1
US SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended January 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-17740
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
(Exact name of Registrant as specified in its charter)
Vancouver, British Columbia, Canada
(Jurisdiction of incorporation or organization)
101, 3750 North Fraser Way, Burnaby, British Columbia, Canada V5J 5E9
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which
None registered
- - - ----------------------------------- -----------------------------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Stock
- - - --------------------------------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
- - - --------------------------------------------------------------------------------
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report.
18,558,857
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirement for the past 90 days.
[X] Yes [ ] No
Indicate by check mark which financial statement item the Registrant has
elected to follow.
[ ] Item 17 [x] Item 18
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
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The dollar amounts presented in this annual report are in Canadian
currency unless otherwise noted (CAN$1 = US$0.7325 on June 30, 1996), and are
presented in accordance with accounting principles generally accepted in Canada.
Historic rates of exchange appear in Part I, "Item 8. Selected Financial Data."
To the Company's knowledge, there is no material difference between Canadian and
US generally accepted accounting principles ("GAAP") which would bear upon its
financial statements and, more particularly, income applicable to equity share
and retained earnings, except as disclosed in Note 21 of Notes to Consolidated
Financial Statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY
Advanced Gravis Computer Technology Ltd. ("Gravis" or the "Company") was
incorporated under the laws of the Province of British Columbia on March 22,
1982 as Gravis Computer Peripherals Inc. The Company began trading on the
Vancouver Stock Exchange (the "VSE") on December 3, 1984 after completing its
initial public offering. The Company currently trades on the Toronto Stock
Exchange (the "TSE") under the symbol "AED," and on the National Association of
Securities Dealers OTC Bulletin Board under the symbol "GRVSF."
Production of the Company's first product, the analog joystick, began on
February 1, 1985. On December 10, 1985 the Company effected a two-for-one
reverse stock split in anticipation of a rights offering which did not
materialize. Following the change in capitalization, the Company changed its
name to International Gravis Computer Technology Inc. ("International"). In
March 1986, the switch joystick and the IBM PC expansion game card were
introduced.
On April 10, 1987 International and Abaton Resources Ltd. ("Abaton")
amalgamated (merged) pursuant to the laws of the Province of British Columbia.
Abaton was incorporated pursuant to the laws of the Province of British Columbia
on February 7, 1980. After the consummation of the amalgamation, the Company
changed its name to Advanced Gravis Computer Technology Ltd. The amalgamation
enabled the Company to take advantage of certain financial resources available
to Abaton and added several resource properties to the Company's assets, namely,
the Sol mineral claim located in the Nicola Mining Division of the Province of
British Columbia and, through the Company's wholly owned subsidiary, Abaton
Resources Inc. ("ARI"), an interest in one oil and gas well in Woods County,
Oklahoma. Revenues attributable to ARI represented less than .1% of the
Company's revenues in fiscal 1994 and fiscal 1993. The Company does not
anticipate that ARI will contribute significantly to the Company in the future
and there are no plans to develop further the ARI properties or the Sol mineral
claim. The Company wrote off the residual book value of the resource properties
in January 1992. In fiscal 1994, ARI sold all of its interest in the oil and gas
well and is currently inactive.
Effective October 18, 1989, the Company agreed to acquire all the
outstanding shares of Aristotle Industries Inc. ("Aristotle"), a Vancouver-based
manufacturer and marketer of completely portable compact external hard disk
drives, in exchange for 100,000 shares of the Company's common stock. Aristotle
began business in 1987 and, after two years of development, commenced commercial
production of its external hard disk drives in January 1989. Subsequent to the
acquisition, Aristotle underwent a reorganization where all its assets were
transferred to the Company and held as part of its Hardpac division. On January
31, 1992 all of these assets were sold for $175,000.
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In November 1991, the PC GamePad(TM) was introduced. The PC GamePad is a
combination control pad and joystick for IBM and IBM-compatible personal
computers.
The Company introduced UltraSound(TM) in October 1992. UltraSound is a
16-bit, 32 voice card which delivers digital quality sound for IBM or
IBM-compatible personal computers. In May 1994, the Company began shipping the
UltraSound Max, an advanced UltraSound product featuring 16-bit recording and
built-in CD-ROM interfaces. In January 1995, the Company introduced the low cost
UltraSound ACE wavetable upgrade sound card for owners of earlier FM-based sound
boards.
The new Gravis flight and weapons control system, The Phoenix Flight,
for PC games and simulators was introduced in September 1994. In May 1995, the
Gravis Firebird programmable joystick was introduced. In December 1995, the
Company introduced the GrIP (Gravis Interface Protocol) game system, the
UltraSound Plug & Play and UltraSound Plug & Play Pro sound cards, the
Thunderbird joystick and the Macintosh version of Firebird joystick.
