Consolidated Balance Sheets
(Thousands of U.S. dollars)
As at March 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 13,602 $ 11,817
Accounts receivable 28,694 26,880
Inventories (note 2) 13,491 15,230
Other 1,867 2,268
- ----------------------------------------------------------------------------------------------------------------
Total current assets 57,654 56,195
Fixed assets (note 3) 16,253 18,619
Goodwill, net of accumulated amortization of $3,172 (1995 - $2,952) 3,242 3,462
Other assets 2,226 3,232
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 79,375 $ 81,508
================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Bank operating lines (note 4) $ - $ 5,854
Accounts payable and accrued liabilities (note 5) 21,755 21,369
Deferred revenue 6,178 7,758
Current portion of long-term debt (note 6) 360 157
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 28,293 35,138
Long-term debt (note 6) 2,496 1,877
Convertible debentures (note 7) - 10,051
Shareholders' equity:
Capital stock (notes 8 and 9)
Common shares, 42,939,523 issued and
outstanding (1995 - 35,238,064) 54,198 91,644
Retained earnings (note 8) 260 (52,364)
Cumulative translation adjustment (5,872) (4,838)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 48,586 34,442
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 79,375 $ 81,508
================================================================================================================
Commitments and contingencies (note 15)
On behalf of the Board of Directors:
s/THOMAS A. VASSILIADES s/D.M. GLEKLEN
T.A. Vassiliades, Director D.M. Gleklen, Director
See accompanying notes to consolidated financial statements
Consolidated Statements of Income
(Thousands of U.S. dollars, except per share amounts)
Years Ended March 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Revenues:
Product $ 81,076 $ 83,801 $ 90,813
Service 35,457 36,710 40,510
- ------------------------------------------------------------------------------------------------------------
116,533 120,511 131,323
Operating expenses:
Cost of product sales 38,941 43,630 49,509
Service expenses 24,053 23,316 27,024
Sales and marketing 31,942 33,148 43,678
Administration and general 8,054 7,513 11,094
Research and development 11,524 10,197 14,316
Restructuring and other costs (note 10) 1,531 685 28,662
- ------------------------------------------------------------------------------------------------------------
Income (loss) from operations 488 2,022 (42,960)
Gain on sale of portfolio investment - 2,024 -
Interest expense (487) (2,969) (4,127)
Interest income and foreign exchange 259 329 991
Income taxes (note 11) - - (1,142)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) for the year $ 260 $ 1,406 $ (47,238)
============================================================================================================
Basic earnings (loss) per share (note 12) $ 0.01 $ 0.05 $ (2.27)
============================================================================================================
Weighted average number of common shares
outstanding (thousands) 40,359 28,589 20,802
============================================================================================================
See accompanying notes to consolidated financial statements
Auditors' Report
To the Shareholders of Gandalf Technologies Inc.
We have audited the consolidated balance sheets of Gandalf Technologies
Inc. as at March 31, 1996 and 1995 and the consolidated statements of
income, changes in financial position and shareholders' equity for each
of the years in the three year period ended March 31, 1996. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at
March 31, 1996 and 1995 and the results of its operations and the changes
in its financial position for each of the years in the three year period
ended March 31, 1996, in accordance with generally accepted accounting
principles.
s/KPMG PEAT MARWICK THORNE
Chartered Accountants
Ottawa, Canada
May 10 1996
Consolidated Statements of Changes in Financial Position
(Thousands of U.S. dollars)
Years Ended March 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Operating activities:
Cash provided by (applied to) operations (note 13) $ 5,687 $ 4,958 $ (14,395)
Decrease (increase) in operating working capital (note 14) (785) 4,212 775
- ----------------------------------------------------------------------------------------------------------------
Cash provided by (applied to) operating activities 4,902 9,170 (13,620)
- ----------------------------------------------------------------------------------------------------------------
Financing activities:
Issue of capital stock 15,273 12,242 34,226
Conversion of debentures (note 7) (10,336) (11,533) -
Long-term debt incurred 1,020 - -
Long-term debt retired (251) (446) (20,841)
- ----------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 5,706 263 13,385
- ----------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of fixed assets (2,671) (2,919) (4,411)
Proceeds on disposal of investments - 3,857 1,158
Proceeds on disposal of fixed assets - 298 1,088
Other 39 293 (2,041)
- ----------------------------------------------------------------------------------------------------------------
Cash provided by (applied to) investing activities (2,632) 1,529 (4,206)
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash balances (337) 240 (510)
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash position in the year 7,639 11,202 (4,951)
Cash position at beginning of year 5,963 (5,239) (288)
- ----------------------------------------------------------------------------------------------------------------
Cash position at end of year $ 13,602 $ 5,963 $ (5,239)
================================================================================================================
Cash position is comprised of:
Cash and cash equivalents $ 13,602 $ 11,817 $ 5,273
Bank operating lines - (5,854) (10,512)
- ----------------------------------------------------------------------------------------------------------------
$ 13,602 $ 5,963 $ (5,239)
================================================================================================================
See accompanying notes to consolidated financial statements
Consolidated Statements of Shareholders' Equity
(Thousands of U.S. dollars)
Years Ended March 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
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 35,238,064 $ 91,644 28,072,333 $ 79,811 15,864,833 $ 45,585
Issued:
On conversion of debentures (note 7) 5,983,372 9,839 6,782,519 11,124 - -
On public offering, net of share
issue costs - - - - 12,000,000 33,863
Exercise of stock options (note 9) 1,582,685 3,531 182,214 354 207,500 363
Other 135,402 1,548 200,998 355 - -
Reduction in stated capital (note 8) - (52,364) - - - -
- ------------------------------------------------------------------------------------------------------------------
Balance at end of year 42,939,523 $ 54,198 35,238,064 $ 91,644 28,072,333 $ 79,811
==================================================================================================================
Retained Earnings:
Balance at beginning of year $(52,364) $(53,770) $ (6,532)
Net income (loss) 260 1,406 (47,238)
Reduction in stated capital (note 8) 52,364 - -
- ------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 260 $(52,364) $(53,770)
==================================================================================================================
Cumulative Translation Adjustment:
Balance at beginning of year $ (4,838) $ (6,932) $ (4,745)
Adjustment arising on translation of foreign
subsidiaries' financial statements to U.S. dollars 549 1,091 (3,122)
Adjustment relating to subsidiary loans designated
as long-term investments (1,583) 1,003 935
- ------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (5,872) $ (4,838) $ (6,932)
==================================================================================================================
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements
All amounts are stated in U.S. dollars unless otherwise indicated.
