SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 29, 1996 Commission file number 0-12643
------------- -------
GANDALF TECHNOLOGIES INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
ONTARIO, CANADA NOT APPLICABLE
-------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 COLONNADE ROAD SOUTH, NEPEAN, ONTARIO K2E 7M4
- ------------------------------------------ ----------------
(Address of principal executive offices) (Postal Code)
Registrant' s telephone number,
including area code (613) 274-6500
---------------
NOT APPLICABLE
- -------------------------------------------------------------
Former name, former address and former fiscal year, if changed
since last report.
*Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
The number of shares outstanding as at July 31, 1996 was
43,295,857.
GANDALF TECHNOLOGIES INC.
INDEX
Page No
--------
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets- 3
Consolidated Statements of Income - 4
Consolidated Statements of Changes in
Financial Position - 5
Consolidated Statements of Shareholders Equity - 6
Notes to Consolidated Financial Statements - 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations - 12
PART II OTHER INFORMATION 21
SIGNATURE PAGE 21
GANDALF TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of US dollars)
June 29 March 31
1996 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 10,478 $ 13,602
Accounts receivable 22,231 28,694
Inventories (note 2) 16,906 13,491
Other 1,556 1,867
-------- --------
Total current assets 51,171 57,654
Fixed assets (note 3) 14,455 16,253
Goodwill, net of amortization of $3,225
(March 31, 1996: $3,172) 3,189 3,242
Other assets 2,175 2,226
-------- --------
Total assets $ 70,990 $ 79,375
======== ========
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 5) $ 21,202 $ 21,755
Deferred revenue 6,036 6,178
Current portion of long-term debt 417 360
-------- --------
Total current liabilities 27,655 28,293
Long-term debt 2,527 2,496
Shareholders equity:
Capital stock:
Common shares, 43,264,941 issued and
outstanding (March 31, 1996: 42,939,523) (note 6) 55,364 54,198
Retained earnings (deficit) (note 6) (8,720) 260
Cumulative translation adjustment (5,836) (5,872)
-------- --------
Total shareholders equity 40,808 48,586
-------- --------
Total liabilities and shareholders equity $ 70,990 $ 79,375
======== ========
(See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Thousands of US dollars except per share amounts)
13 Weeks Ended
June 29
--------------------
1996 1995
-------- --------
Revenues:
Product $ 10,917 $ 19,414
Service 7,420 9,236
-------- --------
18,337 28,650
Operating expenses:
Cost of product sales 6,431 9,663
Service expenses 5,307 5,869
Sales and marketing 7,294 8,198
Administration and general 2,278 2,071
Research and development 3,004 2,595
Restructuring costs (note 7) 3,010 -
-------- --------
Income (loss) from operations (8,987) 254
Interest expense (47) (206)
Interest income and foreign exchange 54 18
-------- --------
Net income (loss) for the period $ (8,980) $ 66
======== ========
Basic earnings (loss) per share (note 8) $ (0.21) $ -
======== ========
Weighted average number of
shares outstanding (thousands) 43,083 37,642
======== ========
(See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Unaudited)
(Thousands of US dollars)
13 Weeks Ended
June 29
--------------------
1996 1995
-------- --------
Operating activities:
Cash provided by (applied to) operations (note 9) $ (6,458) $ 1,576
Decrease (increase) in operating working capital (note 10) 2,693 (202)
-------- --------
Cash provided by (applied to) operating activities (3,765) 1,374
-------- --------
Financing activities:
Issue of capital stock 1,166 6,423
Conversion of debentures (note 11) - (6,197)
Other 92 302
-------- --------
Cash provided by financing activities 1,258 528
-------- --------
Investing activities:
Purchase of fixed assets (610) (674)
Other 15 (34)
-------- --------
Cash applied to investing activities (595) (708)
-------- --------
Effect of exchange rate changes on cash balances (22) (81)
-------- --------
Increase (decrease) in cash position in the period (3,124) 1,113
Cash position at beginning of period 13,602 5,963
-------- --------
Cash position at end of period $ 10,478 $ 7,076
======== ========
Cash position is comprised of cash and cash
equivalents net of any borrowings under bank
operating lines.
