nang Wong, 48 Nominee Currently on sabbatical from the
University of Waterloo, Waterloo,
Ontario to the IBM Zurich Research
Laboratory, as Visiting Scientist in
the Department of Communication Systems.
From 1985 to present, Professor,
Department of Computer Science,
University of Waterloo, with cross-
appointment in the Department of
Electrical and Computer Engineering.
From 1989 to 1994 served as Associate
Provost, Computing and Information
Systems with the University of Waterloo.
</TABLE>
<PAGE>
There are no family relationships between directors or executive officers of
the Company. Under the provisions of the Ontario Business Corporations Act,
1982, a majority of the directors must be resident Canadians.
The names, ages, positions with the Company and business experience of the
executive officers of the Company as of June 1, 1996, other than Mr.
Vassiliades, are as follows:
Richard Busto, 52, has been Vice President, Strategy, Business Development
and Network Services since January 1996. Mr. Busto joined the Company in
October 1995 as Vice President of Networking Services, Education and Quality
after 29 years of industry experience at the IBM Corporation of Armonk, New
York. Before joining the Company, Mr. Busto was director of business
development for IBM's services division. From 1990 to 1993, Mr. Busto was
general manager for field service operations for the U.S. and has held
various management positions throughout IBM's services organization,
including director of networking services, director of service planning and
director of finance.
Michael Chawner, 49, has been Vice President, Product Operations and Chief
Technology Officer since January 1996 and is responsible for product
development, manufacturing and supply. Previously, Mr. Chawner was Vice
President, Strategy and Business Development, a position which he held from
February 1995 when he joined the Company. From 1988 to February 1995, Mr.
Chawner was with Newbridge Networks Corporation and held positions as Vice
President of Research and Development and Vice President of Network
Engineering. Mr. Chawner has over 20 years of combined experience in the
industry with Bell-Northern Research Ltd., Mitel Corporation, Leigh
Instruments and British Telecom in the United Kingdom.
Joceline Lemieux, 37, was appointed Vice President, Worldwide Marketing in
January 1996. Her mandate encompasses corporate marketing, product line
management and field marketing. Ms. Lemieux has been with the Company's
sales organization since April 1986. From September 1995 to April 1996 she
was Vice President, Canadian Sales and from April 1992 to September 1995 was
the Regional Manager for the Eastern Canada region.
Walter R. MacDonald, 34, has been Vice President, Finance and Chief Financial
Officer since September 1993. From June 1992 to September 1993, he was
Controller; from June 1991 to June 1992 he was Treasurer and from January
1990 to June 1991 he was Assistant Treasurer of the Company.
<PAGE>
John McGoldrick, 43, was appointed president of the Company's newly formed
Asia Pacific Group in April 1996 located in Tokyo, Japan. From April 1995 to
April 1996, Mr. McGoldrick was managing director for sales, services and
marketing in Europe, the Middle East, Australasia and Africa. From January
1995 to April 1995, Mr. McGoldrick was Managing Director of Gandalf Digital
Communications Limited, the Company's subsidiary in the United Kingdom, and
from October 1994 to January 1995, was General Manager, European Direct for
Gandalf Digital Communications Limited. Between February 1990 and October
1994, Mr. McGoldrick was Vice President of Sorbus UK, and from July 1991 to
October 1994 was also general manager of a joint venture between ICL Company
located in the United Kingdom and Bell Atlantic Customer Services, located in
the United States.
Peter Merrifield, 35, has been Managing Director, Europe, Middle East and
Africa, since April 1996. Prior to April 1996, Mr. Merrifield was Regional
Sales Director, Gandalf International Limited. Between 1984 and March 1996
he held various positions within Gandalf Digital Communications Limited and
Gandalf International Limited including International Sales Support Director,
Sales Support Manager and Product Line Manager.
Kenneth Stess, 37, was appointed Vice President, North American Sales in
April 1996. From January 1996 to April 1996, he was Vice President, Sales
and Marketing, United States and from 1991 to 1996, Mr. Stess held various
positions in the Company, including Vice President, North American Marketing;
Vice President, Marketing of Gandalf Systems Corporation; Strategic Marketing
(Remote Access) and Marketing Manager, New Business Development.
Frank van der Poll, 31, has been Managing Director, Northern Europe, since
April 1996. From March 1994 to April 1996, Mr. van der Poll was Managing
Director, Gandalf Nederland B.V. From 1993 to February 1994, Mr. van der
Poll was Sales Director, Gandalf Nederland B.V. From 1990
to 1993, Mr. van der Poll held positions with ICL Company.
<PAGE>
ITEM 11.
EXECUTIVE COMPENSATION
Overview
- --------
The Company currently has 9 executive officers of whom two became executive
officers subsequent to March 31, 1996 and whose compensation during fiscal
1996 does not form part of the amounts contained in this section. The
aggregate cash compensation, including amounts paid under the Executive
Incentive Plan paid to all executive officers as a group (9 persons,
including two individuals who were executive officers during fiscal 1996, but
were not serving at March 31, 1996) by the Company and its subsidiaries for
services rendered during the fiscal year ended March 31, 1996 was $1,260,786.
In addition, during the fiscal year ended March 31, 1996, executive officers
were given the use of automobiles leased by the Company at an aggregate
incremental cost to the Company and its subsidiaries of $45,348.
Liability Insurance
- -------------------
The Company provides liability insurance for directors and officers of the
Company and its subsidiaries. Effective November 1, 1995 the Company had
directors' and officers' liability insurance with policy limits of $18.3
million per loss with an annual aggregate of $18.3 million. The Company's
annual deductible is $73,000 except $257,000 for claims originating in the
United States, and no deductible to the individual. The premium for
directors' and officers' liability insurance in respect of fiscal 1996 was
$226,000. The individual directors and officers of the Company and its
subsidiaries are insured for losses arising from claims against them for
certain of their acts, errors or omissions. The Company is insured against
any loss arising out of any liability to indemnify a director or officer.
Summary Compensation Table
- --------------------------
The following table presents information provided in accordance with
regulations under the Securities Act (Ontario) which requires the disclosure
of compensation paid during each of the years in the three year period ended
March 31, 1996, in respect of the individuals serving as executive officers
at March 31, 1996, who during fiscal 1996 held the position of chief
executive officer of the Company or who were the other four most highly
compensated executive officers of the Company. The table also includes two
additional individuals who were executive officers during fiscal 1996, but
were not serving at March 31, 1996. In addition, the Company has included
information in respect of two other executive officers of the Company serving
at March 31, 1996.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
----------------------------------- -----------
Securities
Under
Name and Fiscal Other Annual Options All Other
Principal Positions Year Salary Bonus Compensation Granted Compensation
($) ($) (#)
(a) (b) (c) (d) (e) (f) (g)
- -------------------------------------------------------------------------------------------------------
Executive officers serving with the Company as at June 1, 1996
- -------------------------------------------------------------------------------------------------------
<C> <S> <S> <S> <S> <S> <S>
T.A. Vassiliades 1996 $200,000 --- --- 800,000 ---
Chairman, President and CEO 1995 $178,498 (1) --- --- 600,000 ---
1994 --- --- --- --- ---
R. Busto 1996 $146,125 (2) --- --- 100,000 ---
VP Strategy, Business 1995 --- --- --- --- ---
Development and Network 1994 --- --- --- --- ---
Services
M. Chawner 1996 $ 89,903 --- --- 50,000 ---
VP Product Operations and 1995 $ 10,228 (3) --- --- 75,000 ---
Chief Technology Officer 1994 --- --- --- --- ---
J. Lemieux 1996 $ 99,760 (4) --- --- 50,000 ---
VP Worldwide Marketing 1995 --- --- --- --- ---
1994 --- --- --- --- ---
W. R. MacDonald 1996 $ 89,536 $18,164 --- 64,000 ---
VP Finance and CFO 1995 $ 84,443 --- --- 40,000 ---
1994 $ 71,287 --- --- 50,000 ---
J. McGoldrick 1996 $103,376 $ 3,671 --- 50,000 ---
President Asia Pacific 1995 62,240 (5) --- --- 50,000 ---
Group 1994 --- --- --- --- ---
K. Stess 1996 $169,751 (4) --- --- 35,000 ---
VP North American Sales 1995 --- --- --- --- ---
1994 --- --- --- --- ---
Executive officers no longer serving with the Company as at June 1, 1996
- ------------------------------------------------------------------------------------------------------
P. Beaumont 1996 $157,883 (6) --- --- 25,000 ---
VP Sales, Services and 1995 $149,376 (4) --- --- 125,000 ---
Marketing for the Americas 1994 --- --- --- --- ---
G.A. Daniello 1996 $131,463 (7) $35,219 --- 25,000 ---
VP Product Operations 1995 $137,478 --- --- 75,000 ---
and Chief Technology Officer 1994 $111,493 (8) --- --- 125,000 ---
<FN>
(1) T.A. Vassiliades was appointed President and CEO on May 10, 1994. He held this office for ten months
in fiscal 1995, and previously provided consulting services to the Company through Avatar Management
Services, Inc., a company controlled by him.
(2) R. Busto was employed by the Company for seven months during fiscal 1996.
(3) M. Chawner was employed by the Company for one month during fiscal 1995.
(4) Includes sales commissions.
(5) J. McGoldrick was employed by the Company for five months during fiscal 1995.
(6) P. Beaumont resigned from the Company March 31, 1996.
(7) G.A. Daniello resigned from the Company on January 19, 1996.