Gravis has three wholly owned subsidiaries: Advanced Gravis Computer
Technology (US), Inc., a Wyoming corporation, which is not yet active; Abaton
Resources Inc., an inactive Washington corporation; and Gravis Europe B.V., a
Dutch subsidiary company.
The principal business address of the Company is 101, 3750 North Fraser
Way, Burnaby, British Columbia V5J 5E9. Its registered office is at 2800 - 666
Burrard Street, Vancouver, British Columbia.
BUSINESS OF THE COMPANY
GENERAL
The Company designs, develops, manufactures and markets high-quality
computer input devices and accessories for most personal computers ("PCs"). The
Company's primary product, an analog input device, commonly referred to as a
"joystick," is produced for use with IBM PC and compatible computers. The
Phoenix and Firebird flight and weapons control systems are programmable
joysticks. Other products include the PC GamePad, a combination control pad and
joystick for IBM, IBM-compatible and Macintosh computers, and the
MouseStick(TM), an industry "standard" joystick for the Macintosh and the GrIP
game system. In addition to its line of joysticks and game system, the Company
manufactures and markets an expansion game card, for use with the IBM PC, which
permits the computers to interface with joysticks. The Company also manufactures
and markets the UltraSound sound card and the ACE wavetable upgrade sound card.
PRODUCTS
The following table sets forth the approximate dollar amount and
percentage of total sales attributable to the Company's primary products for the
last three fiscal years:
1996 1995 1994
--------------------- -------------------- -------------------
Core Joystick 33,759,499 79% 33,371,665 77% $17,793,426 75%
Products
Sound Card Products 8,811,442 21 10,200,614 23 5,882,070 25
----------- --- ---------- --- ----------- ---
42,570,941 100% 43,572,279 100% 23,675,496 100%
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JOYSTICKS
Analog Joysticks. The Company's analog joystick enables a computer to
define any point on a two-dimensional grid by utilizing two potentiometers
(variable electrical resistors) to control the horizontal and vertical
direction. The Gravis analog joystick has numerous features that distinguish it
from the competition, including a patented eight-position handle-centering
tension control, three independent and individually selectable microswitch fire
buttons, and a full-size foam-padded pistol grip handle with fire button. The
Company believes that its analog joystick is accepted as the state-of-the-art
joystick by most in the industry.
PC GamePad(TM). The PC GamePad is a combination control pad and joystick
for IBM, IBM-compatible and Macintosh personal computers. The Gravis PC
GamePad's "control pad" design is familiar to millions of Nintendo(R) and Sega
players. By affixing its detachable handle the PC GamePad can be converted to a
joystick for desktop use. Its special characteristics are ideally suited to
arcade and nonproportional or directional control style games. This game-playing
device is easy to install, compatible with current PC game cards and software,
and designed for left- or right-handed use.
MouseStick II. The MouseStick II is the standard for Macintosh
joysticks. It is a 5-button, high resolution joystick that is compatible with
all desktop Macintosh models except Mac 512/Plus. It is ideal for flight
simulation as well as arcade games.
Programmable Joysticks. The newest family of joysticks is the
Thunderbird and Firebird flight and weapons control systems. The Thunderbird has
four quick response buttons. The Firebird features 17 programmable buttons and
is available for IBM, IBM-compatible and Macintosh personal computers.
SOUND CARDS
Gravis UltraSound. The Gravis UltraSound(TM) is a 32-voice, 16-bit sound
card for IBM PCs and compatibles. Using wavetable synthesis, UltraSound(TM)
delivers 16-bit, 44.1 kHz true CD quality stereo sound unmatched by all ordinary
and 16-bit FM-based sound cards. The UltraSound Max is an advanced ultrasound
product with built in CD-ROM interfaces. The UltraSound ACE is a wavetable
upgrade sound card for owners of FM-based sound cards. With the introduction of
the Gravis UltraSound Plug & Play and Plug & Play Pro sound cards, the earlier
models of the UltraSound and the MAX have been discontinued. The Company's sound
card product relies on wavetable synthesis technology.
Wavetable technology uses a library of sounds to create audio by
"looking up" a recording or sample of the original sound in the instrument
library and playing it back in real time. FM synthesis technology generates an
approximate sound within the chip itself. Generally, wavetable technology
produces better sound and music quality than FM-generated sounds but wavetable
technology has historically cost more to develop. Wavetable products are better
suited for music oriented games and music applications.