(See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited)
(Thousands of US dollars)
13 Weeks Ended
June 29
-------------------------------------------------
1996 1995
------------------------ ---------------------
Shares Dollars Shares Dollars
---------- --------- --------- ---------
Capital Stock:
Consisting of an unlimited
number of common shares
authorized, without par value
Balance at beginning of period (note 6) 42,939,523 $ 54,198 35,238,064 $ 91,644
Issued:
On conversion of debentures (note 11) - - 3,613,592 5,905
On exercise of stock options 325,418 1,166 82,633 226
---------- --------- ---------- ---------
Balance at end of period 43,264,941 $ 55,364 38,934,289 $ 97,775
========== ========= ========== =========
Retained Earnings (Deficit):
Balance at beginning of period (note 6) $ 260 $ (52,364)
Net income (loss) (8,980) 66
--------- ---------
Balance at end of period $ (8,720) $ (52,298)
========= =========
Cumulative Translation Adjustment:
Balance at beginning of period $ (5,872) $ (4,838)
Adjustment arising on translation of
foreign subsidiaries financial
statements to US dollars (110) 776
Adjustment relating to subsidiary loans
designated as long-term investments 146 (885)
--------- ---------
Balance at end of period $ (5,836) $ (4,947)
========= =========
(See accompanying notes to consolidated financial statements)
GANDALF TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
All amounts are stated in US 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 ending March 31.
1. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements for the first quarter of
the 1997 fiscal year which ended June 29, 1996, are unaudited
and reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial
position and operating results for the interim period.
2. INVENTORIES
June 29 March 31
1996 1996
-------- --------
Raw materials $ 3,675 $ 2,905
Work-in-process 4,400 3,821
Finished goods 8,831 6,765
-------- --------
$ 16,906 $ 13,491
======== ========
3. FIXED ASSETS
June 29 March 31
1996 1996
-------- --------
Cost:
Land $ 222 $ 218
Buildings 3,298 4,627
Equipment 58,984 58,336
Leasehold improvements 1,945 1,966
--------- --------
64,449 65,147
Accumulated depreciation 49,994 48,894
-------- --------
Net book value $ 14,455 $ 16,253
======== ========
4. BANK OPERATING LINES
The Company's authorized bank operating lines at June 29, 1996
totaled $20.2 million. At that time, based on margin formulas,
$13.8 million was available to, but not utilized by, the
Company. Cash and cash equivalents held as of that date
represented a further $10.5 million of available cash
resources, and cash and unused credit lines totaled $24.3
million. The authorized lines are secured by certain of the
accounts receivable, inventories and other assets of the
Company and bear interest at the bank s prime rate plus 0.5%
to 1.5%.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
June 29 March 31
1996 1996
-------- --------
Trade accounts payable $ 9,047 $ 7,376
Payroll, commissions and related taxes 2,811 3,873
Accrued restructuring charges 3,373 2,747
Other payables 4,698 6,434
Income and other taxes payable 1,273 1,325
-------- --------
$ 21,202 $ 21,755
======== ========
6. REDUCTION IN STATED CAPITAL
On August 10, 1995, during the second fiscal quarter of 1996,
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.
7. RESTRUCTURING COSTS
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 is
currently less than 700 employees, approximately one-third the
level of five years ago.
Restructuring charges of $3.0 million recorded in the first
quarter of 1997 included a write down following a review of
the net carrying amount of the Company's manufacturing
facilities in which it was determined, in conjunction with the
decision to enter into an agreement with a third party to
provide the Company with a high-volume manufacturing
capability, that the net carrying amount exceeded the
estimated net recoverable amount. Restructuring charges also
included provisions for future lease costs on sales offices
made redundant in connection with changing the Company s sales
distribution model from direct sales to multiple channels of
distribution including: national resellers, operating
telephone companies, Internet service providers, OEMs, system
partners and corporate accounts.
8. 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 period. Fully diluted earnings
per share information has not been presented as potential
conversions are anti-dilutive.
