Consolidated Balance Sheet
(Thousands of U.S. dollars)
As at March 31 1995 1994
- ---------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 11,817 $ 5,273
Accounts receivable 26,880 30,182
Inventories (note 2) 15,230 20,877
Other 2,268 4,022
- ---------------------------------------------------------------------------------------
Total current assets 56,195 60,354
Fixed assets (note 3) 18,619 20,214
Goodwill, net of accumulated
amortization of $2,952 (1994 - $2,734) 3,462 3,680
Other assets 3,232 4,938
- ---------------------------------------------------------------------------------------
Total assets $ 81,508 $ 89,186
=======================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Bank operating lines (note 4) $ 5,854 $ 10,512
Accounts payable and accrued liabilities (note 5) 21,369 27,854
Deferred revenue 7,758 7,424
Current portion of long-term debt (note 6) 157 586
- ---------------------------------------------------------------------------------------
Total current liabilities 35,138 46,376
Long-term debt (note 6) 1,877 2,020
8.5% convertible debentures (note 7) 10,051 21,681
Shareholders' equity:
Capital stock (notes 7 and 8)
Common shares, 35,238,064 issued and outstanding
(1994 - 28,072,333) 91,644 79,811
Retained earnings (deficit) (52,364) (53,770)
Cumulative translation adjustment (4,838) (6,932)
- ---------------------------------------------------------------------------------------
Total shareholders' equity 34,442 19,109
- ---------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 81,508 $ 89,186
=======================================================================================
Commitments and contingencies (note 16)
On behalf of the Board of Directors:
s/D. CUNNINGHAM s/D.M. GLEKLEN
D. Cunningham, Director D.M. Gleklen,
Director
See accompanying notes to consolidated financial statements
Consolidated Statement of Income
(Thousands of U.S. dollars, except per share amounts)
Years Ended March 31 1995 1994 1993
- -----------------------------------------------------------------------------------------
Revenues:
Product $ 83,801 $ 90,813 $ 113,877
Service 36,710 40,510 47,023
- ----------------------------------------------------------------------------------------
120,511 131,323 160,900
Operating expenses:
Cost of product sales 43,630 49,509 61,237
Service expenses 23,316 27,024 29,333
Sales and marketing 33,148 43,678 47,928
Administration and general 7,513 11,094 14,879
Research and development (note 9) 10,197 14,316 17,279
Restructuring and other costs (note 10) 685 28,662 5,547
- ----------------------------------------------------------------------------------------
Income (loss) from operations 2,022 (42,960) (15,303)
Gain on sale of portfolio investment 2,024 - -
Interest expense (note 11) (2,969) (4,127) (4,653)
Interest income and foreign exchange 329 991 449
Income taxes (note 12) - (1,142) -
- ----------------------------------------------------------------------------------------
Net income (loss) for the year $ 1,406 $ (47,238) $ (19,507)
========================================================================================
Basic earnings (loss) per share (note 13) $ 0.05 $ (2.27) $ (1.24)
========================================================================================
Weighted average number of common shares
outstanding (thousands) 28,589 20,802 15,702
========================================================================================
See accompanying notes to consolidated financial statements
Auditors' Report
To the Shareholders of Gandalf Technologies Inc.
We have audited the consolidated balance sheets of Gandalf
Technologies Inc. as at March 31, 1995 and 1994 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, 1995. 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, 1995 and 1994 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, 1995, in accordance with accounting principles
generally accepted in Canada which, except as disclosed in
Note 19 to the consolidated financial statements, also conform
in all material respects with accounting principles generally
accepted in the United States.
s/KPMG PEAT MARWICK THORNE
Chartered Accountants
Ottawa, Canada
May 26, 1995
Consolidated Statement of Changes in Financial Position
(Thousands of U.S. dollars)
Years Ended March 31 1995 1994 1993
- ----------------------------------------------------------------------------------------
Operating activities:
Cash provided by (applied to)
operations (note 14) $ 4,958 $ (14,395) $ (1,650)
Decrease in operating working
capital (note 15) 4,212 775 3,099
- ----------------------------------------------------------------------------------------
Cash provided by (applied to)
operating activities 9,170 (13,620) 1,449
- ----------------------------------------------------------------------------------------
Financing activities:
Issue of capital stock 12,242 34,226 343
Issue of 8.5% convertible debentures - - 21,665
Conversion of 8.5% convertible
debentures (note 7) (11,533) - -
Long-term debt incurred - - 792
Long-term debt retired (446) (20,841) (11,989)
- ----------------------------------------------------------------------------------------
Cash provided by financing activities 263 13,385 10,811
- ----------------------------------------------------------------------------------------
Investing activities:
Purchase of fixed assets (2,919) (4,411) (3,929)
Proceeds on disposal of investments 3,857 1,158 -
Proceeds on disposal of fixed assets 298 1,088 -
Software development costs deferred (note 9) (150) (1,986) (3,012)
Other 443 (55) 1,338
- ----------------------------------------------------------------------------------------
Cash provided by (applied to)
investing activities 1,529 (4,206) (5,603)
- ----------------------------------------------------------------------------------------
Effect of exchange rate changes
on cash balances 240 (510) 31
- ----------------------------------------------------------------------------------------
Increase (decrease) in cash position
in the year 11,202 (4,951) 6,688
Cash position at beginning of year (5,239) (288) (6,976)
- ----------------------------------------------------------------------------------------
Cash position at end of year $ 5,963 $ (5,239) $ (288)
========================================================================================
Cash position is comprised of:
Cash and cash equivalents $ 11,817 $ 5,273 $ 9,737
Bank operating lines (5,854) (10,512) (10,025)
- ----------------------------------------------------------------------------------------
$ 5,963 $ (5,239) $ (288)
========================================================================================
See accompanying notes to consolidated financial statements
Consolidated Statement of Shareholders' Equity
(Thousands of U.S. dollars)
Years Ended March 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
- -------------------------------------------------------------------------------------------------------
Capital Stock:
Consisting of an unlimited
number of common shares
authorized, without par value
Balance at beginning of year 28,072,333 $ 79,811 15,864,833 $ 45,585 15,671,907 $ 45,242
Issued:
On conversion of debentures
(note 7) 6,782,519 11,124 - - - -
On public offering, net of share
issue costs - - 12,000,000 33,863 - -
Exercise of stock options (note 8) 182,214 354 207,500 363 198,000 354
Employee share purchase plan 200,998 355 - - - -
Cancelled - - - - (5,074) (11)
- --------------------------------------------------------------------------------------------------------
Balance at end of year 35,238,064 $ 91,644 28,072,333 $ 79,811 15,864,833 $ 45,585
========================================================================================================
Retained Earnings (Deficit):
Balance at beginning of year $(53,770) $ (6,532) $ 12,975
Net income (loss) 1,406 (47,238) (19,507)
- --------------------------------------------------------------------------------------------------------
Balance at end of year $(52,364) $(53,770) $ (6,532)
========================================================================================================
Cumulative Translation Adjustment:
Balance at beginning of year $ (6,932) $ (4,745) $ (2,726)
Adjustment arising on translation
of foreign subsidiaries' financial
statements to U.S. dollars 1,091 (3,122) (1,524)
Adjustment relating to subsidiary loans
designated as long-term investments 1,003 935 (495)
- -------------------------------------------------------------------------------------------------------
Balance at end of year $ (4,838) $ (6,932) $ (4,745)
========================================================================================================
See accompanying notes to consolidated financial statements
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. Prior year financial
statements have been reclassified to conform with the current
year's presentation.