C$ refers to Canadian dollars. Tabular amounts are in thousands except
per share data. References to years are to fiscal years ended March 31.
1. Summary of Accounting Principles
These consolidated financial statements have been prepared by management
in accordance with accounting principles generally accepted in Canada.
These principles are also generally accepted in the United States in all
material respects except as disclosed in note 17. The significant
accounting principles are outlined below.
(a) Basis of Consolidation
The consolidated financial statements include the accounts of Gandalf
Technologies Inc. and its subsidiaries. All significant intercompany
transactions and balances are eliminated.
(b) Foreign Currency Translation
Operations using a unit of measurement and presentation other than the
U.S. dollar, including the Company's Canadian parent, represent foreign
operations. The Company considers that for translation purposes all
of its foreign operations are self-sustaining.
The assets and liabilities of self-sustaining foreign operations are
translated into U.S. dollars at year-end exchange rates and the resulting
unrealized exchange gains or losses are included in the cumulative
translation adjustment as a separate component of shareholders' equity.
The income statements of such operations are translated at exchange rates
prevailing during the year.
(c) Revenue Recognition
Revenue from the sale of products is recognized at the time goods are
shipped to customers, net of appropriate provisions for estimated
returns. Revenue from services is recognized at the time services
are rendered. Billings in advance of services are included in deferred
revenue.
(d) Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments purchased
with an original maturity of three months or less.
(e) Inventories
Work-in-process and finished goods inventories are valued at the
lower of cost and net realizable value. Raw materials are valued
at the lower of cost and replacement cost. Cost is determined on
a first-in first-out basis and includes material, labour and
manufacturing overhead where applicable.
(f) Fixed Assets
Fixed assets are recorded at cost net of government assistance.
Equipment is depreciated using the declining balance method at an
annual rate of 20%, with the exception of service spares which are
depreciated using the straight-line method over 5 years. Buildings
are depreciated using the straight-line method based on a useful life
of 20 years. Leasehold improvements are amortized using the
straight-line method over the term of the related lease.
(g) Research and Development Costs
Research costs are expensed as incurred. Development costs are expensed
in the year incurred unless management believes a development project
meets the generally accepted accounting criteria for deferral and
amortization.
(h) Goodwill
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired of subsidiary companies and is amortized using
the straight-line method over a period not exceeding 20 years.
When warranted by events or circumstances that might indicate that
recoverability is impaired, management will evaluate recoverability by
use of the undiscounted cash flow method.
(i) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Inventories
As at March 31 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Raw materials $ 2,905 $ 3,336
Work-in-process 3,821 4,591
Finished goods 6,765 7,303
- -------------------------------------------------------------------------------------------------------------------
$ 13,491 $ 15,230
===================================================================================================================
3. Fixed Assets
As at March 31 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Cost:
Land $ 218 $ 232
Buildings 4,627 4,725
Equipment 58,336 55,879
Leasehold improvements 1,966 1,930
- --------------------------------------------------------------------------------------------------------------------
65,147 62,766
Accumulated depreciation 48,894 44,147
- --------------------------------------------------------------------------------------------------------------------
Net book value $ 16,253 $ 18,619
====================================================================================================================
4. Bank Operating Lines
At March 31, 1996 the Company's authorized bank operating lines totaled
$20.8 million. These committed credit facilities are provided by a
Canadian chartered bank and bear interest at the banks prime rate
plus 0.5% to 1.5%.
The operating lines are secured by certain of the accounts receivable,
inventories and other assets of the Company. The amount available for
borrowing at any time under the facilities is based on margin formulas
relating to levels of accounts receivable, inventories and other bank
covenants. Under such formulas, $17.3 million was available to, but
not utilized by, the Company at March 31, 1996. Cash and cash equivalents
held as of that date represented a further $13.6 million of cash resources
available to the Company. Cash and unused credit lines totaled $30.9
million at March 31, 1996, compared to $20.8 million at March 31, 1995.
5. Accounts Payable and Accrued Liabilities
As at March 31 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Trade accounts payable $ 7,376 $ 7,341
Payroll, commissions and related taxes 3,873 4,072
Accrued restructuring costs 2,747 3,033
Other payables 6,434 5,266
Income and other taxes payable 1,325 1,657
- --------------------------------------------------------------------------------------------------------------------
$ 21,755 $ 21,369
====================================================================================================================
6. Long-term Debt
As at March 31 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Interest
Description Rates Security
- -------------------------------------------------------------------------------------------------------------------
Various capital lease 8%-12.9% Certain equipment and $ 2,856 $ 2,034
obligations denominated in facilities
Canadian dollars, lease
terms ending 1999 - 2009
Classified as current (360) (157)
- -------------------------------------------------------------------------------------------------------------------
$ 2,496 $ 1,877
===================================================================================================================
The aggregate amount of long-term debt scheduled to be repaid
in the five years ending March 31, 2001 is $1,359,000, with the
balance of $1,497,000 due thereafter.
7. Convertible Debentures
Shares Issued
Aggregate Principal Amount % Upon Conversion
- ---------------------------------------------------------------------------------------------------------------
Balance at March 31, 1994 C$ 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 during year (14,061) (10,336) (47) 5,983,372
Impact of foreign exchange - 285 -
- --------------------------------------------------------------------------------------------
Balance at March 31, 1996 C$ - $ - -
============================================================================================
In November 1992 the Company issued 8.5% convertible debentures with
an aggregate principal amount of C$30.0 million which were due to
mature in November 2002. At any time prior to maturity they were
convertible into common shares of the Company at the option of the holder
at a conversion price of C$2.35 (approximately $1.72) which would yield
425.53 common shares for each C$1,000 (approximately $732) of principal
amount of debentures held. During 1995 debentures with an aggregate
principal amount of $11,533,000 were converted into 6,782,519 common shares.
