<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 30, 1997 (the last
trading day prior to June 1, 1997) was approximately $66,405,720. This amount
excludes 73,700 common shares held by all executive officers, directors, and
shareholders holding over five percent of the outstanding common shares on that
date, as such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. As of June 1, 1997, 43,440,701 common shares, without nominal or par
value, were issued and outstanding.
All dollar amounts in the Annual Report on Form 10-K are in United States
dollars, except where indicated. C$ refers to Canadian dollars. References to
years are to fiscal years ended March 31.
DOCUMENTS INCORPORATED BY REFERENCE
PART I None
PART II None
PART III None
[Cover page 2 of 2 pages}
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business 4
The Company and Corporate Structure 4
Industry Background 4
Products and Services 5
Sales and Marketing 7
Research and Development 7
Manufacturing 8
Customers 8
Competition 8
Backlog 9
Intellectual Property and Proprietary Rights 9
Employees 9
Environmental Affairs 9
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote
of Security Holders 10
PART II
Item 5. Market for Registrant's Common Stock
and Related Security Holder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 13
Item 8. Financial Statements and Supplementary
Data 20
Item 9. Disagreements on Accounting and
Financial Disclosure 36
PART III
Item 10. Directors and Executive Officers
of the Registrant 36
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain
Beneficial Owners and Management 44
Item 13. Certain Relationships and Related
Transactions 45
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 45
Signatures 47
<PAGE>
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
The Company and Corporate Structure
- -----------------------------------
Gandalf Technologies Inc. ("Gandalf" or the "Company") 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 sales operations
are conducted through two distinct operating units: the North America Group
based in Nepean, Ontario and Boston, Massachusetts covering Canada, the United
States and Mexico; and the International Group, based in Bracknell, UK, covering
Europe, the Middle East, Africa, Asia, Australia and New Zealand. For
information regarding Gandalf's foreign and domestic operations, see Note 17 to
the Company's consolidated financial statements contained in this Annual Report
of Form 10-K.
The Company is currently facing financial difficulties. See "Liquidity and
Capital Resources" 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 13 and 11 respectively, of this Annual
Report on Form 10-K.
Industry Background
- -------------------
For many organizations, access to information is a strategic element of
business. A number of 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.
Remote access is that segment of the networking industry which involves
workstation-to-network connections from remote locations. Products in this
segment allow individuals and remote business offices to connect to local and
wide area networks via telephone lines. The end-user market consists of
part-time and full-time teleworkers, small remote branch offices, large branch
offices, corporate head offices and the Internet Service Provider (ISP) segment
activities.
The Company is engaged in the design, production, and marketing of
communications networking products and solutions, and has increasingly focused
its sales and marketing efforts on the remote access market over the last three
years. Specifically, the Company produces server and concentrator products for
central sites as well as multiplexers, routers and remote access adapters. The
Company also provides full life cycle services for the remote access market.
The remote access market is divided into three segments; corporate LAN access
("Corporate access"), WAN access, and Internet access. The Company's primary
focus is the Corporate access market; however, the Company also participates in
the Internet market.
<PAGE>
Products and Services
- ---------------------
Gandalf and its subsidiaries sell products and services in four principal
segments of the networking market: remote access, LAN connectivity, wide area
networking and network services. Remote access products include internetworking
edge routers, carrier class concentration servers for central sites, ISDN
terminal adapters, bridges, modems, routers and software products which extend
corporate, public network, or Internet Service Provider (ISP) based resources,
integrating voice and data, to remote, distributed locations. LAN connectivity
products include concentrators for connectivity to Ethernet LANs, and LAN
switches, providing interconnectivity among small, independent networks. Wide
area networking products include multiplexers and concentrators designed to
carry a variety of traffic types, including voice, data, video, fax, and LAN,
over private or public networks. Network services include value-added network
design, implementation and full life cycle support services customized to meet
specific user needs, reduce costs, and increase productivity. Gandalf has
increasingly focused its sales and marketing efforts on remote access products
and services over the last three years.
Remote Access Products
The Company has developed a wide array of products and services for the remote
access market. XpressAnywhere(TM) is Gandalf's total-solution strategy that
creates and supports a virtual office environment by extending integrated voice
and data features to the remote office through the delivery of central site and
remote site products, as well as a full range of services. Gandalf has conducted
extensive research to determine its customers' priority requirements for virtual
office infrastructures. Gandalf has designed the XpressAnywhere solution around
its customers' requirements to deliver four principal benefits: productivity,
ease of use, value and security.
Gandalf serves the expanding remote access market with 25 core products in three
categories: remote devices and central site access servers and concentrators.
Many of Gandalf's products can operate over a variety of public networks as they
are designed with a compatible module for each transmission technology including
Frame Relay, ISDN, analog, and X.25. As networks evolve, the Company's products
are designed to remain compatible with new transport technologies, such as xDSL,
ATM and cable. This approach provides investment protection to customers by
allowing them to easily modify their systems at low incremental cost as their
enterprises grow and develop.
The Company's remote access family of products fall into four branded groups:
XpressConnect(TM), XpressStack(TM), Xpressway(TM), and XpressView(TM). Gandalf's
range of products address the needs of each user segment from small business
operations to major corporations. The XpressConnect group of products is
designed for the home, desktop, or regional office. XpressStack and Xpressway
provide companies with sufficient capacity to connect corporate headquarters.
The XpressConnect line of access products is Gandalf's solution for customers
seeking connection to the edge of a network. Each model comes with a selection
of features to allow end users to tailor their networks according to individual
or corporate requirements. XpressConnect products deliver the response time and
performance of a local LAN connection even over a low speed, WAN or local loop
facility. The XpressConnect line comprises a range of access solutions for
casual, part time and full time teleworkers or Internet users, small and large
branch offices, as well as corporate head offices.
While the XpressConnect family provides edge access, XpressStack and Xpressway
are designed to connect corporate headquarters to remote access networks.
XpressStack is a modular and stackable line of remote access server and
internetworking products. XpressStack provides concentration to small and medium
branch offices, teleworkers, or ISPs who serve a moderate number of subscribers.
<PAGE>
The Xpressway line of concentrators and internetworking products offers a
high-density, chassis-based solution which allows enterprises and service
providers the ability to concentrate large numbers of remote users, providing
them access to the LAN, WAN and the Internet within a single chassis. The
scaleable design ensures that performance remains consistent as additional
remote users are added to the system. Numerous internetworking modules can be
added to an Xpressway system (multiprotocol router, campus LAN switch, hub
cards) to enable a complete solution. Designed for larger corporate offices, the
Xpressway RLAN subsystem allows a large number of users to connect to and from a
central network through ISDN, analog, Frame Relay, or leased line connections.
Gandalf's Xpressway solution for multiple large offices is the XBR 7202, a local
and remote Ethernet bridge and multiprotocol router which delivers secure and
reliable interconnection between corporate offices and remote sites.
Network management software is available at both central and remote sites, using
XpressView and Passport. XpressView allows users to configure and manage the
full set of Gandalf products. The console-based system simplifies system
management through its Windows(TM)-based Graphical User Interface (GUI)
available on a PC. The Company's Passport Network Management System offers
solutions for complex multi-vendor networks. Passport draws a visual map to
provide a clear representation of the network to the user. The system allows for
navigation and control of even the most complicated LAN and WAN environments.
LAN Connectivity Products
The Company markets the LANLine series of bridges and routers in addition to its
Xpress family of remote access products. Gandalf's LAN products are designed to
substitute expensive leased lines with switched digital services for high volume
teleworkers and branch offices. Users may select a number of Xpressway Ethernet
modules to connect multiple segments of Ethernet LANs. LAN connectivity is
further enhanced by the Company's Virtual LAN Switch (VLS(TM)) which segments
client/server LANs into smaller, independent networks and interconnects them at
full network speed, resulting in increased bandwidth for faster networking.
Wide Area Network Products
The Company continues to market its legacy wide area networking (WAN) products
directly to long-standing customers, and new customers primarily in
international markets. Gandalf's WAN solutions allow organizations to
concentrate and integrate multimedia traffic and minimize bandwidth volumes.
Gandalf's WAN 2000 family of bandwidth management concentrators and multiplexers
has been designed to maximize the efficiency of carrying LAN, digital and analog
voice, fax, video, Frame Relay and data traffic over single or multiple leased
lines. Gandalf's WAN 2000 family includes three products: the 2120 Access
Concentrator, the 2300 Regional Concentrator and the 2050 Communications Switch.
Other Products
The Company continues to derive revenue from a number of mature products which
were designed to facilitate terminal-to-computer traffic. These include data
switches, modems and multiplexers under brand names: Starmaster, LDS, LDM and
MUX 2000.
Network Services and Support
Gandalf provides life cycle support and services for its products, including
network design, implementation, management and operations, asset management,
training, and maintenance. Services are sold with products as part of the
Company's total networking solutions.
The Company has devised a number of branded services packages for its business
partners and customers. Services include the Partner Program, for those channel
partners who wish to enhance their own services capabilities, and the Alliance
Program for channel partners who do not have their own service organizations.
Teleworking services include RemoteConnect a complete turnkey, value-added,
integrated services package encompassing installation, projection management,
line provisioning, and user support. Remote Connect is designed to provide
customers with a cost-effective solution for deploying and supporting
teleworking programs.
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.
<PAGE>
Sales and Marketing
- --------------------
In the first quarter of fiscal 1997, Gandalf altered its sales and distribution
model by shifting from direct sales toward indirect channels, a model which the
Company considers to be the most effective and efficient method of distribution
for its chosen markets. Gandalf has built its remote access sales and
distribution infrastructure around national distributors, value added resellers
(VARs), telephone companies, Internet service providers and OEM partnerships, in
addition to its own direct sales force. The Company has distribution and
reseller agreements in North America, Europe and the Pacific Rim, with companies
such as Ingram Micro, Tech Data, Bell Atlantic, Bell South, Ameritech, Nippon
Telegraph and Telephone, NEC, KNC in Korea, France Telecom, and PTT Nederland.
Over the past year, the Company has added additional distributors such as
Samsung Electronics in Korea, Telecom Italia in Italy, and Pacific Bell Network
Integration in the U.S., as well as Internet service providers such as COLOMSAT,
Information Gateway Services, and the Zoo Corporation.
The Company operates two regional sales and marketing groups: North America and
International. The Company has structured its sales and marketing organization
to meet the standards and market practices of target countries and to maximize
the penetration of local telephone companies, VARs, distributors and OEMs.
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.
Gandalf's research and development effort is focused on continually expanding
its remote access product capabilities through feature innovation and
performance enhancements. The Company's technical competencies include data
compression, encryption, voice and data integration, bandwidth-on-demand
routing, switched digital connectivity, and scalability in design. The Company
integrates commodity products and components via OEM relationships.
The majority of the Company's research and development involves information
handling, network interconnections, interoperability and network management.
These efforts capitalize on the Company's expertise in several underlying
technologies, including remote access protocols (PPP, PPTP, multilink, SLIP,
BACP); ISDN, X.25 and Frame Relay implementation; LAN and WAN interface
development; bandwidth management; data compression and encryption; voice
interfaces and network management.
The Company operates separate North American and European technology centers at
its facilities in Nepean, Canada and Fearnhead, U.K. The majority of development
staff is located in North America. Gandalf's U.K. research facility employs a
small number of professionals with expertise in ISDN, X.25 and PRI development.
The Company's processes encompass computer aided engineering (CAE), computer
aided design (CAD), and automated testing techniques. A minor portion of R&D has
been contracted to a third party.
The Company spent $13.0 million in fiscal 1997, $11.5 million in fiscal 1996 and
$10.1 million in fiscal 1995 on product development.
<PAGE>
Manufacturing
- -------------
The Company's manufacturing operations consist of materials planning and
procurement, assembling, and testing of electronic assemblies. In addition, the
Company manufactures printed circuit boards for use in its products. Gandalf's
manufacturing quality systems are managed to the ISO 9002-1994 standard and are
recognized under the Quality Management Institute's registration program.
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
- ---------
The Company's revenues are derived from a broad base of customers and
distributors, reducing its dependence on individual corporate and distribution
accounts.
Gandalf's target customers include corporations from the financial, technology,
healthcare, utility and government sectors that are implementing remote access
solutions to support teleworkers, remote offices and mobile workers. The
Company's customers also include ISPs and telephone companies, who use Gandalf's
products for their own environments in addition to providing solutions for their
customers.
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, 1997, no customer accounted for 10 percent or
more of the Company's revenues in any year.
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 market being
identified and include companies such as 3Com Corporation, Ascend
Communications, Inc., Bay Networks Inc., and Cisco Systems Inc. These and other
competitors and potential competitors have greater financial, technological,
manufacturing, marketing and personnel resources than the Company. Gandalf is
devoting significant time and energy to establishing strategic alliances and
partnerships that would give it the critical mass it needs to succeed in its
chosen market segment. Since February 1997, the Company has been working with JP
Morgan & Co in seeking a strategic partner which will complement the Company's
strengths and provide the additional resources the Company requires to
continue its operation in its chosen market. While these efforts continue,
to date no firm offers have been received and no assurance can be given that
the Company will be successful in achieving a strategic agreement.
<PAGE>
Backlog
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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 relies on a combination of patent, trademark, copyright and trade
secret laws, non- disclosure agreements and other contractual provisions to
establish and maintain its proprietary rights.
Gandalf protects its intellectual property through patents and trademarks on a
worldwide basis. The Company either holds or has applied for patents on its
proprietary compression and encryption technology. The Company utilizes
non-disclosure and confidentiality agreements to disclose proprietary
information to its resellers, distributors, and potential customers. The firm's
products include proprietary software and firmware which are provided under
license to customers and end-users.
Employees
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On March 31, 1997, the Company had 615 employees worldwide. Of these, 237 were
sales, marketing and customer support personnel, 111 were engaged in engineering
development, 150 were engaged in manufacturing and distribution and 117 held
general administrative positions. On March 31, 1996 the Company had 812
employees and on March 31, 1995 the Company had 897 employees.
The majority of the reduction in employees from fiscal 1996 to fiscal 1997
resulted from the transformation of the Company's sales distribution structure
to an indirect sales channel model -- one where intermediaries manage the final
sale -- instead of the direct sales model it had in place. In addition, since
January 1997, the Company has further consolidated its sales and marketing
units, consistent with its focus on the corporate access segment of the remote
access market.
Organizational changes in other functional groups have taken place as well. The
Company has consolidated North American engineering with the objective of
streamlining the organization and focusing it more directly on remote access
development. Support staff in administration, marketing, service, finance and
information systems have been reduced. The number of manufacturing staff has
been reduced to a level commensurate with the current production volume.
As a result of these changes, at June 1, 1997 the Company had fewer than 540
employees. Approximately 67% of these employees are located in North America and
the remainder are employed in other parts of the world, mostly in Europe.
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
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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 maintains
a letter of credit in the amount of $100,000 with Royal Bank of Canada to secure
its clean-up obligations under New Jersey law. In the opinion of management, the
cost to complete the remediation 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 adjacent leased premises at this location,
consisting of a research and administration facility (97,000 square feet), a
manufacturing facility (58,000 square feet) and a printed circuit board
manufacturing facility (18,250 square feet). The research and administration
facility and the manufacturing facility were sold to the builder upon completion
in 1987 and leased back to the Company for a 10-year term, expiring in September
1997, with four options to renew of five years each. These properties currently
exceed the Company's needs and the Company has therefore not exercised the
option to renew. The printed circuit board manufacturing facility was sold to
the builder upon completion in 1988 and leased back to the Company for a 20-year
term.