(8) G.A. Daniello was employed by the Company for ten months during fiscal 1994.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL
YEAR
% Market
of Total Value of
Options Securities
Securities to Granted Underlying
Under Employees Option on
Name and Options Financial Exercise or the Date Expiration
Principal Positions Granted Year Base Price of Grant (1) Date
(#) ($/Security) ($/Security)
(a) (b) (c) (d) (e) (f)
Executive officers serving with the Company as at June 1, 1996
- ----------------------------------------------------------------------------------------------
<C> <S> <S> <S> <S> <S>
T.A. Vassiliades 800,000 45.9% 800,000 @ $ 3.77 $ 3.77 April 7, 2005
Chairman, President
and CEO
R. Busto 100,000 5.7% 100,000 @ $ 7.65 $ 7.65 August 27, 2005
VP Strategy, Business
Development and
Network Services
M. Chawner 50,000 2.8% 25,000 @ $ 4.77 (2) $ 4.77 May 10, 2005
VP Product Operations 25,000 @ $15.96 (2) $15.96 January 21, 2006
and Chief Technology
Officer
J. Lemieux 50,000 2.8% 5,000 @ $ 8.80 (2) $ 8.80 July 16, 2005
VP Worldwide 20,000 @ $ 5.50 (2) $ 5.50 October 31, 2005
Marketing 25,000 @ $13.39 (2) $13.39 January 10, 2006
W. R. MacDonald 64,000 3.7% 44,000 @ $ 4.77 (2) $ 4.77 May 10, 2005
VP Finance and CFO 20,000 @ $13.85 (2) $13.85 March 17, 2006
J. McGoldrick 50,000 2.8% 50,000 @ $ 4.72 (3) $ 4.72 May 10, 2002
President Asia
Pacific Group
K. Stess
VP North American 35,000 2.0% 10,000 @ $ 8.85 $ 8.85 July 16, 2005
Sales 25,000 @ $15.70 $15.70 January 3, 2006
Executive officers no longer serving with the Company as at June 1, 1996
- ----------------------------------------------------------------------------------------------
P. Beaumont
VP Sales, Services 25,000 1.4% 25,000 @ $ 4.72 (3) $ 4.72 May 10, 2002
and Marketing for
the Americas
G.A. Daniello 25,000 1.4% 25,000 @ $ 4.77 (2) $ 4.77 May 10, 2005
VP Product Operations
and Chief Technology
Officer
<FN>
(1) The market value of the common shares underlying the options was the closing market price on the Toronto
Stock Exchange on the day prior to the date of the grant.
(2) Options were granted in Canadian dollars. Translated at the year end exchange rate of C$1=$0.7336.
(3) Options were granted in pounds sterling. Translated at the year end exchange rate of 1 pound sterling=$1.5263
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY
COMPLETED FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION VALUES
Value of
Unexercised
Unexercised in-the-Money
Options Options
at Fiscal at Fiscal
Securities Aggregate Value of Year End (1)(#) Year End (2)($)
Name and Acquired Securities Acquired Exercisable/ Excerciseable/
Principal Positions on Exercise on Exercise Unexerciseable Unexcerciseable
(#) ($)
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S> <S>
Executive officers serving with the Company as at June 1, 1995
- ------------------------------------------------------------------------------------------------------------------
T.A. Vassiliades 1,152,502 $12,008,388 266,665 Exercisable $2,930,649 Exercisable
Chairman, President 10,833 Unexercisable $ 126,711 Unexercisable
and CEO
R. Busto --- --- 100,000 Unexercisable $ 711,000 Unexercisable
VP Strategy, Business
Development and Network
Services
M. Chawner --- --- 25,005 Exercisable $ 309,462 (3) Exercisable
VP Product Operations and 99,995 Unexercisable $ 868,538 (3) Unexercisable
Chief Technology Officer
J. Lemieux --- --- 1,667 Exercisable $ 17,267 (3) Exercisable
VP Worldwide Marketing 53,333 Unexercisable $ 283,768 (3) Unexercisable
W. R. MacDonald --- --- 67,671 Exercisable $ 871,750 (3) Exercisable
VP Finance and CFO 107,329 Unexercisable $1,061,147 (3) Exercisable
J. McGoldrick 5,000 $ 52,021 11,667 Exercisable $ 157,073 (4) Exercisable
President Asia Pacific 83,333 Unexercisable $ 950,662 (4) Unexercisable
Group
K. Stess 6,667 $ 91,837 48,333 Unexercisable $ 243,509 Unexercisable
VP North American Sales
Executive officers no longer serving with the Company as at June 1, 1996
- ------------------------------------------------------------------------------------------------------------------
P. Beaumont 41,666 $ 225,968 NIL (5) NIL
VP Sales, Services
and Marketing for the
Americas
G.A. Daniello 116,675 $1,214,670 NIL (6) NIL
VP Product Operations
and Chief Technology
Officer
<FN>
(1) Includes options granted prior to appointment as an executive officer.
(2) The market value of common shares underlying the options on March 31, 1996 was $14.76.
(3) Options were granted in Canadian dollars. Translated at the year end exchange rate of C$1=0.7336.
(4) Options were granted in pounds sterling. Translated at the year end exchange rate of 1 pound
sterling=$1.5263.
(5) P. Beaumont resigned from the Company on March 31, 1996. 108,334 options expired upon the
Optionee ceasing to be employed by the Company.
(6) G. Daniello resigned from the Company on January 19, 1996. 108,325 options expired upon
the Optionee ceasing to be employed by the Company.
</FN>
</TABLE>
<PAGE>
Bonus and Stock Plans
- ---------------------
The Company has an executive incentive plan under which cash compensation is
distributed to executive officers during the year. The plan is administered
by the Compensation Committee of the board of directors which determines
the amount that may be paid to executive officers as a bonus during the year.
The criteria used to determine the amount awarded reflects the position held
by the executive officer in the Company, the level of responsibility,
and the degree to which established objectives are achieved. Bonuses paid to
executive officers during the fiscal year ended March 31, 1996 totaled
$57,054.
The Company has five stock option plans as set out below, of which only
one is an active plan. All option grants made during the fiscal year
ended March 31, 1996 were from the Stock Option Plan for Key Employees
and Directors (formerly the Stock Option Plan for Executives and Directors).
1983 Stock Option Plan for Key Employees
1984 Stock Option Plan for Directors
1988 Stock Option Plan for Key Employees
1988 Stock Option Plan for Directors
Stock Option Plan for Key Employees and Directors
As at March 31, 1996, 1,859,225 Common Shares were subject to options at
prices ranging from C$0.88 to C$23.00 and expiring at various dates between
January 10, 1997 and March 17, 2006. Of such options, 1,167,165 Common Shares
were subject to options held by all directors and executive officers as a
group.
Compensation of Directors
- -------------------------
The by-laws of the Company authorize the Board to determine the amount
of remuneration to be paid to directors for their services as directors.
The Board has approved the following schedule of fees for directors who are
not employees of the Company (Outside Directors). Outside Directors
resident in Canada receive an annual retainer of C$7,500 . Outside
Directors resident in the United States receive an annual retainer of
$7,000. In addition, each director receives an attendance fee of
$400 (in local currency) for meetings of shareholders, the Board of Directors
and Committees of the Board of which he is a member. Directors are entitled
to reimbursement by the Company for all reasonable expenses incurred in
attending such meetings. Directors who are employees receive no remuneration
for serving as members of the Board or as members of Committees of the Board.
No additional compensation is paid to the Chairs of the various Committees.
<PAGE>
During the fiscal year ended March 31, 1996, the following amounts were paid
to directors of the Company in their capacity as directors, including amounts
paid for Committee participation or special assignments: Desmond Cunningham
C$10,660; Alexander Curran $11,100; John F. Gamba $6,096; Charles J. Gardner
C$15,900; Donald M. Gleklen $11,000; Robert E. Keith $14,600; A. Graham
Sadler C$10,700; Albert Sinyor C$6,417. Thomas A. Vassiliades was appointed
Chairman on May 31, 1995 and President and Chief Executive Officer on May 10,
1994. Desmond Cunningham resigned as Chairman of the Company on May 31,
1995.
Directors of the Company, are eligible to receive stock options under the
Stock Option Plan for Key Employees and Directors. Pursuant to the terms of
the Plan, as amended and ratified by the shareholders on August 10, 1995,
directors are to be awarded stock options on 10,000 common shares of the
Company on the date of their initial election, and stock options on 5,000
common shares of the Company on each subsequent re-election, up to a maximum
of 50,000 unexercised stock options. On August 10, 1995, Mr. Gamba and Mr.
Sinyor were elected directors of the Company and each received a stock option
under the Stock Option Plan for Key Employees and Directors to purchase
10,000 common shares at an exercise price of $10.86 per common share (the
equivalent of the Canadian market price on the date of grant), and C$14.75,
respectively.
The remaining directors of the Company each received option grants, effective
May 31, 1995, at an exercise price equal to the market price on the date of
grant. The number of stock options granted vary by individual director, in
recognition of additional responsibilities undertaken for committee work as
well as length of service as a director. Resident Canadian directors
received option grants at an exercise price of C$7.50, as follows: Desmond
Cunningham, 10,000; Alexander Curran, 15,000; Charles J. Gardner, 15,000; A.
Graham Sadler, 10,000. United States resident directors received option
grants at an exercise price of $5.48 (the equivalent of the Canadian market
price on the date of grant), as follows: Donald M. Gleklen, 20,000; Robert
E. Keith, 10,000.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of June 1, 1996 with respect to
(1) all shareholders known to the Company to be beneficial owners of more
than 5 percent of its outstanding Common Shares and (2) share ownership by
each director and nominee for director and by each named executive officer
still in the employ of the Company and by all executive officers and
directors as a group.