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 19. 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. Buildings are depreciated using the
straight-line method based on a useful life of 20 years.
Leasehold improvements are amortized using the straight-line
method over the term of the related lease.
Notes (Cont'd)
(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. To date, the only
development costs which have met these criteria have been
certain computer software development costs.
(h) Goodwill
Goodwill represents the excess of the purchase price over the
fair value of net assets acquired of subsidiary companies and
is amortized using the straight-line method over a period not
exceeding 20 years. When warranted by events or circumstances
that might indicate that recoverability is impaired,
management will evaluate recoverability by use of the
undiscounted cash flow method.
2. Inventories
As at March 31 1995 1994
- ---------------------------------------------------------------------------------------
Raw materials $ 3,336 $ 5,587
Work-in-process 4,591 4,007
Finished goods 7,303 11,283
- ---------------------------------------------------------------------------------------
$ 15,230 $ 20,877
=======================================================================================
3. Fixed Assets
As at March 31 1995 1994
- ---------------------------------------------------------------------------------------
Cost:
Land $ 232 $ 213
Buildings 4,725 4,535
Equipment 55,879 53,340
Leasehold improvements 1,930 1,779
- ---------------------------------------------------------------------------------------
62,766 59,867
Accumulated depreciation 44,147 39,653
- ---------------------------------------------------------------------------------------
Net book value $ 18,619 $ 20,214
=======================================================================================
4. Bank Operating Lines
At March 31, 1995 the Company's authorized bank operating
lines totalled $18.9 million. This included $15.2 million
relating to two committed credit facilities with a Canadian
chartered bank. During May 1995, two months in advance of
their expiry, these facilities were renewed for the period
through to the next annual review date of June 30, 1996. The
facilities bear interest at the bank's prime rate plus 0.5%.
The additional authorized amount of $3.7 million related to a
demand credit facility with a bank in the United Kingdom.
During the third quarter of 1995, this facility was renewed
until September 1995. The interest rate varies depending on
borrowing levels and ranges from 2.0% to 2.5% above the bank's
base rate.
Notes (Cont'd)
The operating lines are secured by certain of the accounts
receivable, inventories and other assets of the Company. The
amount available for borrowing at any time under the
facilities is based on margin formulas relating to levels of
accounts receivable, inventories and other bank covenants.
Under such formulas, $14.8 million was available to the
Company at March 31, 1995 and $5.8 million was being utilized.
Cash and cash equivalents held as of that date represented a
further $11.8 million of cash resources available to the
Company. Cash and unused credit lines totalled $20.8 million
at March 31, 1995, compared to $10.2 million at March 31,
1994.
5. Accounts Payable and Accrued Liabilities
As at March 31 1995 1994
- ---------------------------------------------------------------------------------------
Trade accounts payable $ 7,341 $ 9,784
Payroll, commissions and related taxes 4,072 3,594
Accrued restructuring costs 3,033 6,720
Other payables 5,266 6,292
Income and other taxes payable 1,657 1,464
- ---------------------------------------------------------------------------------------
$ 21,369 $ 27,854
=======================================================================================
The decrease in accrued restructuring costs during 1995
occurred primarily as a result of the payment of severance and
lease costs for redundant facilities which were accrued during
the fourth quarter of the 1994 fiscal year. Accrued
restructuring costs at March 31, 1995 primarily represent the
remaining portion of lease costs for redundant facilities.
6. Long-term Debt
As at March 31 1995 1994
- ---------------------------------------------------------------------------------------
Interest
Description Rate Security
- ---------------------------------------------------------------------------------------
Obligation under capital 12.9% Printed Circuit Board $ 1,984 $ 2,078
lease denominated in Manufacturing Facility,
Canadian dollars, lease Nepean, Ontario
term ending during 2009
Other Various Various 50 528
- ---------------------------------------------------------------------------------------
2,034 2,606
Classified as current 157 586
- ---------------------------------------------------------------------------------------
$ 1,877 $ 2,020
=======================================================================================
The aggregate amount of long-term debt scheduled to be repaid
in the five years ending March 31, 2000 is $482,000 with the
balance of $1,552,000 due thereafter.
Notes (Cont'd)
7. 8.5% Convertible Debentures
Shares Issued
Aggregate Principal Amount % Upon Conversion
- ---------------------------------------------------------------------- ---------------
Balance at March 31, 1994 C$ 30,000 $ 21,681 100%
Converted during year (15,939) (11,533) (53%) 6,782,519
Impact of foreign exchange - (97) -
- -----------------------------------------------------------------------
Balance at March 31, 1995 14,061 10,051 47%
Converted subsequent to year end (8,020) (5,864) (27%) 3,412,747
Impact of foreign exchange - 213 -
- -----------------------------------------------------------------------
Balance at May 26, 1995 C$ 6,041 $ 4,400 20%
=======================================================================
In November 1992 the Company issued 8.5% convertible
debentures with an aggregate principal amount of C$30.0
million which mature in November 2002. At any time prior to
maturity they are convertible into common shares of the
Company at the option of the holder at a conversion price of
C$2.35 (approximately $1.71) which would yield 425.53 common
shares for each C$1,000 (approximately $728) of principal
amount of debentures held.
During the fourth quarter of fiscal 1995 debentures with an
aggregate principal amount of $11,533,000 were converted into
6,782,519 common shares. The resulting increase in capital
stock of $11,124,000 was determined as the sum of the
principal amount of the debentures converted ($11,533,000)
plus interest accrued to the date of conversion ($325,000),
net of the pro rata share of the associated unamortized
deferred financing costs ($734,000).