During 1996 all remaining debentures were converted into 5,983,372 common
shares. The resulting increase in capital stock of $9,839,000 was determined
as the sum of the principal amount of the debentures converted ($10,336,000)
plus interest accrued, but unpaid to the date of conversion ($135,000),
net of the pro rata share of the associated unamortized deferred financing
costs ($632,000).
8. Reduction in Stated Capital
On August 10, 1995 the shareholders of the Company passed a special
resolution authorizing a reduction in statutory stated capital in respect
of the common shares by $52,364,000. This resulted in a corresponding
reduction in the accumulated deficit as shown on the consolidated balance
sheets and the consolidated statements of shareholders equity.
9. Stock Options
The following table summarizes the activity for the stock option plans in
effect during the year ended March 31, 1996 and for each of the preceding
two years.
Shares Available Outstanding
for Grant Options
- ------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1993 228,460 1,148,000
Reserved for issuance 1,000,000 -
Granted (700,000) 700,000
Terminated 376,000 (376,000)
Exercised - (207,500)
- ------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1994 904,460 1,264,500
Reserved for issuance 438,000 -
Granted (1,790,000) 1,790,000
Terminated 532,500 (532,500)
Exercised - (182,214)
- ------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1995 84,960 2,339,786
Reserved for issuance 3,000,574 -
Granted (1,743,000) 1,743,000
Terminated 640,876 (640,876)
Exercised - (1,582,685)
- ------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 1,983,410 1,859,225
==================================================================================================================
The options to purchase common shares granted under the above stock
option plans expire between January 10, 1997 and March 17, 2006. Of
the 1,859,225 options outstanding at March 31, 1996, 583,857 were
exercisable as of that date, and the prices at which the outstanding
options may be exercised approximated the market value on the dates of
grant. The exercise prices for outstanding options granted on or before
March 31, 1995 range from C$0.88 to C$6.00 (approximately $0.65 to $4.40)
per share. The exercise price for options granted during the year
ended March 31, 1996 range from C$5.25 to C$23.00 (approximately $3.85 to
$16.87) per share. Directors and executive officers as a group held
1,167,165 options as at March 31, 1996.
10. Restructuring and Other Costs
Years Ended March 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Restructuring $ 1,531 $ 685 $ 15,760
Other - - 12,902
- -------------------------------------------------------------------------------------------------------------------
$ 1,531 $ 685 $ 28,662
===================================================================================================================
Over the past several years the Company has undertaken significant
restructuring activities in order to reposition the Company in line
with its strategy, reduce costs and improve competitiveness. The size
of the Company's workforce, after taking into account restructuring
activities which were accrued in 1996, is now less than 700 employees,
approximately one-third the level of five years ago.
Restructuring charges in the fourth quarter of 1996 were recorded in
connection with certain consolidation and outsourcing activities
carried out since the end of the third quarter in the areas of
manufacturing distribution and repair in Europe, outsourcing to
partners for the delivery of field service maintenance, and changes
in the sales structure to continue the implementation of the
Company's distribution channel strategy. These charges primarily
related to severance and facilities costs.
Restructuring costs recorded in 1995 represented severance costs
associated with the elimination of approximately 70 positions at
the end of the first fiscal quarter in connection with an internal
functional realignment.
Restructuring costs recorded in 1994 related to decisions made by
the Company in February 1994 to reduce its workforce by approximately
300 positions worldwide and consolidate its North American operations
under a single organization structure. Restructuring costs included
$5.3 million relating to severance, $4.2 million in provisions for
redundant facilities representing the estimated future lease costs
and the unamortized cost of leasehold improvements for vacant
facilities worldwide, and $6.3 million in fixed asset writedowns
to adjust the net book value of surplus equipment and spare parts
inventory in North America to their estimated net realizable value.
During 1994, other costs included a writedown of $7.5 million in
deferred tax assets which primarily related to investment tax
credits earned in Canada prior to the third quarter of 1993 on
research and development expenditures. For financial reporting
purposes, as a result of sustaining several consecutive years of
losses up to the end of 1994, management believed that the
accounting criteria for continuing to recognize these amounts as
an asset were no longer met. These tax credits remain available
to the Company and the benefit of these tax credits will instead
be recorded in the financial statements as they are utilized to
reduce future federal income taxes payable in Canada. Other
costs in 1994 also included a writedown of $4.5 million in
deferred software development costs which were not expected to
be recovered through future cash flows and a $0.9 million
writedown of assets held for disposal to their net realizable value.
11. Income Taxes
Years Ended March 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
Current:
Canadian $ - $ - $ (342)
Foreign - - (800)
- -----------------------------------------------------------------------------------------------------------------
$ - $ - $ (1,142)
=================================================================================================================
The income tax expense reported differs from the amount
computed by applying the Canadian tax rates to the income
(loss) before income taxes.
Years Ended March 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Expected tax rate 44.6% 44.3% 44.3%
Expected tax expense (recovery) $ 116 $ 623 $(20,420)
Utilization of losses
not previously recorded (116) (623) -
Losses for which no tax benefit
has been recorded - - 20,420
Other - - (1,142)
- ----------------------------------------------------------------------------------------------------------------
$ - $ - $ (1,142)
================================================================================================================
At March 31, 1996, the Company had available, subject to audit and
certain restrictions, accumulated accounting losses of approximately
$70 million, the potential tax benefit of which has not been recorded
in the consolidated financial statements. These include loss carry
forwards for income tax purposes of approximately $50 million
($39 million related to U.S. operations) which begin to expire after
the 1999 fiscal year. The remaining amount relates to items expensed
in the consolidated financial statements which have not yet been
claimed for income tax purposes. The Company also had available at
March 31, 1996, subject to audit, investment tax credits of
approximately $11 million which can be applied to reduce federal
taxes payable in Canada. These investment tax credits expire between
1997 and 2006.
Tax authorities in the Netherlands have reassessed income taxes for
the years 1989 through 1991, disallowing certain amounts which have
been claimed for income tax purposes. The Company has filed
objections to these reassessments and is in discussion with the tax
authorities. The Company anticipates that the resolution of this
matter will lead to amended reassessments which, after taking into
consideration available loss carry-forwards, would be unlikely to
result in a material adverse effect on the Company's consolidated
financial position or its future results of operations.