<TABLE>
Amount Percent
Name Beneficially Owned (1) of Class (7)
- ----------------------------------------------------------------------------------
<C> <S> <S>
Richard Busto - -
Michael Chawner 34,640 (4) -
Desmond Cunningham 83,693 (2) -
Alexander Curran 18,917 (3) -
John F. Gamba 800 -
Charles J. Gardner 25,667 (4) -
Donald M. Gleklen 75,668 (4) -
Barclay C. Isherwood 287,200
Robert E. Keith 47,943 (4) -
Joceline Lemieux 3,334 (3) -
Ian McLaren - -
John McGoldrick 10,337 (3) -
A. Graham Sadler 3,250 (3) -
Albert Sinyor - -
Kenneth Stess 6,667 (3) -
Walter R. MacDonald 95,673 (3) -
Peter Merrifield 5,001 (3) -
Frank van der Poll 5,001 (3) -
Mihkel E. Voore - -
Johnny Wai-Nang Wong - -
Thomas A. Vassiliades 665,844 (4) (5) 1.5%
All executive officers and
directors as a group (21 persons) 1,369,635 (6) 3.1%
<FN>
FOOTNOTES
(1) All shares are owned of record or beneficially and the sole investment
and voting power is held by the person named, except as set forth below.
(2) 81,692 shares are owned of record by Donosti Investments Inc., a
corporation controlled by Desmond Cunningham, and the balance represent
options currently exercisable (or exercisable within the next 60 days) by
Desmond Cunningham.
<PAGE>
(3) Represents options (currently exercisable or exercisable within 60 days).
(4) Includes options (currently exercisable or exercisable within 60 days) on
the following shares:
Michael Chawner 33,340
Charles J. Gardner 24,667
Donald M. Gleklen 25,668
Robert E. Keith 3,250
Thomas A. Vassiliades 1,250
(5) Includes 300,000 common shares held by Mr. Vassiliades wife.
(6) Includes options (currently exercisable or exercisable within 60 days) on
238,356 common shares.
(7) Percentage ownership is calculated based upon total shares outstanding
plus shares subject to options (currently exercisable or exercisable within
60 days) held by the individual named or the persons included in the relevant
group. - indicates beneficial ownership of less than 1% of the class.
</FN>
</TABLE>
Statements contained in the table as to securities beneficially owned by
directors, officers and certain shareholders or over which they exercise
control or direction are, in each instance, based upon information obtained
from such directors, executive officers and shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Charles J. Gardner, a current Board member, and Mihkel E. Voore, a nominee to
the Board, are each partners in law firms which provides legal services to
the Company. Mr. Cunningham had a consulting arrangement under which he
performed services for the Company during the fiscal year ended March 31,
1996. Mr. Vassiliades had a consulting arrangement with the Company prior to
his becoming President and Chief Executive Officer on May 10, 1994. Other
than as described above, there are no material relationships and related
transactions with directors and executive officers of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report.
(1) The following financial statements, included in the 1996 Annual Report to
Shareholders are incorporated by reference into this report.
Auditors' Report.
Consolidated Financial Statements of Gandalf Technologies Inc. including:
Consolidated Balance Sheets at March 31, 1996 and March 31, 1995.
<PAGE>
Consolidated Statements of Income for the years ended March 31, 1996, March
31, 1995 and March 31, 1994.
Consolidated Statements of Changes in Financial Position for the years ended
March 31, 1996, March 31, 1995 and March 31, 1994.
Consolidated Statements of Shareholders' Equity for the years ended March 31,
1996, March 31, 1995 and March 31, 1994.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule.
Auditors' Report on Schedule.
Schedule II: Valuation and qualifying accounts.
Note: Schedules other than the one above are omitted as not applicable, not
required, or the information is included in the consolidated financial
statements thereto.
(3) Exhibits
Exhibit No. Description
----------- -----------
*3.1 Articles of Incorporation of the Registrant and amendments
thereto (filed as Exhibit 3.1 to Registration Statement No. 2-
74405 on Form S-1).
*3.2 Articles of Amendment to Articles of Incorporation of the
Registrant effective December 14, 1983 and December 13, 1985
(filed as Exhibit 4.4 to Registration Statement No.33-14899 on
Form S-2).
*3.3 By-laws of the Registrant (filed as Exhibit 3.2 to the Form
10-K for the fiscal year ended July 31, 1985).
*3.4 Amendment to By-laws of the Registrant (filed as Exhibit 4.5
to Registration Statement No. 33-14899 on Form S-2).
*4.1 Common Share certificate (filed as Exhibit 4.1 to the Form 10-
K for the fiscal year ended March 31, 1993).
<PAGE>
*10.1 Lease dated 15th September, 1987 between The Glenview
Corporation, the Company and Gandalf Data Limited whereby The
Glenview Corporation leased the land and buildings known as
130 Colonnade Road South, Nepean to the Company and Gandalf
Data Limited for an initial term of 10 years at an initial
rent of C$1,125,000 per annum with four options to extend each
being for five year periods (filed as Exhibit 10.2 to the Form
10-Q for the quarter ended April 30, 1988).
*10.2 Lease dated 15 September, 1987 between The Glenview
Corporation, the Company and Gandalf Data Limited whereby The
Glenview Corporation leased the land and the buildings known
as 100 Colonnade Road South, Nepean, to the Company and
Gandalf Data Limited for an initial term of 10 years at an
initial rent of C$402,000 per annum with four options to
extend each being for five year periods (filed as Exhibit 10.3
to the Form 10-Q for the quarter ended April 30, 1988).
*10.3 Agreement of Purchase and Sale dated October 14, 1988 between
the Company and The Glenview Corporation of the land and
building known as 40 Concourse Gate in Nepean, Ontario for
C$3,000,000 subject to a lease-back to the Company for 20
years at a basic rent of C$420,000 per annum; and providing
the Company with an exclusive option to re-purchase the lands
for C$3,500,000 within 10 years or C$4,000,000 after October
31, 1998 and before October 31, 2003 (filed as Exhibit 10.27
to the Form 10-K for the fiscal year ended July 31, 1989).
*10.4 Agreement dated as of July 3, 1991, among Radnor Venture
Partners, L.P., Safeguard Scientifics (Delaware), Inc., the
Company and Gandalf Systems Corporation (filed as Exhibit
10.17 to the Form 10-K for the fiscal year ended July 31,
1991).
*10.5 Registration Agreement dated as of August 1, 1991, among
Radnor Venture Partners, L.P., Safeguard Scientifics
(Delaware), Inc. and the Company (filed as Exhibit 10.18 to
the Form 10-K for the fiscal year ended July 31, 1991).
*10.6 Lease dated September 13, 1988 between Cherry Hill Industrial
Sites, Inc. and Gandalf Systems Corporation (filed as Exhibit
10.52 to the Form 10-K for the fiscal year ended July 31,
1991).
<PAGE>
*10.7 Consulting Agreement dated as of February 21, 1994 between the
Company and Thomas A. Vassiliades (filed as Exhibit 10.17 to
the Form 10-K for the fiscal year ended March 31, 1994).
*10.8 Consulting Agreement dated as of March 1, 1995 between
Thomas A. Vassiliades and the Company (filed as Exhibit
10.11 to the Form 10-Q for the quarter ended July 1, 1995).
*10.9 Credit Agreement dated as of May 30, 1995 between the
Royal Bank of Canada and the Company (filed as Exhibit
10.12 to the Form 10-Q for the quarter ended July 1, 1995).
*10.10 Credit Agreement, dated as of May 30, 1995 between the
Royal Bank of Canada and Gandalf Canada Limited/Gandalf
Technologies Inc. (filed as Exhibit 10.13 to the Form
10-Q for the quarter ended July 1, 1995).
13 Pages 14 to 34 of the Annual Report to Shareholders for the
fiscal year ended March 31, 1996.
21 List of subsidiaries.
23 Consent of KPMG Peat Marwick Thorne.
- ----------------------------------
*Incorporated herein by reference.
(b) The Company did not file any reports on Form 8-K during the fourth
quarter of the fiscal year ended March 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GANDALF TECHNOLOGIES INC.
By: s/THOMAS A. VASSILIADES
-----------------------
(Thomas A. Vassiliades)
Chairman, President and Chief Executive Officer
Dated: June 3, 1996
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Thomas A. Vassiliades and
Walter R. MacDonald, jointly and severally, his attorneys-in-fact,
each with full power of substitution, for him in any and all
capacities, to sign any amendments to the Report on Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission
hereby ratifying and confirming all that each said attorneys-in-fact,
or his substitute or substitutes, may do or cause to be done by
virtue hereof.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the date indicated.
Signatures Title Date
- ------------------ ----- --------
s/DESMOND CUNNINGHAM
- --------------------
(Desmond Cunningham) Director June 3, 1996
s/ALEXANDER CURRAN
- ------------------
(Alexander Curran) Director June 3, 1996
s/JOHN F. GAMBA
- ---------------
(John F. Gamba) Director June 3, 1996
s/CHARLES J. GARDNER
- --------------------
(Charles J. Gardner) Director June 3, 1996
<PAGE>
s/DONALD M. GLEKLEN
- -------------------
(Donald M. Gleklen) Director June 3, 1996
s/ROBERT E. KEITH
- -----------------
(Robert E. Keith) Director June 3, 1996
s/WALTER R. MACDONALD
- ---------------------- Vice President June 3, 1996
(Walter R. MacDonald) of Finance
(Principal Financial and
and Accounting Officer)
s/A. GRAHAM SADLER
- ------------------
(A. Graham Sadler) Director June 3, 1996
s/ALBERT SINYOR
- ---------------
(Albert Sinyor) Director June 3, 1996
s/THOMAS A. VASSILIADES
- ------------------------ Director, Chairman, June 3, 1996
(Thomas A. Vassiliades) President, and
Chief Executive Officer
(Principal Executive Officer)
<PAGE>
Consolidated Financial Statements of Gandalf Technologies Inc.
These financial statements are prepared in accordance with Canadian
generally accepted accounting principles which in the case of the
Company differ in certain respects from those in the United States.