During the period subsequent to March 31, 1995 until May 26,
1995, debentures with an aggregate principal amount of
$5,864,000 were converted into 3,412,747 common shares. As of
May 26, 1995, approximately 20% of the original amount of
debentures remained outstanding which, if converted, would
result in a maximum of 2,570,638 additional common shares
being issued. At that date the closing price of the Company's
common shares on the Toronto Stock Exchange (the "TSE") was
C$7.88 and on NASDAQ in the United States the closing price
was $5.75, which represented approximately 335% of the
conversion price.
The remaining outstanding debentures represent an unsecured
direct obligation of the Company. After November 10, 1995 any
outstanding debentures are redeemable by the Company provided
that for the 20 trading days ending with the fifth trading day
preceding the date on which the notice of redemption is first
given, the weighted average market price at which the shares
have traded on the TSE and NASDAQ is not less than 125% of the
conversion price.
Notes (Cont'd)
8. Stock Options
The following table summarizes the activity for the stock
options plans in effect during the year ended March 31, 1995
and for each of the preceding two years.
Shares Available Outstanding
for Grant Options
- ----------------------------------------------------------------------------------------
Balance at March 31, 1992 78,460 896,000
Reserved for issuance 600,000 -
Granted (575,000) 575,000
Terminated 125,000 (125,000)
Exercised - (198,000)
- ----------------------------------------------------------------------------------------
Balance at March 31, 1993 228,460 1,148,000
Reserved for issuance 1,000,000 -
Granted (700,000) 700,000
Terminated 376,000 (376,000)
Exercised - (207,500)
- ----------------------------------------------------------------------------------------
Balance at March 31, 1994 904,460 1,264,500
Reserved for issuance 438,000 -
Granted (1,790,000) 1,790,000
Terminated 532,500 (532,500)
Exercised - (182,214)
- ----------------------------------------------------------------------------------------
Balance at March 31, 1995 84,960 2,339,786
========================================================================================
The options to purchase common shares granted under the above
stock option plans expire between January 10, 1997 and April
18, 2005. Of the 2,339,786 options outstanding at March 31,
1995, 945,474 were exercisable as of that date, and the prices
at which the outstanding options may be exercised approximated
the market value on the dates of grant. The exercise price
for outstanding options granted on or before March 31, 1994
range from C$1.53 to C$5.25 (approximately $1.09 to $3.75) per
share. The exercise price for options granted during the year
ended March 31, 1995 range from C$0.88 to C$6.00
(approximately $0.63 to $4.29) per share. Directors and
executive officers as a group held 1,632,486 options as at
March 31, 1995.
9. Research and Development
Years Ended March 31 1995 1994 1993
- ----------------------------------------------------------------------------------------
Research and development expenditures $ 10,078 $ 14,980 $ 20,504
Investment incentives (287) (798) (2,028)
Software development costs:
Amortized 556 2,120 1,815
Deferred (150) (1,986) (3,012)
- ----------------------------------------------------------------------------------------
$ 10,197 $ 14,316 $ 17,279
========================================================================================
Notes (Cont'd)
10. Restructuring and Other Costs
Years Ended March 31 1995 1994 1993
- ---------------------------------------------------------------------------------------
Restructuring $ 685 $ 15,760 $ 5,547
Other - 12,902 -
- ---------------------------------------------------------------------------------------
$ 685 $ 28,662 $ 5,547
=======================================================================================
Restructuring costs recorded in 1995 represent severance costs
associated with the elimination of approximately 70 positions
at the end of the first fiscal quarter in connection with an
internal functional realignment.
Restructuring costs recorded in 1994 relate to decisions made
by the Company in February 1994 to reduce its workforce by
approximately 300 positions worldwide and consolidate its
North American operations under a single organization
structure. Restructuring costs included $5.3 million relating
to severance, $4.2 million in provisions for redundant
facilities representing the estimated future lease costs and
the unamortized cost of leasehold improvements for vacant
facilities worldwide, and $6.3 million in fixed asset
writedowns to adjust the net book value of surplus equipment
and spare parts inventory in North America to their estimated
net realizable value.
During 1994, other costs included a writedown of $7.5 million
in deferred tax assets which primarily related to investment
tax credits earned in Canada prior to the third quarter of
1993 on research and development expenditures. For financial
reporting purposes, as a result of sustaining several
consecutive years of losses up to the end of 1994, management
believed that the accounting criteria for continuing to
recognize these amounts as an asset were no longer met. These
tax credits remain available to the Company and the benefit of
these tax credits will instead be recorded in the financial
statements as they are utilized to reduce future federal
income taxes payable in Canada. Other costs in fiscal 1994
also included a writedown of $4.5 million in deferred software
development costs which were not expected to be recovered
through future cash flows and a $0.9 million writedown of
assets held for disposal to their net realizable value.
Restructuring costs of $5.5 million recorded in 1993 related
to severance costs associated with the elimination of
positions within the Company and the estimated future cost of
leased property which had become redundant.
11. Interest Expense
Interest expense appearing on the consolidated statement of
income relates only to bank operating lines, bank term debt
and convertible debentures. It does not include interest on
the capital lease obligation for the manufacturing facility.
Such interest is considered to be a cost of occupancy which is
allocated to operating expenses. Total interest expense,
including these amounts, during the year ended March 31, 1995
amounted to $3,224,000 (1994 - $4,402,000; 1993 - $4,952,000).
Of this amount, $2,212,000 (1994 - $3,578,000; 1993 -
$3,568,000) represented interest on indebtedness initially
incurred for a term of more than one year.
Notes (cont'd)
12. Income Taxes
Years Ended March 31 1995 1994 1993
- ---------------------------------------------------------------------------------------
Current:
Canadian $ - $ (342) $ -
Foreign - (800) -
- ---------------------------------------------------------------------------------------
$ - $ (1,142) $ -
=======================================================================================
The income tax expense reported differs from the amount
computed by applying the Canadian tax rates to the income
(loss) before income taxes.
Years Ended March 31 1995 1994 1993
- ---------------------------------------------------------------------------------------
Expected tax rate 44.3% 44.3% 43.5%
Expected tax expense (recovery) $ 623 $ (20,420) $ (8,486)
Utilization of losses
not previously recorded (623) - -
Losses for which no tax benefit
has been recorded - 20,420 8,486
Other - (1,142) -
- ---------------------------------------------------------------------------------------
$ - $ (1,142) $ -
=======================================================================================
At March 31, 1995, the Company had available, subject to audit
and certain restrictions, accumulated accounting losses of
approximately $70 million the potential tax benefit of which
have not been recorded in the consolidated financial
statements. These include loss carry-forwards for income tax
purposes of approximately $50 million 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, subject to audit, investment tax
credits of approximately $11 million which can be applied to
reduce federal taxes payable in Canada. These investment tax
credits expire between 1997 and 2005.