The loss before income taxes attributable to all foreign operations
for the year ended March 31, 1996 was $1,933,000 (1995 - $735,000;
1994 -$31,074,000).
At March 31, 1996 the balance of unremitted earnings of subsidiaries
was $9,599,000 (1995 - $11,113,000; 1994 - $7,761,000). The Company
does not currently anticipate repatriating earnings of foreign
subsidiaries where such repatriation would give rise to withholding
taxes.
12. Earnings Per Share
Basic earnings (loss) per share figures are presented on the
consolidated statements of income. These figures are calculated using
the monthly weighted average number of common shares outstanding
during the year. Fully diluted earnings per share information has not
been presented as potential conversions are anti-dilutive.
Adjusted earnings per share for 1996 was $0.01 (1995 - $0.07). The
calculation assumes that the conversion of debentures, which occurred
during 1996 and 1995, had occurred at the beginning of each applicable
fiscal year.
13. Cash Provided By Operations
Cash provided by (applied to) operations is computed as
follows:
Years Ended March 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from operations $ 488 $ 2,022 $ (42,960)
Depreciation and amortization 5,408 5,616 9,658
Reserves and writedowns not involving
an outlay of cash - - 22,004
Interest paid (468) (2,803) (3,546)
Interest received and foreign exchange 259 329 991
Other - (206) (542)
- ---------------------------------------------------------------------------------------------------------------
$ 5,687 $ 4,958 $ (14,395)
===============================================================================================================
14. Changes in Operating Working Capital
The decrease (increase) in operating working capital is computed as
follows:
Years Ended March 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Accounts receivable $ (1,814) $ 3,302 $ 4,103
Inventories 1,739 5,647 1,750
Other current assets 401 78 73
Accounts payable and accrued liabilities 513 (6,160) (1,132)
Deferred revenue (1,580) 334 (1,075)
Foreign currency translation adjustment (44) 1,011 (2,944)
- -------------------------------------------------------------------------------------------------------------------
$ (785) $ 4,212 $ 775
===================================================================================================================
15. Commitments and Contingencies
(a) The Company has entered into various commitments under leases
and other contracts. At March 31, 1996, the minimum amounts
payable under such commitments in future fiscal years were
as follows:
1997 $ 12,793
1998 10,674
1999 2,059
2000 1,926
2001 1,733
Thereafter 6,689
--------
$ 35,874
========
(b) Since 1991, the Company has received funding of approximately
$1.4 million and $2.5 million respectively under two projects
approved through the Canadian federal government's
Microelectronics and Systems Development Program (MSDP).
While the repayment terms of the two projects differ slightly,
both are tied to future sales, with the liability to repay the
funding arising from product revenues earned following both the
commercialization of the resulting technology and the completion
of the MSDP project. The amount that is potentially repayable
is calculated without interest as a royalty on revenues earned in
the ten years following the project completion date and is
limited to the amount of the funding received.
The Company commenced accruing royalties during 1996 upon
completion of each project and expects that the funding will be
fully repaid within three to five years. At March 31,1996,
$785,000 had been accrued related to these projects.
(c) In the normal course of business, various litigation, claims and
assessments have arisen involving the Company and its subsidiaries.
In certain instances, substantial amounts are being sought.
Management is vigorously defending its position in all such
actions. While the outcome of such proceedings is currently not
determinable, management believes, after consideration of all
relevant facts, that their outcome would be unlikely to result in
a material adverse effect on the Company's consolidated financial
position or its future results of operations.
16. Segmented Information
The Company operates in one business segment, providing networking
solutions to customers through designing, manufacturing, marketing and
servicing a broad line of computerized communications systems.
The Company has defined five geographic regions for the segments in
which it operates: the United States, Canada, the United Kingdom,
Holland/France and other international markets. The following table
sets forth information concerning these geographic segments for each
of the years in the three year period ended March 31, 1996.
Years Ended March 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Sales to customers:
United States $ 32,758 $ 32,547 $ 35,157
Canada 21,675 22,473 23,341
United Kingdom 31,644 37,939 39,309
Holland/France 20,066 16,052 15,441
Other 10,390 11,500 18,075
Segment transfers:
United States - 964 5,360
Canada 27,601 22,822 24,702
United Kingdom 1,031 977 2,385
Holland/France 6 9 476
Eliminations (28,638) (24,772) (32,923)
- ------------------------------------------------------------------------------------------------------------------
Total revenues $ 116,533 $ 120,511 $ 131,323
==================================================================================================================
Segment operating profit:
United States $ 6,416 $ 4,739 $ (1,621)
Canada 3,433 1,764 (226)
United Kingdom 5,722 8,242 6,908
Holland/France 4,276 3,527 2,550
Other (1,107) (65) 2,574
- -------------------------------------------------------------------------------------------------------------------
Total segment operating profit 18,740 18,207 10,185
- -------------------------------------------------------------------------------------------------------------------
Expenses:
Research and development 11,524 10,197 14,316
General corporate 5,197 5,303 10,167
Restructuring and other costs 1,531 685 28,662
Gain on sale of portfolio investment - (2,024) -
Interest expense 487 2,969 4,127
Interest income and foreign exchange (259) (329) (991)
Income taxes - - 1,142
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 260 $ 1,406 $ (47,238)
===================================================================================================================
Identifiable assets:
United States $ 10,845 $ 10,015 $ 14,919
Canada 31,530 27,376 33,440
United Kingdom 21,201 24,315 23,336
Holland/France 10,727 10,800 7,308
Other 5,072 9,002 10,183
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 79,375 $ 81,508 $ 89,186
===================================================================================================================
17. United States Accounting Principles
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada (Canadian
GAAP) which in the case of the Company differ in the following material
respects from those generally accepted in the United States(U.S. GAAP)
(a) Under U.S. GAAP, financing and investing activities not involving
a receipt or outlay of cash are excluded from the consolidated
statements of changes in financial position. Accordingly, the
following financing activities would not be presented in the
consolidated statement of changes in financial position for the
years ended March 31, 1996 and 1995 but would be shown
supplementally.