In addition to game playing and multimedia applications, the wavetable
technology utilized by the Company is also usable by the home
music/entertainment market. Gravis UltraSound allows connection to standard MIDI
(musical instrument digital interface) musical instruments. It can also be used
as a quality general MIDI sound module. Other significant applications include
entertainment multimedia such as the new music CD-ROMs, offering interactively
with the artists and their music.
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UltraSound PC. In February 1994, the Company acquired the technology
related to the UltraSound PC sound card from Forte Technologies, Inc. ("Forte
Technologies"). This technology had previously been utilized through a licensing
agreement with Forte Technologies. The Company also signed a ten-year
development and royalty agreement to exclusively license major portions of its
UltraSound PC sound card technology to Advanced Micro Devices, Inc. ("AMD"). The
Company and AMD intend to introduce further advancements and integration of the
UltraSound sound card in the future. The first new chip, Interwave, was
announced by AMD in April 1995, based on the joint development agreement.
Production quantity shipments of this new AMD chip began in the fall of 1995.
Gravis UltraSound Plug & Play and Plug & Play Pro. In December 1995, the
Company launched the Gravis UltraSound Plug & Play and Plug & Play Pro sound
cards, based on the Interwave audio chip from AMD. Designed to take advantage of
the benefits of Windows 95(R), these cards are currently being marketed as "the
best sound cards for the Internet" because of their full-duplex capabilities
that allow simultaneous two-way conversation via Internet telephone software.
This benefit allows users to capitalize on the growing phenomenon of "toll-free"
long distance calling via the Internet. As a result, the new UltraSound Plug &
Play cards are recommended for use with such products as Internet Phone(TM) as
the only widely available full duplex sound cards. Product offerings from the
sound card market leader, Creative Labs, Inc. to date have not supported full
duplex operation. Using this springboard, the Company has bundled an Internet
access kit, web browser, demo version of Internet Phone(TM), and other Internet
software with the product to provide to the consumer a full Internet access
solution in addition to an attractively priced, high-quality wavetable sound
card.
EXPANSION GAME CARDS
The IBM PC and most IBM compatibles generally require accessory or
expansion cards to interface with certain accessories. Common expansion cards
are video and printer cards, which allow the computer to interface with a
computer monitor and printer. The Company's expansion game cards allow computers
to interface with joysticks. Every IBM PC requires a game card or equivalent
multifunction card for this purpose. Fully adjustable dual joystick game cards
called Eliminator(TM) were introduced in the fall of 1989. As most sound cards
today also include a game card, the market for stand-alone game cards is
decreasing rapidly.
GAME SYSTEMS
GrIP. The Gravis GrIP Game System is the Company's newest product,
capitalizing on its GrIP (Gravis Interface Protocol) technology. This system
brings digital arcade speed and control to PC games. The GrIP MultiPort(TM)
four-player digital game control system connects to any PC game port. The
GrIP-Pad(TM) controllers' eight independent buttons mean PC game players can
play arcade games in their original format, not stripped-down versions for the
PC, and the GrIP-Pads are programmable for keyboard commands in Windows 95(R).
These features have been previously unavailable on the PC, so both PC game
developers and gamer players have responded positively to the Company's
development and advertising efforts. A rapidly expanding list of game titles
from developers such as Electronic Arts support the GrIP technology, and Gravis'
retail channel partners are adding the product to their inventories.
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RETAIL PRICE RANGES OF PRODUCTS
The suggested retail prices in US dollars for the Company's products are
as follows:
Analog Joysticks $14.95 to $49.95
Programmable Joysticks $69.95 to $99.95
PC GamePad $19.95
MouseStick II $49.95
Expansion Game Cards $24.95
Sound Cards $119.95 to $199.95
GrIP $119.95
BACKLOG
The Company does not carry a large inventory of finished goods. To
maximize efficiency and minimize inventory carrying costs, production is tied as
closely as possible to actual orders. For this reason, from time to time for
short periods during the Christmas season, the Company has experienced order
backlogs of up to $2.5 million in past years. For the last three fiscal years,
the Company estimates its backlog levels as at January 31 were as follows:
Fiscal 1996: $ 1,470,000
Fiscal 1995: $ 616,000
Fiscal 1994: $ 380,000
MARKETING AND SALES
The Company distributes its products in the United States, Canada and
Europe through direct sales staff, regional distributors and manufacturer
representatives. In North America, the Company's products are sold primarily to
distributors, computer retail chains, computer resellers and value-added
resellers. In some market areas the Company uses manufacturer representatives to
sell its products. The Company has entered into distribution agreements with
eight national distributors and most major computer retail chains, mass
merchants and clubs in the United States. In total these agreements have
increased the number of storefronts carrying Gravis products from 1,500 in 1989
to over 11,000 worldwide today.