Included in the loss carry-forwards for income tax purposes
are approximately $40 million million of net operating loss
carry-forwards ("NOLs") in the United States. The Company's
ability to use these NOLs to offset future taxable income is
subject to restrictions enacted in the United States Internal
Revenue Code of 1986 as amended (the "Code"). These
restrictions would limit the Company's future use of its NOLs
when certain stock ownership changes described in the Code
have occurred over a three year period. These ownership
changes may arise from the public sale of securities. As a
result of the public issue of shares by the Company during
fiscal 1994 the Company may be restricted on future use of
NOLs.
The loss carry-forwards for income tax purposes include losses
arising in the Netherlands. Tax authorities in the Netherlands
have reassessed income taxes for the years 1989 through 1991,
disallowing certain amounts which have been claimed for income
tax purposes. The Company has filed objections to these
reassessments and is in discussion with the tax authorities.
The Company anticipates that the resolution of this matter
will lead to amended reassessments which, after taking into
consideration available loss carry-forwards, would not result
in a material tax liability to the Company.
The loss before income taxes attributable to all foreign
operations for the year ended March 31, 1995 was $735,000
(1994 - $31,074,000; 1993 - $8,175,000).
At March 31, 1995 the balance of unremitted earnings of
subsidiaries was $11,113,000 (1994 - $7,761,000; 1993 -
$9,676,000). The Company does not currently anticipate
repatriating earnings of foreign subsidiaries where such
repatriation would give rise to withholding taxes.
Notes (Cont'd)
13. Earnings Per Share
Basic earnings (loss) per share figures are presented on the
consolidated statement of income. These figures are
calculated using the monthly weighted average number of common
shares outstanding during the year. Fully diluted earnings per
share information has not been presented as potential
conversions are anti-dilutive.
Adjusted earnings per share for 1995 was $0.07. The
calculation assumes that the conversion of debentures, which
occurred during 1995, had occurred at the beginning of the
1995 fiscal year. Pro forma earnings per share for 1995 was
$0.08. The calculation assumes that the conversion of
debentures which occurred during 1995 and from April 1, 1995
until May 26, 1995, had occurred at the beginning of the 1995
fiscal year (see note 7).
14. Cash Provided By Operations
Cash provided by (applied to) operations is computed as
follows:
Years Ended March 31 1995 1994 1993
- ----------------------------------------------------------------------------------------
Income (loss) from operations $ 2,022 $ (42,960) $ (15,303)
Depreciation and amortization 5,616 9,658 11,675
Reserves and writedowns not involving
an outlay of cash - 22,004 6,182
Interest paid (2,803) (3,546) (4,653)
Interest received and foreign exchange 329 991 449
Other (206) (542) -
- ----------------------------------------------------------------------------------------
$ 4,958 $ (14,395) $ (1,650)
=========================================================================================
15. Changes in Operating Working Capital
The decrease in operating working capital is computed as
follows:
Years Ended March 31 1995 1994 1993
- ----------------------------------------------------------------------------------------
Accounts receivable $ 3,302 $ 4,103 $ 3,775
Inventories 5,647 1,750 2,488
Other current assets 78 73 8
Accounts payable and accrued liabilities (6,353) (1,602) (3,462)
Income taxes payable 193 470 (1,433)
Deferred revenue 334 (1,075) 2,271
Foreign currency translation adjustment 1,011 (2,944) (548)
- ----------------------------------------------------------------------------------------
$ 4,212 $ 775 $ 3,099
========================================================================================
Notes (Cont'd)
16. Commitments and Contingencies
(a) The Company has entered into various lease commitments
primarily for office premises and automobiles. At March
31, 1995, the minimum amounts payable under such leases
in future fiscal years are as follows:
1996 $ 7,100
1997 5,600
1998 3,400
1999 2,100
2000 1,900
Thereafter 5,000
--------
$ 25,100
========
The Company has provided guarantees totalling
approximately $906,000 pursuant to
certain contracts and agreements.
(b) Since 1991, the Company has received funding of
approximately $1.4 million and $2.5 million respectively
under two projects approved through the Canadian federal
government's Microelectronics and Systems Development
Program ("MSDP"). While the repayment terms of the two
projects differ slightly, both are tied to future sales,
with the liability to repay the funding arising from
product revenues earned following both the
commercialization of the resulting technology and the
completion of the MSDP project. The amount that is
potentially repayable is calculated without interest as a
royalty on revenues earned in the 10 years following the
project completion date and is limited to the amount of
the funding received.
The first project was completed on March 31, 1995 and the
Company will commence accruing the corresponding royalty
at the beginning of fiscal 1996. The royalty for this
project is 2% of consolidated gross revenue from the
resulting products. The royalty payments are due
annually six months after the anniversary of the project
completion date. The Company expects that the funding
will be fully repaid within 3-5 years.
The second project is expected to be completed during
fiscal 1996 and the Company will commence accruing the
corresponding royalty at that time. The royalty for this
project is 1% of the Canadian subsidiary's total product
revenues. The royalty payments are due annually three
months after the anniversary of the project completion
date. The Company expects that the funding will be fully
repaid within 3-5 years.
(c) In the normal course of business, various litigation,
claims and assessments have arisen involving the Company
and its subsidiaries. In certain instances, substantial
amounts are being sought. Management is vigorously
defending its position in all such actions. While the
outcome of such proceedings is currently not
determinable, management believes, after consideration of
all relevant facts, that their outcome would be unlikely
to result in a material adverse effect on the Company's
consolidated financial position or its future results of
operations.
Notes (Cont'd)
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 of America,
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, 1995.