See note 17 to the consolidated financial statements.
<PAGE>
AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Shareholders
of Gandalf Technologies Inc.
Under date of May 10, 1996, we reported on the consolidated balance
sheets of Gandalf Technologies Inc. as at March 31, 1996 and 1995
and the consolidated statements of income, changes in financial
position and shareholders' equity for each of the years in the three
year period ended March 31, 1996 as contained in the 1996 annual report
to shareholders. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K
for the fiscal year 1996. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited
the related financial statement schedule as listed in item 14 of Form
10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on
this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set
forth therein.
s/KPMG PEAT MARWICK THORNE
Chartered Accountants
Ottawa, Canada
May 10, 1996
<PAGE>
<TABLE>
<CAPTION>
Schedule II: Valuation and qualifying accounts and reserves.
(Thousands of United States dollars)
- -------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
Additions
---------------------
(1) (2)
Charged to
Balance at Charged to other Balance
beginning costs and accounts Deductions at end
Description of year expenses - describe(1) - describe of year
- -------------------------------------------------------------------------------
<C> <S> <S> <S> <S> <S>
Year ended March 31, 1996
- -----------
Reserve for bad
debts deducted
in the balance
sheet from amounts
receivable ....... $ 4,430 $ 836 $ (364) $ - $ 4,902
Year ended March 31, 1995
- -----------
Reserve for bad
debts deducted
in the balance
sheet from amounts
receivable ...... $ 4,414 $ 519 $ (503) $ - $ 4,430
<FN>
(1) Relates to accounts receivable charged directly against
reserve for bad debts.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(Thousands of U.S. dollars)
As at March 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <S>
Assets
Current assets:
Cash and cash equivalents $ 13,602 $ 11,817
Accounts receivable 28,694 26,880
Inventories (note 2) 13,491 15,230
Other 1,867 2,268
- ----------------------------------------------------------------------------------------------------------------
Total current assets 57,654 56,195
Fixed assets (note 3) 16,253 18,619
Goodwill, net of accumulated amortization of $3,172 (1995 - $2,952) 3,242 3,462
Other assets 2,226 3,232
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 79,375 $ 81,508
================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Bank operating lines (note 4) $ - $ 5,854
Accounts payable and accrued liabilities (note 5) 21,755 21,369
Deferred revenue 6,178 7,758
Current portion of long-term debt (note 6) 360 157
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 28,293 35,138
Long-term debt (note 6) 2,496 1,877
Convertible debentures (note 7) - 10,051
Shareholders' equity:
Capital stock (notes 8 and 9)
Common shares, 42,939,523 issued and
outstanding (1995 - 35,238,064) 54,198 91,644
Retained earnings (note 8) 260 (52,364)
Cumulative translation adjustment (5,872) (4,838)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 48,586 34,442
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 79,375 $ 81,508
================================================================================================================
Commitments and contingencies (note 15)
On behalf of the Board of Directors:
s/THOMAS A. VASSILIADES s/D.M. GLEKLEN
T.A. Vassiliades, Director D.M. Gleklen, Director
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
(Thousands of U.S. dollars, except per share amounts)
Years Ended March 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S>
Revenues:
Product $ 81,076 $ 83,801 $ 90,813
Service 35,457 36,710 40,510
- ------------------------------------------------------------------------------------------------------------
116,533 120,511 131,323
Operating expenses:
Cost of product sales 38,941 43,630 49,509
Service expenses 24,053 23,316 27,024
Sales and marketing 31,942 33,148 43,678
Administration and general 8,054 7,513 11,094
Research and development 11,524 10,197 14,316
Restructuring and other costs (note 10) 1,531 685 28,662
- ------------------------------------------------------------------------------------------------------------
Income (loss) from operations 488 2,022 (42,960)
Gain on sale of portfolio investment - 2,024 -
Interest expense (487) (2,969) (4,127)
Interest income and foreign exchange 259 329 991
Income taxes (note 11) - - (1,142)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) for the year $ 260 $ 1,406 $ (47,238)
============================================================================================================
Basic earnings (loss) per share (note 12) $ 0.01 $ 0.05 $ (2.27)
============================================================================================================
Weighted average number of common shares
outstanding (thousands) 40,359 28,589 20,802
============================================================================================================
See accompanying notes to consolidated financial statements
</TABLE>
Auditors' Report
To the Shareholders of Gandalf Technologies Inc.
We have audited the consolidated balance sheets of Gandalf Technologies
Inc. as at March 31, 1996 and 1995 and the consolidated statements of
income, changes in financial position and shareholders' equity for each
of the years in the three year period ended March 31, 1996. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation.
<PAGE>
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at
March 31, 1996 and 1995 and the results of its operations and the changes
in its financial position for each of the years in the three year period
ended March 31, 1996, in accordance with generally accepted accounting
principles.
s/KPMG PEAT MARWICK THORNE
Chartered Accountants
Ottawa, Canada
May 10 1996
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Financial Position
(Thousands of U.S. dollars)
Years Ended March 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S>
Operating activities:
Cash provided by (applied to) operations (note 13) $ 5,687 $ 4,958 $ (14,395)
Decrease (increase) in operating working capital (note 14) (785) 4,212 775
- ----------------------------------------------------------------------------------------------------------------
Cash provided by (applied to) operating activities 4,902 9,170 (13,620)
- ----------------------------------------------------------------------------------------------------------------
Financing activities:
Issue of capital stock 15,273 12,242 34,226
Conversion of debentures (note 7) (10,336) (11,533) -
Long-term debt incurred 1,020 - -
Long-term debt retired (251) (446) (20,841)
- ----------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 5,706 263 13,385
- ----------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of fixed assets (2,671) (2,919) (4,411)
Proceeds on disposal of investments - 3,857 1,158
Proceeds on disposal of fixed assets - 298 1,088
Other 39 293 (2,041)
- ----------------------------------------------------------------------------------------------------------------
Cash provided by (applied to) investing activities (2,632) 1,529 (4,206)
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash balances (337) 240 (510)
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash position in the year 7,639 11,202 (4,951)
Cash position at beginning of year 5,963 (5,239) (288)
- ----------------------------------------------------------------------------------------------------------------
Cash position at end of year $ 13,602 $ 5,963 $ (5,239)
================================================================================================================
Cash position is comprised of:
Cash and cash equivalents $ 13,602 $ 11,817 $ 5,273
Bank operating lines - (5,854) (10,512)
- ----------------------------------------------------------------------------------------------------------------
$ 13,602 $ 5,963 $ (5,239)
================================================================================================================
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
(Thousands of U.S. dollars)
Years Ended March 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S> <S> <S> <S>
Capital Stock:
Consisting of an unlimited number
of common shares authorized, without par value
Balance at beginning of year 35,238,064 $ 91,644 28,072,333 $ 79,811 15,864,833 $ 45,585
Issued:
On conversion of debentures (note 7) 5,983,372 9,839 6,782,519 11,124 - -
On public offering, net of share
issue costs - - - - 12,000,000 33,863
Exercise of stock options (note 9) 1,582,685 3,531 182,214 354 207,500 363
Other 135,402 1,548 200,998 355 - -
Reduction in stated capital (note 8) - (52,364) - - - -
- ------------------------------------------------------------------------------------------------------------------
Balance at end of year 42,939,523 $ 54,198 35,238,064 $ 91,644 28,072,333 $ 79,811
==================================================================================================================
Retained Earnings:
Balance at beginning of year $(52,364) $(53,770) $ (6,532)
Net income (loss) 260 1,406 (47,238)
Reduction in stated capital (note 8) 52,364 - -
- ------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 260 $(52,364) $(53,770)
==================================================================================================================
Cumulative Translation Adjustment:
Balance at beginning of year $ (4,838) $ (6,932) $ (4,745)
Adjustment arising on translation of foreign
subsidiaries' financial statements to U.S. dollars 549 1,091 (3,122)
Adjustment relating to subsidiary loans designated
as long-term investments (1,583) 1,003 935
- ------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (5,872) $ (4,838) $ (6,932)
==================================================================================================================
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
All amounts are stated in U.S. dollars unless otherwise indicated.
C$ refers to Canadian dollars. Tabular amounts are in thousands except
per share data. References to years are to fiscal years ended March 31.
1. Summary of Accounting Principles
These consolidated financial statements have been prepared by management
in accordance with accounting principles generally accepted in Canada.
These principles are also generally accepted in the United States in all
material respects except as disclosed in note 17. The significant
accounting principles are outlined below.
(a) Basis of Consolidation
The consolidated financial statements include the accounts of Gandalf
Technologies Inc. and its subsidiaries. All significant intercompany
transactions and balances are eliminated.
(b) Foreign Currency Translation
Operations using a unit of measurement and presentation other than the
U.S. dollar, including the Company's Canadian parent, represent foreign
operations. The Company considers that for translation purposes all
of its foreign operations are self-sustaining.
The assets and liabilities of self-sustaining foreign operations are
translated into U.S. dollars at year-end exchange rates and the resulting
unrealized exchange gains or losses are included in the cumulative
translation adjustment as a separate component of shareholders' equity.
The income statements of such operations are translated at exchange rates
prevailing during the year.
(c) Revenue Recognition
Revenue from the sale of products is recognized at the time goods are
shipped to customers, net of appropriate provisions for estimated
returns. Revenue from services is recognized at the time services
are rendered. Billings in advance of services are included in deferred
revenue.
(d) Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments purchased
with an original maturity of three months or less.
(e) Inventories
Work-in-process and finished goods inventories are valued at the
lower of cost and net realizable value. Raw materials are valued
at the lower of cost and replacement cost. Cost is determined on
a first-in first-out basis and includes material, labour and
manufacturing overhead where applicable.