Historically, approximately 70% of the Company's total sales have been
to US customers, with the balance to Canadian customers. Effective April 1994,
the Company established a sales and technical support office in Almere, The
Netherlands. The Company also has customers in Australia and the Far East. As a
result, distribution in fiscal 1996 was as follows:
United States 55%
Canada 8%
Europe 30%
Pacific Rim/other 7%
Advertising expenditures decreased by $18,258 to $3,580,551 in fiscal
1996 compared to fiscal 1995. The Company advertises through a combination of
media advertising, press releases, product test reports, in-store
point-of-purchase displays and posters.
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The Company warrants its products against defects in materials and
workmanship from one to three years from the date of acquisition by the
end-user. To date, warranty expense has not been significant.
MANUFACTURING
Final assembly and testing of the Company's joysticks, programmable
joysticks, Eliminator game cards, and sound cards are performed at the Company's
manufacturing facility in Burnaby, British Columbia. Assembly of a portion of
the Company's sound cards is performed by contracted manufacturers in Taiwan.
The Company also purchases finished joystick products and GamePads from a
manufacturer in the People's Republic of China. The major components used in the
Company's joysticks are cables, micro switches, potentiometers, plastic
moldings, industry standard chips, and certain proprietary items manufactured by
subcontractors. In addition to the wavetable sound chips, the Company's sound
cards also use industry standard electronic components, including resistors,
capacitors, printed circuit boards and memory chips. The Company has multiple
sources for many of its materials and components, including a significant
portion from countries in the Far East such as Hong Kong, Taiwan, Malaysia,
Japan and the People's Republic of China. In the case of the Company's input
devices, the Company generally has had only one set of tooling molds and in the
case of its joystick products the majority of such tooling has been relocated to
the People's Republic of China. Delivery of components from this source
commenced in September 1993. The Company maintains additional inventory to
reflect longer lead times for delivery of parts from the People's Republic of
China.
The Company is dependent on sole- or limited-source suppliers for
certain key components used in its products, including certain components
provided by suppliers that compete with or provide products to competitors of
the Company. The Company has only one set of tooling molds for most of its input
devices, and, in the case of the Company's joysticks, many of the molds are
located in the People's Republic of China. Lack of access to its tooling would
materially adversely affect on at least an interim basis the Company's ability
to manufacture and deliver its products. Because of lead times involved, certain
suppliers' inability to provide components has resulted in temporary reductions
in the Company's ability to deliver its products and could do so again in the
future upon receipt of unexpected large customer orders. The Company believes,
however, that it derives reasonable protection against this possibility from its
practice of dealing and maintaining relationships with well established
suppliers, and submitting orders well in advance of delivery dates.
RESEARCH AND DEVELOPMENT
The computer and sound card industry is subject to rapid technological
advances, and the Company's ability to compete and operate successfully depends
upon, among other things, its ability to anticipate and react to such advances.
Faced with this environment, the Company is continually engaged in developing
enhancements to its computer input devices and sound cards in an effort to offer
increased performance and reliability.
As of January 31, 1996, the Company had 23 hardware and software
engineers employed full time in research and development. Research, development
and engineering expenses were $1,528,075 for fiscal 1996, $1,361,072 for fiscal
1995 and $726,731 for fiscal 1994, and are expected to be $1.4 million for
fiscal 1997.
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COMPETITION
The markets for the Company's products are divided into two general
areas - the joystick and game input market, and the sound card market which
deals primarily with audio. Both markets are related to entertainment using PCs
and are discussed generally below.
Input Devices. The joystick market is related to the computer games
market where the demand for joysticks is driven by the success of games that use
joysticks. The Company experiences intense competition from a number of
competitors. The leading competitors of the Company in the PC joystick market
are Suncom Technologies, Bondwell Global Ltd., Microspeed Incorporated, CH
Products, ThrustMaster, Inc., Logitech International ("Logitech") and Microsoft
Corporation within the last 12 months, with products ranging in retail price
from US$15 to $199. Competition is fragmented, however, and no manufacturer
currently dominates the PC joystick market. In the Apple Macintosh market,
however, the Company currently has a significant market share of the high-end
entertainment input device market with both its MouseStick II and GamePad.
Products based on the Company's GrIP technology do not experience direct
feature-for-feature competition, although there are products which can provide
multi-player or multi-button controller support. None of these products, in the
Company's view, affords the functionality or ease of use of the GrIP system.
The Company believes that the type and number of competitors will
increase as the various market segments continue to grow. Typically, price,
product features and quality have been the primary competitive elements in the
sale of computer input devices.