Years Ended March 31 1995 1994 1993
- ----------------------------------------------------------------------------------------
Sales to customers:
United States $ 32,547 $ 35,157 $ 45,347
Canada 22,473 23,341 32,887
United Kingdom 37,939 39,309 41,996
Holland/France 15,772 14,867 19,327
Other International 11,780 18,649 21,343
Segment transfers:
United States 964 5,360 3,573
Canada 22,822 24,702 20,846
United Kingdom 977 2,385 7,387
Holland/France 9 476 938
Eliminations (24,772) (32,923) (32,744)
- ----------------------------------------------------------------------------------------
Total revenues $ 120,511 $ 131,323 $ 160,900
========================================================================================
Segment operating profit:
United States $ 4,739 $ (1,621) $ 603
Canada 1,764 (226) 4,802
United Kingdom 8,242 6,908 8,488
Holland/France 3,527 2,550 4,200
Other International (65) 2,574 1,627
- ----------------------------------------------------------------------------------------
Total segment operating profit 18,207 10,185 19,720
- ----------------------------------------------------------------------------------------
Expenses:
Research and development 10,197 14,316 17,279
General corporate 5,303 10,167 12,197
Restructuring and other costs 685 28,662 5,547
Gain on sale of portfolio investment (2,024) - -
Interest expense 2,969 4,127 4,653
Interest income and foreign exchange (329) (991) (449)
Income taxes - 1,142 -
- ----------------------------------------------------------------------------------------
Net income (loss) $ 1,406 $ (47,238) $ (19,507)
========================================================================================
Identifiable assets:
United States $ 10,015 $ 14,919 $ 35,086
Canada 27,376 33,440 58,718
United Kingdom 24,315 23,336 25,560
Holland/France 10,800 7,308 8,869
Other International 9,002 10,183 1,370
- ----------------------------------------------------------------------------------------
Total assets $ 81,508 $ 89,186 $ 129,603
========================================================================================
18. Quarterly Financial Information (Unaudited)
Quarterly unaudited financial information for each of the
years ended March 31, 1995 and 1994 is as follows:
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------
Revenues:
Product $ 20,745 $ 21,754 $ 20,363 $ 20,939
Service 8,973 8,906 9,388 9,443
- --------------------------------------------------------------------------------------
29,718 30,660 29,751 30,382
- --------------------------------------------------------------------------------------
Operating expenses:
Cost of product sales 10,896 11,094 10,661 10,979
Service expenses 5,871 5,739 5,754 5,952
Sales and marketing 8,742 8,002 7,854 8,550
Administration and general 1,929 1,907 1,957 1,720
Research and development 2,413 2,581 2,658 2,545
Restructuring costs 685 - - -
- --------------------------------------------------------------------------------------
Income (loss) from operations (818) 1,337 867 636
Gain on sale of portfolio investment - - 2,024 -
Interest expense (798) (823) (795) (553)
Interest income and foreign exhange 57 88 58 126
- --------------------------------------------------------------------------------------
Net income (loss) $ (1,559) $ 602 $ 2,154 $ 209
======================================================================================
Basic earnings (loss) per share $ (0.06) $ 0.02 $ 0.08 $ 0.01
======================================================================================
Fully diluted earnings per share $ 0.06
======================================================================================
First Second Third Fourth
1994 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------
Revenues:
Product $ 23,453 $ 24,632 $ 20,301 $ 22,427
Service 10,720 10,386 9,965 9,439
- --------------------------------------------------------------------------------------
34,173 35,018 30,266 31,866
- --------------------------------------------------------------------------------------
Operating expenses:
Cost of product sales 11,820 12,639 11,295 13,755
Service expenses 6,837 6,769 6,963 6,455
Sales and marketing 10,577 11,176 11,274 10,651
Administration and general 2,679 2,434 2,825 3,156
Research and development 3,083 3,359 4,204 3,670
Restructuring and other costs - - - 28,662
- --------------------------------------------------------------------------------------
Loss from operations (823) (1,359) (6,295) (34,483)
Interest expense (1,298) (1,160) (1,010) (659)
Interest income and foreign exchange 174 172 517 128
Income taxes - - - (1,142)
- --------------------------------------------------------------------------------------
Net loss $ (1,947) $ (2,347) $ (6,788) $(36,156)
======================================================================================
Basic loss per share $ (0.12) $ (0.15) $ (0.29) $ (1.29)
======================================================================================
Notes (cont'd)
Quarterly earnings per share figures are calculated based on
the monthly weighted average number of common shares
outstanding during the quarter. Fully diluted earnings per
share is calculated assuming convertible debentures had been
converted at the beginning of the fiscal period, and all
outstanding options had been exercised on the date which is
the later of the beginning of the fiscal period and the dates
the options were granted. With the exception of the third
fiscal quarter of 1995, potential conversions are anti-
dilutive for each quarter during the two year period ended
March 31, 1995.
During the fourth quarter of 1994 the Company recorded
additional inventory provisions of $1.5 million on mature
product lines, which were included in the caption "Cost of
product sales". Restructuring and other costs of $28.7
million in the fourth quarter of 1994 are described in Note 10
to the consolidated financial statements.
19. United States Accounting Principles
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in
Canada ("Canadian GAAP") which in the case of the Company
differ in the following material respects from those generally
accepted in the United States ("U.S. GAAP").
(a) Under U.S. GAAP, financing and investing activities not
involving a receipt or outlay of cash are excluded from
the consolidated statement of changes in financial
position. Accordingly, the following financing
activities would not be presented in the consolidated
statement of changes in financial position for the year
ended March 31, 1995 but would be shown supplementally.
Conversion of 8.5% convertible debentures $ (11,533)
Issue of capital stock on conversion of debentures $ 11,533
(b) Under U.S. GAAP, bank operating lines would not be
included as a component of the cash position presented in
the consolidated statement of changes in financial
position. The change in bank operating lines would be
presented as a financing activity and would therefore be
included in the determination of the increase or
decrease in cash position in the 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.
1995 1994
-----------------------------------------------------------------------------
Operating loss carry-forwards $ 21,600 $ 20,000
Depreciation 2,500 2,700
Restructuring reserves 800 3,200
Investment tax credits 11,000 11,000
Other 2,900 2,500
-----------------------------------------------------------------------------
38,800 39,400
Valuation allowance (38,296) (38,896)
-----------------------------------------------------------------------------
Net non-current deferred tax asset $ 504 $ 504
=============================================================================
(d) The Company includes the amortization of software
development costs as part of research and development
expenses. Under U.S. GAAP these costs would be
charged to cost of product sales.
(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.
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 19 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.
General Summary Discussion
The financial results for the fiscal year ended March 31, 1995
represented a significant improvement over performance during
the previous three year period. In response to declining
revenues on mature products following the acquisition of
Infotron Systems Corporation, between 1992 and 1994 the
Company carried out a series of restructuring and cost
reduction activities. In 1995, the combined effect of
significant growth in new products and a reduced cost
infrastructure led to profitable results and positive cash
flow. During the three year period following the acquisition
of Infotron, revenues declined from a pre-acquisition combined
level for the two companies of $213 million to $131 million, a
decline of 38%. During this period, the Company reported
losses totalling $77 million including $38 million in
restructuring charges and other costs. The size of the
Company's workforce is now approximately 900 people, compared
with approximately 1,375 prior to the Infotron acquisition and
just under 2,000 immediately following the acquisition.