For the first quarter of 1996 adjusted earnings per share is
not materially different from the basic earnings per share
figure. The calculation assumes that the conversion of
debentures, which occurred during the first quarter of 1996,
had occurred at the beginning of the quarter.
9. CASH PROVIDED BY OPERATIONS
Cash provided by (applied to) operations is computed as follows:
13 Weeks Ended
June 29
---------------------
1996 1995
-------- --------
Income (loss) from operations $ (8,987) $ 254
Depreciation and amortization 1,152 1,497
Writedowns not involving an outlay of cash 1,370 -
Interest paid (47) (193)
Interest income and foreign exchange 159 18
Other (105) -
-------- --------
$ (6,458) $ 1,576
======== ========
10. DECREASE IN OPERATING WORKING CAPITAL
The decrease (increase) in operating working capital is computed as follows:
13 Weeks Ended
June 29
---------------------
1996 1995
-------- --------
Accounts receivable $ 6,463 $ 657
Inventories (3,415) 330
Prepaid expenses 311 172
Accounts payable and accrued liabilities (501) (1,302)
Income taxes payable (52) 20
Deferred revenue (142) (37)
Foreign currency equity adjustment 29 (42)
-------- --------
$ 2,693 $ (202)
======== ========
11. CONVERTIBLE DEBENTURES
Shares Issued
Aggregate Principal Amount % Upon Conversion
- ---------------------------------------------------------------------- ---------------
Balance at March 31, 1994 C$ 30,000 $ 21,681 100%
Converted during the year (15,939) (11,533) (53) 6,782,519
Impact of foreign exchange - (97) -
- ----------------------------------------------------------------------
Balance at March 31, 1995 C$ 14,061 $ 10,051 47
Converted during the 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 the first quarter of 1996 debentures with an aggregate
principal amount of $6,197,000 were converted into 3,613,592
common shares. The resulting increase in capital stock of
$5,905,000 was determined as the sum of the principal amount
of the debentures converted ($6,197,000) plus interest accrued
to the date of conversion ($95,000), net of the pro rata share
of the associated unamortized deferred financing costs
($387,000). During the second and third quarters of 1996 all
remaining debentures were converted into 2,369,780 common
shares.
12. 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 (US GAAP).
(a) Under US 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 first quarter of 1996 but would be
shown supplementally.
Conversion of debentures $ (6,197)
Issue of capital stock on conversion of
debentures $ 6,197
(b) Under US 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 period.
(c) Reductions in stated capital and deficit as described
in note 6 do not fall within the definition of a
quasi-reorganization under US GAAP and, accordingly,
under US GAAP, capital stock and retained earnings
(deficit) would not each be reduced by $52,364,000.
(d) US 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 for the first quarter
ended June 29, 1996, 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 12 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 US dollars unless otherwise
indicated. References to years are to fiscal years ending
March 31.
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 past 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.
Statements included in this Quarterly Report on Form 10-Q which
are not historical facts, including statements about the
Company's beliefs and strategies, are forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995 that involve risks and uncertainties and are not
guarantees of future performance. The risks described herein and
in the Company's other filings with the Securities and Exchange
Commission could affect the Company's future results and could
cause such results to differ materially from estimates expressed
in any forward-looking statement included herein.
Results of Operations - First Quarter Ended June 29, 1996
- ---------------------------------------------------------
The Company experienced a significant decline in product revenues
in the first quarter of 1997 attributed to difficulties
experienced in implementing its new distribution model which has
been underway for some period of time. The Company previously
concluded it was necessary to accelerate the implementation of
the new sales distribution infrastructure in the first quarter.
The Company did not anticipate that accelerating the
implementation of the new distribution model in the first quarter
would adversely impact revenues. Service revenues also declined
in the first quarter of 1997, representing a continuation of a
trend in recent quarters. This decline has occurred as a result
of lower revenues on products which the Company has traditionally
derived the majority of its service revenues.