1996 1995
- -------------------------------------------------------------------------------------------------------------------
Issue of capital stock on conversion of debentures $ 10,336 $ 11,533
Conversion of convertible debentures $ (10,336) $ (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
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.
1996 1995
--------------------------------------------------------------------------------------------------------------
Operating loss carry-forwards $ 20,300 $ 21,600
Depreciation 1,700 2,500
Restructuring reserves 200 800
Investment tax credits 11,000 11,000
Other 4,800 2,900
--------------------------------------------------------------------------------------------------------------
38,000 38,800
Valuation allowance (37,496) (38,296)
--------------------------------------------------------------------------------------------------------------
Net non-current deferred tax asset $ 504 $ 504
==============================================================================================================
(d) Reductions in stated capital and deficit as described in note 8 do
not fall within the definition of a quasi-reorganization under U.S.
GAAP and, accordingly, under U.S. GAAP, capital stock and retained
earnings would not each be reduced by $52,364,000 as
shown in the consolidated statements of shareholders' equity.
(e) U.S. GAAP requires the calculation of primary earnings per share.
This figure is not materially different from the basic earnings
per share figure calculated under Canadian GAAP.
Quarterly Financial Information (Unaudited)
Quarterly unaudited financial information for each of the years ended
March 31, 1996 and 1995 is as follows:
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 $ - $ - $ - $ -
==================================================================================================================
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 exchange 57 88 58 126
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,559) $ 602 $ 2,154 $ 209
==================================================================================================================
Basic earnings (loss) per share $ (0.06) $ 0.02 $ 0.08 $ 0.01
==================================================================================================================
Fully diluted earnings per share $ 0.06
==================================================================================================================
Quarterly earnings per share figures are calculated based on the
monthly weighted average number of common shares outstanding during
the quarter. Fully diluted earnings per share is calculated
assuming convertible debentures had been converted at the beginning
of the fiscal period, and all outstanding options had been exercised
on the date which is the later of the beginning of the fiscal period
and the dates the options were granted. With the exception of the
third fiscal quarter of 1995, potential conversions are anti-dilutive
for each quarter during the two year period ended March 31, 1996.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Introduction
The consolidated financial statements together with accompanying notes
should be read as an integral part of this review. These financial
statements have been prepared by management in accordance with
accounting principles generally accepted in Canada. Note 17 to the
consolidated financial statements describes the impact, in the case
of the Company, of differences between accounting principles generally
accepted in Canada and the United States. All amounts are stated in
U.S. dollars unless otherwise indicated. C$ refers to Canadian
dollars. References to years are to fiscal years ended March 31.
General Summary Discussion
The Company reported net income for the 1996 fiscal year of $260,000 or
$0.01 per share on revenues of $116.5 million, compared to net income of
$1.4 million or $0.05 per share on revenues of $120.5 million for the
fiscal year ended March 31, 1995. The 1995 results included a one-time
gain of $2.0 million on the sale of a portfolio investment. Income
before restructuring charges for 1996 was $1.8 million, representing
$0.04 per share. Income for 1995, exclusive of restructuring charges
and a one-time gain on the sale of a portfolio investment, was $67,000,
break even on a per share basis. Restructuring charges of $1.5
million were recorded in 1996 in connection with certain consolidation
and outsourcing activities carried out in the areas of manufacturing
distribution and repair in Europe, outsourcing to partners for the
delivery of field service maintenance, and changes in the sales
structure to continue the implementation of the Company's
distribution channel strategy.
The Company operates in one business segment, providing a broad range
of internetworking products and services. Within this segment the
Company derives revenue from four main product areas: remote access
products; modems, multiplexers and local connectivity products; wide
area networking (WAN) backbone products; and other. The majority of
new product introductions and enhancements during 1996 occurred in the
remote access area. Revenues from the sale of these products in 1996
increased more than 25% compared to 1995 and represented 65% of total
product revenue compared to 49% in 1995 and 25% in 1994.
The combined gross margin on product and service revenues improved in
1996 to 45.9% compared to 44.4% in 1995 and 41.7% in 1994. Operating
expenses for sales and marketing, and administration and general
expenses, declined approximately 2% in 1996 compared to 1995 after
declining close to 26% in 1995 compared to 1994. Research and
development expenses increased 13% in 1996 compared to 1995, and during
the three year period 1994 to 1996 the Company has made expenditures
on research and development which on average have been in excess of
14% of its annual revenues derived from the sale of products.
The Company's net cash position more than doubled during 1996, from
$6.0 million at March 31, 1995 to $13.6 million at March 31, 1996.
Cash and unused credit lines were $30.9 million at March 31, 1996,
an increase of 49% over the balance of $20.8 million at March 31,
1995. In addition, all remaining debentures issued in 1992 were
converted to common shares of the Company in accordance with the
terms of the debentures.
Factors That May Affect Future Financial Performance
The Company's quarterly and annual operating results are affected
by various trends and factors including, but not limited to,
competition, the Company's success in developing, introducing and
gaining market acceptance for new products, the timing of orders
from customers, the levels of inventory held by resellers and
distributors, as well as factors such as changes in general
economic conditions or conditions in the specific markets for the
Company's products, government regulation, tariffing of carrier
services, and industry consolidation.
The networking industry is intensely competitive and subject to
rapid change. As the market for the Company's products continues to
develop, additional competitors are expected to enter the market
and competition is anticipated to intensify. This may result in price
reductions and margin erosion. Many of the Company's current and
potential competitors have larger technical staffs, more established
and larger marketing and sales organizations, and significantly
greater financial resources than does the Company. The Company also
competes with other data networking vendors for access to distribution
channels.
The Company's success is substantially dependent upon its ability to
manage changes in its operations. Over the past several years the
Company has undertaken significant restructuring activities in order
to reposition the Company in line with its strategy, reduce costs and
improve competitiveness. During the most recent fiscal year, examples
of such changes included the establishment of new marketing and
distribution channels, the restructuring of international operations
and the outsourcing of the delivery of field service maintenance.