As a result of the restructuring activities carried out during fiscal 1997, the
Company closed, reduced and consolidated many of its sales offices worldwide.
Outside of North America the Company's other principal leased premises are in
Bracknell, England (15,000 square feet), Fearnhead, England (10,000 square feet)
and Amsterdam, Netherlands (28,000 square feet). It is the Company's belief that
these properties are adequate for the Company's current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company has been, from time to time, subject to litigation in its ordinary
course of business, none of which, with the exception noted below, the Company
believes to be material.
In August 1996, an action was instituted in the Superior Court of the State of
New Jersey, Law Division, for Burlington County against the Company, certain of
its officers and directors, and one former director by Michael Wagnerman
purportedly on behalf of all persons who purchased or otherwise acquired shares
of the Company's stock from November 6, 1995 through July 2, 1996. The
plaintiff's claim is for common law negligent misrepresentation and common law
fraud allegedly arising from certain press releases and public statements
purportedly made by the Company and certain of its officers during the period in
question relating to its business. The plaintiff seeks to recover monetary
damages in an unspecified amount, including punitive damages, and unspecified
injunctive relief. The Company believes that it has complied with all of its
obligations under the securities laws of the United States and Canada, and does
not believe that any of the Company's conduct or the conduct of any of its
officers and directors resulted in any negligent misrepresentations.
Accordingly, the Company intends to vigorously defend against the plaintiff's
allegations and considers such allegations to be groundless and without merit.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fourth Third Second First | Fourth Third Second First
Quarter Quarter Quarter Quarter | Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
Fiscal 1997
High 6.10 7.60 11.20 26.30 | 4 - 1/2 5 - 5/8 8 - 3/8 19 - 1/2
Low 2.25 3.15 5.55 9.00 | 1 - 5/8 2 - 1/4 4 - 1/16 6 - 3/4
Volume (000's) 15,021 16,479 13,161 6,204 | 20,745 37,796 55,712 75,381
- -------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Volatility of Stock Prices
The market price of the Company's common stock has been, and may continue to be,
extremely volatile.
In recent quarters, the market price for the Company's stock has been, and may
continue to be, adversely affected by operating losses reported by the Company
and by concerns over its future financial viability. Other factors which may
impact the market price of the Company's stock include 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.
Shareholders
As at June 1, 1997, there were 43,440,701 shares issued and outstanding with
1,767 record holders. The stock closed on The Toronto Stock Exchange at C$2.20
on May 30, 1997 (the last trading day prior to June 1, 1997), and on The Nasdaq
Stock Market at $1 17/32.
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>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Thousands of U.S. dollars except per share amounts
<S> <C> <C> <C> <C> <C>
Years ended March 31 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Revenues $66,213 $116,533 $120,511 $131,323 $160,900
Gross margin 29.2% 45.9% 44.4% 41.7% 43.7%
Selling, general and administration 40,842 39,996 40,661 54,772 62,807
Research and development 13,030 11,524 10,197 14,316 17,279
Net income (loss) (46,316) 260 1,406 (47,238) (19,507)
Basic earnings (loss) per share (1.07) 0.01 0.05 (2.27) (1.24)
- ------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Total assets 45,159 79,375 81,508 89,186 129,603
Fixed assets 10,763 16,253 18,619 20,214 30,768
Working capital (6,254) 29,361 21,057 13,978 25,596
Current ratio 0.8 2.0 1.6 1.3 1.5
Cash and cash equivalents net of current bank debt (5,360) 13,602 5,963 (5,239) (688)
Long-term debt 2,387 2,496 1,877 2,020 22,980
Convertible debentures - - 10,051 21,681 23,862
Shareholders' equity 3,710 48,586 34,442 19,109 34,308
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The consolidated financial statements together with accompanying notes should be
read as an integral part of this review. These financial statements have been
prepared by management in accordance with accounting principles generally
accepted in Canada. Note 18 to the consolidated financial statements describes
the impact, in the case of the Company, of differences between accounting
principles generally accepted in Canada and the United States. All amounts are
stated in U.S. dollars unless otherwise indicated. C$ refers to Canadian
dollars. References to years are to fiscal years ended March 31.
At the beginning of 1997 the Company determined that in order to position the
Company for growth in the remote access market a transformation of the Company's
distribution model was required. Difficulties experienced in the implementation
of the new sales distribution model have resulted in a significant unanticipated
decrease in product revenues in 1997 compared to the previous year. Although the
new sales distribution model is now in place, the Company believes that the
financial difficulties currently facing the Company are affecting customers'
purchasing decisions, and are having and will continue to have a significant
impact on revenue levels until such time as these financial uncertainties
are resolved. Service revenues also declined in 1997 compared to 1996 and 1995
as a result of lower revenues on products rom which the Company has
traditionally derived the majority of its service revenues.
Liquidity and Capital Resources
The Company had not anticipated the decline in revenues which occurred during
1997. Initially the Company's infrastructure was maintained in anticipation of
revenues returning to levels foreseen in the Company's business plan. As a
result, the Company reported significant operating losses for the four fiscal
quarters of 1997 and substantial negative cash flow of $19.0 million during
1997. At March 31, 1997 net bank borrowings (bank operating lines net of cash
and cash equivalents) were $5.4 million compared to a net cash position (cash
and cash equivalents net of bank operating lines) of $13.6 million a year ago.
Negative cash flow from operations (cash applied to operations) was $19.4
million. Cash applied to operations for 1997 represents a lower amount than the
loss from operations reported on the consolidated statement of income during the
same period as a result of reductions in working capital levels and in
particular accounts receivable.
In the fourth quarter of 1997 it was determined that certain restructuring
initiatives should be undertaken which would reduce operating costs in future
periods and reduce the Company's break even level for revenues. However the
Company expects that it will continue to generate operating losses over the next
several quarters and will require significant amounts of capital to fund these
operating losses and the restructuring actions. In view of the Company's current
bank borrowing levels and anticipated additional demands on cash and credit
resources during 1998, the Company has been actively seeking a purchaser since
February 1997 who would provide the cash resources the Company requires to
continue its operations. While the Company, with the ongoing assistance of
an investment banker, is continuing its search, to date the Company has not
received any formal offers in this regard. The Company has also explored
additional sources of financing which may be required to fund the operations
in the short term. However the Company has been unsuccessful to date and is
unlikely to secure additional financing. In the absence of additional
financing and if no purchaser is forthcoming in the near term, the Company will
evaluate all the options available to it which may include seeking court
protection from its creditors in order to permit it to restructure and
reorganize its affairs.
At March 31, 1997 the Company was not in compliance with certain financial
covenants contained in its committed credit facilities with Royal Bank of
Canada, which measure on a quarterly basis, among other things, the tangible net
worth, the ratio of liabilities to tangible net worth and the current ratio of
the Company. This non compliance constitutes an event of default at March 31,
1997 which has not been waived by the bank and thereby renders the borrowings
under the credit agreements repayable on demand. The amount available for
borrowing at any time is based on margin formulas relating to levels of accounts
receivable and inventories and other bank covenants. The Company also advised
the bank prior to March 31, 1997 that based on anticipated operating cash
requirements it expected that during the first quarter of fiscal 1998 the
Company would be required to borrow funds under the credit facilities which
would exceed the expected margin amount. During April 1997 the bank provided a
letter to the Company tolerating the defaults and reducing the aggregate of the
bank credit facilities from $21.2 million to $13.1 million.
<PAGE>
Based on margin formulas, $10.7 million was available to the Company at March
31, 1997 and $10.2 million was being utilized. Cash and cash equivalents held as
of that date represented a further $4.8 million of cash resources available to
the Company. Cash and cash equivalents and unused credit lines totaled $5.3
million at March 31, 1997. The authorized credit lines are secured by certain of
the accounts receivable, inventories and other assets of the Company and bear
interest at the bank's prime rate plus 1.75% or equivalent. The Company's
utilization of the credit facilities is now in excess of the amount authorized
under the facilities. There can be no assurance that the bank credit facilities
will remain in place or will provide sufficient credit capacity to meet the
Company's ongoing cash requirements. The Company believes that the bank's future
course of action will be dependent among other things on progress on the part of
the Company in its efforts to locate a purchaser.
The Company's financial statements have been prepared on a going concern basis
in accordance with generally accepted accounting principles. The going concern
basis of presentation assumes the Company will continue its operation for the
foreseeable future and be able to realize its assets and discharge its
liabilities in the normal course of business. The uncertainties which currently
exist surrounding the Company's ability to continue to fund its operations cast
significant doubt on the appropriateness of the going concern assumption. The
Company's financial statements do not give effect to the adjustments to the
carrying value of assets and liabilities and to the reported revenues and
expenses, and the balance sheet classifications used that would be necessary
should the Company be unable to continue to operate in the ordinary course of
business.
The Company's current ratio was 0.84:1 at March 31, 1997 compared to 2.0:1 at
March 31, 1996. Accounts receivable were $15.0 million at March 31, 1997
compared to $28.7 million at March 31, 1996. The decline in accounts receivable
primarily occurred as a result of lower revenues in the fourth quarter of 1997
compared to the fourth quarter a year ago. Inventories were $11.3 million at
March 31, 1997 compared to $13.5 million at March 31, 1996. Lower than
anticipated product revenues in the first quarter of fiscal 1997 resulted in an
increase in inventory levels. The Company adjusted manufacturing production
levels following the first quarter of fiscal 1997 and inventory levels have
declined each quarter since the first quarter. Accounts payable and accrued
liabilities were $23.1 million at March 31, 1997 compared to $21.8 million a
year ago. The increase is primarily due to accrued restructuring costs recorded
in the fourth quarter of fiscal 1997. Capital spending was $2.3 million in 1997,
$2.7 million in 1996 and $2.9 million in 1995.
<PAGE>
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, 1997
and for each of the preceding two years.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended March 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
(Percentage of Revenues)
Revenues:
Product 58.1% 69.6% 69.5%
Service 41.9 30.4 30.5
- ---------------------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0%
===============================================================================================================
Gross margin:
Product 31.8% 52.0% 47.9%
Service 25.5 32.2 36.5
Combined 29.2 45.9 44.4
Expenses:
Sales and marketing 47.8 27.4 27.5
Administration and general 13.8 6.9 6.2
Research and development 19.7 9.9 8.4
Restructuring and other costs 17.2 1.3 0.6
- --------------------------------------------------------------------------------------------------------------
Income (loss) from operations (69.3) 0.4 1.7
Gain on sale of portfolio investment - - 1.7
Interest expense (0.7) (0.4) (2.5)
Interest income and foreign exchange - 0.2 0.3
- --------------------------------------------------------------------------------------------------------------
Net income (loss) (70.0)% 0.2% 1.2%
==============================================================================================================
</TABLE>
Revenues
The following three tables set forth, for the year ended March 31, 1997 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.
<PAGE>
<TABLE>
<CAPTION>
Modems/
Multiplexers/
Remote WAN Local
Years Ended March 31 Access Backbone Connectivity Other Total
------- --------- ------------ ----- -----
<S> <C> <C> <C> <C> <C>
1997
United States 23% 3% 3% 1% 30%
Canada 7 1 4 - 12
United Kingdom 14 1 6 2 23
Holland/France 16 1 3 1 21
Other 9 2 3 - 14
--- --- --- --- ---
69% 8% 19% 4% 100%
=== === === === ===
1996
United States 25% 1% 5% 1% 32%
Canada 12 1 4 1 18
United Kingdom 11 2 7 3 23
Holland/France 9 1 2 2 14
Other 8 3 2 - 13
--- --- --- --- ---
65% 8% 20% 7% 100%
=== === === === ===
1995
United States 15% 1% 8% 4% 28%
Canada 9 2 7 1 19
United Kingdom 12 3 9 4 28
Holland/France 6 1 3 1 11
Other 7 3 2 2 14
--- --- --- --- ---
49% 10% 29% 12% 100%
=== === === === ===
</TABLE>
Gross Margin
The combined gross margin (total revenues minus cost of product sales and
service expenses expressed as a percentage of total revenues) was 29% in 1997
compared to 46% in 1996 and 44% in 1995. The gross margin on total revenues
declined in 1997 as a result of lower margins earned on both product revenues
and service revenues and the fact that a higher proportion of total revenues
was derived from service in 1997, which has inherently lower margins than
product revenues.
The gross margin on product revenues (product revenues minus cost of product
sales expressed as a percentage of product revenues) was 32% in 1997, compared
to 52% in 1996 and 48% in 1995. During 1997 the gross margin on product revenues
was adversely impacted by lower sales volumes during the period, resulting in
fixed manufacturing costs representing a larger percentage of product revenues.
The gross margin in 1997 was also adversely affected by higher adverse
manufacturing volume variances as a result of lower production levels in order
to reduce inventories from the end of the first quarter of 1997. Certain price
promotions carried out in 1997 also had an adverse impact on the margin.
The gross margin on service revenues (service revenues minus service expenses
expressed as a percentage of service revenues) was 26% in 1997, 32% in 1996 and
37% in 1995. The decrease in service margin has occurred as a result of the 22%
decline in service revenues in 1997 compared to 1996 which has more than offset
the decrease in service expenses. Service expenses declined 14% in 1997 compared
to 1996 as a result of the outsourcing to partners for the delivery of field
service maintenance which occurred in the fourth quarter of 1996.
<PAGE>
Operating Expenses
Sales and marketing, and administration and general expenses were $40.8 million
in 1997, compared to $40.0 million in 1996 and $40.7 million in 1995. Increased
spending in the sales and marketing area during 1997, as part of the continuing
implementation of the Company's indirect sales distribution model, has more than
offset the reduction in variable sales expenses in 1997 compared to 1996 due to
lower product revenues.
Research and development expenses were $13.0 million in 1997 13% higher than in
1996. The Company has increased its investment in research and development in
order to accelerate the completion of certain projects.
Since 1991, the Company has received funding of approximately $1.4 million and
$2.6 million respectively under two projects approved through the Canadian
federal government's Microelectronics and Systems Development Program (MSDP).
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. At March 31, 1997, royalties of approximately $1.2 have been accrued
related to these projects. Of this amount, $0.8 million was due for payment
under the funding contracts on or before March 31, 1997. The Company has
initiated discussions with the Canadian federal government in order to seek ways
to restructure the royalty payments under the agreement. There can be no
assurance at this time as to the extent to which the Company might be successful
in this regard.
Restructuring charges of $8.4 million recorded in 1997 resulted from provisions
of $3.0 million and $5.4 million in the first and fourth quarters respectively.
The provisions include $5.8 million in provisions for redundant facilities, $1.8
million relating to severance and $0.8 million to adjust the book value of field
service spares to their estimated net recoverable amount. The provision for
redundant facilities represents the estimated future lease cost and the
unamortized balance of leasehold improvements for facilities made redundant in
connection with changing the Company's sales distribution model and reductions
in the workforce, and a writedown in the carrying amount of the Company's
manufacturing facilities and a provision for future costs under the capital
lease as a result of the decision to outsource portions of the manufacturing
process.
Other costs of $3.0 million recorded in the fourth quarter of fiscal 1997
represents a writedown in the carrying value of goodwill. This goodwill arose on
the acquisition of the minority interests share of the Dutch subsidiary in 1988
and was being amortized over 20 years. As a result of the decline in revenues
and poor operating performance reported by the Dutch subsidiary in
1997, management determined that there was significant doubt that the
carrying value would be recovered through future cash flows and accordingly it
was written down to nil.