The Company has been working through a period of transition for
the past two years focusing on improving elements such as time-
to-market, product support and quality while managing significant
changes in its product lines. During this transitionary period,
remote access products have increased from 25% of product
revenues in 1994 to close to two-thirds of product revenues in
the most recent fiscal year ended March 31, 1996. Changing the
sales distribution model from direct to indirect has always been
considered a necessary and significant next step in the Company's
recovery plan in order to increase the sales volume from indirect
channels. The Company shifted and acquired resources and skills
supporting an historically direct sales model to one of multiple
channels of distribution including: national resellers, operating
telephone companies, Internet service providers, OEMs, system
partners and corporate accounts. The Company continues to expand
its support to these distribution channels through marketing
programs, increased training, seminars, on-site representatives,
brand recognition and distributor and reseller incentive
programs. While accelerating implementation of the new
distribution model adversely impacted revenues in the first
quarter, the Company believes the anticipated benefits of the
model and related programs supporting the channels will occur in
later quarters.
The following table sets forth items derived from the
quarterly consolidated statements of income as a percentage of
revenues for the quarter ended June 29, 1996 and for each of
the preceding four quarters. The column in the table entitled
"Percentage Change Quarter 1, 1997 vs 1996 " represents the
percentage change, either favourable or (unfavourable), in the
dollar amount of such items for the first quarter of 1997
compared with the first quarter of 1996.
Percentage
Fiscal 1996 Fiscal 1997 Change
------------------------------------------ ----------- Quarter 1
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 1997 vs. 1996
--------- --------- --------- --------- --------- -------------
(Thousands of dollars)
Revenues $28,650 $27,357 $28,171 $32,355 $18,337 (36.0)%
======= ======= ======= ======= ======= =======
(Percentage of revenues)
Revenues:
Product 67.8% 67.3% 68.6% 68.6% 59.5% (43.8)%
Service 32.2 32.7 31.4 31.4 40.5 (19.7)
------- ------- ------- ------- -------
100.0% 100.0% 100.0% 100.0% 100.0% (36.0)
======= ======= ======= ======= =======
Gross Margin:
Product 50.2% 53.4% 52.5% 51.8% 41.1% (54.0)
Service 36.5 34.0 31.1 26.6 28.5 (37.2)
Combined 45.8 47.1 45.8 45.3 36.0 (49.7)
Expenses:
Sales & marketing 28.6 28.0 28.0 25.3 39.8 11.0
Administration & general 7.2 7.8 7.5 5.4 12.4 (10.0)
Research & development 9.1 10.4 10.3 9.9 16.4 (15.8)
Restructuring costs - - - 4.7 16.4
------- ------- ------- ------- -------
Income(loss)from operations 0.9 0.9 - - (49.0)
Interest expense (0.7) (0.5) (0.4) (0.1) (0.3)
Interest income and foreign
exchange - (0.3) 0.7 0.3 0.3
------- ------- ------- ------- -------
Net income (loss) 0.2% 0.1% 0.3% 0.2% (49.0)%
======= ======= ======= ======= =======
Revenues
- --------
The following table sets forth product and service revenues by
geographic segment for the quarter ended June 29, 1996 and for
each of the preceding four quarters. The table also includes
the change in revenues, expressed as a percentage, in the
first quarter of 1997 compared to the corresponding period of
1996.