In addition, the successful establishment and implementation of
relationships with strategic partners and distributors is critical
to the future success of the Company. During the past year, the
Company has changed the way it distributes its products by establishing
multi-tiered distribution channels and entering into agreements
with several large resellers and distributors in North America,
Europe and the Asia Pacific region. These new distribution channels,
while viewed by the Company as critical to its future success, also
bring additional new risks. These include less predictability regarding
product demand and ordering patterns, reduced gross margins on sales to
indirect channels and the time associated with reseller training and
increasing awareness for the Company's products.
The Company's quarterly operating results fluctuate as a result of a
number of factors including pricing, distributor ordering patterns,
product returns and reserves, product mix, as well as the timing of
new product announcements and introductions by the Company and its
competitors. The Company's revenues are difficult to predict due to
shipment patterns. A substantial portion of the Company's expenses
are fixed, and consequently any significant fluctuations in revenue
will impact earnings. Products are generally shipped as orders are
received, and accordingly, the Company operates with a relatively small
backlog. As a result, sales in any quarter are dependent on orders
booked and shipped in that quarter. A high percentage of the Company's
revenues are typically earned in the third month of each fiscal quarter
and tend to be concentrated in the latter half of that month.
Accordingly, quarterly financial results will be difficult to predict
prior to the end of the quarter and a shortfall in shipments at the end
of any particular quarter may cause the results of that quarter to fall
significantly short of anticipated levels.
At the end of each quarter, the Company's distributors typically hold
significant inventories of the Company's products. The Company has
established reserves for returns based on experience. New channel
relationships introduce additional uncertainty in this area. Setting
reserves involves making judgments about future competitive conditions,
product acceptance and other factors which by their nature involve
uncertainties at the time the reserves are established.
Results of Operations
The following table sets forth items derived from the consolidated
statements of income, expressed as a percentage of revenues, for
the year ended March 31, 1996 and for each of the preceding two years.
Years Ended March 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
(Percentage of Revenues)
Product 69.6% 69.5% 69.2%
Service 30.4 30.5 30.8
- ------------------------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0%
==================================================================================================================
Gross margin:
Product 52.0% 47.9% 45.5%
Service 32.2 36.5 33.3
Combined 45.9 44.5 41.7
Expenses:
Sales and marketing 27.4 27.5 33.3
Administration and general 6.9 6.2 8.4
Research and development 9.9 8.4 10.9
Restructuring and other costs 1.3 0.6 21.8
- -----------------------------------------------------------------------------------------------------------------
Income (loss) from operations 0.4 1.7 (32.7)
Gain on sale of portfolio investment - 1.7 -
Interest expense (0.4) (2.5) (3.1)
Interest income and foreign exchange 0.2 0.3 0.7
Income taxes - - (0.9)
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) 0.2% 1.2% (36.0)%
=================================================================================================================
Revenues
The following three tables set forth, for the year ended March 31, 1996
and for each of the two preceding fiscal years, product revenues by
geographic segment and product group expressed as a percentage of total
product revenues. These amounts have been calculated assuming constant
rates of exchange in the translation of foreign currency amounts to U.S.
dollars. Remote access products primarily include internetworking
products sold under the names Gandalf Xpressway, XpressStack and
XpressConnect. Remote access products represent a subset of the Company's
total LAN internetworking product line. The other three product groups
shown below represent traditional product areas for the Company which
include wide area networking (WAN) backbone products; modems,
multiplexers and local connectivity products; and other products which
primarily represent third-party products.
Modems/
Multiplexers/
Remote WAN Local
Years Ended March 31 Access Backbone Connectivity Other Total
------- --------- ------------ ----- -----
1996
United States 25% 1% 5% 1% 32%
Canada 12 1 4 1 18
United Kingdom 11 2 7 3 23
Holland/France 9 1 2 2 14
Other 8 3 2 - 13
--- --- --- --- ---
65% 8% 20% 7% 100%
=== === === === ===
1995
United States 15% 1% 8% 4% 28%
Canada 9 2 7 1 19
United Kingdom 12 3 9 4 28
Holland/France 6 1 3 1 11
Other 7 3 2 2 14
--- --- --- --- ---
49% 10% 29% 12% 100%
=== === === === ===
1994
United States 7% 3% 9% 7% 26%
Canada 5 1 9 2 17
United Kingdom 6 6 10 5 27
Holland/France 3 1 4 3 11
Other 4 7 5 3 19
--- --- --- --- ---
25% 18% 37% 20% 100%
=== === === === ===
Revenues in the fiscal year ended March 31, 1996 were $116.5
million compared to $120.5 million in 1995 and $131.3 million
during 1994. Approximately 70% of revenues in 1996 were
derived from the sale of products with the balance represented
by service revenues. The mix of revenues between the sale of
products and services has not changed significantly over the
last three years.
Product revenues for the year ended March 31, 1996 were $81.1
million. For 1995 and 1994 such revenues were $83.8 million
and $90.8 million respectively. Revenues from the Company's
remote access products showed growth of 26% in 1996 compared to
1995 and represented 65% of product revenues in 1996 compared to
49% in 1995 and 25% in 1994. A decline in sales during 1995 and 1996
of other products sold by the Company, including third-party products,
more than offset the growth in remote access products during this two
year period, resulting in a decline in total product revenues of 3.3%
in 1996 compared to 1995, and 7.7% in 1995 compared to 1994.
Revenues from services were $35.5 million in 1996 compared to
$36.7 million in 1995 and $40.5 million in 1994. Service revenues
declined in 1996 compared to 1995 and 1994 as a result of lower
revenues during each of the last two fiscal years on products which
the Company has traditionally derived the majority of its service
revenues.
Gross Margin
The combined gross margin (total revenues minus cost of product sales
and service expenses expressed as a percentage of total revenues)
was 45.9% in 1996 compared to 44.4% in 1995 and 41.7% in 1994.
The improvement in the combined gross margin in 1996 compared to
1995 largely mitigated the reduction in revenues of $4.0 million from
1995 to 1996. The combined gross profit (total revenues minus cost of
product sales and service expenses) in 1996 was $53.5 million on
revenues of $116.5 million compared to $53.6 million on revenues of
$120.5 million in 1995.