<PAGE>
(f) Fixed Assets
Fixed assets are recorded at cost net of government assistance.
Equipment is depreciated using the declining balance method at an
annual rate of 20%, with the exception of service spares which are
depreciated using the straight-line method over 5 years. Buildings
are depreciated using the straight-line method based on a useful life
of 20 years. Leasehold improvements are amortized using the
straight-line method over the term of the related lease.
(g) Research and Development Costs
Research costs are expensed as incurred. Development costs are expensed
in the year incurred unless management believes a development project
meets the generally accepted accounting criteria for deferral and
amortization.
(h) Goodwill
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired of subsidiary companies and is amortized using
the straight-line method over a period not exceeding 20 years.
When warranted by events or circumstances that might indicate that
recoverability is impaired, management will evaluate recoverability by
use of the undiscounted cash flow method.
(i) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Inventories
<TABLE>
<CAPTION>
As at March 31 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <S>
Raw materials $ 2,905 $ 3,336
Work-in-process 3,821 4,591
Finished goods 6,765 7,303
- -------------------------------------------------------------------------------------------------------------------
$ 13,491 $ 15,230
===================================================================================================================
<PAGE>
</TABLE>
3. Fixed Assets
<TABLE>
<CAPTION>
As at March 31 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<C> <S> <S>
Cost:
Land $ 218 $ 232
Buildings 4,627 4,725
Equipment 58,336 55,879
Leasehold improvements 1,966 1,930
- --------------------------------------------------------------------------------------------------------------------
65,147 62,766
Accumulated depreciation 48,894 44,147
- --------------------------------------------------------------------------------------------------------------------
Net book value $ 16,253 $ 18,619
====================================================================================================================
</TABLE>
4. Bank Operating Lines
At March 31, 1996 the Company's authorized bank operating lines totaled
$20.8 million. These committed credit facilities are provided by a
Canadian chartered bank and bear interest at the banks prime rate
plus 0.5% to 1.5%.
The 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, $17.3 million was available to, but
not utilized by, the Company at March 31, 1996. Cash and cash equivalents
held as of that date represented a further $13.6 million of cash resources
available to the Company. Cash and unused credit lines totaled $30.9
million at March 31, 1996, compared to $20.8 million at March 31, 1995.
5. Accounts Payable and Accrued Liabilities
<TABLE>
<CAPTION>
As at March 31 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<C> <S> <S>
Trade accounts payable $ 7,376 $ 7,341
Payroll, commissions and related taxes 3,873 4,072
Accrued restructuring costs 2,747 3,033
Other payables 6,434 5,266
Income and other taxes payable 1,325 1,657
- --------------------------------------------------------------------------------------------------------------------
$ 21,755 $ 21,369
====================================================================================================================
</TABLE>
<PAGE>
6. Long-term Debt
<TABLE>
<CAPTION>
As at March 31 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S> <S>
Interest
Description Rates Security
- -------------------------------------------------------------------------------------------------------------------
Various capital lease 8%-12.9% Certain equipment and $ 2,856 $ 2,034
obligations denominated in facilities
Canadian dollars, lease
terms ending 1999 - 2009
Classified as current (360) (157)
- -------------------------------------------------------------------------------------------------------------------
$ 2,496 $ 1,877
===================================================================================================================
</TABLE>
The aggregate amount of long-term debt scheduled to be repaid
in the five years ending March 31, 2001 is $1,359,000, with the
balance of $1,497,000 due thereafter.
7. Convertible Debentures
<TABLE>
<CAPTION>
Shares Issued
Aggregate Principal Amount % Upon Conversion
- ---------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S> <S>
Balance at March 31, 1994 C$ 30,000 $ 21,681 100%
Converted during 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 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.
<PAGE>
During 1996 all remaining debentures were converted into 5,983,372 common
shares. 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, but unpaid to the date of conversion ($135,000),
net of the pro rata share of the associated unamortized deferred financing
costs ($632,000).
8. 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
sheets and the consolidated statements of shareholders equity.
9. Stock Options
The following table summarizes the activity for the stock option plans in
effect during the year ended March 31, 1996 and for each of the preceding
two years.
<TABLE>
<CAPTION>
Shares Available Outstanding
for Grant Options
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <S>
Balance at March 31, 1993 228,460 1,148,000
Reserved for issuance 1,000,000 -
Granted (700,000) 700,000
Terminated 376,000 (376,000)
Exercised - (207,500)
- ------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1994 904,460 1,264,500
Reserved for issuance 438,000 -
Granted (1,790,000) 1,790,000
Terminated 532,500 (532,500)
Exercised - (182,214)
- ------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1995 84,960 2,339,786
Reserved for issuance 3,000,574 -
Granted (1,743,000) 1,743,000
Terminated 640,876 (640,876)
Exercised - (1,582,685)
- ------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 1,983,410 1,859,225
==================================================================================================================
</TABLE>
The options to purchase common shares granted under the above stock
option plans expire between January 10, 1997 and March 17, 2006. Of
the 1,859,225 options outstanding at March 31, 1996, 583,857 were
exercisable as of that date, and the prices at which the outstanding
options may be exercised approximated the market value on the dates of
grant. The exercise prices for outstanding options granted on or before
March 31, 1995 range from C$0.88 to C$6.00 (approximately $0.65 to $4.40)
per share. The exercise price for options granted during the year
ended March 31, 1996 range from C$5.25 to C$23.00 (approximately $3.85 to
$16.87) per share. Directors and executive officers as a group held
1,167,165 options as at March 31, 1996.
10. Restructuring and Other Costs
<TABLE>
<CAPTION>
Years Ended March 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S>
Restructuring $ 1,531 $ 685 $ 15,760
Other - - 12,902
- -------------------------------------------------------------------------------------------------------------------
$ 1,531 $ 685 $ 28,662
===================================================================================================================
</TABLE>
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, after taking into account restructuring
activities which were accrued in 1996, is now less than 700 employees,
approximately one-third the level of five years ago.
Restructuring charges in the fourth quarter of 1996 were recorded in
connection with certain consolidation and outsourcing activities
carried out since the end of the third quarter in the areas of
manufacturing distribution and repair in Europe, outsourcing to
partners for the delivery of field service maintenance, and changes
in the sales structure to continue the implementation of the
Company's distribution channel strategy. These charges primarily
related to severance and facilities costs.
Restructuring costs recorded in 1995 represented severance costs
associated with the elimination of approximately 70 positions at
the end of the first fiscal quarter in connection with an internal
functional realignment.
Restructuring costs recorded in 1994 related to decisions made by
the Company in February 1994 to reduce its workforce by approximately
300 positions worldwide and consolidate its North American operations
under a single organization structure. Restructuring costs included
$5.3 million relating to severance, $4.2 million in provisions for
redundant facilities representing the estimated future lease costs
and the unamortized cost of leasehold improvements for vacant
facilities worldwide, and $6.3 million in fixed asset writedowns
to adjust the net book value of surplus equipment and spare parts
inventory in North America to their estimated net realizable value.
During 1994, other costs included a writedown of $7.5 million in
deferred tax assets which primarily related to investment tax
credits earned in Canada prior to the third quarter of 1993 on
research and development expenditures. For financial reporting
<PAGE>
purposes, as a result of sustaining several consecutive years of
losses up to the end of 1994, management believed that the
accounting criteria for continuing to recognize these amounts as
an asset were no longer met. These tax credits remain available
to the Company and the benefit of these tax credits will instead
be recorded in the financial statements as they are utilized to
reduce future federal income taxes payable in Canada. Other
costs in 1994 also included a writedown of $4.5 million in
deferred software development costs which were not expected to
be recovered through future cash flows and a $0.9 million
writedown of assets held for disposal to their net realizable value.
11. Income Taxes
<TABLE>
<CAPTION>
Years Ended March 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S>
Current:
Canadian $ - $ - $ (342)
Foreign - - (800)
- -----------------------------------------------------------------------------------------------------------------
$ - $ - $ (1,142)
=================================================================================================================
The income tax expense reported differs from the amount
computed by applying the Canadian tax rates to the income
(loss) before income taxes.
Years Ended March 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Expected tax rate 44.6% 44.3% 44.3%
Expected tax expense (recovery) $ 116 $ 623 $(20,420)
Utilization of losses
not previously recorded (116) (623) -
Losses for which no tax benefit
has been recorded - - 20,420
Other - - (1,142)
- ----------------------------------------------------------------------------------------------------------------
$ - $ - $ (1,142)
================================================================================================================
</TABLE>
<PAGE>
At March 31, 1996, the Company had available, subject to audit and
certain restrictions, accumulated accounting losses of approximately
$70 million, the potential tax benefit of which has not been recorded
in the consolidated financial statements. These include loss carry
forwards for income tax purposes of approximately $50 million
($39 million related to U.S. operations) which begin to expire after
the 1999 fiscal year. The remaining amount relates to items expensed
in the consolidated financial statements which have not yet been
claimed for income tax purposes. The Company also had available at
March 31, 1996, subject to audit, investment tax credits of
approximately $11 million which can be applied to reduce federal
taxes payable in Canada. These investment tax credits expire between
1997 and 2006.
Tax authorities in the Netherlands have reassessed income taxes for
the years 1989 through 1991, disallowing certain amounts which have
been claimed for income tax purposes. The Company has filed
objections to these reassessments and is in discussion with the tax
authorities. The Company anticipates that the resolution of this
matter will lead to amended reassessments which, after taking into
consideration available loss carry-forwards, would be unlikely to
result in a material adverse effect on the Company's consolidated
financial position or its future results of operations.
The loss before income taxes attributable to all foreign operations
for the year ended March 31, 1996 was $1,933,000 (1995 - $735,000;
1994 -$31,074,000).