Percentage
Fiscal 1996 Fiscal 1997 Change
------------------------------------------ ----------- Quarter 1
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 1997 vs. 1996
--------- --------- --------- --------- --------- -------------
(Thousands of dollars)
Product Revenues:
United States $ 5,733 $ 6,243 $ 6,361 $ 6,432 $ 2,669 (53.5)%
Canada 3,438 3,642 3,474 4,479 1,408 (59.0)
United Kingdom 4,905 3,783 4,361 5,491 2,676 (45.4)
Holland/France 2,853 2,272 3,428 3,791 2,516 (11.8)
Other 2,485 2,461 1,702 3,742 1,648 (33.7)
------- ------- ------- ------- -------
$19,414 $18,401 $19,326 $23,935 $10,917 (43.8)%
======= ======= ======= ======= =======
Service Revenues:
United States $ 2,159 $ 2,078 $ 1,962 $ 1,790 $ 1,526 (29.3)%
Canada 1,747 1,598 1,690 1,607 1,316 (24.7)
United Kingdom 3,502 3,445 3,074 3,083 2,810 (19.8)
Holland/France 1,828 1,835 2,119 1,940 1,768 (3.3)
------- ------- ------- ------- -------
$ 9,236 $ 8,956 $ 8,845 $ 8,420 $ 7,420 (19.7)%
======= ======= ======= ======= =======
The following table sets forth, for the thirteen weeks ended June
29, 1996 and for each of the two preceding full fiscal years,
product revenues by geographic segment and product group
expressed as a percentage of total product revenues. These
amounts have been calculated assuming constant rates of exchange
in the translation of foreign currency amounts to US dollars.
Remote access products primarily include internetworking products
sold under the names Gandalf Xpressway (TM), XpressStack (TM) and
XpressConnnect (TM). 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 ending March 31 Access Backbone Connectivity Other Total
- -------------------- ------- --------- ------------- ------- -------
1997: (Quarter 1)
United States 19% 1% 5% -% 25%
Canada 8 - 5 - 13
United Kingdom 13 2 8 2 25
Holland/France 15 1 4 2 22
Other 8 5 2 - 15
--- --- --- --- ---
63% 9% 24% 4% 100%
=== === === === ===
1996:
United States 25% 1% 5% 1% 32%
Canada 12 1 4 1 18
United Kingdom 11 2 7 3 23
Holland/France 9 1 2 2 14
Other 8 3 2 - 13
--- --- --- --- ---
65% 8% 20% 7% 100%
=== === === === ===
1995:
United States 15% 1% 8% 4% 28%
Canada 9 2 7 1 19
United Kingdom 12 3 9 4 28
Holland/France 6 1 3 1 11
Other 7 3 2 2 14
--- --- --- --- ---
49% 10% 29% 12% 100%
=== === === === ===
Gross Margin
- ------------
The gross margin on product revenues was 41% in the first quarter
of 1997 compared to 50% in the first quarter a year ago. The
gross margin on product revenues in the first quarter of 1997 was
adversely impacted by lower sales volumes during the quarter,
resulting in fixed manufacturing costs representing a larger
percentage of product revenues.
The gross margin on service revenues (service revenues less
service expenses expressed as a percentage of service revenues)
was 28.5% during the first quarter of 1997 compared to 36.5% in
the same period a year ago. The decrease in service margin has
occurred as a result of the continuing decline in service
revenues which has more than offset the decrease in service
expenses. Service expenses declined 9.6% in the first quarter of
1997 compared with the first quarter of 1996, as result of the
outsourcing to partners for the delivery of field service
maintenance, which has occurred since the end of the third
quarter of 1996.
Operating Expenses
- ------------------
Expenses for sales and marketing, administration and general, and
research and development totaled $12.6 million in the first
quarter of 1997, compared to $12.9 million in the first quarter
of 1996. In aggregate, these expenses declined primarily due to
reduced variable sales expenses in the first quarter of 1997
compared to the first quarter a year ago, on lower product
revenues. The reduction in operating expenses due to lower sales
expenses was partially offset by higher spending on research and
development.
Restructuring charges of $3.0 million recorded in the first
quarter of 1997 included a write down following a review of
the net carrying amount of the Company's manufacturing
facilities in which it was determined, in conjunction with the
decision to enter into an agreement with a third party to
provide the Company with a high-volume manufacturing
capability, that the net carrying amount exceeded the
estimated net recoverable amount. Restructuring charges also
included provisions for future lease costs on sales offices
made redundant in connection with changing the Company's sales
distribution model from direct sales to multiple channels of
distribution including: national resellers, operating
telephone companies, Internet service providers, OEMs, system
partners and corporate accounts.