The gross margin on product revenues (product revenues minus cost of
product sales expressed as a percentage of product revenues) improved
to 52.0% in 1996, compared to 47.9% in 1995 and 45.5% in 1994. In
general, the combined effect of lower manufacturing costs following
restructuring actions taken in the fourth quarter of 1994 and the first
quarter of 1995 and a more favourable product mix, primarily due to a
reduction in the volume of third-party product sales, has resulted in
improvements since 1994 in the gross margin earned on product revenues.
However, the Company anticipates that it will continue to experience
quarterly fluctuations in the gross margin on product revenues such as
those that were experienced in 1996, during which the gross margin on
product revenues fluctuated in a range between 50.2% and 53.4% over the
four fiscal quarters.
The gross margin on service revenues (service revenues minus service
expenses expressed as a percentage of service revenues) was 32.2% in
1996, 36.5% in 1995 and 33.3% in 1994. The decline in 1996 compared
to 1995 occurred as a result of a 6% decline in service revenues in 1996
compared to 1995, when applying constant exchange rates for translation
purposes for both periods. Service expenses, when translated in the
same way, were unchanged in 1996 compared to 1995.
Operating Expenses
Sales and marketing, and administration and general expenses were $40.0
million in 1996, compared to $40.7 million in 1995 and $54.8 million in
1994. Reductions in these operating expenses in 1996 and 1995 related to
restructuring and downsizing actions undertaken between 1993 and 1995.
Research and development expenses in 1996 were $11.5 million, 13.0% higher
than in 1995. Research and development expenses have averaged more than
14% of product revenues during the three years 1994 to 1996.
Since 1991, the Company has received funding of approximately $1.4 million
and $2.5 million respectively under two projects approved through the
Canadian federal government's Microelectronics and Systems Development
Program (MSDP). This funding is repayable, without interest, as a
royalty on revenues earned in the ten years following the project
completion date and is limited to the amount of funding received. The
Company commenced accruing royalties during 1996 upon completion of each
project and expects that the funding will be fully repaid within three to
five years. At March 31, 1996 $785,000 had been accrued related to these
projects.
Restructuring charges of $1.5 million in the fourth quarter of 1996
were recorded in connection with certain consolidation and outsourcing
activities carried out in the areas of manufacturing distribution
and repair in Europe, outsourcing to partners for the delivery of field
service maintenance, and changes in the sales structure to continue the
implementation of the Company's distribution channel strategy. These
charges primarily relate to severance and facilities costs.
The Company recorded restructuring costs of $0.7 million during the
first quarter of 1995, representing severance costs associated with
the elimination of approximately 70 positions in connection with an
internal functional realignment.
Restructuring costs of $15.8 million recorded during the 1994 fiscal
year related to decisions made by the Company in February 1994 to
reduce its workforce by approximately 300 positions worldwide and
consolidate its North American operations under a single organization
structure.
Other costs recorded in the fourth quarter of fiscal 1994 included the
writedown of $7.5 million in deferred tax assets which primarily related
to investment tax credits earned in Canada prior to the third quarter of
1993 on research and development expenditures. These tax credits remain
available to the Company and the benefit of these tax credits will instead
be recorded in the financial statements as they are utilized to reduce
federal income taxes payable in Canada. Other costs in 1994 also included
a writedown of $4.5 million in deferred software development costs which
were not expected to be recovered through future cash flows and a $0.9
million writedown of the carrying value of assets held for disposal to
their estimated net realizable value.
Income From Operations
The Company reported income from operations, net of restructuring
charges, of $488,000 in 1996 compared to income from operations of
$2.0 million in 1995 and a loss from operations of $43.0 million in
1994. Income from operations, before restructuring charges, was $2.0
million in 1996 and $2.7 million in 1995, compared to a loss from
operations, before restructuring charges and other costs, of $14.3
million in 1994.
Net Financial Expenses
Interest expense was $487,000 in 1996 compared with $3.0 million in
1995 and $4.1 million in 1994. Interest expense declined in 1996
compared to 1995 and 1994 as a result of the conversion of interest-
bearing debentures to common shares during 1996 and 1995 and lower
utilization of bank operating lines.
Net Income
Net income for the year ended March 31, 1996 was $260,000 or $0.01 per
share compared to net income of $1.4 million or $0.05 per share in 1995.
Income before restructuring charges in 1996 was $1.8 million, representing
$0.04 per share. Income for 1995, exclusive of restructuring charges and
a one-time gain on the sale of a portfolio investment, was $67,000, break
even on a per share basis.
Segment Operating Results
Note 16 to the consolidated financial statements contains information
concerning the geographic segments in which the Company operates.
The following table sets forth supplemental information regarding
product and service revenues by geographic segment for the year ended
March 31, 1996 and for each of the preceding two years.
Years ended March 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
Product Revenues:
United States $ 24,769 $ 23,341 $ 24,177
Canada 15,033 15,539 15,431
United Kingdom 18,540 24,059 24,602
Holland/France 12,344 9,362 8,528
Other 10,390 11,500 18,075
- -----------------------------------------------------------------------------------------------------------------
$ 81,076 $ 83,801 $ 90,813
=================================================================================================================
Service Revenues:
United States $ 7,989 $ 9,206 $ 10,980
Canada 6,642 6,934 7,910
United Kingdom 13,104 13,880 14,707
Holland/France 7,722 6,690 6,913
- -----------------------------------------------------------------------------------------------------------------
$ 35,457 $ 36,710 $ 40,510
=================================================================================================================
Product and service revenues in North America (United States and Canada)
were $54.4 million in 1996, compared to $55.0 million in 1995 and $58.5
million in 1994. The Company's European direct sales markets (United
Kingdom, Holland and France) reported total revenues of $51.7 million
in 1996, compared to $54.0 million in 1995 and $54.8 million in 1994.
Other international markets represented revenues of $10.4 in 1996,
$11.5 million in 1995 and $18.1 million in 1994.
Segment operating profit for North America (United States and Canada) in
1996, expressed as a percentage of revenues, was 18.1% compared to 11.8%
in 1995. In 1994, the segment operating loss in North America represented
3.2% of revenues. The improvement in operating performance for this segment
between 1994 and 1996 is primarily attributable to a reduced cost
infrastructure and an improved product mix.