Restructuring charges in 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.
Restructuring costs recorded in 1995 represented severance costs associated with
the elimination of approximately 70 positions in connection with an internal
functional realignment.
Income From Operations
The Company reported an operating loss of $45.9 million in 1997 on revenues of
$66.2 million, compared to income from operations of $488,000 on revenues of
$116.5 million in 1996 and income from operations of $2.0 million on revenues of
$120.5 million in 1995. Exclusive of restructuring charges the loss from
operations was $34.5 million in 1997, compared with income from operations,
before restructuring charges, of $2.0 million in 1996 and $2.7 million in 1995.
Net Loss
The net loss for the year ended March 31, 1997 was $46.3 million or $1.07 per
share compared to net income of $260,000 or $0.01 per share in 1996. Net income
for 1995 was $1.4 million or $0.05 per share.
<PAGE>
Segment Operating Results
Note 17 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, 1997 and for each of the
preceding two years.
<TABLE>
<CAPTION>
Years ended March 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Product Revenues:
United States $ 11,017 $ 24,769 $ 23,341
Canada 4,586 15,033 15,539
United Kingdom 9,361 18,540 24,059
Holland/France 8,161 12,344 9,362
Other 5,335 10,390 11,500
- -------------------------------------------------------------------------------------------------------------
$ 38,460 $ 81,076 $ 83,801
=============================================================================================================
Service Revenues:
United States $ 5,103 $ 7,989 $ 9,206
Canada 5,368 6,642 6,934
United Kingdom 11,200 13,104 13,880
Holland/France 6,082 7,722 6,690
- -------------------------------------------------------------------------------------------------------------
$ 27,753 $ 35,457 $ 36,710
=============================================================================================================
</TABLE>
Product and service revenues in North America (United States and Canada) were
$26.1 million in 1997 compared to $54.4 million in 1996 and $55.0 million in
1995. The Company's European direct sales markets (United Kingdom, Holland and
France) reported total revenues of $34.8 million in 1997 compared to $51.7
million in 1996 and $54.0 million in 1995. Other international markets
represented revenues of $5.3 million in 1997, $10.4 million in 1996 and $11.5
million in 1995.
All segments reported operating losses in 1997 as a result of the unanticipated
decline in revenues which occurred in all segments. The segment operating loss
in 1997, expressed as a percentage of revenues was 33.4% for North America
(United States and Canada) 3.7% for the Company's operations in the United
Kingdom, Holland and France and 40.0% in the Company's other international
markets. The decline in revenues was proportionately less in the United
Kingdom, Holland and France and, accordingly, the segment reported a lower
operating loss.
<PAGE>
Factors That May Affect Future Financial Performance
The most critical factor affecting the Company's future will be its ability to
deal with its current financial difficulties as described in the section
"Liquidity and Capital Resources". Other factors which may affect future
financial performance are outlined below.
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 fourth quarter of 1997 the Company
undertook further restructuring actions which, when complete, will have
reduced the Company's workforce by a further 200 positions. The Company's
performance will be impacted by its ability to manage the continuing
changes to its operations.
The networking industry is intensely competitive and subject to rapid change.
The Company's performance will be affected by its ability to develop, introduce
and gain market acceptance for new products. 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 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 largely dependent on orders booked and
shipped in that quarter. A high percentage of the Company's revenues are
typically earned in the third month of each fiscal quarter and tend to be
concentrated in the latter half of that month. Accordingly, quarterly financial
results will be difficult to predict prior to the end of the quarter and a
shortfall in shipments at the end of any particular quarter may cause the
results of that quarter to fall significantly short of anticipated levels.
At the end of each quarter, the Company's distributors typically hold
significant inventories of the Company's products. The Company has established
reserves for returns based on experience. New channel relationships introduce
additional uncertainty in this area. Setting reserves involves making judgments
about future competitive conditions, product acceptance and other factors which
by their nature involve uncertainties at the time the reserves are established.
Statements included in this Annual Report on Form 10-K which are not historical
facts, including statements about the Company's beliefs and strategies, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties and are not
guarantees of future performance. The risks described herein and in the
Company's other filings with the Securities and Exchange Commission could affect
the Company's future results and could cause such results to differ materially
from estimates expressed in any forward-looking statement included herein.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 18 to the
consolidated financial statements.
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(Thousands of U.S. dollars)
As at March 31 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,803 $ 13,602
Accounts receivable 14,971 28,694
Inventories (note 3) 11,295 13,491
Other 1,739 1,867
- ----------------------------------------------------------------------------------------------------------------
Total current assets 32,808 57,654
Fixed assets (note 4) 10,763 16,253
Goodwill (1996 - net of accumulated amortization of $3,172) - 3,242
Other assets 1,588 2,226
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 45,159 $ 79,375
================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Bank operating lines (note 5) $ 10,163 $ -
Accounts payable and accrued liabilities (note 6) 23,096 21,755
Deferred revenue 5,246 6,178
Current portion of long-term debt (note 7) 557 360
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 39,062 28,293
Long-term debt (note 7) 2,387 2,496
Shareholders' equity:
Capital stock (notes 9 and 10)
Common shares, 43,405,695 issued and
outstanding (1996 - 42,939,523) 55,740 54,198
Retained earnings (deficit)(note 9) (46,056) 260
Cumulative translation adjustment (5,974) (5,872)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 3,710 48,586
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 45,159 $ 79,375
================================================================================================================
Going concern assumption (note 2)
Commitments and contingencies (note 16)
On behalf of the Board of Directors:
s/JOHN F. GAMBA s/D.M. GLEKLEN
J.F. Gamba, 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 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Product $ 38,460 $ 81,076 $ 83,801
Service 27,753 35,457 36,710
- ------------------------------------------------------------------------------------------------------------
66,213 116,533 120,511
Operating expenses:
Cost of product sales 26,219 38,941 43,630
Service expenses 20,665 24,053 23,316
Sales and marketing 31,672 31,942 33,148
Administration and general 9,170 8,054 7,513
Research and development 13,030 11,524 10,197
Restructuring and other costs (note 11) 11,368 1,531 685
- ------------------------------------------------------------------------------------------------------------
Income (loss) from operations (45,911) 488 2,022
Gain on sale of portfolio investment - - 2,024
Interest expense (455) (487) (2,969)
Interest income and foreign exchange 50 259 329
- ------------------------------------------------------------------------------------------------------------
Net income (loss) for the year $ (46,316) $ 260 $ 1,406
============================================================================================================
Basic earnings (loss) per share (note 13) $ (1.07) $ 0.01 $ 0.05
============================================================================================================
Weighted average number of common shares
outstanding (thousands) 43,295 40,359 28,589
============================================================================================================
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, 1997 and 1996 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, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at March 31, 1997
and 1996 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, 1997, in
accordance with generally accepted accounting principles.
s/KPMG
Chartered Accountants
Ottawa, Canada
May 13, 1997
<PAGE>
Comments by Auditor for U.S. Readers on Canada-U.S. Reporting Difference
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
Note 2 to the financial statements. Our report to the shareholders dated May 13,
1997 is expressed in accordance with Canadian reporting standards which do not
permit a reference to such events and conditions in the auditor's report when
these are adequately disclosed in the financial statements.
s/KPMG
Chartered Accountants
Ottawa, Canada
May 13, 1997
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Financial Position
(Thousands of U.S. dollars)
Years Ended March 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Cash provided by (applied to) operations (note 14) $ (36,341) $ 5,687 $ 4,958
Decrease (increase) in operating working capital (note 15) 16,946 (785) 4,212
- ----------------------------------------------------------------------------------------------------------------
Cash provided by (applied to) operating activities (19,395) 4,902 9,170
- ----------------------------------------------------------------------------------------------------------------
Financing activities:
Issue of capital stock 1,542 15,273 12,242
Conversion of debentures - (10,336) (11,533)
Long-term debt incurred 577 1,020 -
Long-term debt retired (441) (251) (446)
- ----------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 1,678 5,706 263
- ----------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of fixed assets (2,336) (2,671) (2,919)
Proceeds on disposal of investments - - 3,857
Proceeds on disposal of fixed assets 1,193 - 298
Other 46 39 293
- ----------------------------------------------------------------------------------------------------------------
Cash provided by (applied to) investing activities (1,097) (2,632) 1,529
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash balances (148) (337) 240
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash position in the year (18,962) 7,639 11,202
Cash position at beginning of year 13,602 5,963 (5,239)
- ----------------------------------------------------------------------------------------------------------------
Cash position at end of year $ (5,360) $ 13,602 $ 5,963
================================================================================================================
Cash position is comprised of:
Cash and cash equivalents $ 4,803 $ 13,602 $ 11,817
Bank operating lines (10,163) - (5,854)
- ----------------------------------------------------------------------------------------------------------------
$ (5,360) $ 13,602 $ 5,963
================================================================================================================
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 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capital Stock:
Consisting of an unlimited number
of common shares authorized, without par value
Balance at beginning of year 42,939,523 $ 54,198 35,238,064 $ 91,644 28,072,333 $ 79,811
Issued:
On conversion of debentures - - 5,983,372 9,839 6,782,519 11,124
Exercise of stock options (note 10) 418,016 1,318 1,582,685 3,531 182,214 354
Other 48,156 224 135,402 1,548 200,998 355
Reduction in stated capital (note 9) - - - (52,364) - -
- ------------------------------------------------------------------------------------------------------------------
Balance at end of year 43,405,695 $ 55,740 42,939,523 $ 54,198 35,238,064 $ 91,644
==================================================================================================================
Retained Earnings (Deficit):
Balance at beginning of year $ 260 $(52,364) $(53,770)
Net income (loss) (46,316) 260 1,406
Reduction in stated capital (note 9) - 52,364 -
- ------------------------------------------------------------------------------------------------------------------
Balance at end of year $(46,056) $ 260 $(52,364)
==================================================================================================================
Cumulative Translation Adjustment:
Balance at beginning of year $ (5,872) $ (4,838) $ (6,932)
Adjustment arising on translation of foreign
subsidiaries' financial statements to U.S. dollars (1,063) 549 1,091
Adjustment relating to subsidiary loans designated
as long-term investments 961 (1,583) 1,003
- ------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (5,974) $ (5,872) $ (4,838)
==================================================================================================================
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 18. 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.
(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. Leasehold improvements are amortized using the
straight-line method over the term of the related lease.
<PAGE>
(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
evaluates 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. Going Concern Assumption
These consolidated financial statements have been prepared on a going concern
basis in accordance with generally accepted accounting principles.
The Company has reported substantial operating losses and negative cash flow for
the year ended March 31, 1997. While the Company is reducing its cost structure
to reduce its break-even level the Company anticipates that it will continue to
generate operating losses over the next several quarters and will require
significant amounts of capital to fund these operating losses and the
restructuring actions. In view of the Company's current bank borrowing levels
and anticipated additional demands on cash and credit resources during 1998, the
Company has been actively seeking since February 1997 a purchaser who would
provide the cash resources the Company requires to continue its operations.
While the Company, with the ongoing assistance of an investment banker, is
continuing its search, to date the Company has not received any formal offers
in this regard. The Company has also explored additional sources of
financing which may be required to fund the operations in the short term.
However the Company has been unsuccessful to date and is unlikely to secure
additional financing. In the absence of additional financing and if no
purchaser is forthcoming in the near term, the Company will evaluate all the
options available to it which may include seeking court protection from its
creditors in order to permit it to reorganize and restructure its affairs.
At March 31, 1997, the Company was not in compliance with certain financial
covenants contained in its committed credit facilities with Royal Bank of
Canada, which measure on a quarterly basis, among other things, the tangible net
worth, the ratio of liabilities to tangible net worth and the current ratio of
the Company. This non-compliance constitutes an event of default at March 31,
1997 which has not been waived by the bank and thereby renders the borrowings
under the credit agreements repayable on demand. The amount available for
borrowing at any time is based on margin formulas relating to levels of accounts
receivables and inventories and other bank covenants. The Company also advised
the bank prior to March 31, 1997 that based on anticipated operating cash
requirements it expected that during the first quarter of fiscal 1998 the
Company would be required to borrow funds under the credit facilities which
would exceed the expected margin amount. During April 1997 the bank provided a
letter to the Company tolerating the defaults and reducing the aggregate of the
bank credit facilities from $21.2 million to $13.1 million. The Company's
utilization of the credit facilities is now in excess of the amount authorized
under the facilities. There can be no assurance that the bank credit facilities
will remain in place or will provide sufficient credit capacity to meet the
Company's ongoing cash requirements. The Company believes that the bank's future
course action will be dependent among other things on progress on the part of
the Company in efforts to find a purchaser.
The going concern basis of presentation assumes the Company will continue its
operation for the foreseeable future and be able to realize its assets and
discharge its liabilities in the normal course of business. The uncertainties
which currently exist surrounding the Company's ability to continue to fund its
operations cast significant doubt on the appropriateness of the going concern
assumption. These consolidated financial statements do not give effect to the
adjustments to the carrying value of assets and liabilities and to the reported
revenues and expenses, and the balance sheet classifications used that would be
necessary should the Company be unable to continue to operate in the ordinary
course of business.
<PAGE>
3. Inventories
<TABLE>
<CAPTION>
As at March 31 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 3,160 $ 2,905
Work-in-process 3,096 3,821
Finished goods 5,039 6,765
- -------------------------------------------------------------------------------------------------------------------
$ 11,295 $ 13,491
===================================================================================================================
</TABLE>
4. Fixed Assets
<TABLE>
<CAPTION>
As at March 31 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost:
Land $ - $ 218
Buildings - 4,627
Equipment 56,587 58,336
Leasehold improvements 1,041 1,966
- ------------------------------------------------------------------------------------------------------------------
57,628 65,147
Accumulated depreciation 46,865 48,894
- ------------------------------------------------------------------------------------------------------------------
Net book value $ 10,763 $ 16,253
==================================================================================================================
</TABLE>
5. Bank Operating Lines
As described in note 2, at March 31, 1997 the Company was not in compliance with
certain financial covenants contained in its committed credit facilities with
Royal Bank of Canada. During April 1997 the bank provided a letter to the
Company tolerating the defaults and reducing the aggregate of the bank credit
facilities from $21.2 million to $13.1 million. Based on margin formulas, $10.7
million was available to the Company at March 31, 1997 and $10.2 million was
being utilized. Cash and cash equivalents held as of that date represented a
further $4.8 million of cash resources available to the Company. Cash and cash
equivalents and unused credit lines totaled $5.3 million at March 31, 1997. The
authorized credit lines are secured by certain of the accounts receivable,
inventories and other assets of the Company and bear interest at the bank's
prime rate plus 1.75% or equivalent.
6. Accounts Payable and Accrued Liabilities
<TABLE>
<CAPTION>
As at March 31 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $ 6,731 $ 7,376
Payroll, commissions and related taxes 2,882 3,873
Accrued restructuring costs 5,696 2,747
Other payables 6,765 6,434
Income and other taxes payable 1,022 1,325
- ------------------------------------------------------------------------------------------------------------------
$ 23,096 $ 21,755
==================================================================================================================
</TABLE>
During 1997, the Company made payments of $2.4 million primarily for lease and
severance costs which were accrued in prior periods. Accrued restructuring costs
at March 31, 1997 is comprised of $5.4 million in severance and lease costs
relating to restructuring actions undertaken in fiscal 1997. The balance
represents the remaining portion of lease costs accrued in prior periods.