At March 31, 1996 the balance of unremitted earnings of subsidiaries
was $9,599,000 (1995 - $11,113,000; 1994 - $7,761,000). The Company
does not currently anticipate repatriating earnings of foreign
subsidiaries where such repatriation would give rise to withholding
taxes.
12. 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 year. Fully diluted earnings per share information has not
been presented as potential conversions are anti-dilutive.
Adjusted earnings per share for 1996 was $0.01 (1995 - $0.07). The
calculation assumes that the conversion of debentures, which occurred
during 1996 and 1995, had occurred at the beginning of each applicable
fiscal year.
<PAGE>
13. Cash Provided By Operations
Cash provided by (applied to) operations is computed as
follows:
<TABLE>
<CAPTION>
Years Ended March 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S>
Income (loss) from operations $ 488 $ 2,022 $ (42,960)
Depreciation and amortization 5,408 5,616 9,658
Reserves and writedowns not involving
an outlay of cash - - 22,004
Interest paid (468) (2,803) (3,546)
Interest received and foreign exchange 259 329 991
Other - (206) (542)
- ---------------------------------------------------------------------------------------------------------------
$ 5,687 $ 4,958 $ (14,395)
===============================================================================================================
</TABLE>
14. Changes in Operating Working Capital
The decrease (increase) in operating working capital is computed as
follows:
<TABLE>
<CAPTION>
Years Ended March 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S>
Accounts receivable $ (1,814) $ 3,302 $ 4,103
Inventories 1,739 5,647 1,750
Other current assets 401 78 73
Accounts payable and accrued liabilities 513 (6,160) (1,132)
Deferred revenue (1,580) 334 (1,075)
Foreign currency translation adjustment (44) 1,011 (2,944)
- -------------------------------------------------------------------------------------------------------------------
$ (785) $ 4,212 $ 775
===================================================================================================================
</TABLE>
<PAGE>
15. Commitments and Contingencies
(a) The Company has entered into various commitments under leases
and other contracts. At March 31, 1996, the minimum amounts
payable under such commitments in future fiscal years were
as follows:
1997 $ 12,793
1998 10,674
1999 2,059
2000 1,926
2001 1,733
Thereafter 6,689
--------
$ 35,874
========
(b) Since 1991, the Company has received funding of approximately
$1.4 million and $2.5 million respectively under two projects
approved through the Canadian federal government's
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 MSDP 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 the 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. At March 31,1996,
$785,000 had been accrued related to these projects.
(c) In the normal course of business, various litigation, claims and
assessments have arisen involving the Company and its subsidiaries.
In certain instances, substantial amounts are being sought.
Management is vigorously defending its position in all such
actions. While the outcome of such proceedings is currently not
determinable, management believes, after consideration of all
relevant facts, that their outcome would be unlikely to result in
a material adverse effect on the Company's consolidated financial
position or its future results of operations.
<PAGE>
16. Segmented Information
The Company operates in one business segment, providing networking
solutions to customers through designing, manufacturing, marketing and
servicing a broad line of computerized communications systems.
The Company has defined five geographic regions for the segments in
which it operates: the United States, Canada, the United Kingdom,
Holland/France and other international markets. The following table
sets forth information concerning these geographic segments for each
of the years in the three year period ended March 31, 1996.
<TABLE>
<CAPTION>
Years Ended March 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S>
Sales to customers:
United States $ 32,758 $ 32,547 $ 35,157
Canada 21,675 22,473 23,341
United Kingdom 31,644 37,939 39,309
Holland/France 20,066 16,052 15,441
Other 10,390 11,500 18,075
Segment transfers:
United States - 964 5,360
Canada 27,601 22,822 24,702
United Kingdom 1,031 977 2,385
Holland/France 6 9 476
Eliminations (28,638) (24,772) (32,923)
- ------------------------------------------------------------------------------------------------------------------
Total revenues $ 116,533 $ 120,511 $ 131,323
==================================================================================================================
Segment operating profit:
United States $ 6,416 $ 4,739 $ (1,621)
Canada 3,433 1,764 (226)
United Kingdom 5,722 8,242 6,908
Holland/France 4,276 3,527 2,550
Other (1,107) (65) 2,574
- -------------------------------------------------------------------------------------------------------------------
Total segment operating profit 18,740 18,207 10,185
- -------------------------------------------------------------------------------------------------------------------
Expenses:
Research and development 11,524 10,197 14,316
General corporate 5,197 5,303 10,167
Restructuring and other costs 1,531 685 28,662
Gain on sale of portfolio investment - (2,024) -
Interest expense 487 2,969 4,127
Interest income and foreign exchange (259) (329) (991)
Income taxes - - 1,142
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 260 $ 1,406 $ (47,238)
===================================================================================================================
Identifiable assets:
United States $ 10,845 $ 10,015 $ 14,919
Canada 31,530 27,376 33,440
United Kingdom 21,201 24,315 23,336
Holland/France 10,727 10,800 7,308
Other 5,072 9,002 10,183
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 79,375 $ 81,508 $ 89,186
===================================================================================================================
</TABLE>
<PAGE>
17. 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
statements of changes in financial position. Accordingly, the
following financing activities would not be presented in the
consolidated statement of changes in financial position for the
years ended March 31, 1996 and 1995 but would be shown
supplementally.
<TABLE>
<CAPTION>
<C> <S> <S>
1996 1995
- -------------------------------------------------------------------------------------------------------------------
Issue of capital stock on conversion of debentures $ 10,336 $ 11,533
Conversion of convertible debentures $ (10,336) $ (11,533)
</TABLE>
(b) Under U.S. 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 year.
(c) The Company follows the deferral method of accounting for income
taxes. Under U.S. GAAP the asset and liability method is used.
In the case of the Company the application of the asset and
liability method does not result in a difference in the amount of
the deferred tax asset. U.S. GAAP also requires the disclosure
of the tax effect of temporary differences that give rise to
deferred tax assets and liabilities. This information is provided
in the following table.
<TABLE>
<C> <S> <S>
1996 1995
--------------------------------------------------------------------------------------------------------------
Operating loss carry-forwards $ 20,300 $ 21,600
Depreciation 1,700 2,500
Restructuring reserves 200 800
Investment tax credits 11,000 11,000
Other 4,800 2,900
--------------------------------------------------------------------------------------------------------------
38,000 38,800
Valuation allowance (37,496) (38,296)
--------------------------------------------------------------------------------------------------------------
Net non-current deferred tax asset $ 504 $ 504
==============================================================================================================
</TABLE>
<PAGE>
(d) Reductions in stated capital and deficit as described in note 8 do
not fall within the definition of a quasi-reorganization under U.S.
GAAP and, accordingly, under U.S. GAAP, capital stock and retained
earnings would not each be reduced by $52,364,000 as
shown in the consolidated statements of shareholders' equity.
(e) 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.
Quarterly Financial Information (Unaudited)
Quarterly unaudited financial information for each of the years ended
March 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S> <S>
Revenues:
Product $ 19,414 $ 18,401 $ 19,326 $ 23,935
Service 9,236 8,956 8,845 8,420
- ------------------------------------------------------------------------------------------------------------------
28,650 27,357 28,171 32,355
- ------------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of product sales 9,663 8,572 9,179 11,527
Service expenses 5,869 5,910 6,096 6,178
Sales and marketing 8,198 7,659 7,892 8,193
Administration and general 2,071 2,142 2,102 1,739
Research and development 2,595 2,839 2,895 3,195
Restructuring costs - - - 1,531
- ------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 254 235 7 (8)
Interest expense (206) (136) (108) (37)
Interest income and foreign exchange 18 (64) 193 112
- ------------------------------------------------------------------------------------------------------------------
Net income $ 66 $ 35 $ 92 $ 67
==================================================================================================================
Basic earnings per share $ - $ - $ - $ -
==================================================================================================================
<PAGE>
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S> <S>
Revenues:
Product $ 20,745 $ 21,754 $ 20,363 $ 20,939
Service 8,973 8,906 9,388 9,443
- ------------------------------------------------------------------------------------------------------------------
29,718 30,660 29,751 30,382
- ------------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of product sales 10,896 11,094 10,661 10,979
Service expenses 5,871 5,739 5,754 5,952
Sales and marketing 8,742 8,002 7,854 8,550
Administration and general 1,929 1,907 1,957 1,720
Research and development 2,413 2,581 2,658 2,545
Restructuring costs 685 - - -
- ------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (818) 1,337 867 636
Gain on sale of portfolio investment - - 2,024 -
Interest expense (798) (823) (795) (553)
Interest income and foreign exchange 57 88 58 126
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,559) $ 602 $ 2,154 $ 209
==================================================================================================================
Basic earnings (loss) per share $ (0.06) $ 0.02 $ 0.08 $ 0.01
==================================================================================================================
Fully diluted earnings per share $ 0.06
==================================================================================================================
</TABLE>
Quarterly earnings per share figures are calculated based on the
monthly weighted average number of common shares outstanding during
the quarter. Fully diluted earnings per share is calculated
assuming convertible debentures had been converted at the beginning
of the fiscal period, and all outstanding options had been exercised
on the date which is the later of the beginning of the fiscal period
and the dates the options were granted. With the exception of the
third fiscal quarter of 1995, potential conversions are anti-dilutive
for each quarter during the two year period ended March 31, 1996.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Introduction
The consolidated financial statements 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 17 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.
<PAGE>
General Summary Discussion
The Company reported net income for the 1996 fiscal year of $260,000 or
$0.01 per share on revenues of $116.5 million, compared to net income of
$1.4 million or $0.05 per share on revenues of $120.5 million for the
fiscal year ended March 31, 1995. The 1995 results included a one-time
gain of $2.0 million on the sale of a portfolio investment. Income
before restructuring charges for 1996 was $1.8 million, representing
$0.04 per share. Income for 1995, exclusive of restructuring charges
and a one-time gain on the sale of a portfolio investment, was $67,000,
break even on a per share basis. Restructuring charges of $1.5
million were recorded in 1996 in connection with certain consolidation
and outsourcing activities carried out in the areas of manufacturing
distribution and repair in Europe, outsourcing to partners for the
delivery of field service maintenance, and changes in the sales
structure to continue the implementation of the Company's
distribution channel strategy.