The Company operates in one business segment, providing a
broad range of internetworking products and services. Within
this segment the Company operates in four lines of business:
access products, concentration products, backbone products and
services. The majority of new product introductions and
enhancements during 1995 occurred in the access and
concentration lines of business. Product revenues from these
two areas grew by 44% in 1995 compared to 1994, and
represented close to 60% of total product revenues in 1995
compared to 36% a year earlier.
Net income in 1995 was $1.4 million or $0.05 per share
compared to the net loss of $47.2 million or $2.27 per share
in 1994 and the net loss of $19.5 million or $1.24 per share
in 1993. This improvement was achieved in 1995, despite a
decline of 8% in total revenues compared to 1994, through
improved margins and significantly lower operating expenses.
The combined gross margin on product and service revenues
improved in 1995 to 44.5% compared to 41.7% in 1994.
Operating expenses for sales and marketing, administration and
general, and research and development were $50.9 million in
1995, representing a decrease of 26.3% from 1994 and a
decrease of 36.5% from 1993. Throughout this three year
period, the Company has continued to make expenditures on
research and development which are in excess of 12% of its
annual revenues derived from the sale of products.
In addition to the improvement in 1995 in the Company's
operating results and profitability compared to the previous
three years, the Company's cash position also improved
significantly over 1994. Cash and unused credit lines more
than doubled during the year, increasing from $10.2 million at
March 31, 1994 to $20.8 million at March 31, 1995. The
chartered bank in Canada which represents the Company's
primary lending relationship renewed its credit facilities
during May 1995, two months in advance of their expiry, for
the period through to the next annual review date of June 30,
1996. Positive cash flow from operating activities of $9.2
million in 1995 represented an improvement from the negative
cash flow from operating activities of $13.6 million in 1994
and positive cash flow from operating activities of $1.4
million in 1993. Overall, the Company reported positive cash
flow of $11.2 million in 1995 compared to negative cash flow
of $5.0 million in 1994.
Management's Discussion and Analysis (Cont'd)
The debt to equity ratio of the Company has improved since
March 31, 1992, the first fiscal year end date following the
acquisition of Infotron, as a result of a private placement of
convertible debentures in 1993, a public offering of common
shares in 1994, and positive cash flow from operating
activities and the sale of two portfolio investments in 1995.
During the fourth quarter of fiscal 1995 and subsequent to
March 31, 1995, approximately 80% of the original principal
amount of the debentures were converted to common shares of
the Company in accordance with the terms of the debentures.
Results of Operations
The following table sets forth items derived from the
consolidated statement of income, expressed as a percentage of
revenues, for the year ended March 31, 1995 and for each of
the preceding two years.
Years ended March 31 1995 1994 1993
- ------------------------------------------------------------------------------------------
(Percentage of Revenues)
Revenues:
Product 69.5% 69.2% 70.8%
Service 30.5 30.8 29.2
- ------------------------------------------------------------------------------------------
100.0% 100.0% 100.0%
==========================================================================================
Gross profit:
Product 47.9% 45.5% 46.2%
Service 36.5 33.3 37.6
Combined 44.5 41.7 43.7
Expenses:
Sales and marketing 27.5 33.3 29.8
Administration and general 6.2 8.4 9.2
Research and development 8.5 10.9 10.7
Restructuring and other costs 0.6 21.8 3.5
- ------------------------------------------------------------------------------------------
Income (loss) from operations 1.7 (32.7) (9.5)
Gain on sale of portfolio investment 1.7 - -
Net financial expenses (2.2) (2.4) (2.6)
Income taxes - (0.9) -
- ------------------------------------------------------------------------------------------
Net income (loss) 1.2% (36.0)% (12.1)%
==========================================================================================
Revenues
Revenues in the fiscal year ended March 31, 1995 were $120.5
million compared to $131.3 million in 1994 and $160.9 million
during 1993. Approximately 70% of revenues in 1995 were
derived from the sale of products with the balance represented
by service revenues. The mix of revenues between the sale of
products and services has not changed significantly over the
last three years. From the third quarter of 1994 to the
fourth quarter of the fiscal 1995 year, the Company has
reported six consecutive quarters in which revenues have
consistently been approximately $30 million. Revenues on the
second half of 1994 were $62.1 million compared to $69.2
million in the first half.
Product revenues for the year ended March 31, 1995 were $83.8
million. For 1994 and 1993 such revenues were $90.8 million
and $113.9 million respectively. Revenues from the Company's
access and concentration ("LAN internetworking") products,
which are sold under the names Gandalf LANLine and Gandalf
Xpressway, showed growth of 44% in 1995 compared to 1994 and
represented close to 60% of product revenues in 1995 compared
to 36% in 1994. A decline in sales during 1994 and 1995 of
other products sold by the Company, including third-party
products, more than offset the growth in LAN internetworking
products during this two year period, resulting in a decline
in total product revenues of 7.7% in 1995 compared to 1994,
and 20.3% in 1994 compared to 1993.
Management's Discussion and Analysis (Cont'd)
Service revenues were $36.7 million in 1995 compared with
$40.5 million in 1994 and $47.0 million in 1993. Service
revenues declined in 1995 compared to 1994 and 1993 as a
result of lower revenues during each of the last two fiscal
years on products which the Company has traditionally derived
the majority of its service revenues.
Gross Profit
The combined gross margin (total revenues minus cost of
product sales and service expenses expressed as a percentage
of total revenues) was 44.5% in 1995 compared to 41.7% in 1994
and 43.7% in 1993. The improvement in the combined gross
margin in 1995 compared to 1994 largely mitigated the
reduction in revenues of $10.8 million from 1994 to 1995. The
combined gross profit (total revenues minus cost of product
sales and service expenses) in 1995 was $53.6 million on
revenues of $120.5 million compared to $54.8 million on
revenues of $131.3 million in 1994.
The gross margin on product revenues (product revenues minus
cost of product sales expressed as a percentage of product
revenues) improved to 47.9% in 1995, compared to 45.5% in 1994
and 46.2% in 1993. The improvement in margin earned on
product revenues in 1995 resulted from lower manufacturing
costs following the restructuring actions in the fourth
quarter of 1994.
The gross margin on service revenues (service revenues minus
service expenses expressed as a percentage of service
revenues) was 36.5% in 1995, 33.3% in 1994 and 37.6% in 1993.