Sound Cards. The sound card market is dominated by Creative Technology,
Ltd. ("Creative Technology") and to a lesser extent by Aztech Systems. There are
other major companies such as Microsoft Corporation and Logitech that have in
the past developed and sold sound card audio products which compete with the
Company's products. Most of the Company's competition has in the past relied on
products based on FM technologyowned by Yamaha Corporation of America. Well over
80% of the installed base of sound cards is based on this older technology. The
Company's sound card product relies on the wavetable synthesis technology.
Virtually all of the Company's competitors are now offering versions of their
sound cards incorporating wavetable technology.
Competition in the wavetable market is increasing. Yamaha Corporation of
America is now shipping sound chips (the OPL 4) that combine FM synthesis and
wavetable synthesis. Such chips offer backward FM compatibility plus the
improved wavetable sound. Additional wavetable competitors today are Creative
Technology, Roland Corporation US, Turtle Beach Systems, and Ensoniq Corp.
Virtually all the Company's major competitors are now selling wavetable based
versions of their sound cards.
In addition, new technologies are evolving that may challenge both the
FM and wavetable based sound cards. Digital Signal Processors (DSP) from
companies such as AT&T, Analog Devices, Texas Instruments and Sierra
Semi-Conductor can be used to produce music and sound synthesis. The DSP chips
can also be used for other functions including use as fax and data modems. The
Company believes that custom sound specific chips will offer better sound and
performance and be more price competitive than general purpose DSP solutions
that are dependent on significant computing power to generate sound.
The principal competitive factors in the markets for the Company's
products include the ability to integrate diverse technologies, the success and
timing of new product developments by the Company and its competitors, brand
name recognition, breadth and compatibility of product offerings, product
performance
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and price, product quality, breadth of distribution and customer support. The
Company believes it competes favorably on most of the foregoing bases; however,
Creative Technology and Aztec Systems, which entered the sound card market prior
to the Company, and many of the Company's other and potential competitors,
including Microsoft and Logitech, have significantly greater resources and brand
name recognition in the sound card market.
The Company also faces substantial indirect competition from a number of
companies, including personal computer, semi-conductor and software companies
that offer multimedia products or multimedia computing alternatives. The Company
faces indirect competition from electronic games systems connected to
televisions and from the proprietary multimedia products incorporated by major
computer manufacturers as integrated components of their products. The Company
expects that existing and new competitors will continue to introduce multimedia
products which are directly or indirectly competitive with those of the Company.
Many of the Company's current and potential competitors have substantially
greater financial, technical, marketing and sales resources than the Company and
there can be no assurance that the Company will be able to compete successfully
in the future.
PROPRIETARY RIGHTS
The Company relies substantially on unpatented proprietary technology.
The Company owns one US patent relating to the basic technology used in the
Company's analog joysticks and MouseStick, another relating to the basic
technology of the Company's switchstick and another patent in Canada and the
United States relating to the optical encoder for the MouseStick. The Company
has filed patent applications in Canada and the United States covering
technology relating to its PC GamePads, its Phoenix joystick, its new GrIP
technology, and its UltraSound technology.
There can be no assurance that others may not acquire or independently
develop similar technology. There can be no assurance that the patents applied
for will be issued. While the Company believes that patent rights have value,
rapidly changing technology in the computer input device industry makes the
Company's future success dependent primarily on continuing innovation, the
skills of its employees and the timely introduction of product enhancements,
rather than on patent protection.
Certain of the technology underlying the Company's UltraSound products
was licensed on an exclusive basis from Forte Technologies, Inc. ("Forte
Technologies"). In February 1994 the Company acquired outright the technology
related to the Ultrasound PC Sound Card from Forte Technologies.
The Company entered into a license agreement on January 1, 1993 with
Focal Point 3D Audio ("Focal Point") to produce and sell a software product
called Focal Point 3D Audio for use with UltraSound. The Company terminated the
agreement effective December 31, 1994. Focal Point commenced suit against Gravis
in relation to this agreement, which was voluntarily discontinued and moved to
binding arbitration. The arbitrator denied all claims of Focal Point except one
for which it was awarded Can$622,349. Focal Point subsequently refiled a US$20
million claim against the Company which was settled for an additional
Can$591,031 (Can$400,000 of which was paid to Focal Point in common stock of the
Company).
The Company has software manufacturing and distribution licenses for
certain application software that it bundles with its analog joystick, GamePad
and GrIP products. These licenses vary in time and quantity commitments, but the
Company has no significant outstanding software license obligations at the
present.