The Company operates in one business segment, providing a broad range
of internetworking products and services. Within this segment the
Company derives revenue from four main product areas: remote access
products; modems, multiplexers and local connectivity products; wide
area networking (WAN) backbone products; and other. The majority of
new product introductions and enhancements during 1996 occurred in the
remote access area. Revenues from the sale of these products in 1996
increased more than 25% compared to 1995 and represented 65% of total
product revenue compared to 49% in 1995 and 25% in 1994.
The combined gross margin on product and service revenues improved in
1996 to 45.9% compared to 44.4% in 1995 and 41.7% in 1994. Operating
expenses for sales and marketing, and administration and general
expenses, declined approximately 2% in 1996 compared to 1995 after
declining close to 26% in 1995 compared to 1994. Research and
development expenses increased 13% in 1996 compared to 1995, and during
the three year period 1994 to 1996 the Company has made expenditures
on research and development which on average have been in excess of
14% of its annual revenues derived from the sale of products.
The Company's net cash position more than doubled during 1996, from
$6.0 million at March 31, 1995 to $13.6 million at March 31, 1996.
Cash and unused credit lines were $30.9 million at March 31, 1996,
an increase of 49% over the balance of $20.8 million at March 31,
1995. In addition, all remaining debentures issued in 1992 were
converted to common shares of the Company in accordance with the
terms of the debentures.
<PAGE>
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 most recent fiscal 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.
Results of Operations
The following table sets forth items derived from the consolidated
statements of income, expressed as a percentage of revenues, for
the year ended March 31, 1996 and for each of the preceding two years.
<TABLE>
<CAPTION>
Years Ended March 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S>
(Percentage of Revenues)
Product 69.6% 69.5% 69.2%
Service 30.4 30.5 30.8
- ------------------------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0%
==================================================================================================================
Gross margin:
Product 52.0% 47.9% 45.5%
Service 32.2 36.5 33.3
Combined 45.9 44.5 41.7
Expenses:
Sales and marketing 27.4 27.5 33.3
Administration and general 6.9 6.2 8.4
Research and development 9.9 8.4 10.9
Restructuring and other costs 1.3 0.6 21.8
- -----------------------------------------------------------------------------------------------------------------
Income (loss) from operations 0.4 1.7 (32.7)
Gain on sale of portfolio investment - 1.7 -
Interest expense (0.4) (2.5) (3.1)
Interest income and foreign exchange 0.2 0.3 0.7
Income taxes - - (0.9)
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) 0.2% 1.2% (36.0)%
=================================================================================================================
</TABLE>
<PAGE>
Revenues
The following three tables set forth, for the year ended March 31, 1996
and for each of the two preceding 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, XpressStack and
XpressConnect. 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 Ended March 31 Access Backbone Connectivity Other Total
------- --------- ------------ ----- -----
<C> <S> <S> <S> <S> <S>
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%
=== === === === ===
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
Other 4 7 5 3 19
--- --- --- --- ---
25% 18% 37% 20% 100%
=== === === === ===
</TABLE>
Revenues in the fiscal year ended March 31, 1996 were $116.5
million compared to $120.5 million in 1995 and $131.3 million
during 1994. Approximately 70% of revenues in 1996 were
derived from the sale of products with the balance represented
by service revenues. The mix of revenues between the sale of
products and services has not changed significantly over the
last three years.
Product revenues for the year ended March 31, 1996 were $81.1
million. For 1995 and 1994 such revenues were $83.8 million
and $90.8 million respectively. Revenues from the Company's
remote access products showed growth of 26% in 1996 compared to
1995 and represented 65% of product revenues in 1996 compared to
49% in 1995 and 25% in 1994. A decline in sales during 1995 and 1996
of other products sold by the Company, including third-party products,
more than offset the growth in remote access products during this two
year period, resulting in a decline in total product revenues of 3.3%
in 1996 compared to 1995, and 7.7% in 1995 compared to 1994.
<PAGE>
Revenues from services were $35.5 million in 1996 compared to
$36.7 million in 1995 and $40.5 million in 1994. Service revenues
declined in 1996 compared to 1995 and 1994 as a result of lower
revenues during each of the last two fiscal years on products which
the Company has traditionally derived the majority of its service
revenues.
Gross Margin
The combined gross margin (total revenues minus cost of product sales
and service expenses expressed as a percentage of total revenues)
was 45.9% in 1996 compared to 44.4% in 1995 and 41.7% in 1994.
The improvement in the combined gross margin in 1996 compared to
1995 largely mitigated the reduction in revenues of $4.0 million from
1995 to 1996. The combined gross profit (total revenues minus cost of
product sales and service expenses) in 1996 was $53.5 million on
revenues of $116.5 million compared to $53.6 million on revenues of
$120.5 million in 1995.
The gross margin on product revenues (product revenues minus cost of
product sales expressed as a percentage of product revenues) improved
to 52.0% in 1996, compared to 47.9% in 1995 and 45.5% in 1994. 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 were experienced in 1996, during which the gross margin on
product revenues fluctuated in a range between 50.2% and 53.4% over the
four fiscal quarters.
The gross margin on service revenues (service revenues minus service
expenses expressed as a percentage of service revenues) was 32.2% in
1996, 36.5% in 1995 and 33.3% in 1994. The decline in 1996 compared
to 1995 occurred as a result of a 6% decline in service revenues in 1996
compared to 1995, when applying constant exchange rates for translation
purposes for both periods. Service expenses, when translated in the
same way, were unchanged in 1996 compared to 1995.
<PAGE>
Operating Expenses
Sales and marketing, and administration and general expenses were $40.0
million in 1996, compared to $40.7 million in 1995 and $54.8 million in
1994. Reductions in these operating expenses in 1996 and 1995 related to
restructuring and downsizing actions undertaken between 1993 and 1995.
Research and development expenses in 1996 were $11.5 million, 13.0% higher
than in 1995. Research and development expenses have averaged more than
14% of product revenues during the three years 1994 to 1996.
Since 1991, the Company has received funding of approximately $1.4 million
and $2.5 million respectively under two projects approved through the
Canadian federal government's Microelectronics and Systems Development
Program (MSDP). This funding is repayable, 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. At March 31, 1996 $785,000 had been accrued related to these
projects.
Restructuring charges of $1.5 million in the fourth quarter of 1996
were recorded in connection with certain consolidation and outsourcing
activities carried out in the areas of manufacturing distribution
and repair in Europe, outsourcing to partners for the delivery of field
service maintenance, and changes in the sales structure to continue the
implementation of the Company's distribution channel strategy. These
charges primarily relate to severance and facilities costs.
The Company recorded restructuring costs of $0.7 million during the
first quarter of 1995, representing severance costs associated with
the elimination of approximately 70 positions in connection with an
internal functional realignment.
Restructuring costs of $15.8 million recorded during the 1994 fiscal
year related to decisions made by the Company in February 1994 to
reduce its workforce by approximately 300 positions worldwide and
consolidate its North American operations under a single organization
structure.
<PAGE>
Other costs recorded in the fourth quarter of fiscal 1994 included the
writedown of $7.5 million in deferred tax assets which primarily related
to investment tax credits earned in Canada prior to the third quarter of
1993 on research and development expenditures. These tax credits remain
available to the Company and the benefit of these tax credits will instead
be recorded in the financial statements as they are utilized to reduce
federal income taxes payable in Canada. Other costs in 1994 also included
a writedown of $4.5 million in deferred software development costs which
were not expected to be recovered through future cash flows and a $0.9
million writedown of the carrying value of assets held for disposal to
their estimated net realizable value.
Income From Operations
The Company reported income from operations, net of restructuring
charges, of $488,000 in 1996 compared to income from operations of
$2.0 million in 1995 and a loss from operations of $43.0 million in
1994. Income from operations, before restructuring charges, was $2.0
million in 1996 and $2.7 million in 1995, compared to a loss from
operations, before restructuring charges and other costs, of $14.3
million in 1994.
Net Financial Expenses
Interest expense was $487,000 in 1996 compared with $3.0 million in
1995 and $4.1 million in 1994. Interest expense declined in 1996
compared to 1995 and 1994 as a result of the conversion of interest-
bearing debentures to common shares during 1996 and 1995 and lower
utilization of bank operating lines.
Net Income
Net income for the year ended March 31, 1996 was $260,000 or $0.01 per
share compared to net income of $1.4 million or $0.05 per share in 1995.
Income before restructuring charges in 1996 was $1.8 million, representing
$0.04 per share. Income for 1995, exclusive of restructuring charges and
a one-time gain on the sale of a portfolio investment, was $67,000, break
even on a per share basis.
<PAGE>
Segment Operating Results
Note 16 to the consolidated financial statements contains information
concerning the geographic segments in which the Company operates.
The following table sets forth supplemental information regarding
product and service revenues by geographic segment for the year ended
March 31, 1996 and for each of the preceding two years.