Restructuring actions taken in the fourth quarter of 1994
reduced service costs and have resulted in an improvement in
the margin earned on service revenues in 1995 compared to
1994. The decline in the margin earned on service revenues
during 1994 resulted from service revenues declining at a
faster rate than service expenses.
Operating Expenses
Operating expenses for sales and marketing, administration and
general, and research and development in 1995 were $50.9
million, 26.3% lower than the $69.1 million reported in 1994.
In 1993, these expenses were $80.1 million or 49.8% of
revenues. Reductions in operating expenses in each of 1994
and 1995 related to restructuring and downsizing actions
undertaken in 1993 and 1994.
Since 1991, the Company has received funding of approximately
$1.4 million and $2.5 million respectively under two projects
approved through the Canadian federal government's
Microelectronics and Systems Development Program ("MSDP").
While the repayment terms of the two projects differ slightly,
both are tied to future sales, with the liability to repay the
funding arising from product revenues earned following both
the commercialization of the resulting technology and the
completion of the MSDP project. The amount that is
potentially repayable is calculated without interest as a
royalty on revenues earned in the 10 years following the
project completion date and is limited to the amount of
funding received.
The first MSDP project was completed on March 31, 1995 and the
Company will commence accruing the corresponding royalty at
the beginning of fiscal 1996. The royalty for this project is
2% of consolidated gross revenues from the resulting products.
The royalty payments are due annually six months after the
anniversary of the project completion date. The Company
expects that the funding will be fully repaid within 3-5
years.
The second MSDP project is expected to be completed during
fiscal 1996 and the Company will commence accruing the
corresponding royalty at that time. The royalty for this
project is 1% of the Canadian subsidiary's total product
revenues. The royalty payments are due annually three months
after the anniversary of the project completion date. The
Company expects that the funding will be fully repaid within
3-5 years.
The Company recorded restructuring costs of $0.7 million
during the first quarter of 1995, representing severance costs
associated with the elimination of approximately 70 positions
in connection with an internal functional realignment.
Management's Discussion and Analysis (Cont'd)
Restructuring costs of $15.8 million recorded during the 1994
fiscal year related to decisions made by the Company in
February 1994 to reduce its workforce by approximately 300
positions worldwide and consolidate its North American
operations under a single organization structure. These costs
included $5.3 million relating to severance, $4.2 million in
provisions for redundant facilities representing the estimated
future lease costs and the unamortized cost of leasehold
improvements for vacant facilities worldwide, and $6.3 million
in fixed asset writedowns to adjust the net book value of
surplus equipment and spare parts inventory in North America
to their estimated net realizable value.
Other costs recorded in the fourth quarter of fiscal 1994
included the writedown of $7.5 million in deferred tax assets
which primarily related to investment tax credits earned in
Canada prior to the third quarter of 1993 on research and
development expenditures. These tax credits remain available
to the Company in order to reduce federal income taxes payable
in Canada and the benefit of these tax credits will instead be
recorded in the financial statements as they are utilized. At
March 31, 1995, the Company had available, subject to audit,
unused investment tax credits totalling approximately $11.0
million which expire between 1997 and 2005. Other costs in
1994 also included a writedown of $4.5 million in deferred
software development costs incurred in prior years relating to
products for which such costs were not expected to be
recovered through future cash flows and a $0.9 million
writedown of the carrying value of assets held for disposal to
their estimated net realizable value.
Restructuring costs of $5.5 million recorded in 1993 related
to severance costs associated with the elimination of
positions within the Company and the estimated future cost of
leased property which had become redundant.
Income From Operations
The Company reported income from operations of $2.0 million on
revenues of $120.5 million in 1995. The respective amounts of
losses from operations in 1994 and 1993 were $43.0 million and
$15.3 million on revenues of $131.3 million and $160.9
million. The improved operating performance in 1995 compared
to 1994 and 1993 occurred as a result of reduced operating
expenses associated with downsizing and restructuring actions
taken during the latter part of the 1994 fiscal year.
Net Financial Expenses
Interest expense was $3.0 million in 1995 compared with $4.1
million in 1994 and $4.7 million in 1993. Interest expense
was significantly lower in 1995 compared to 1994 and 1993 as a
result of the Company reducing its borrowings under bank loans
during the second half of 1994 following the issue of common
shares by the Company. The proceeds were used to retire $19.7
million in term bank loans and repay outstanding borrowings
under the Company's short-term bank credit lines. Interest
expense during 1995 included interest on the 8.5% convertible
debentures issued in November 1992. Interest costs associated
with the debentures which have been converted up to May 26,
1995 were approximately $1.5 million annually. The Company's
obligation to pay interest is limited only to those debentures
which are outstanding as of the semi-annual interest payment
dates on May 10 and November 10 each year. Note 7 to the
consolidated financial statements describes the conditions
under which the Company can redeem any debentures which remain
outstanding after November 10, 1995.
Net Income
The net income for the year ended March 31, 1995 was $1.4
million or $0.05 per share. This included restructuring costs
of $0.7 million and a gain of $2.0 from the sale of a
portfolio investment. The respective net loss figures for 1994
and 1993 were $47.2 million and $19.5 million.
Management's Discussion and Analysis (Cont'd)
Segment Operating Results
The following table sets forth revenues by geographic segment
for the year ended March 31, 1995 and for each of the two
preceding years. Note 17 to the consolidated financial
statements contains additional information concerning the
geographic segments.
Years Ended March 31 1995 1994 1993
- -------------------------------------------------------------
(Millions of dollars)
United States $ 32.5 $ 35.2 $ 45.4
Canada 22.5 23.3 32.9
United Kingdom 37.9 39.3 42.0
Holland/France 15.8 14.9 19.3
Other International 11.8 18.6 21.3
- -------------------------------------------------------------
$ 120.5 $ 131.3 $ 160.9
=============================================================
Revenues in North America (United States and Canada) were
$55.0 million in 1995, down 6.0% from 1994 and 29.8% from
1993. The Company's European direct sales markets (United
Kingdom, Holland and France) reported revenues of $53.7
million in 1995, essentially unchanged from 1994 and 12.4%
below the level in 1993.
Revenues earned in other international markets was $11.8
million in 1995, $18.6 million in 1994 and $21.3 million in
1993. The overall change in revenue mix during 1995 from the
Company's traditional products to the LAN internetworking
products has been more pronounced in the Company's markets
outside North America and Europe than for the Company as a
whole. This has impacted the level of sales to certain
customers of the Company's traditional products in other
international markets who together previously represented a
significant proportion of the revenues earned in these
markets.