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There can be no assurance that the Company's present and proposed
products do not and will not infringe patents held by others. The Company
received notice in late 1994 of a potential infringement of a U.S. patent by one
of its products. The Company has responded stating that in its view, the alleged
claim is without substance and that the Company's products do not infringe. The
ultimate outcome is undeterminable at this date, but there has been no further
action taken since the Company responded to the initial notice. The Company is
not aware that the manufacture and sale of its products require licenses from
others except for one license which relates to the Company's Analog Joystick
sales in the United States, and for licenses for bundled software referred to
above. It may be necessary or desirable in the future, however, for the Company
to obtain additional licenses relating to one or more of its products. There can
be no assurance that such licenses could be obtained on conditions which would
not have a materially adverse financial effect on the Company.
RISK FACTORS
In addition to the other information in this annual report, the
following risk factors should be considered carefully in evaluating the Company
and its business.
Operating Losses; Accountants Report Substantial Doubt About the
Company's Ability to Continue as a Going Concern. The Company's independent
auditors include an explanatory paragraph in their report dated May 3, 1996,
indicating that certain conditions raise substantial doubt about the Company's
ability to continue as a going concern. The report states that the Company has
suffered significant losses from operations and may require additional debt or
equity financing. At January 31, 1996, there was an accumulated deficit of
$13,868,645 and a working capital deficiency of $1,103,243. The Company's line
of credit which expired on May 15, 1996, has been extended to August 2, 1996.
While the Company's bank has given conditional assurance that the facility may
be extended to November 30, 1996 if additional investment funds of $2,000,000
are secured, there can be no assurance that an extension will be granted. The
Company has undertaken plans with respect to developing sources of capital to
remove the threat to its continuation in business as a going concern. There can
be no assurance that the Company's strategies to develop sources of capital will
be successful. See "Auditors Report" and Note 1 of "Notes to Consolidated
Financial Statements."
Competition. The Company faces significant competition in the market for
personal computer entertainment devices. In particular, the market for the
growing multimedia segment is intensely competitive. The Company faces direct
competition from companies which have significantly greater marketing and
financial resources than the Company and also faces substantial indirect
competition from a number of companies, including personal computer,
semiconductor and software companies that presently offer, or are actively
engaged in, research and development for multimedia products or multimedia
computing alternatives. The Company expects competition in this area to
intensify and there is no assurance that the Company will be able to compete
successfully in the future with current and potential competitors that have
substantially greater financial, technical, marketing and sales resources than
the Company. Also, because of standardized hardware and software technologies it
is possible for new emerging companies to develop and manufacture competitive
products.
Limited Source of Supply. The Company is dependent on sole or limited
source suppliers for certain key components used in its products, including
certain components provided by suppliers that compete with or provide products
to competitors of the Company. The Company has only one set of tooling molds for
most of its input devices and in the case of the Company's joysticks many of the
molds are located in the People's Republic of China. Lack of access to its
tooling would materially adversely affect on at least an interim basis the
Company's ability to manufacture and deliver its products. The
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Company's reliance on these suppliers, as well as industry supply conditions in
general, involve several risks, including the possibility of a shortage of
components, increases in component costs and reduced control over delivery
schedules, which could adversely affect the Company. Some of the Company's
foreign suppliers are subject to risks of changes in government policies, risk
of imposition of tariffs and other factors beyond the Company's control that
could affect the supply and cost of materials and components.
Fluctuations in Quarterly Results. The Company's quarterly operating
results depend upon the volume and timing of orders received during each
quarter. Consistent with the PC consumer software and add-on accessory industry,
demand for the Company's products has been and is expected to be stronger in the
second half of the calendar (fiscal) year and weaker in the first half of the
calendar year due to seasonal customer buying patterns. Sales of the Company's
products depend upon such factors as new product introductions by the Company
and its competitors, the development of computer games, consumer buying patterns
and overall trends in the economy and purchasing patterns of distributors and
retailers. In addition, retailers and distributors generally order on an
as-needed basis and accordingly, back-logs of orders can at times result.
Product is tied as closely as possible to actual orders and for this reason the
Company has in the past experienced order back-logs which have resulted in lost
sales.
Management of Growth. The Company in the past has significantly expanded
its operations prior to the previous fiscal year. Revenues were down slightly as
compared to fiscal 1995. The Company may not without significant investments be
able to regain its growth and expansion, and may experience further declines in
its revenues. The inability to regain growth will have an adverse effect on the
development of the Company and its operating results.
Foreign Currency Fluctuations. The Company transacts business
predominantly in U.S. dollars and most of its revenues are collected in U.S.
dollars. A substantial portion of the Company's costs are denominated in
Canadian dollars. There are currency exchange risks on the conversion of the
Company's US dollar balances and currency translation gains and losses on the
recording of its U.S. dollar sales in Canadian dollars.
EMPLOYEES
As of January 31, 1996, the Company employed 190 persons, of whom 119
were in manufacturing, 23 in research and development, 24 in marketing and sales
and 24 in general and administrative.