<PAGE>
7. Long-term Debt
<TABLE>
<CAPTION>
As at March 31 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest
Description Rates Security
- -----------------------------------------------------------------------------------------------------------------
Various capital lease 7.5%-12.9% Certain equipment and $ 2,944 $ 2,856
obligations denominated in facilities
Canadian dollars, lease
terms ending 1999 - 2009
Classified as current (557) (360)
- -----------------------------------------------------------------------------------------------------------------
$ 2,387 $ 2,496
=================================================================================================================
</TABLE>
The aggregate amount of long-term debt scheduled to be repaid in the five years
ending March 31, 2002 is $1,608,000, with the balance of $1,336,000 due
thereafter.
8. Fair Value of Financial Assets and Liabilities
The carrying values of cash and cash equivalents, accounts receivable and
accounts payable and accrued liabilities approximate their fair values due to
the relatively short periods to maturity of the instruments. The carrying value
of the Company's bank operating lines approximates its fair value as the
interest rate on this debt automatically reprices to market rates. The fair
value of long-term debt is determined by discounting the future contractual cash
flows of the leases at discount rates which represent borrowing rates presently
available to the Company for instruments with similar terms and maturities. At
March 31, 1997, the carrying amount of the long-term debt approximates its fair
value.
9. 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 $52,364,000. This resulted in a corresponding reduction in the
accumulated deficit as shown on the consolidated balance sheets and the
consolidated statements of shareholders' equity.
<PAGE>
10. Stock Options
The Company has five stock option plans, of which only one is an active plan.
The following table summarizes the activity for the stock option plans in effect
during the year ended March 31, 1997 and for each of the preceding two years.
<TABLE>
<CAPTION>
Shares Available Outstanding Weighted Average Exercise
for Grant Options Price per Share
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1994 904,460 1,264,500 C$ 3.16 $ 2.28
Reserved for issuance 438,000 - - -
Granted (1,790,000) 1,790,000 1.41 1.08
Terminated 532,500 (532,500) (2.39) (1.83)
Exercised - (182,214) (2.67) (2.04)
Impact of foreign exchange - - - (0.04)
- ----------------------------------------------------------------------------------------------------------------
Balance at March 31, 1995 84,960 2,339,786 2.02 1.44
Reserved for issuance 3,000,574 - - -
Granted (1,743,000) 1,743,000 9.12 6.69
Terminated 640,876 (640,876) (2.73) (2.00)
Exercised - (1,582,685) (3.05) (2.24)
Impact of foreign exchange - - - 0.04
- ----------------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 1,983,410 1,859,225 7.54 5.53
Granted (1,954,500) 1,954,500 7.28 5.35
Terminated 513,152 (513,152) (9.06) (6.66)
Exercised - (418,016) (4.41) (3.24)
Options repriced-original price - (282,250) (13.77) (10.12)
Options repriced-amended price - 282,250 5.50 4.04
Cancelled (185,264) - - -
Impact of foreign exchange - - - (0.06)
- ----------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 356,798 2,882,557 C$ 6.75 $ 4.88
================================================================================================================
</TABLE>
The exercise price for options outstanding at March 31, 1997 range from C$0.90
to C$24.00 per share (approximately $0.65 to $17.34). These options expire
between April 2, 1997 and March 9, 2007 and their weighted average contractual
life is eight years. Of the 2,882,557 options outstanding at March 31, 1997,
759,367 were exercisable as of that date. Directors and officers as a group held
1,730,833 options as at March 31, 1997.
All options granted during 1997 were from the Stock Option Plan for Key
Employees and Directors. This plan provides for the granting of options at
prices equal to the market value at the time of grant. Options granted under the
plan may be exercised during such period as may be determined by the Company,
provided that no option may be exercisable after the tenth anniversary of the
date of the grant. During 1997 options granted to employees vest over a graded
three year period, and options granted to directors vest over a graded five year
period. During January 1997 the exercise price of 282,250 options was amended to
C$5.50 ($4.04) which represented the average market trading price of stock
during the month preceding the amendment. The exercise price of options held by
directors and officers was not adjusted.
<PAGE>
11. Restructuring and Other Costs
<TABLE>
<CAPTION>
Years Ended March 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Restructuring $ 8,338 $ 1,531 $ 685
Other 3,030 - -
- -----------------------------------------------------------------------------------------------------------------
$ 11,368 $ 1,531 $ 685
=================================================================================================================
</TABLE>
Restructuring charges of $8.4 million recorded in 1997 resulted from provisions
of $3.0 million and $5.4 million in the first and fourth quarters respectively.
The provisions include $5.8 million in provisions for redundant facilities, $1.8
million relating to severance and $0.8 million to adjust the book value of field
service spares to their estimated net recoverable amount. The provision for
redundant facilities represents the estimated future lease cost and the
unamortized balance of leasehold improvements for facilities made redundant in
connection with changing the Company's sales distribution model and reductions
in the workforce, and a writedown in the carrying amount of the Company's
manufacturing facilities and a provision for future costs under the capital
lease as a result of the decision to outsource portions of the manufacturing
process.
Other costs of $3.0 million recorded in the fourth quarter of fiscal 1997
represents a writedown in the carrying value of goodwill. This goodwill arose on
the acquisition of the minority interests share of the Dutch subsidiary in 1988
and was being amortized over 20 years. As a result of the decline in revenues
and poor operating performance reported by the Dutch subsidiary in
1997, management determined that there was significant doubt that the
carrying value would be recovered through future cash flows and accordingly it
was written down to nil.
Restructuring charges in 1996 were recorded in connection with certain
consolidation and outsourcing activities 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 in connection with an internal
functional realignment.
12. Income Taxes
At March 31, 1997, the Company had available, subject to audit and certain
restrictions, accumulated accounting losses of approximately $100 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 $70 million ($50 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,
1997, 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 1998 and 2007.
The loss before income taxes attributable to all foreign operations for the year
ended March 31, 1997 was approximately $29.0 million (1996 - $1.9 million; 1995
- - $0.7 million).
At March 31, 1997 the balance of unremitted earnings of subsidiaries was nil
(1996 - $9,599,000; 1995 - $11,113,000).
<PAGE>
13. 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, which is not applicable for 1997, was $0.01 for
1996 and $0.07 for 1995. The calculation assumes that the conversion of
debentures, which occurred during 1996 and 1995, had occurred at the beginning
of each applicable fiscal year.
14. Cash Provided By Operations
<TABLE>
<CAPTION>
Cash provided by (applied to) operations is computed as follows:
Years Ended March 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from operations $ (45,911) $ 488 $ 2,022
Depreciation and amortization 4,323 5,408 5,616
Reserves and writedowns not involving
an outlay of cash 5,652 - -
Interest paid (455) (468) (2,803)
Interest received and foreign exchange 50 259 329
Other - - (206)
- ---------------------------------------------------------------------------------------------------------------
$ (36,341) $ 5,687 $ 4,958
===============================================================================================================
</TABLE>
<PAGE>
15. Changes in Operating Working Capital
<TABLE>
<CAPTION>
The decrease (increase) in operating working capital is computed as follows:
Years Ended March 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts receivable $ 13,723 $ (1,814) $ 3,302
Inventories 2,196 1,739 5,647
Other current assets 128 401 78
Accounts payable and accrued liabilities 1,845 513 (6,160)
Deferred revenue (932) (1,580) 334
Foreign currency translation adjustment (14) (44) 1,011
- -----------------------------------------------------------------------------------------------------------------
$ 16,946 $ (785) $ 4,212
=================================================================================================================
</TABLE>
16. Commitments and Contingencies
(a) The Company has entered into various commitments under leases and other
contracts. At March 31, 1997, the minimum amounts payable under such
commitments in future fiscal years were as follows:
1998 $ 10,058
1999 1,058
2000 577
2001 446
2002 173
Thereafter 1,326
--------
$ 13,638
========
(b) Since 1991, the Company has received funding of approximately $1.4 million
and $2.6 million respectively under two projects approved through the
Canadian federal government's Microelectronics and Systems Development
Program (MSDP). 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. To date, royalties of approximately $1.2 million have been
accrued related to these projects. Of this amount, $0.8 million was due for
payment under the funding contracts on or before March 31, 1997. The
Company has initiated discussions with the Canadian Federal Government in
order to seek ways to restructure the royalty payments under the agreement.
There can be no assurance at this time as to the extent to which the
Company might be successful in this regard.
(c) During 1997 a claim was made against the Company for negligent
misrepresentations and fraud allegedly arising from certain press releases
and public statements made by the Company and certain of its officers.
The plaintiff seeks to recover monetary damages in an unspecified amount.
The Company believes that it complied with all its obligations
under securities laws in the United States and Canada and does not believe
that any of the Company's conduct or the conduct of any of its officers or
directors resulted in any negligent misrepresentation. However because of
the preliminary stage of this litigation, it is impossible, at present, to
express an estimate of the amount or range of potential loss, if any, or
the likelihood of an outcome unfavourable to the Company.
(d) During March 1997, in an effort to retain certain key employees the Company
entered into a commitment to provide retention bonuses totalling
approximately $1.5 million. The bonuses were provided under two plans.
Under one plan the liability to pay the bonus arises if the employee
continues to be employed by the Company as of March 31, 1998. Under the
second plan the liability to pay the bonus arises on the completion of a
transaction to sell or merge the Company. In order to be eligible the
employee must continue to be employed by the Company at the time of the
transaction.
<PAGE>
(e) 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.
17. 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, 1997.
<TABLE>
<CAPTION>
Years Ended March 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales to customers:
United States $ 16,120 $ 32,758 $ 32,547
Canada 9,954 21,675 22,473
United Kingdom 20,561 31,644 37,939
Holland/France 14,243 20,066 16,052
Other 5,335 10,390 11,500
Segment transfers:
United States - - 964
Canada 16,330 27,601 22,822
United Kingdom 792 1,031 977
Holland/France - 6 9
Eliminations (17,122) (28,638) (24,772)
- ----------------------------------------------------------------------------------------------------------------
Total revenues $ 66,213 $ 116,533 $ 120,511
================================================================================================================
Segment operating profit:
United States $ (4,041) $ 6,416 $ 4,739
Canada (4,681) 3,433 1,764
United Kingdom (1,205) 5,722 8,242
Holland/France (82) 4,276 3,527
Other (2,138) (1,107) (65)
- ----------------------------------------------------------------------------------------------------------------
Total segment operating profit (12,147) 18,740 18,207
- ----------------------------------------------------------------------------------------------------------------
Expenses:
Research and development 13,030 11,524 10,197
General corporate 9,366 5,197 5,303
Restructuring and other costs 11,368 1,531 685
Gain on sale of portfolio investment - - (2,024)
Interest expense 455 487 2,969
Interest income and foreign exchange (50) (259) (329)
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (46,316) $ 260 $ 1,406
================================================================================================================
Identifiable assets:
United States $ 3,585 $ 10,845 $ 10,015
Canada 19,220 31,530 27,376
United Kingdom 11,138 21,201 24,315
Holland/France 9,119 10,727 10,800
Other 2,097 5,072 9,002
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 45,159 $ 79,375 $ 81,508
================================================================================================================
</TABLE>
<PAGE>
18. 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 statements of changes in
financial position for the years ended March 31, 1996 and 1995 but would be
shown supplementally.
<TABLE>
<CAPTION>
<S> <C> <C>
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>
<CAPTION>
<S> <C> <C>
1997 1996
------------------------------------------------------------------------------------------------------------
Operating loss carry-forwards $ 27,500 $ 20,300
Depreciation 1,900 1,700
Restructuring reserves 2,700 200
Investment tax credits 11,000 11,000
Other 7,100 4,800
------------------------------------------------------------------------------------------------------------
50,200 38,000
Valuation allowance (50,200) (37,496)
------------------------------------------------------------------------------------------------------------
Net non-current deferred tax asset $ - $ 504
============================================================================================================
</TABLE>
<PAGE>
(d) Reductions in stated capital and deficit as described in note 9 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.
(f) The Company accounts for its stock-based awards using the intrinsic value
method, whereby the compensation cost is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of grant
over the amount an employee must pay to acquire the stock. Since the
Company's stock options plan provides for the granting of options at
prices equal to the market value at the time of grant no compensation
expense has been recognized in the financial statements for employee stock
arrangements. U.S. GAAP requires the disclosure of pro forma net loss and
loss per share assuming the fair value method of accounting for stock
options had been used. This information is provided in the following
table.
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
------------------------------------------------------------------------------------------------------------
Net income (loss) as reported $ (46,316) $ 260
Estimated stock based compensation costs (1,805) (3,201)
------------------------------------------------------------------------------------------------------------
Pro forma net loss $ (48,121) $ (2,941)
============================================================================================================
Pro forma net loss per share $ (1.11) $ (0.07)
============================================================================================================
</TABLE>
The weighted average fair value of all options granted during 1997 and 1996
was estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions.
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
------------------------------------------------------------------------------------------------------------
Weighted average fair value $ 3.66 $ 4.30
Expected option life (years) 3.5 3.5
Volatility 76% 72%
Risk free interest rate 6.3% 5.5%
Dividend yield nil nil
============================================================================================================
</TABLE>
The Black-Scholes model used by the Company to calculate option values, as
well as other currently accepted option valuation models, were developed to
estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require highly subjective
assumptions including future stock price volatility and expected time until
exercise, which greatly affect the calculated values. Accordingly,
management believes that this model does not necessarily provide a reliable
single measure of the fair value of the Company's stock option awards.
<PAGE>
Quarterly Financial Information (Unaudited)
Quarterly unaudited financial information for each of the years ended March 31,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product $ 10,917 $ 8,082 $ 10,029 $ 9,432
Service 7,420 7,145 6,593 6,595
- ---------------------------------------------------------------------------------------------------------------
18,337 15,227 16,622 16,027
- ---------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of product sales 6,431 5,873 6,833 7,082
Service expenses 5,307 4,942 5,186 5,230
Sales and marketing 7,294 7,740 8,372 8,266
Administration and general 2,278 2,203 2,367 2,322
Research and development 3,004 3,110 3,517 3,399
Restructuring costs 3,010 - - 8,358
- ---------------------------------------------------------------------------------------------------------------
Loss from operations (8,987) (8,641) (9,653) (18,630)
Interest expense (47) (39) (156) (213)
Interest income and foreign exchange 54 17 (41) 20
- ---------------------------------------------------------------------------------------------------------------
Net loss $ (8,980) $ (8,663) $ (9,850) $(18,823)
===============================================================================================================
Basic loss per share $ (0.21) $ (0.20) $ (0.23) $ (0.43)
===============================================================================================================
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------
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 $ - $ - $ - $ -
===============================================================================================================
</TABLE>
Quarterly earnings per share figures are calculated based on the monthly
weighted average number of common shares outstanding during the quarter.
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and the notes thereto set out, as of June 1, 1997, 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>
BUSINESS EXPERIENCE
<S> <C> <C>
DIRECTOR BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS,
NAME SINCE DIRECTORSHIPS AND OTHER INFORMATION
- -----------------------------------------------------------------------------------------
Richard D. Busto, 53 1996 President since October 1996 and Chief
Executive Officer since February 1997;
previously Chief Operating Officer from
October 1996 to Februar 1997 and Vice
President of Strategy, Business
Development and Networking Services from January
1996 to October 1996 and Vice President of
Networking Services from October 1995 to
January 1996. From 1993 to 1995 director of business
development for IBM's Services Division, and general
manager for IBM's field service operations in the United
States from 1990 to 1993.