<TABLE>
<CAPTION> <S> <S> <S>
Years ended March 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
Product Revenues:
United States $ 24,769 $ 23,341 $ 24,177
Canada 15,033 15,539 15,431
United Kingdom 18,540 24,059 24,602
Holland/France 12,344 9,362 8,528
Other 10,390 11,500 18,075
- -----------------------------------------------------------------------------------------------------------------
$ 81,076 $ 83,801 $ 90,813
=================================================================================================================
Service Revenues:
United States $ 7,989 $ 9,206 $ 10,980
Canada 6,642 6,934 7,910
United Kingdom 13,104 13,880 14,707
Holland/France 7,722 6,690 6,913
- -----------------------------------------------------------------------------------------------------------------
$ 35,457 $ 36,710 $ 40,510
=================================================================================================================
</TABLE>
Product and service revenues in North America (United States and Canada)
were $54.4 million in 1996, compared to $55.0 million in 1995 and $58.5
million in 1994. The Company's European direct sales markets (United
Kingdom, Holland and France) reported total revenues of $51.7 million
in 1996, compared to $54.0 million in 1995 and $54.8 million in 1994.
Other international markets represented revenues of $10.4 in 1996,
$11.5 million in 1995 and $18.1 million in 1994.
Segment operating profit for North America (United States and Canada) in
1996, expressed as a percentage of revenues, was 18.1% compared to 11.8%
in 1995. In 1994, the segment operating loss in North America represented
3.2% of revenues. The improvement in operating performance for this segment
between 1994 and 1996 is primarily attributable to a reduced cost
infrastructure and an improved product mix.
Segment operating profit, expressed as a percentage of revenues, for the
Company's operations in the United Kingdom, Holland and France was 19.3%
in 1996, 21.8% in 1995 and 17.3% in 1994. The decrease in operating profit
in Europe during 1996 is primarily attributable to a 30% decline in
traditional product revenues in the United Kingdom.
<PAGE>
The Company's other international markets reported a segment operating loss
of 10.7% of revenues in 1996 compared to a segment operating loss of 0.6% of
revenues in 1995, and a segment operating income of 13.8% of revenues in
1994. This reduction in profitability is primarily due to the combined
effect of a change in product mix and the higher costs associated with
developing these markets.
Liquidity and Capital Resources
The Company recorded positive cash flow of $7.6 million during 1996.
At March 31, 1996 the net cash position (cash and cash equivalents net
of bank operating lines) was $13.6 million compared to $6.0 million a
year ago. The increase in cash included positive cash flow from
operating activities of $4.9 million. Non-operating sources of cash
in 1996 included net proceeds of $4.9 million from the issue of capital
stock, primarily from the exercise of stock options and shares issued
under the employee stock purchase plan.
At March 31, 1996 the Company's authorized bank operating lines totaled
$20.8 million. These committed facilities are provided by a Canadian
chartered bank and bear interest at the bank's prime rate plus 0.5%
to 1.5%.
The 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, $17.3 million was available to, but
not utilized by, the Company at March 31, 1996. Cash and cash equivalents
held as of that date represented a further $13.6 million of cash resources
available to the Company. Cash and unused credit lines totaled $30.9
million at March 31, 1996, compared to $20.8 million at March 31,
1995.
During 1995 and 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>
Capital spending was $2.7 million in 1996, $2.9 million in 1995 and
$4.4 million in 1994. The Company believes it must continue to invest
in its capital asset base at 1996 or moderately higher levels.
The ratio of term debt to shareholders' equity at March 31, 1996 was
0.05:1. The corresponding figure at March 31, 1995 was 0.35:1. The
Company's current ratio improved to 2.0:1 at March 31, 1996 compared
to 1.6:1 at March 31, 1995.
Market for Gandalf Stock and Related Security Holder Matters
Markets Information
The common shares of Gandalf Technologies Inc. are listed on The Toronto
Stock Exchange in Canada (Symbol GAN) and on The Nasdaq Stock Market
(NMS) in the United States (Symbol GANDF).
<TABLE>
<CAPTION>
The Toronto Stock Exchange The Nasdaq Stock Market
(Canadian Dollars) (U.S. Dollars)
<C> <S> <S> <S> <S> <S> <S> <S> <S>
Fourth Third Second First | Fourth Third Second First
Quarter Quarter Quarter Quarter | Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------
Fiscal
1996
High 23 27 - 3/8 17.00 13 - 3/8 | 17 - 1/8 20 - 1/16 12 - 1/8 9 - 3/4
Low 16 - 5/8 6 - 3/8 7 - 4/8 4.85 | 12 - 3/32 4 - 7/8 5 - 5/8 3 - 1/2
Volume (000's) 8,705 33,241 15,958 24,240 | 93,368 168,536 89,217 69,536
- ------------------------------------------------------------------------------------------------------------------------
Fiscal
1995
High 6 - 7/8 2.33 1.58 1.74 | 4 - 7/8 1 - 11/16 1 - 3/16 1 - 3/8
Low 1.80 1.26 0.85 0.75 | 1 - 1/4 7/8 9/16 1/2
Volume (000's) 52,236 8,886 9,765 10,037 | 49,876 2,478 1,475 2,810
- ------------------------------------------------------------------------------------------------------------------------
Fiscal
1994
High 3.75 4.60 4.00 4.60 | 3 3 - 1/2 3 - 1/4 3 - 19/32
Low 0.95 3.40 2.85 3.60 | 13/16 2 - 1/2 2 - 1/8 2 - 3/4
Volume (000's) 20,284 9,167 1,633 3,008 | 1,418 798 453 605
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Volatility of Stock Prices
The market price of the Company's common stock has been, and may continue
to be, extremely volatile. The Company believes that the market price
for the Company's stock at any particular time is heavily dependent on
expectations in the market, including analysts' expectations, of future
performance and growth which may be based on trends existing generally
in industry. There can be no assurance that the Company's performance will
meet such expectations, and accordingly, a shortfall in earnings in any
given period can be expected to have an immediate and significant adverse
effect on the trading price of the Company's common stock. Factors such as
new product announcements by the Company or its competitors, strategic
alliances, mergers or acquisitions announced by the Company's competitors,
general conditions in the data networking market, the general volatility
of stocks of high technology companies and other factors that may be
unrelated to the performance of the Company may also have a significant
impact on the market price of the Company's common stock.
<PAGE>
Shareholders
As at June 1, 1996, there were 43,262,941 shares issued and outstanding
with 1,867 record holders. The stock closed on The Toronto Stock
Exchange at C$19.35 on May 31, 1996, and on The Nasdaq Stock Market
at $13 56/64.
Dividends
Individuals and corporations resident in the United States are subject
generally to a 15 percent withholding tax on dividends, and individuals
and corporations resident in countries that do not have a treaty with
Canada are subject to a 25% withholding tax. For United States
corporations only, however, the United States/Canada Tax Treaty reduces
the withholding tax to 10 percent if the United States corporation
owns at least 10 percent of the Company's voting shares.
It is the Company's present policy not to pay cash dividends and to
retain its earnings to finance expansion and growth. Future dividends
if any, would be expected to be paid in Canadian dollars. Payment of
future dividends will be at the discretion of the Board of Directors
and will be dependent on earnings, capital requirements and the financial
condition of the Company.
Capital gains derived in Canada from the sale or exchange of the Company's
shares by an individual or corporation resident in the United States and
without a permanent establishment in Canada are exempt from taxation in
Canada with limited exceptions.
<PAGE>
LIST OF SUBSIDIARIES
Jurisdiction of
Name Incorporation
- ------------------------------------- -----------------
Gandalf Australia Pty. Limited Australia
Unit 17
390-392 Eastern Valley Way
East Roseville, NSW
2083 Australia
Gandalf Canada Ltd. Ontario, Canada
130 Colonnade Road South
Nepean, Ontario
Canada K2E 7M4
Gandalf Digital Communications Limited United Kingdom
19 Kingsland Grange
Woolston, Warrington
Cheshire, WA1 4RW
England
Gandalf Systems Corporation Delaware, U.S.A.
501 Delran Parkway
Delran, New Jersey
08075 USA
Gandalf International Limited United Kingdom
Doncastle Road
Bracknell, Berkshire
RG12 8GD
Gandalf Nederland B.V. Holland
Kruisweg 609
2132 NA Hoofddorp
Amsterdam, Netherlands
Gandalf S.A. France
16, Burospace
route de Gisy
91572 Bievres Cedex
France
<PAGE>
Jurisdiction of
Name Incorporation
- ------------------------------------- -----------------
Gandalf Systems Belgium N.V. Belgium
Heizel Esplanade, P.O. Box 6,
1020 Brussels
Infotron Puerto Rico, Inc. Delaware, United States
501 Delran Parkway
Delran, New Jersey
08075-1249
T3-Inc. Delaware, United States
501 Delran Parkway
Delran, New Jersey
08075-1249
Infotron Belgium N.V. Belgium
Heizel Esplande
P.O. Box 6
1020 Brussels
Belgium
Infotron Systems Foreign Virgin Islands
5 Kronprindsens Gade
P.O. Box 8560, Charlotte Amalie
St Thomas, Virgin Islands
00801-8080
Infotron Systems Worldwide Inc. Delaware, United States
103 Springer Building
3411 Silver Side Road
Wilmington, Delaware
19810 USA
Infotron Systems Italia, S.r.l. Italy
Via Del Grana, Di Nervi, 42
00142 Roma, Italy
<PAGE>
<PAGE>
CONSENT OF CHARTERED ACCOUNTANTS
To the Board of Directors of Gandalf Technologies Inc.
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (No. 2-87578, No. 2-93961, No. 33-31498, No. 33-31499, No. 33-
50017, No. 03-55221, No. 033-58691, No. 033-64375, No. 333-00783 and
No. 333-02677); on Form S-4 (No. 33-41556); on Form S-3 (No. 33-42077) and
in the related prospectuses therein of our reports dated May 10, 1996 on the
consolidated financial statements and schedule of Gandalf Technologies Inc.,
which reports are included or incorporated by reference in this annual
report on Form 10-K.
S/KPMG PEAT MARWICK THORNE
- --------------------------
Chartered Accountants
Ottawa, Ontario
May 10, 1996