Segment operating profit for North America (United States and
Canada) in 1995, expressed as a percentage of revenues, was
11.8%. The 1995 amount represented an improvement from the
operating loss of 3.2% for this segment in 1994. In 1993, the
segment operating profit in North America represented 6.9% of
revenues. The operating results for this segment had
deteriorated from 1993 to 1994 as a result of the decline in
revenues in 1994. The significant restructuring actions
undertaken by the Company in the fourth quarter of 1994 led to
the improvement in operating performance for this segment in
1995.
Segment operating profit, expressed as a percentage of
revenues, for the Company's operations in the United Kingdom,
Holland and France was 20.7% in 1993, 17.5% in 1994 and 21.9%
in 1995. The level of operating profit for these European
markets has traditionally been higher, in the case of the
Company, than for its North American operations. Revenues in
Europe declined 11.7% in 1994 compared to 1993 resulting in
operating profit for this segment falling below 20%. Lower
costs in 1995 following the restructuring actions by the
Company near the end of the 1994 fiscal year led to the
improvement in segment operating profit in 1995.
The operating performance in the Company's other international
markets deteriorated in 1995 compared to 1994 as a result of a
decline in revenues of 36.8% in 1995. The operating loss for
this segment represented 0.6% of revenues in 1995. In 1994
and 1993, the respective segment operating profit amounts,
expressed as a percentage of revenues in those years, were
13.8% and 7.6%.
Management's Discussion and Analysis (Cont'd)
Liquidity and Capital Resources
The Company recorded positive cash flow of $11.2 million
during 1995. At March 31, 1995 the net cash position (cash and
cash equivalents net of bank operating lines) was $6.0 million
compared with net bank borrowings (bank operating lines net of
cash and cash equivalents) of $5.2 million a year ago. The
increase in cash included positive cash flow from operating
activities of $9.2 million. This represented a significant
improvement over the negative cash flow from operating
activities of $13.6 million in 1994. Non-operating sources of
cash in 1995 included proceeds of $3.9 million from the sale
of two portfolio investments.
At March 31, 1995 the Company's authorized bank operating
lines totalled $18.9 million. This included $15.2 million
relating to two committed credit facilities with a Canadian
chartered bank. During May 1995, two months in advance of
their expiry, these facilities were renewed for the period
through to the next annual review date of June 30, 1996. The
facilities bear interest at the bank's prime rate plus 0.5%.
The additional authorized amount of $3.7 million related to a
demand credit facility with a bank in the United Kingdom.
During the third quarter of 1995, this facility was renewed
until September 1995. The interest rate varies depending on
borrowing levels and ranges from 2.0% to 2.5% above the bank's
base rate.
The operating lines are secured by certain of the accounts
receivable, inventories and other assets of the Company. The
amount available for borrowing at any time under the
facilities is based on margin formulas relating to levels of
accounts receivable, inventories and other bank covenants.
Under such formulas, $14.8 million was available to the
Company at March 31, 1995 and $5.8 million was being utilized.
Cash and cash equivalents held as of that date represented a
further $11.8 million of cash resources available to the
Company. Cash and unused credit lines totalled $20.8 million
at March 31, 1995, compared to $10.2 million at March 31,
1994.
The Company believes that its current financial base together
with available credit facilities provides sufficient financial
resources to meet its short-term operating requirements. The
Company anticipates that its long-term cash requirements will
be satisfied through future operating cash flows and the
conversion or refinancing of term debt, the majority of which
relates to the remaining outstanding debentures which it is
anticipated will be converted during the 1996 fiscal year.
Capital spending was $2.9 million in 1995, $4.4 million in
1994 and $3.9 million in 1993. The Company believes it must
continue to invest in its capital asset base at 1995 or
moderately higher levels.
Accounts receivable and inventories at March 31, 1995 were
$42.1 million (accounts receivable - $26.9 million;
inventories - $15.2 million) versus $51.1 million at March 31,
1994 (accounts receivable - $30.2 million; inventories - $20.9
million). Lower manufacturing costs as a result of the
restructuring actions taken in the fourth quarter of 1994
contributed to the decrease in inventory levels. Accounts
payable and accrued liabilities have decreased $6.5 million
since March 31, 1994 as a result of the payment of
restructuring costs accrued in the fourth quarter of 1994 and
a reduced level of raw materials inventory.
The ratio of term debt, exclusive of the convertible
debentures, to shareholders' equity at March 31, 1995 was
0.06:1. This compares favourably to the corresponding figures
at March 31, 1994, 1993 and 1992 which were 0.14:1, 0.69:1 and
0.63:1 respectively. The Company's current ratio improved to
1.6:1 at March 31, 1995 compared to 1.3:1 at March 31, 1994.
Market for Gandalf Stock and Related Security Holder Matters
Markets Information
The common shares of Gandalf Technologies Inc. are listed on
The Toronto Stock Exchange in Canada (Symbol GAN) and on The
Nasdaq Stock Market (NMS) in the United States (Symbol GANDF).
The Toronto Stock Exchange The Nasdaq Stock Market
(Canadian Dollars) (U.S. Dollars)
Fourth Third Second First | Fourth Third Second First
Quarter Quarter Quarter Quarter | Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------
Fiscal 1995
High 6 - 7/8 2.33 1.58 1.74 | 4 - 7/8 1 - 11/16 1 - 3/16 1 - 3/8
Low 1.80 1.26 0.85 0.75 | 1 - 1/4 7/8 9/16 1/2
Volume (000's) 52,236 8,886 9,765 10,037 | 49,876 2,478 1,475 2,810
- ----------------------------------------------------------------------------------------------------
Fiscal 1994
High 3.75 4.60 4.00 4.60 | 3 3 - 1/2 3 - 1/4 3 - 19/32
Low 0.95 3.40 2.85 3.60 | 13/16 2 - 1/2 2 - 1/8 2 - 3/4
Volume (000's) 20,284 9,167 1,633 3,008 | 1,418 798 453 605
- ----------------------------------------------------------------------------------------------------
Fiscal 1993
High 5.50 4.10 3.35 3.65 | 4 - 1/2 3 - 1/4 2 - 7/8 3 - 1/8
Low 3.90 1.85 2.25 2.50 | 3 1 - 1/2 1 - 3/4 2 - 1/8
Volume (000's) 6,356 4,266 417 1,161 | 1,393 826 459 920
- ----------------------------------------------------------------------------------------------------
Shareholders
As at June 1, 1995, there were 38,681,607 shares issued and
outstanding with 2,239 record holders. The stock closed on
The Toronto Stock Exchange at $8.00 (Cdn.) on June 1, 1995,
and on The Nasdaq Stock Market at $5 30/32.
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 percent 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.