Since 1991 the Company has received funding of approximately $1.4
million and $2.6 million respectively under two projects approved
through the Canadian federal government's Microelectronics and
Systems Development Program (MSDP). While the repayment terms of
the two projects differ slightly, both are tied to future sales,
with the liability to repay the funding arising from product
revenues earned following both the commercialization of the
resulting technology and the completion of the MSDP project. The
amount that is potentially repayable is calculated without
interest as a royalty on revenues earned in the ten years
following the project completion date and is limited to the
amount of 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 June 29, 1996,
$900,000 had been accrued related to these projects.
Operating Loss
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The Company reported a loss from operations, inclusive of
restructuring charges, of $9.0 million for the first quarter of
1997 on revenues of $18.3 million. The loss from operations,
before restructuring charges was $6.0 million. For the first
quarter of 1996 the income from operations was $254,000 on
revenues of $28.7 million.
Net Loss
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The net loss for the first quarter of 1997 was $9.0 million or
$0.21 per share. The net loss before restructuring charges was
$6.0 million or $0.14 per share. Net income for the first
quarter of 1996 was $66,000, or break-even on a per share basis.
Liquidity and Capital Resources
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The Company's current ratio was 1.9:1 at June 29, 1996 compared
to 2.0:1 at March 31, 1996. Inventories were $16.9 million at
June 29, 1996 versus $13.5 million at the end of the previous
quarter. Lower than anticipated product revenues during the
first quarter of fiscal 1997 resulted in the increase in
inventory levels and the Company has adjusted planned production
levels accordingly for the second quarter of fiscal 1997.
Accounts receivable were $22.2 million at June 29, 1996 compared
to $28.7 million at March 31, 1996. The decline in accounts
receivable occurred as a result of lower product revenues in the
first quarter of fiscal 1997 compared with the fourth quarter of
fiscal 1996.
The Company recorded negative cash flow of $3.1 million during
the first quarter of 1997. At June 29, 1996, the net cash
position (cash and cash equivalents net of bank operating lines)
was $10.5 million compared to $13.6 million at March 31, 1996.
At the end of the first quarter of 1996, the net cash position
was $7.1 million. The decrease in cash during the first quarter
of 1997 occurred as a result of negative cash flow from operating
activities of $3.8 million arising from the net loss for the
period. The Company anticipates that the net loss reported for
the first quarter of 1997 will also impact cash flow in the
second quarter, primarily due to the lower level of accounts
receivable at June 29, 1996.
At June 29, 1996 the Company's authorized bank operating lines
totaled $20.2 million under two committed credit facilities
provided by a Canadian chartered bank which bear interest at the
bank's prime rate plus 0.5% to 1.5%. The authorized amount
includes $15.9 million under the Company's primary facility which
was recently renewed until June 30, 1997. Any borrowings under
the credit agreements are secured by certain of the accounts
receivable, inventories and other assets of the Company. The
amount available for borrowing at any time is based on margin
formulas relating to levels of accounts receivable, inventories
and other bank covenants. The Company obtained a waiver from the
bank in July 1996 of a technical default under one of the credit
agreements at June 29, 1996 which occurred as a result of the
reported net loss for the first quarter of 1997 exceeding the
maximum permitted quarterly net loss amount under the agreement.
The Company is in full compliance with all other terms of its
bank credit agreements.
Based on the margin formulas, $13.8 million was available to, but
not utilized by, the Company at June 29, 1996. Cash and cash
equivalents held as of that date represented a further $10.5
million of cash resources available to the Company. Cash and
unused credit lines totaled $24.3 million at June 29, 1996.
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.
II - OTHER INFORMATION
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Item 6(a) - Exhibits
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10.11 Credit Agreement dated as of June 11, 1996 between
the Royal Bank of Canada and the Company.
Item 6(b) - Report on Form 8-K
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There were no reports on Form 8-K filed for the quarter ended
June 29, 1996.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
GANDALF TECHNOLOGIES INC.
August 1, 1996 s/T.A. VASSILIADES
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Date Thomas A. Vassiliades
Chairman, President
and Chief Executive Officer
August 1, 1996 s/W.R. MACDONALD
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Date Walter R. MacDonald
Vice President, Finance
and Chief Financial Officer