On August 1, 1995, the Company signed a collective bargaining agreement
with the Teamsters Local Union 213 which represents the Company's manufacturing
employees. The agreement expires on June 16, 1997. The Company has never
experienced a work stoppage and it believes its employee relations are
excellent.
ITEM 2. PROPERTIES
The executive offices and production facilities of the Company are
located at Suite 101, 3750 North Fraser Way, Burnaby, British Columbia, and
consist of approximately 44,678 square feet. These offices are leased pursuant
to a lease expiring March 31, 1998, at a rental rate of $20,850, plus
maintenance and taxes, per month. Additional space of 9,481 square feet across
from this location was leased in 1995 at $6,720 per month and the lease expires
March 31, 1998. The Company also has a US distribution and service facility in
Bellingham, Washington, consisting of approximately 10,500 square feet
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under a lease expiring on August 14, 1996 at a rental rate of US$3,990 per month
plus maintenance and taxes. The Company is under lease negotiations regarding
its relocation to a larger facility in Bellingham after the current lease
expires. The Company believes the new lease will be at approximately the same
rent as the current lease. The Company maintains an inventory of products in a
bonded warehouse in Antwerp, Belgium for distribution in Europe. The Company's
European sales office is in Almere, The Netherlands. The lease on this 2,500
square foot office expires on May 15, 1997 and is being leased at a rental rate
of 2,625 NLG (approximately US$1,690) per month.
ITEM 3. LEGAL PROCEEDINGS
The Company entered into a license agreement on January 1, 1993 with
Focal Point, which the Company terminated effective December 31, 1994. Focal
Point commenced suit against the Company for copyright and trademark
infringement claiming US$20 million in damages. The claim was voluntarily
discontinued and moved to binding arbitration wherein the arbitor rejected all
but one claim for which Focal Point was awarded Can$622,349. Focal Point
subsequently refiled the US$20 million suit which was settled out of court for
an additional Can$591,031, Can$400,000 of which was paid to Focal Point in cash
with the balance paid in common stock of the Company. The Company received
notice in late 1994 of a potential infringement of a U.S. patent by one of its
products. The Company responded to the claim stating that in its view, the
alleged claim is without substance and that the Company's products do not
infringe. The ultimate outcome is undeterminable at this date, but there has
been no further action taken since the Company responded to the initial notice.
ITEM 4. CONTROL OF REGISTRANT
(a) To the knowledge of the Company, it is not directly or indirectly
owned or controlled by another corporation or any government.
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(b) The following table sets forth as of January 31, 1996 those persons
known to the Company to be owners of more than 10% of the Company's common stock
and the ownership of the Company's common stock by all directors and officers as
a group:
NUMBER OF
BENEFICIALLY PERCENTAGE
IDENTITY OF PERSON OR GROUP OWNED SHARES OF CLASS
- - - --------------------------- ------------ ----------
Sagit Investment Management Ltd. 3,251,000 16.7%
Suite 900 - 789 W. Pender St.
Vancouver, B.C.
Altamira Management Ltd. 2,105,200 10.8%
Suite 301
250 Bloor Street West
Toronto, Ontario
CDS & Co. 8,247,327 44.4%
P.O. Box 1038
Station A
25 The Esplanade
Toronto, Ontario
Cede & Co. 3,458,408 18.3%
P.O. Box 20
Bowling Green Station
New York, New York 10274
Directors and Officers as a group (9 1,089,031 5.8%
persons)
CDS & Co. and Cede & Co. are depository trusts beneficially holding
shares on behalf of shareholders of the Company. Other than as set forth above,
the Company has no knowledge that any such shares are beneficially owned by any
person who owns beneficially 10% or more of the outstanding shares of common
stock of the Company.
ITEM 5. NATURE OF TRADING MARKET
The common stock of the Company or its predecessors was listed on the
VSE from December 3, 1984 through February 1996.
Effective July 10, 1989, the Company's shares commenced trading in the
United States on the Nasdaq National Market ("Nasdaq") under the symbol "GRVSF."
Effective June 17, 1992, the Company's shares ceased trading on Nasdaq because
it failed to meet Nasdaq's capital and surplus requirements. The Company's
shares are listed on the Nasdaq OTC Bulletin Board. The Company intends to seek
reinstatement on Nasdaq once it can fully meet the requirements for listing.
On September 18, 1989, the Company's common stock commenced trading on
the TSE. The trading symbol is "AED" on both the VSE and the TSE. The Company
chose to delist its shares on February 15, 1996 from the VSE and maintain the
TSE as its principal Canadian stock exchange.