Segment operating profit, expressed as a percentage of revenues, for the
Company's operations in the United Kingdom, Holland and France was 19.3%
in 1996, 21.8% in 1995 and 17.3% in 1994. The decrease in operating profit
in Europe during 1996 is primarily attributable to a 30% decline in
traditional product revenues in the United Kingdom.
The Company's other international markets reported a segment operating loss
of 10.7% of revenues in 1996 compared to a segment operating loss of 0.6% of
revenues in 1995, and a segment operating income of 13.8% of revenues in
1994. This reduction in profitability is primarily due to the combined
effect of a change in product mix and the higher costs associated with
developing these markets.
Liquidity and Capital Resources
The Company recorded positive cash flow of $7.6 million during 1996.
At March 31, 1996 the net cash position (cash and cash equivalents net
of bank operating lines) was $13.6 million compared to $6.0 million a
year ago. The increase in cash included positive cash flow from
operating activities of $4.9 million. Non-operating sources of cash
in 1996 included net proceeds of $4.9 million from the issue of capital
stock, primarily from the exercise of stock options and shares issued
under the employee stock purchase plan.
At March 31, 1996 the Company's authorized bank operating lines totaled
$20.8 million. These committed facilities are provided by a Canadian
chartered bank and bear interest at the bank's prime rate plus 0.5%
to 1.5%.
The operating lines are secured by certain of the accounts receivable,
inventories and other assets of the Company. The amount available for
borrowing at any time under the facilities is based on margin formulas
relating to levels of accounts receivable, inventories and other bank
covenants. Under such formulas, $17.3 million was available to, but
not utilized by, the Company at March 31, 1996. Cash and cash equivalents
held as of that date represented a further $13.6 million of cash resources
available to the Company. Cash and unused credit lines totaled $30.9
million at March 31, 1996, compared to $20.8 million at March 31,
1995.
During 1995 and 1996 all outstanding 8.5% convertible debentures,
issued in November 1992, were converted to common shares of the Company
in accordance with the terms of the debentures.
The Company believes that its current financial base together with
available credit facilities provides sufficient financial resources to
meet its short-term operating requirements. The Company currently
anticipates that its long-term cash requirements will be satisfied through
future operating cash flows.
Capital spending was $2.7 million in 1996, $2.9 million in 1995 and
$4.4 million in 1994. The Company believes it must continue to invest
in its capital asset base at 1996 or moderately higher levels.
The ratio of term debt to shareholders' equity at March 31, 1996 was
0.05:1. The corresponding figure at March 31, 1995 was 0.35:1. The
Company's current ratio improved to 2.0:1 at March 31, 1996 compared
to 1.6:1 at March 31, 1995.
Market for Gandalf Stock and Related Security Holder Matters
Markets Information
The common shares of Gandalf Technologies Inc. are listed on The Toronto
Stock Exchange in Canada (Symbol GAN) and on The Nasdaq Stock Market
(NMS) in the United States (Symbol GANDF).
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
1996
High 23 27 - 3/8 17.00 13 - 3/8 | 17 - 1/8 20 - 1/16 12 - 1/8 9 - 3/4
Low 16 - 5/8 6 - 3/8 7 - 4/8 4.85 | 12 - 3/32 4 - 7/8 5 - 5/8 3 - 1/2
Volume (000's) 8,705 33,241 15,958 24,240 | 93,368 168,536 89,217 69,536
- ------------------------------------------------------------------------------------------------------------------------
Fiscal
1995
High 6 - 7/8 2.33 1.58 1.74 | 4 - 7/8 1 - 11/16 1 - 3/16 1 - 3/8
Low 1.80 1.26 0.85 0.75 | 1 - 1/4 7/8 9/16 1/2
Volume (000's) 52,236 8,886 9,765 10,037 | 49,876 2,478 1,475 2,810
- ------------------------------------------------------------------------------------------------------------------------
Fiscal
1994
High 3.75 4.60 4.00 4.60 | 3 3 - 1/2 3 - 1/4 3 - 19/32
Low 0.95 3.40 2.85 3.60 | 13/16 2 - 1/2 2 - 1/8 2 - 3/4
Volume (000's) 20,284 9,167 1,633 3,008 | 1,418 798 453 605
- ------------------------------------------------------------------------------------------------------------------------
Volatility of Stock Prices
The market price of the Company's common stock has been, and may continue
to be, extremely volatile. The Company believes that the market price
for the Company's stock at any particular time is heavily dependent on
expectations in the market, including analysts' expectations, of future
performance and growth which may be based on trends existing generally
in industry. There can be no assurance that the Company's performance will
meet such expectations, and accordingly, a shortfall in earnings in any
given period can be expected to have an immediate and significant adverse
effect on the trading price of the Company's common stock. Factors such as
new product announcements by the Company or its competitors, strategic
alliances, mergers or acquisitions announced by the Company's competitors,
general conditions in the data networking market, the general volatility
of stocks of high technology companies and other factors that may be
unrelated to the performance of the Company may also have a significant
impact on the market price of the Company's common stock.
Shareholders
As at June 1, 1996, there were 43,262,941 shares issued and outstanding
with 1,867 record holders. The stock closed on The Toronto Stock
Exchange at C$19.35 on May 31, 1996, and on The Nasdaq Stock Market
at $13 56/64.
Dividends
Individuals and corporations resident in the United States are subject
generally to a 15 percent withholding tax on dividends, and individuals
and corporations resident in countries that do not have a treaty with
Canada are subject to a 25% withholding tax. For United States
corporations only, however, the United States/Canada Tax Treaty reduces
the withholding tax to 10 percent if the United States corporation
owns at least 10 percent of the Company's voting shares.
It is the Company's present policy not to pay cash dividends and to
retain its earnings to finance expansion and growth. Future dividends
if any, would be expected to be paid in Canadian dollars. Payment of
future dividends will be at the discretion of the Board of Directors
and will be dependent on earnings, capital requirements and the financial
condition of the Company.
Capital gains derived in Canada from the sale or exchange of the Company's
shares by an individual or corporation resident in the United States and
without a permanent establishment in Canada are exempt from taxation in
Canada with limited exceptions.