Michael Chawner, 50 1997 Vice President Product Operations and Chief
Technology Officer since January 1996; previously
Vice President Strategy and Business Development
from February 1995 to January 1996. From January
1988 to 1995 Vice President of Research and
Development and Vice President of Networking
Engineering with Newbridge Networks Corporation.
Christopher A. Fournier, 55 1997 Partner, since 1990, with the law firm of Gowling,
Strathy & Henderson in Ottawa, Ontario practicing
in the areas of corporate and commercial law.
John F. Gamba, 58 1995 Chairman of the Company since February 1997;
Senior Vice President, Corporate Resources and
Performance Assurance, Bell Atlantic Corporation
(regional operating telephone company) since
January 1995. Group President, Network Technologies
& Systems of Bell Atlantic Network Services, Inc.
from March 1992 to January 1995.
<PAGE>
Donald M. Gleklen, 60 1991 President, Jocard Financial Services, Inc.
(merchant banking)
Ian McLaren, 40 1996 President, SHL Canada, since December 1995
(a wholly owned subsidiary of MCI, providing
systems integration and outsourcing services).
From 1994 to 1995, Executive Vice President and
General Manager of the Ottawa Region for SHL Canada.
Prior to 1994, Group Vice President, Finance,
Professional and Public Administration Sector of
Digital Equipment of Canada.
Mihkel E. Voore, 42 1996 Partner, since 1991, with the law firm of Stikeman,
Elliott in Toronto, Ontario, practicing in the areas of
corporate and securities law.
</TABLE>
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, 1997, other than Mr. Busto and
Mr. Chawner, are as follows:
Joceline Lemieux, 38, was appointed Vice President, North American Sales in
October 1996, and from January 1996 to October 1996, was Vice President,
Worldwide 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 she was the Regional
Manager for the Eastern Canada region.
James Cammarata, 43, was appointed Vice President, Network Services in October
1996. Mr. Cammarata joined the Company in January 1996, and held the position of
Director of Services Operations from January 1996 to October 1996. Prior to
joining the Company, Mr. Cammarata was employed by IBM Corporation, from 1980 to
1995, in various management and executive positions, including services
operations, business development, systems integration, project management and
marketing.
Paul Beaumont, 41, has held the position of Vice President, Worldwide Sales and
Marketing since April 1997. From February 1997 to April 1997, Mr. Beaumont was
Managing Director, Europe Middle East and Africa. Between January 1996 and
February 1997, Mr. Beaumont co-founded Business Progression International, a
specialist sales and marketing consultancy business. Prior to January 1996, Mr.
Beaumont had worked for Gandalf since October 1990 in the United Kingdom and
Canada, in various positions, including Vice President, North American Sales and
Marketing from October 1994 to December 1995 and Managing Director for Europe,
from July 1994 to October 1994.
Pamela Minelli, 34, has held the position of Vice President Marketing, since
April 1997. From October 1996 to April 1997, Ms. Minelli was Vice President
Worldwide Marketing, from April 1996 to October 1996, Vice President, Channels
and Industry Marketing and from January 1996 to April 1996, Director, Industry
Marketing. Between 1985 and 1996 Ms. Minelli was with IBM Corporation, in
marketing and sales management positions.
Frank van der Poll, 32, 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. and from 1993 to February 1994, Sales
Director, Gandalf Nederland B.V. From 1990 to 1993, Mr. van der Poll held
positions with ICL Company in the Netherlands.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Overview
- --------
At March 31, 1997 the Company had 9 executive officers of whom two subsequently
resigned. One additional executive officer was Chairman, President and CEO for a
portion of the 1997 fiscal year but resigned prior to March 31, 1997. The
aggregate cash compensation, including amounts paid under the Executive
Incentive Plan paid to all executive officers as a group (10 persons, including
one individual who served as President Chairman and CEO for a portion of the
fiscal year ) by the Company and its subsidiaries for services rendered during
the fiscal year ended March 31, 1997 was $1,474,073. In addition, during the
fiscal year ended March 31, 1997, executive officers were given the use of
automobiles leased by the Company at an aggregate incremental cost to the
Company and its subsidiaries of $44,787.
Liability Insurance
- -------------------
The Company provides liability insurance for directors and officers of the
Company and its subsidiaries. Effective November 1, 1996 the Company had
directors' and officers' liability insurance with various carriers with policy
limits of C$25 million per loss with an annual aggregate of C$25 million. The
Company's annual deductible is C$100,000 except C$350,000 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 1997 was
C$447,767. The individual directors and officers of the Company and its
subsidiaries are insured for losses arising from claims against them for certain
of their acts, errors or omissions. The Company is insured against any loss
arising out of any liability to indemnify a director or officer.
Summary Compensation Table
- --------------------------
The following table presents information provided in accordance with regulations
under the Securities Act (Ontario) which requires the disclosure of compensation
paid during each of the years in the three year period ended March 31, 1997, in
respect of the individuals serving as executive officers at March 31, 1997, who
during fiscal 1997 held the position of chief executive officer of the Company
or who were the other four most highly compensated executive officers of the
Company.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
----------------------------------- -----------
Securities
Under
Name and Fiscal Other Annual Options All Other
Principal Positions Year Salary Bonus Compensation Granted Compensation
($) ($) (#)
(a) (b) (c) (d) (e) (f) (g)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R.D. Busto 1997 $178,554 (1) $41,009 $4,506 (2) 785,000 ---
President and CEO 1996 $146,125 (3) --- --- 100,000 ---
1995 --- --- --- --- ---
M. Chawner 1997 $115,984 $23,115 --- 50,000 ---
VP Product Operations and 1996 $ 89,903 --- --- 50,000 ---
Chief Technology Officer 1995 10,228 (4) --- --- 75,000 ---
J. Lemieux 1997 $115,770 (5) $ 3,670 --- 10,000 ---
VP North American Sales 1996 $ 99,760 (5) --- --- 50,000 ---
1995 --- --- --- --- ---
W.R. MacDonald (6) 1997 $110,533 $19,113 --- 45,000 ---
VP Finance and CFO 1996 $ 89,536 $18,164 --- 64,000 ---
1995 $ 84,443 --- --- 40,000 ---
P. Merrifield (7) 1997 $174,526 (8) --- --- 15,000 ---
Managing Director 1996 --- --- --- 30,000 ---
Asia Pacific Group 1995 --- --- --- 15,000 ---
Executive officers no longer serving with the Company as at March 31, 1997
- -----------------------------------------------------------------------------------------------------
T.A. Vassiliades (9) 1997 $216,667 --- --- 5,000 ---
Chairman, President and 1996 $200,000 --- --- 800,000 ---
CEO 1995 $178,498 (10) --- --- 600,000 ---
<FN>
(1) R.D. Busto was appointed President on October 4, 1996 and CEO on February 6, 1997.
(2) Pursuant to a contract of employment between the Company and R.D. Busto entered into
upon his appointment as President, the Company is required to make an
equalization payment to Mr. Busto for the difference between Canadian and
US income and payroll taxes. For calander 1996 this payment amounted to
$4,506. The amount owing for calander 1997 has not yet been determined.
(3) R.D. Busto was employed by the Company for seven months during fiscal 1996.
(4) M. Chawner was employed by the Company for one month during fiscal 1995.
(5) Includes sales commissions.
(6) W.R. MacDonald resigned from the Company on May 8, 1997.
(7) P. Merrifield resigned from the Company May 16, 1997.
(8) P. Merrifield was appointed Managing Director of EMEA, April 11, 1996 and
Managing Director of Asia Pacific Group February 2, 1997.
(9) T.A. Vassiliades resigned as President on October 4, 1996 and resigned as
Chairman and CEO and from the board of directors on February 6, 1997.
(10) T.A. Vassiliades was appointed President and CEO on May 10, 1994.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
% Market
of Total Value of
Options Securities
Securities Granted to Underlying
Under Employees in Option on
Name and Options Financial Exercise or the Date Expiration
Principal Positions Granted Year Base Price of Grant (1) Date
(#) ($/Security) ($/Security)
(a) (b) (c) (d) (e) (f)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R.D. Busto 785,000 40.2% 25,000 @ $14.12 $14.12 May 30, 2006
President and CEO 10,000 @ $ 4.20 $ 4.20 November 6, 2006
750,000 @ $ 3.90 $ 3.90 November 10, 2006
M. Chawner 50,000 2.5% 50,000 @ $ 4.08 (2) $ 4.08 October 5, 2006
VP Product Operations
and Chief Technology
Officer
J. Lemieux 10,000 0.5% 10,000 @ $ 5.42 (2) $ 5.42 September 30, 2006
VP North American Sales
W. R. MacDonald 45,000 2.3% 25,000 @ $ 4.08 (2) $ 4.08 October 5, 2006 (4)
VP Finance and CFO 20,000 @ $ 2.89 (2) $ 2.89 January 29, 2007 (4)
P. Merrifield 15,000 0.7% 15,000 @ $19.38 (3) $19.38 April 30, 2003 (5)
Managing Director Asia
Pacific Group
Executive officers no longer serving with the Company as at March 31, 1997
- ----------------------------------------------------------------------------------------------
T.A. Vassiliades 5,000 0.3% 5,000 @ $ 5.69 $ 5.69 July 31, 2006 (6)
Chairman, President and
CEO
<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=$0.7224
(3) Options were granted in pounds sterling. Translated at the year end exchange rate of
1 pound sterling=$1.6452
(4) W.R. MacDonald resigned from the Company on May 8, 1997. The expiry date
of these options was extended until September 13, 1997.
(5) P. Merrifield resigned from the Company on May 16, 1997. These options expired upon the
optionee ceasing to be employed by the Company.
(6) T.A. Vassiliades resigned from the Company on February 6, 1997. The
expiration date of these options was extended to April 30, 1997 and they
expired at that time.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY
COMPLETED FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION VALUES
Value of
Unexercised
Unexercised in-the-Money
Options Options
at Fiscal at Fiscal
Securities Aggregate Value of Year End (1)(#) Year End (2)($)
Name and Acquired Securities Acquired Exercisable/ Excerciseable/
Principal Positions on Exercise on Exercise Unexerciseable Unexcerciseable
(#) ($)
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
R.D. Busto --- --- 225,003 Exercisable ---
President and CEO 659,997 Unexercisable ---
M. Chawner --- --- 66,673 Exercisable ---
VP Product Operations and 108,327 Unexercisable ---
Chief Technology Officer
J. Lemieux --- --- 20,004 Exercisable ---
VP North American Sales 44,996 Unexercisable ---
W. R. MacDonald (3) --- --- 119,006 Exercisable (4) $ 56,445 Exercisable (6)
VP Finance and CFO 100,994 Unexercisable (5) $ 13,773 Unexercisable (6)
P. Merrifield (7) --- --- 15,003 Exercisable (8) $ 2,179 Exercisable (10)
Managing Director 39,997 Unexercisable (9) $ 2,177 Unexercisable (10)
Asia Pacific Group
Executive officers no longer serving with the Company as at March 31, 1997
- ------------------------------------------------------------------------------------------------------------------
T.A. Vassiliades 266,665 3,403,169 9,583 Exercisable ---
Chairman, President 6,250 Unexercisable
and CEO
<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, 1997 was $1.68
(3) W.R. MacDonald resigned from the Company May 8, 1997. Expiry date of options was
extended until September 13, 1997.
(4) Includes 42,338 options which were not in-the-money at March 31, 1997.
(5) Includes 87,662 options which were not in-the-money at March 31, 1997.
(6) Includes options granted in Canadian dollars. Translated at the year end exchange rate
of C$1=0.7224.
(7) P. Merrifield resigned from the Company May 16, 1997. The options expired upon the
optionee ceasing to be employed by the Company.
(8) Includes 10,002 options which were not in-the-money at March 31, 1997.
(9) Includes 34,998 options which were not in-the-money at March 31, 1997.
(10) Options were granted in pounds sterling. Translated at the year end exchange rate of 1
pound sterling =$1.6452.
</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 Human Resources 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 the ten executive
officers during the fiscal year ended March 31, 1997 totaled $142,463
During March 1997, in an effort to retain certain key executives the Company
entered into a commitment to provide retention bonuses to the certain
executives. The liability to pay the bonus arises on the completion of a
transaction to sell or merge the Company. In order to be eligible, the
employee must continue to be employed by the Company at the time of the
transaction. The bonuses are as follows: R.D. Busto, President and Chief
Executive Officer $375,000; P. Beaumont, Vice President Worldwide Sales and
Marketing $180,000; M. Chawner, Vice President Product Operations and Chief
Technology officer C$178,000; J. Cammarata, Vice President Network Services
$100,000; P. Minelli, Vice President Marketing $85,000.
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,
1997 were from the 1993 Stock Option Plan for Key Employees and Directors
(formerly the 1993 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
1993 Stock Option Plan for Key Employees and Directors
As at March 31, 1997, 2,882,557 Common Shares were subject to options at prices
ranging from C$0.90 to C$24.00 and expiring at various dates between April 2,
1997 and March 9, 2007. Of such options, 1,730,833 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. During the
fiscal year ended March 31, 1997, directors who were not employees of the
Company ("Outside Directors") resident in Canada received an annual retainer of
C$7,500. Outside Directors resident in the United States received an annual
retainer of $7,000. The annual retainer was paid in advance, in quarterly
installments. In addition, each director received an attendance fee of $400 (in
local currency) for meetings of shareholders, the Board of Directors and
Committees of the Board of which he was a member. During the fiscal year ended
March 31, 1997, the following amounts were paid or accrued to directors of the
Company in their capacity as directors, including amounts paid for Committee
participation or special assignments: John F. Gamba $12,200; Charles J. Gardner
C$21,900; Donald M. Gleklen $20,200; Barclay C. Isherwood C$5,562; Robert E.
Keith $12,478; Ian McLaren C$5,794; Albert Sinyor C$19,500, Mihkel E. Voore
C$7,794; Johnny Wai-Nang Wong C$8,994. Thomas A. Vassiliades resigned as
President on October 4, 1996 and as Chairman and Chief Executive Officer on
February 6, 1997. Richard D. Busto was appointed President and Chief Operating
Officer on October 4, 1996 and Chief Executive Officer on February 6, 1997. Mr.
Gamba was appointed Chairman of the Company on February 6, 1997. Mr. Gardner,
Mr. Isherwood, Mr. Keith, Mr. Sinyor and Mr. Wong resigned as directors during
the 1997 fiscal year. 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>
On April 30, 1997, the Board approved a revised schedule of fees for Outside
Directors. Outside Directors resident in Canada will now receive an annual
retainer of C$14,600. Outside Directors resident in the United States will
receive an annual retainer of $10,650. The annual retainer is paid in advance,
in quarterly installments. In addition, each Canadian director receives an
attendance fee for meetings of the shareholders, the Board of Directors and
Committees of the Board of which he is a member, in the amount of C$540 for
Canadian directors and $400 for U.S. directors, in respect of meetings held by
teleconference, and C$1,010 for Canadian directors and $750 to U.S. directors,
for meetings attended in person. Under the revised schedule of fees, the
aggregate amount of fees to be paid to seven directors of the Company in fiscal
1998 are not expected to exceed the amounts paid to nine directors during fiscal
1997.
Directors of the Company, are eligible to receive stock options under the 1993
Stock Option Plan for Key Employees and Directors (the "Option Plan").
Pursuant to the terms of the Option Plan, as amended, directors are awarded
stock options on 10,000 common shares of the Company on the date of their
initial election or appointment, and stock options on 5,000 common shares of
the Company on each subsequent re-election, up to a maximum 50,000 unexercised
stock options. On August 1, 1996, Mr. Isherwood, Mr. McLaren, Mr. Voore and
Mr. Wong were elected directors of the Company and each received a stock option
under the Option Plan to purchase 10,000 common shares at an exercise price of
$5.69 per common share (the U.S. dollar equivalent of the Canadian market
price on the date of grant). Stock options on 5,000 common shares of the
Company, at the same price, were granted to Mr. Gamba, Mr. Gardner,
Mr. Gleklen, Mr. Keith, Mr. Sinyor and Mr. Vassiliades on their re-election
on August 1, 1996. Mr. Busto, Mr. Chawner and Mr. Fournier were appointed to
the Board on November 6, 1996, April 2, 1997 and April 30, 1997, respectively,
and on their appointment each received a stock option under the Option Plan to
purchase 10,000 common shares at an exercise of price of $4.20, $1.80 and
$1.03 respectively per common share (the U.S. dollar equivalent of the Canadian
market price on the date of grant).
Charles J. Gardner, a director during fiscal 1997, and Mr. Voore, a current
director, are members of law firms that provide legal services to the Company.
During the fiscal year ended March 31, 1997, Mr. Gardner's firm was paid
C$38,207, and Mr. Voore's firm was paid C$222,612 in legal fees by the Company
and its subsidiaries.
On April 15, 1997, the Company entered into an agreement for the personal
services of Mr. Gamba with respect to his position as Chairman. Pursuant to this
agreement, Mr. Gamba's current honorarium is $48,000, which was effective April
1, 1997. In addition, Mr. Gamba received options under the Option Plan to
purchase 50,000 common shares of the Company, exercisable at $1.42 per common
share (the U.S. dollar equivalent of the Canadian market price on the date of
grant). The compensation provided under this agreement is in lieu of the annual
and meeting fees otherwise paid to directors of the Company.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of June 1, 1997 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>
<CAPTION>
Amount Percent
Name Beneficially Owned (1) of Class (5)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Richard Busto 248,338 (2) -
Paul Beaumont -
Jim Cammarata 6,668 (3)
Michael Chawner 76,306 (2) -
Christopher A. Fournier nil
John F. Gamba 5,400 (2) -
Donald M. Gleklen 87,000 (2) -
Joceline Lemieux 21,671 (3) -
Ian McLaren - -
Pamela Minelli 15,003 (3)
Frank van der Poll 20,002 (3)
Mihkel E. Voore - -
All executive officers and
directors as a group (12 persons) 480,388 (4) 1.1%
<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) Includes options (currently exercisable or exercisable within 60 days) on the following shares:
Richard Busto 233,338
Michael Chawner 75,006
John F. Gamba 2,000
Donald M. Gleklen 33,000
(3) Represents options (currently exercisable or exercisable within 60 days).
(4) Includes options (currently exercisable or exercisable within 60 days) on
406,688 common shares.
(5) 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.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Richard D. Busto, President and Chief Executive Officer is related to one of the
other executive officers of the Company, namely Pamela Minelli, Vice President
Marketing, who is his wife.
Mihkel E. Voore and Christopher A. Fournier, current directors, are each
partners in law firms which provide legal services to the Company. 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) 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.
(2) 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).
3.5 Amendment to By-laws of the Registrant.
*4.1 Common Share certificate (filed as Exhibit 4.1 to the Form 10-K
for the fiscal year ended March 31, 1993).
*10.1 Lease dated 15th September, 1987 between The Glenview
Corporation, the Company and Gandalf Data Limited whereby The
Glenview Corporation leased the land and buildings known as 130
Colonnade Road South, Nepean to the Company and Gandalf Data
Limited for an initial term of 10 years at an initial rent of
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 repurchase 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).
<PAGE>
*10.4 Lease dated September 13, 1988 between Cherry Hill Industrial
Sites, Inc. and Gandalf Systems Corporation (filed as Exhibit
10.52 to the Form 10-K for the fiscal year ended July 31, 1991).
*10.5 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).
*10.6 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).
*10.7 Credit Agreement dated as of May 30, 1995 between Royal Bank
of Canada and the Company (filed as Exhibit 10.12 to the Form
10-Q for the quarter ended July 1, 1995).
*10.8 Credit Agreement dated as of May 30, 1995 between 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).
*10.9 Credit Agreement dated as of June 11, 1996 between Royal Bank
of Canada and the Company. (Filed as Exhibit 10.11 to the Form
10-Q for the quarter ended June 29, 1996).
*10.10 Amendment dated November 18, 1996 to Credit Agreement dated June
11, 1996 between Royal Bank of Canada and the Company. (Filed
as Exhibit 10.12 to the Form 10-Q for the quarter ended December
28, 1996).
10.11 Amendment dated February 7, 1997 to the Credit Agreement dated
June 11, 1996 between Royal Bank of Canada and the Company.
10.12 Amendment dated April 11, 1997 to Credit Agreement dated June 11,
1996 between Royal Bank of Canada and the Company.
10.13 Employment Agreement dated November 11, 1996 between
Richard D. Busto and the Company.
10.14 Consulting Agreement dated April 15, 1997 between John G. Gamba
and the Company.
10.15 Letter Agreement dated April 2, 1997 between Richard D. Busto
and the Company.
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, 1997.
<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/RICHARD D. BUSTO
-----------------------
(Richard D. Busto)
President and Chief Executive Officer
Dated: June 25, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard D. Busto his attorneys-in-fact, 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 said attorneys-in-fact, or
his substitute or substitutes, may do or cause to be done by virtue hereof.
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/RICAHARD D. BUSTO
- --------------------
(Richard D. Busto) President and June 25, 1997
Chief Executive Officer
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
s/MICHAEL CHAWNER
- ------------------
(Michael Chawner) Director June 25, 1997
s/CHRISTOPHER A. FOURNIER
- -------------------------
(Christopher A. Fournier) Director June 25, 1997
s/JOHN F. GAMBA
- --------------------
(John F. Gamba) Director and Chairman June 25, 1997
s/IAN MCLAREN
- -------------------
(Ian McLaren) Director June 25, 1997
s/DONALD M. GLEKLEN
- -----------------
(Donald M. Gleklen) Director June 25, 1997
s/MIHKEL E. VOORE
- ---------------------- Director June 25, 1997
(Mihkel E. Voore)
<PAGE>
AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Shareholders
of Gandalf Technologies Inc.
Under date of May 13, 1997, we reported on the consolidated balance sheets of
Gandalf Technologies Inc. as at March 31, 1997 and 1996 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, 1997 as contained in
the 1997 annual report to shareholders on Form 10-K. 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
Chartered Accountants
Ottawa, Canada
May 13, 1997
<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
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1997
- -----------
Reserve for bad
debts deducted
in the balance
sheet from amounts
receivable ...... $ 4,902 $ 1,130 $ (471) $ - $ 5,561
Year ended March 31, 1996
- -----------
Reserve for bad
debts deducted
in the balance
sheet from amounts
receivable ....... $ 4,430 $ 836 $ (364) $ - $ 4,902
<FN>
(1) Relates to accounts receivable charged directly against
reserve for bad debts.
</FN>
</TABLE>
<PAGE>
GANDALF TECHNOLOGIES INC.
(the "Company")
BY-LAW A3
BE IT ENACTED as a by-law of the Company as follows:
THAT Section 7.10 of By-Law A of the Corporation be and the same is hereby
amended to provide as follows:
A quorum for the transaction of business at any meeting of shareholders
shall be two (2) persons present or represented by proxy, holding not less
than thirty percent (30%) of issued and outstanding common shares of the
Company.
Passed and adopted by the Shareholders of the Company at the Annual General
Meeting held August 10, 1995.
<PAGE>
L.J.(Jim) Blattman
Senior Manager
Technology Banking Group
Royal Bank of Canada
90 Sparks Street
Ottawa, Ontario K1P 5T6
Tel: 613-564-4898
Fax: 613-564-4527
[email protected]
February 7, 1997
Private & Confidential
- ----------------------
Gandalf Technologies Inc.
130 Colonnade Road South
Nepean, Ontario
K2E 7M4
Attention: Mr. Walter R. MacDonald
Vice-President, Finance & CFO
-----------------------------
Dear Sirs:
We refer to the letter agreement date June 11, 1996 detailing a Credit Facility
made available to Gandalf Technologies Inc. by Royal Bank of Canada (the
"Agreement"). All capitalized terms and references herein have the same meaning
as those in the Agreement. We also refer to a letter agreement dated November
18, 1996 between the Bank and the Borrower which waived certain defaults of the
Borrower pursuant to the Agreement and detailed related amendments to the
Agreement (the "Amending Agreement").
The Bank and the Borrower hereby acknowledge the breach by the Borrower of the
Agreement and the Amending Agreement in relation to Sections 23(a), 23(b) and
24(h) for the reporting period ended December 28, 1996. The Bank hereby waives
its rights in respect of such breaches for the period December 28, 1996 to March
31, 1997. This waiver is granted only in respect of the aforementioned breaches
and only for the aforementioned period and is subject to and conditional upon
the following:
i. The Borrower will provide to the bank, within 5 days hereof, a forecast
of cash flow and Margin Requirement, prepared in a weekly format to
March 31, 1997 inclusive. The forecast will be delivered in both
consolidated and non-consolidated versions.
ii. The Borrower will provide to the Bank, by Tuesday of each week
commencing February 4, 1997, with evidence of compliance with the Margin
Requirements together with supporting documentation as required.
iii. The Borrower will provide to the Bank, within 15 calendar days of each
month end, consolidated, rolling sales forecast for the current fiscal
quarter with comparisons to the previous fiscal quarter.
iv. The Borrower will provide to the Bank, within 5 days hereof, evidence
satisfactory to the Bank of the engagement of an investment banking
firm, chosen by the Borrower, together with a related schedule of
activities targeted to provide the Borrower with a cash infusion of not
less than CDN $20 million by no later than March 31, 1997 (the "Funding
Arrangement"). If, in the Bank's sole opinion, there is material adverse
change in the scope or timing of the Funding Arrangement, the Bank may,
at its option, declare Borrowings in default, notwithstanding any other
terms herein.
v. The borrowing spreads detailed in Section 6 (2) (a), (b) and (d) of the
Agreement are increased to 1.75% pending full compliance with the
Agreement.
vi. The Borrower will pay to the Bank a risk premium equal to 1% per annum,
calculated and payable monthly in arrears, of the amount committed under
Segment 2(a) of the Agreement, until the earlier of Tangible Net Worth
exceeding US $40,000,000 or the company recording net after tax profit
of $1,000,000 or more in any fiscal quarter.
vii. Acceptance of similar terms and conditions (with the specific exception
of (iv) above) by GDCL with respect to a credit facility extended to
GDCL by the Bank's office in London, England.
viii. Suspension of Segment (1) of the Agreement with respect to FEF
Contracts.
All other terms and conditions of the Agreement remain unchanged.
Please confirm your acceptance by signing and returning the enclosed copy of
this letter no later than February 19, 1997.
Yours truly,
S/J.L. (JIM) BLATTMAN
- ---------------------
J.L. (Jim) Blattman
<PAGE>
L.J.(Jim) Blattman
Senior Manager
Technology Banking Group
Royal Bank of Canada
90 Sparks Street
Ottawa, Ontario K1P 5T6
Tel: 613-564-4898
Fax: 613-564-4527
[email protected]
April 11, 1997
Private & Confidential
- ----------------------
Gandalf Technologies Inc.
130 Colonnade Road South
Nepean, Ontario
K2E 7M4
Attention: Mr. Walter R. MacDonald
Vice-President, Finance & CFO
-----------------------------
Dear Sirs:
We refer to the letter agreement dated June 11, 1996 detailing a Credit Facility
made available to Gandalf Technologies Inc. by Royal Bank of Canada (the
"Agreement") and to a waiver letter dated November 6, 1996 in relation thereto
(the "First Waiver") and a waiver letter dated February 7, 1997 (the "Second
Waiver").
The Second Waiver having expired March 31, 1997, the Borrower is in default of
the Agreement beginning April 1, 1997, which default continues to this day, and
has advised the Bank of its inability to remedy the defaults in relation to
Sections 23 (a), (b), (c) and 24 (h). While the bank does not waive its rights
in respect of such defaults, it agrees to tolerate the defaults subject to the
following conditions:
1. Section 2 paragraphs (1), (2c) and (2d) of the Agreement are hereby
withdrawn.
2. Section 3 paragraph (1) of the Agreement is reduced to nil.
3. Section 3 paragraph (2a) of the Agreement is reduced to US $10,000,000.
4. The borrowing spreads detailed in Section 6 paragraphs (2a) and (2b)
of the Agreement are increased to 1.75%.
5. The Borrower will provide to the Bank, by Tuesday of each week
commencing immediately, with evidence of compliance with the Margin
Requirement together with supporting documentation as required.
6. Acceptance of similar terms and conditions by GDCL as outlined above
with respect to a credit facility extended to GDCL by the Bank's office
in London, England, including a reduction in said facility to a maximum
of (pound)2,500,000.
7. Payment of a risk premium of US $25,000 commencing April 1, 1997 and
monthly thereafter.
<PAGE>
This tolerance is granted only for the aforementioned defaults and may be
rescinded on ten days written notice or, in the event of an unauthorized breach
of the Margin Requirements, without notice.
All other terms and conditions of the Agreement remain unchanged.
Please confirm your acceptance by signing and returning the enclosed copy of
this letter no later that April 16, 1997.
Yours truly,
S/J.L. (JIM) BLATTMAN
- ---------------------
J.L. (Jim) Blattman
<PAGE>
THIS AGREEMENT made as of the 11th day of November, 1996.
BETWEEN:
GANDALF TECHNOLOGIES INC., a corporation duly incorporated under the laws of
Ontario having its head office at the City of Nepean, in the Province of Ontario
(the "Employer")
AND
RICHARD BUSTO (the "Executive")
WHEREAS:
1. The Employer is engaged in the development, manufacture and distribution of
network infrastructure equipment and services.
2. The Employer and the Executive have agreed to enter into an employment
relationship for their mutual benefit;
THIS AGREEMENT witnesses that the parties have agreed that the terms and
conditions of the relationship shall be as follows:
1. Duties
The Employer appoints the Executive to undertake the duties and exercise the
powers as President and Chief Operating Officer of the Employer as may be
requested of the Executive by the Board of Directors of the Employer and in the
other offices to which he may be appointed by the subsidiary companies of the
Employer provided always that such other offices shall be in an officer capacity
consistent with the Executive's position as Chief Operating Officer of the
Employer. The Executive accepts the office, on the terms and conditions set
forth in this agreement. The parties further agree that subject to the
provisions of this agreement, the Executive will be appointed Chief Executive
Officer of the Employer (and will cease to be Chief Operating Officer) at such
time as Thomas Vassiliades ceases to be Chief Executive Officer of the Employer.
2. Term
The appointment shall commence with effect from October 3, 1996 and shall
continue for thirty-six months.
3. Compensation
(1) The salary of the Executive for his services shall be at annual the rate of
U.S. $200,000 while serving as Chief Operating Officer and U.S. $250,000
while serving as Chief Executive Officer ("Base Remuneration") which shall
be paid in equal installments at the same intervals as other officers of
the Employer are paid.
(2) In addition to the Base Remuneration, the Executive may receive from the
Employer a bonus payment equal to 50% of the Base Remuneration for his
services for each year during the period of his employment. Payment of such
bonus shall be based on the performance criteria agreed to by the Executive
and the Employer.
<PAGE>
4. Benefits
(1) The Executive shall receive an annual automobile allowance of U.S. $7,500
which shall be paid in equal monthly installments.
(2) It is understood and agreed that the Executive will incur expenses in
connection with his duties under this agreement. The Employer will
reimburse the Executive for any expenses provided that the Executive
provides to the Employer an itemized written account and receipts
acceptable to the Employer within thirty days after they have been
incurred.
(3) The Executive shall participate in all benefit plans which the Employer
provides to its employees.
(4) Recognizing the extra requirement for customer entertainment by the
Executive, the Employer will provide for initiation and annual dues
payments for one dinner or private business club.
(5) The Employer shall reimburse the Executive for any Canadian income taxes
and payroll taxes payable on his income from the Employer and on income not
exceeding U.S. $50,000 per year from other sources that are in excess of
actual U.S. income taxes and payroll taxes on such income excluding income
taxes relating to gains realized by the Executive before, during or after
the term of this agreement that relate to the options to purchase its
Shares granted by the Employer to the Executive. The amount of any
reimbursement payable to the Executive pursuant to this paragraph shall be
calculated prior to applying any deduction in Canada or in the U.S. for
contributions to a retirement savings plan such as a RRSP or 401K.
(6) The Employer agrees that upon the execution of this agreement it will grant
the Executive options, under the Employer's Stock Option Plan for
Executives and Directors (the "Plan") to purchase 750,000 Common Shares of
the Employer. The exercise price shall be the market price for Common
Shares of the Employer at the close of business on the date hereof. The
said options shall vest and be exercisable as follows:
116,666 on the date of grant;
116,667 on the first anniversary of the date of grant;
116,667 on the second anniversary of the date of grant;
75,000 upon being appointed Chief Executive Officer;
75,000 on the first anniversary of being appointed Chief
Executive Officer; 125,000 on October 3, 1998; 125,000 on October
3, 1999.
The Employer's obligation to grant options as set out above is subject to the
Employer being able to comply with the requirements of the Toronto Stock
Exchange including, without limiting the generality of the foregoing, the
obtaining of shareholder approval to create a sufficient number of options. The
Employer shall use reasonable efforts to insure that all of the options referred
to above can be granted in compliance with the requirements of the Toronto Stock
Exchange.
Except as provided in this agreement all terms and conditions of the Plan shall
apply to the options granted pursuant to this agreement.
<PAGE>
5. Authority
(1) The Executive shall have, subject always to the general or specific
instructions and directions of the Board of Directors of the Employer,
full power and authority to manage and direct the business and affairs of
the Employer (except only the matters and duties as by law must be
transacted or performed by the Board of Directors or by the shareholders
of the Employer in general meeting), including power and authority to
enter into contracts, engagements or commitments of every nature or kind
in the name of and on behalf of the Employer and to engage and employ and
to dismiss all managers and other employees and agents of the Employer.
(2) The Executive shall conform to all lawful instructions and directions given
to him by the Board of Directors of the Employer, and obey and carry out
the by-laws of the Employer.
6. Service
(1) The Executive, throughout the term of his appointment, shall devote his
full time and attention to the business and affairs of the Employer and its
subsidiaries and shall not, without the consent in writing of the Board of
Directors of the Employer undertake any other business or occupation or
become a director, officer, employee or agent of any other company, firm or
individual. For greater certainty this paragraph is not meant to preclude
the Executive from pursuing any other non-conflicting and non-competing
business activities which are primarily passive in nature or from serving
on other boards of directors so long as such directorships are disclosed
fully to the Employer's Board of Directors.
(2) The Executive shall well and faithfully serve the Employer and its
subsidiaries and use his best efforts to promote the interests thereof and
shall not disclose the private affairs or trade secrets of the Employer and
its subsidiaries to any person other than the Directors and other employees
of the Employer or for any purposes other than those of the Employer any
information he may acquire in relation to the Employer's business.
7. Non-competition
(1) The Executive agrees that, during employment pursuant to this agreement and
for a period of one year following termination of employment, however
caused, he will not hire or take away or cause to be hired or taken away
any employee of the Employer or any former employee who was in the employ
of the Employer during the six months preceding termination.
(2) The Executive further undertakes and agrees with the Employer that the
Executive will not, without written consent of the Employer, for a period
of six months following termination of employment, however caused, either
individually or in partnership or jointly or in connection with any person
as principal, agent, employee, shareholder (other than a holding of shares
listed in a Canadian or United States stock exchange that does not exceed
5% of the outstanding shares so listed) or in any other manner whatsoever,
directly or indirectly, carry on or be engaged in or be concerned with or
interested in or advise, lend money to, guarantee the debts or obligations
of or permit its name or any part thereof to be used or employed by any
person engaged in or concerned with or interested in, within Canada or the
United States of America, any business carried on by the Employer.
<PAGE>
8. Confidential Information
(1) The Executive acknowledges that as the Chief Executive Officer and in any
other position as the Executive may hold, the Executive will acquire
information about certain matters and things which are confidential to the
Employer, and which information is the exclusive property of the Employer,
including:
(a) product design and manufacturing information;
(b) names and addresses, buying habits and preferences of present
customers of the Employer, as well as prospective customers;
(c) pricing and sales policies, techniques and concepts; and
(d) other confidential information of a proprietary nature concerning
the business operations or financing of the Employer.
(2) The Executive acknowledges the information as referred to in paragraph 8(1)
could be used to the detriment of the Employer. Accordingly, the Executive
undertakes not to disclose same to any third party either during the term
of his employment except as may be necessary in the proper discharge of his
employment under this agreement, or after the termination of his
employment, however caused, except with the written permission of an
officer of the Employer.
(3) The Executive acknowledges and agrees that without prejudice to any other
rights of the Employer, in the event of his violation or attempted
violation of any of the covenants contained in paragraphs 7 and 8 of this
agreement, an injunction or any other like remedy shall be the only
effective remedy to protect the Employer's rights and property as set out
in paragraphs 7 and 8, and that an interim injunction may be granted
immediately on the commencement of any suit.
(4) The Executive understands and agrees that the Employer has a material
interest in preserving the relationship it has developed with its customers
against impairment by competitive activities of a former employee.
Accordingly, the Executive agrees that the restrictions and covenants
contained in paragraph 7 and those contained in paragraph 8 of this
agreement and the Executive's agreement to it by his execution of this
agreement, are of the essence to this agreement and constitute a material
inducement to the Employer to enter into this agreement and to employ the
Executive, and that the Employer would not enter into this agreement absent
such inducement. Furthermore, a claim or cause of action by the Executive
against the Employer whether predicated on this agreement or otherwise,
shall not constitute a defense to the enforcement by the Employer of the
covenants or restrictions provided, however, that if any provision shall be
held to be illegal, invalid or unenforceable in any jurisdiction, the
decision shall not affect any other covenant or provision of this agreement
or the application of any other covenant or provision.
<PAGE>
9. Vacation
The Executive shall be entitled during each year to five weeks' paid
vacation. U.S. statutory holidays may be substituted for Canadian statutory
holidays should the Executive wish to do so.
10. Termination of Employment
(1) The parties understand and agree that this agreement may be terminated in
the following manner in the specified circumstances:
(a) By the Employer, in its absolute discretion, without any notice or pay
in lieu thereof, for cause. For the purposes of this agreement, cause
includes the following:
(i) any willful material breach of the provisions of this agreement;
(ii) any conduct of the Executive which in the reasonable opinion of
the Employer may bring himself or the Employer into disrepute;
(iii) the commission of an act of bankruptcy by the Executive;
(iv) conviction of the Executive of a criminal offense;
(v) the inability of the Executive to perform the duties of his
employment hereunder due to physical or emotional incapacity or
illness, where such inability is expected to result in death or to
be of long-continued and indefinite duration. The determination of
disability shall be made by the Board of Directors of the Company
in conjunction with physicians competent in the area to which such
disability relates.
Failure by the Employer to rely on the provision of this paragraph in any
given instance or instances, shall not constitute a precedent or be deemed
a waiver.
(b) By the Employer in its absolute discretion and for any reason.
Provided that if the employment of the Executive is terminated without
cause, the Employer will pay the Executive as termination pay and in
full settlement of any and all claims the Executive may have arising
from such termination, an amount equal to one year's Base Remuneration
as at the date of termination which shall be paid in two equal
installments on the date of termination and 180 days after the date of
termination. Provided further that the Employer shall give the
Executive 90 days written notice if termination is for any reason
other than forcause although the Employer may excuse the Executive
from his duties during the 90 day period.
(c) By the Executive upon giving the Employer 90 days notice in writing and
subject to all applicable provisions of this agreement.
(2) The parties understand and agree that the giving of notice or the payment
of pay in lieu of notice by the Employer to the Executive on termination of
the Executive's employment shall not prevent the Employer from alleging
cause for the termination.
(3) On termination of employment the Executive shall immediately resign all
offices held (including directorships) in the company and save as provided
in this agreement, the Executive shall not be entitled to receive any
severance payment or compensation for loss of office or otherwise by reason
of the resignation. If the Executive fails to resign as mentioned the
Employer is irrevocably authorized to appoint some person in his name and
on his behalf to sign any documents or do any things necessary or requisite
to give effect to it.
<PAGE>
(4) On termination of employment the following shall apply with respect to
stock options granted to the executive pursuant to paragraph 4.06 hereof:
(a) if termination is by the Employer for cause, the Executive shall have
the right, to and including the 90th day following his receipt of a
Notice of Termination from the Employer, to exercise all options that
have vested to that date;
(b) if termination is by the Executive for any reason, the Executive
shall have the right, to and including the date his employment
terminates, to exercise all options that have vested to that date;
(c) if termination is by the Employer without cause, all unexercised
options held by the Executive and granted pursuant to this agreement
shall vest and be exercisable to and including the 90th day following
his receipt of notice of termination from the Employer.
11. Failure to appoint as Chief Executive Officer
If the Employer does not appoint the Executive to the position of Chief
Executive Officer as provided in paragraph 1 hereof the Executive may, at the
Executive's option, terminate this Agreement and his employment by notice in
writing to the Employer, which notice shall be given not later than 30 days
after the date that Thomas Vassiliades ceases to be Chief Executive Officer of
the Employer. If the Executive terminates his employment in accordance with the
provisions of this paragraph, the Employer shall pay or grant him the same
benefits that the Executive would have been entitled to as if he had been
dismissed without cause with the exception that the option to purchase a total
of 250,000 Shares of the Corporation that would have vested in two equal
installments on October 3, 1998 and October 3, 1999 shall not be vested or be
exercisable and shall be cancelled. The Executive acknowledges and agrees that
the benefits to which he is entitled to under this paragraph are the sole and
only benefits that he is entitled to arising out of the failure by the Employer
to appoint the Executive to the position of Chief Executive Officer.
12. Employer's Property
The Executive acknowledges that all items of any and every nature or kind
created or used by the Executive pursuant to the Executive's employment under
this agreement, or furnished by the Employer to the Executive, and all
equipment, automobiles, credit cards, books, records, reports, files, manuals,
literature, confidential information or other materials shall remain and be
considered the exclusive property of the Employer at all times and shall be
surrendered to the Employer, in good condition, promptly on the termination of
the Executive's employment irrespective of the time, manner or cause of the
termination.
13. Assignment of Rights
The rights which accrue to the Employer under this agreement shall pass to its
successors or assigns resulting from an amalgamation, merger or other
reorganization to which the Employer is a party or resulting from the transfer
of a substantial portion of the Employer's assets or undertaking to another
legal entity. The rights of the Executive under this agreement are not
assignable or transferable in any manner.
14. Notices
(1) Any notice required or permitted to be given to the Executive shall be
sufficiently given if delivered to the Executive personally or if mailed by
registered mail to the Executive's address last known to the Employer.
(2) Any notice required or permitted to be given to the Employer shall be
sufficiently given if mailed by registered mail to the Employer's Head
Office at its address last known to the Executive.
<PAGE>
15. Severability
In the event that any provision or part of this agreement shall be deemed void
or invalid by a court of competent jurisdiction, the remaining provisions or
parts shall be and remain in full force and effect.
16. Entire Agreement
This contract constitutes the entire agreement between the parties with respect
to the employment and appointment of the Executive by the Employer and any and
all previous agreements, written or oral, express or implied, between the
parties or on their behalf, including an employment contract dated September 12,
1995 between the Executive and Gandalf Systems Corporation relating to
employment and appointment of the Executive by the Employer are terminated and
cancelled and each of the parties releases and forever discharges the other of
and from all manner of actions, causes of action, claims and demands whatsoever,
under or in respect of any such previous agreement.
17. Modification of Agreement
Any modification to this agreement must be in writing and signed by the parties
or it shall have no effect and shall be void.
18. Headings
The headings used in this agreement are for convenience only and are not to be
construed in any way as additions to or limitations of the covenants and
agreements contained in it.
19. Governing law
This agreement shall be construed in accordance with the laws of the Province of
Ontario.
IN WITNESS WHEREOF this agreement has been executed by the parties to it, the
day, month and year first written above.
SIGNED, SEALED AND DELIVERED
in the presence of:
GANDALF TECHNOLOGIES INC.
Per:
s/CHARLES J. GARDNER - Chairman, Human Resources Committee
- --------------------
Charles J. Gardner
Per:
s/DONALD M. GLEKLEN
- -------------------
Donald M. Gleklen
s/RICHARD D. BUSTO
- ------------------
Richard D. Busto
<PAGE>
THIS AGREEMENT made in triplicate this 15th day of April, 1997.
BETWEEN:
GANDALF TECHNOLOGIES INC. a corporation
duly incorporated under the laws of the Ontario,
having its head office at the City of Nepean,
in the Province of Ontario
(hereinafter referred to as the "Company")
JOHN F. GAMBA
7905 Sandalfoot Drive,
Potomac, Maryland, USA 20854
(hereinafter referred to as the "Chairman")
WHEREAS GAMBA was appointed to the position of Chairman of the Board on
February 6, 1997;
AND WHEREAS the Company is desirous of retaining the services of GAMBA in the
capacity of Chairman of the Board of the Company; AND WHEREAS GAMBA is desirous
to provide his personal services in the capacity of Chairman of the Board of the
Company.
NOW THEREFORE THIS AGREEMENT WITNESSETH THAT in consideration of the premises
and the mutual covenants and agreements hereinafter contained, the parties
hereto mutually covenant and agree as follows:
1.0 Definitions
- ----------------
(a) "Board" shall mean the board of directors of the Company.
(b) "Business of the Company" shall mean and include the business of
Gandalf Technologies Inc., and any of its subsidiary companies,
(c) "Change of Control" shall mean the ownership by a person or entity or
group of persons and/or entities acting in concert of (i) 50% or more of
the issued and outstanding shares of the Company resulting from a
purchase or acquisition of the voting securities of the Company; or (ii)
all or substantially all of the Company's assets as a result of an
amalgamation, consolidation, merger or acquisition.
(d) "Company" shall mean Gandalf Technologies Inc., and its subsidiary
companies.
(e) "Confidential Information" shall mean all trade secrets, customer
lists, sales and marketing information, customer account records,
training and operations material and memoranda, personnel records,
pricing information, and financial information concerning or relating
to the business, accounts customers, employees and affairs of the
Company, obtained by or furnished, disclosed or disseminated to GAMBA,
or obtained, assembled or complied by GAMBA or under his supervision
during the course of his services rendered to the Company, and all
physical embodiments of the foregoing, all of which are hereby agreed
to be the property of and confidential to the Company, but Confidential
Information shall not include any of the foregoing to the extent the
same is or becomes publicly known through no fault or breach of this
Agreement by GAMBA.
<PAGE>
2.0 Services
- -------------
2.01 Position
- --------------
Subject to being re-elected to the Board by the shareholders of the
Company, and subject to the will of the Board and the terms and
conditions herein contained, GAMBA shall hold the position of Chairman of
the Board of the Company and shall perform such duties and exercise such
powers related thereto as may from time to time be assigned to him by the
board of directors and the Company.
2.02 Term
- ----------
The terms of this agreement shall commence with effect from April 1, 1997
and shall continue during GAMBA's tenure as Chairman of the Board, unless
terminated in accordance with the provisions of this agreement.
2.03 Location
- --------------
GAMBA shall perform his work and services for the Company in such places
as the Board and the Company may require from time to time.
3.0 Compensation
- -----------------
3.01 Currency Transaction
- --------------------------
All dollar amounts are expressed in US dollars.
3.02 Honorarium
- ----------------
Subject to the provisions in paragraph 4 hereof, the Company shall pay to
GAMBA an annual honorarium of FORTY EIGHT THOUSAND ($48,000) per annum
during the term of this Agreement. The honorarium shall be paid in
accordance with the normal payroll practices of the Company and shall be
subject to such deductions and withholdings as are required by law.
3.03 GAMBA shall be granted options under the Company's Stock Option Plan for
Key Employees and Directors (the "Plan") to purchase 50,000 common shares
of the Company. The date of grant shall be April 15, 1997 and the options
shall vest in one-fifth increments on each of the next five anniversary
dates of the date of grant. The exercise price shall be the closing price
of one common share of the Company's stock as quoted by The Toronto Stock
Exchange on the day prior to the date of grant.
The Company's obligation to grant the options as set out above is subject
to the Company being able to comply with the requirements of The Toronto
Stock Exchange including, without limiting the generality of the
foregoing, the obtaining of shareholder approval to create a sufficient
number of options. The Company shall use reasonable efforts to insure that
all of the options referred to above can be granted in compliance with the
requirements of The Toronto Stock Exchange.
Except as provided in this agreement, all terms and conditions of the Plan
shall apply to the options granted pursuant to this Agreement.
3.04 Expenses
- --------------
GAMBA shall be entitled to be reimbursed in accordance with the policies
of the Company, as adopted and amended from time to time, for all
reasonable and necessary expenses incurred by him in connection with the
services rendered hereunder; which shall include but not be limited to
travel, lodging, meals and incidental expenses, provided GAMBA shall as a
condition of such reimbursement, submit verification of the nature and
amount of such expenses in accordance with the reimbursement policies from
time to time adopted by the Company.
<PAGE>
4.0 Covenants
- --------------
4.01 Service
- -------------
GAMBA shall devote not less than twelve (12) full days of service in each
fiscal quarter to the business of the Company and shall well and
faithfully serve the Company and shall use his best efforts to promote the
interests of the Company.
4.02 If GAMBA devotes more than forty -eight (48) full days of service in any
fiscal year to the business of the Company, GAMBA shall be paid an
additional TWO THOUSAND DOLLARS ($2,000) for each additional day of
service in excess thereof.
4.03 If GAMBA does not devote forty-eight (48) full days of service to the
Company in any fiscal year, the amount of ONE THOUSAND DOLLARS ($1,000)
shall be deducted from the honorarium set out in paragraph 3.02 hereof,
for each day's service, or part thereof, less than forty-eight (48).
4.04 For purposes of computing a full day of service under this paragraph,
GAMBA may combine partial days or hours of service rendered to the Company
within a fiscal year.
4.05 The compensation paid under this agreement shall be in lieu of the
directors' annual retainer and meeting fees paid to outside directors.
4.06 GAMBA shall maintain a log of the days of service provided to the Company
and shall submit such logs to the Chief Executive Officer of the Company
on a monthly basis.
5.0 Change of Control
- ----------------------
5.01 In the event of a Change of Control, the following shall apply:
(a) in respect of the honorarium paid to GAMBA as set out in paragraph
3.02, the difference, if any, between the honorarium stipulated in
paragraph 3.02 and the amount or amounts paid to the date of the Change of
Control, shall immediately become payable in lump sum; and
(b) in respect of the options granted in paragraph 3.03, all unexercised
options granted pursuant to this Agreement shall vest and be immediately
exercisable.
<PAGE>
6.0 Confidential Information
- -----------------------------
6.01 GAMBA acknowledges that as the Chairman he will acquire information about
certain matters and things which are confidential to the Company, and
which information is the exclusive property of the Company, including:
(a) product design and manufacturing information;
(b) names and addresses, buying habits and preferences of present
customers of the Company, as well as prospective customers;
(c) pricing and sales policies, techniques and concepts; and
(d) other confidential information of a proprietary nature concerning the
business operations or financing of the Company.
6.02 GAMBA acknowledges the information as referred to in paragraph 6.01 could
be used to the detriment of the Company. Accordingly, GAMBA undertakes not
to disclose same to any third party either during the term of this
agreement except as may be necessary in the proper discharge of the
services to be rendered under this agreement, or after he ceases to be
Chairman except with the written permission of an officer of the Company.
6.03 GAMBA acknowledges and agrees that without prejudice to any other rights
of the Company, in the event of his violation or attempted violation of
any of the covenants contained in paragraph 6 of this agreement, an
injunction or any other likely remedy shall be the only effective remedy
to protect the Company's rights and property as set out in paragraph 6,
and that an interim injunction may be granted immediately on the
commencement of any suit.
6.04 GAMBA understands and agrees that the Company has a material interest in
preserving the relationship it has developed with customers against
impairment by competitive activities of a former executive. Accordingly,
GAMBA agrees that the restrictions and covenants contained in paragraph 6
of this agreement, are of the essence to this agreement and constitute a
material inducement to the Company to enter into this agreement and to
retain the services of GAMBA, and that the Company would not enter this
agreement absent such inducement. Furthermore, a claim or cause of action
by GAMBA against the Company whether predicated on this agreement or
otherwise, shall not constitute a defense to the enforcement by the
Company of the covenants or restrictions provided, however, that if any
provision shall be held to be illegal, invalid or unenforceable in any
jurisdiction, the decision shall not affect any other covenant or
provision of this agreement or the application of any other covenant or
provision.
<PAGE>
7.0 Termination of Agreement
- -----------------------------
7.01 The parties understand and agree that this agreement may be terminated in
the following manner in the specified circumstances:
(a) by the Company, in its absolute discretion, without any notice, and
subject to the provision of section 5.01(a) of this Agreement, without
compensation in lieu thereof upon GAMBA ceasing to be the Chairman of the Board;
(b) by GAMBA, upon giving the Company ninety (90) days notice in writing
and subject to all applicable provisions of this agreement, of his intention to
resign his position as Chairman of the Board. Except as specifically provided in
this agreement, GAMBA shall not be entitled to receive any payment or
compensation for loss of office or otherwise by reason of the resignation.
8.0 General
- ------------
8.01 Sections and Headings
- ---------------------------
The division of this Agreement into Articles and Sections and the insertion
of headings are for the convenience of reference only and shall not affect
the constructions or interpretation of this Agreement. The terms "this
Agreement", "hereof", "hereunder" and similar expressions refer to this
Agreement and not to any particular Article, Section or other portion
hereof and include any agreement or instrument supplemental or ancillary
hereto. Unless something in the subject matter or context is inconsistent
therewith, references herein to Articles and Sections are to Articles and
Sections of this Agreement.
8.02 Number
- ------------
In this Agreement words importing the singular number only shall include
the plural and vice versa and words importing the masculine gender shall
include the feminine and neuter genders and vice versa and words importing
persons shall include individuals, partnerships, associations, trusts,
unincorporated organizations and corporations and vice versa.
8.03 Benefit of Agreement
- --------------------------
This Agreement shall enure to the benefit of and be binding upon the heirs,
executors, administrators and legal personal representatives of GAMBA and
the successors and permitted assigns of the Company respectively. This
Agreement is a contract for personal services and may not be assigned by
GAMBA.
8.04 Entire Agreement
- ----------------------
This Agreement constitutes the entire agreement between the parties with
respect to the subject matter hereof and cancels and supersedes any prior
understandings and agreement between the parties hereto with respect
thereto. There are no representations, warranties, forms, conditions,
undertakings, or collateral agreements, express, implied or statutory
between the parties other than as expressly set forth in this Agreement.
<PAGE>
8.05 Amendments and Waivers
- ----------------------------
No amendment to this Agreement shall be valid or binding unless set forth
in writing and duly executed by both of the parties hereto. No waiver of
any breach of any provision of this Agreement shall be effective or binding
unless made in writing and signed by the party purporting to give the same
and, unless otherwise provided in the written waiver, shall be limited to
the specific breach waived.
8.06 Severability
- ------------------
If any provision of this Agreement is determined to be invalid or
unenforceable in whole or in part, such invalidity or unenforceability
shall attach only to such provision or part thereof and the remaining part
of such provision and all other provisions hereof shall continue in full
force and effect.
8.07 Notices
- -------------
Any demand, notice or other communication (hereinafter in this Section 8.07
referred to as a "Communication") to be given in connection with this
Agreement shall be given in writing and may be given by personal delivery
or by registered mail addressed to the recipient as follows:
The President & CEO
c/o Gandalf Technologies Inc.
130 Colonnade Road South
Nepean, Ontario
K2E 7M4
Tel: 613 - 274-6500
Fax: 613 - 274-6505
or such other address or individual as may be designated by notice by
either party to the other. Any Communication given by personal delivery
shall be conclusively deemed to have been given on the day of actual
delivery thereof and, if made or given by registered mail, on the 3rd day,
other than a Saturday, Sunday or statutory holiday in Ontario, following
the deposit thereof in the mail. If the party giving any Communication
knows or ought reasonably to know of any difficulties with the postal
system which might affect the delivery of mail, any such Communication
shall not be mailed but shall be given by personal delivery.
8.08 Governing Law
- -------------------
This Agreement shall be governed by and construed in accordance with the
laws of the Province of Ontario. For the purpose of all legal proceedings
this Agreement shall be deemed to have been performed in the Province of
Ontario and the courts of the Province of Ontario shall have safe and
exclusive jurisdiction to entertain any action arising under this
Agreement.
<PAGE>
8.09 Interpretation of Agreement
- ---------------------------------
Any issues arising out of the application, interpretation or
administration of this Agreement shall be determined by final and binding
arbitration pursuant to the Arbitration Act, 1991 or successor
legislation. The arbitrator shall be appointed in accordance with the
Arbitration Act, 1991, and the arbitrator shall have the power to award
compensation, or damages in case of breach of the terms of this Agreement.
However, the arbitrator shall not have the power to order reinstatement
nor shall he/she have the power to amend, or alter in any way the terms of
this Agreement.
8.10 Copy of Agreement
- -----------------------
GAMBA hereby acknowledges receipt of a copy of this Agreement duly signed
by the Company.
8.11 Confidentiality of This Agreement
- ---------------------------------------
Save and except for such disclosure of this Agreement may be required to be
made by the Company in order to comply with applicable securities laws and
regulations, in further consideration of the mutual promises contained in
this agreement, the GAMBA agrees that the terms of this Agreement shall
remain and be kept confidential by him.
IN WITNESS WHEREOF the parties have executed this Agreement.
SIGNED AND DELIVERED
In the presence of:
s/JOHN F. GAMBA
- ---------------
John F. Gamba
GANDALF TECHNOLOGIES INC.
per:
s/RICHARD D. BUSTO
- ------------------
Richard D. Busto
President and Chief Executive Officer
<PAGE>
Gandalf Technologies Inc.
130 Colonnade Road South
Nepean, Ontario K2E 7M4
Canada
Telephone: (613) 274-6500
Facsimile: (613) 274-6501
WEB URL: http://www.gandalf.ca
PERSONAL & CONFIDENTIAL
April 2, 1997
Richard D. Busto
President and Chief Executive Officer,
130 Colonnade Road South,
Nepean, Ontario K2E 7M4
Dear Dick,
RE: RETENTION BONUS
- --------------------
As you know, Gandalf has engaged the services of JP Morgan to identify and enter
into discussion with potential strategic partners or investors. These
discussions, if successful, could result in a transaction to sell or merge
Gandalf with a third party.
It is my belief that, in order to successfully complete that process, as well as
to continue to operate the company in the interim, you are, and continue to be,
an important and necessary member of the senior executive team. For that reason,
I am extending to you an opportunity to become eligible to receive a retention
bonus of up to $375,000 US, in exchange for your commitment to Gandalf.
Upon a change of control, the 750,000 options which were granted to you on your
appointment as President and CEO of the company will accelerate and become
immediately exercisable. The exercise price of those options is $3.90 US. The
actual amount of the bonus for which you are eligible will be the difference
between the benefit derived upon the exercise of those options and $375,000 US.
To be eligible to receive the retention bonus, you must continue to be employed
by Gandalf at the time of the change of control of the company and you
must continue to meet or exceed all requirements of your job. In order
for the company to comply with its reporting requirements under applicable
securities legislation, it may become necessary for the company to disclose
this retention bonus arrangement in its public filings. Until such disclosure,
if required, is made by the company, it is also a prerequisite that you keep
the arrangement that is being offered to you, and its terms, strictly
confidential and that you not reveal same to anyone except family members,
your legal and financial advisors. Specifically, you are not to
communicate or discuss the retention bonus opportunity, directly or
indirectly, with employees or former employees of Gandalf. Failure to comply
with each of these requirements will result in disqualification from
eligibility for the retention bonus.
The retention bonus is not earned until the conditions set out above have been
satisfied. When earned, the retention bonus will be paid in lump sum within two
months of the date of change of control. If a transaction to sell or merge
Gandalf with a third party is not completed within one year of the date of this
letter, the retention bonus opportunity will automatically terminate.
<PAGE>
Please indicate your acknowledgment of this opportunity and agreement to its
terms by signing the enclosed duplicate copy of this letter, and returning it to
me at your earliest opportunity.
I look forward to continuing to work with you.
s/JOHN F. GAMBA
- --------------------
John F. Gamba
Chairman of the Board
Acknowledge and Agreed
s/RICHARD D. BUSTO
- ------------------
Richard D. Busto
<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
Gandalf House
Doncastle Road
Bracknell, Berkshire, England
RG12 8PE
Gandalf Systems Corporation Delaware, U.S.A.
501 Delran Parkway
Delran, New Jersey
08075-1249 USA
Gandalf International Limited United Kingdom
Doncastle Road
Bracknell, Berkshire, England
RG12 8PE
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
Infotron Puerto Rico, Inc. Delaware, United States
501 Delran Parkway
Delran, New Jersey
08075-1249 USA
T3-Inc. Delaware, United States
501 Delran Parkway
Delran, New Jersey
08075-1249 USA
Infotron Systems Foreign Virgin Islands
Sales Corporation
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>
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, No. 333-02677); on
FormS-4 (No. 33-41556); on Form S-3 (No. 33-42077) and in the related
prospectuses therein of our reports dated May 13, 1997 on the consolidated
financial statements and schedule of Gandalf Technologies Inc., which reports
are included in this annual report on Form 10-K.
S/KPMG
- --------------------------
Chartered Accountants
Ottawa, Ontario
May 13, 1997