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TRADING HISTORY
The following table sets forth the high and low reported sale prices, in
Canadian dollars, of the Company's common stock on the TSE for the periods
indicated:
TSE
Fiscal 1996
-----------
Quarter Ended High Low
------------- ---- ---
April 30, 1995 $1.70 $1.60
July 31, 1995 1.36 1.25
October 31, 1995 .68 .67
January 31, 1996 .84 .80
Fiscal 1995
-----------
Quarter Ended High Low
------------- ---- ---
April 30, 1994 $3.15 $1.75
July 31, 1994 2.50 1.42
October 31, 1994 1.90 1.30
January 31, 1995 1.89 1.10
The following table sets forth the high and low reported sale prices, in
Canadian dollars, of the Company's common stock on the VSE for the periods
indicated:
Fiscal 1996
-----------
Quarter Ended High Low
------------- ---- ---
April 30, 1995 -- --
July 31, 1995 -- --
October 31, 1995 -- --
January 31, 1996 $1.00 $1.00
Fiscal 1995
-----------
Quarter Ended High Low
------------- ---- ---
April 30, 1994 $3.05 $2.50
July 31, 1994 1.51 1.51
October 31, 1994 1.73 1.52
January 31, 1995 1.50 1.50
The following table sets forth the high and low reported sale prices, in
U.S. dollars, of the Company's common stock on the Nasdaq OTC Bulletin Board for
the periods indicated:
Fiscal 1996
-----------
Quarter Ended High Low
------------- ---- ---
April 30, 1995 $1.48 $1.24
July 31, 1995 .97 .97
October 31, 1995 .86 .86
January 31, 1996 .55 .55
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Fiscal 1995
-----------
Quarter Ended
-------------
April 30, 1994 $2.04 $1.89
July 31, 1994 1.72 1.72
October 31, 1994 1.72 1.72
January 31, 1995 1.72 1.72
A significant number of the Company's securities are held in bearer
form. To the best of the Company's knowledge, as of January 31, 1996, there were
123 shareholders resident in the United States holding approximately 5,133,172
shares, representing 27.6% of the Company's shares then outstanding. In total
the Company has in excess of 700 shareholders.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS
(a) There are no governmental laws, decrees or regulations in Canada
relating to restrictions on the export or import of capital into Canada which
affect the remittances of interest, dividends or other payments to nonresident
holders of shares of the Company's stock. Any such remittances to US residents,
however, are subject to withholding tax under the Income Tax Act (Canada), which
is generally reduced to a rate of 15% pursuant to Articles X and XI of the
Canada-US Income Tax convention. See "Item 7. Taxation."
(b) Except as provided in the Investment Canada Act (the "Investment
Act"), as amended by the Canada-United States Free Trade Agreement
Implementation Act (Canada) (the "FTA Implementation Act"), there are no
limitations under the laws of Canada, the Province of British Columbia or in the
charter of any other constituent documents of the Company with respect to the
right of foreigners to hold and/or vote the shares of the Company's stock.
The Investment Act requires a "non-Canadian" making an investment to
acquire control of a Canadian business, the gross assets of which exceed certain
defined threshold levels, to file an application for review with Investment
Canada, the federal agency created by the Investment Act. Under the provisions
of the Investment Act, an investment by a non-Canadian (other than an American,
as defined in the Investment Act) in a Canadian business is reviewable if it is
(i) a direct acquisition, which is defined as the acquisition of the assets or
voting shares of a Canadian business or control of its Canadian parent in
Canada, or a Canadian business with assets of Can$5,000,000 or more or (ii) an
indirect acquisition, which is defined as the acquisition of control of a
Canadian business with assets of Can$50,000,000 or more, where the assets of the
Canadian business represent 50% or less of the value of the total assets
acquired, through control of its Canadian parent entity outside Canada. Where
the value of the assets of the Canadian business represents 50% or more of the
value of the total assets acquired, the direct acquisition threshold applies. As
a result of the FTA Implementation Act, the threshold for review of acquisitions
by Americans has been increased. The threshold is presently Can$25,000,000 for
direct acquisitions and Can$100,000,000 for indirect acquisitions. Acquisitions
of control of certain types of Canadian businesses are excluded from these
higher thresholds. An acquisition of a Canadian business, the gross assets of
which do not exceed the above-threshold amounts, will not be subject to review
and the non-Canadian will simply be required to notify Investment Canada within
certain prescribed time limits.
The Investment Act also requires the filing of a notice with Investment
Canada by a "non-Canadian" making an investment to establish a Canadian
business. Where the business activity is, in
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Investment Canada's opinion, related to Canada's cultural heritage or national
identity, an order can be issued making the investment renewable.
If Investment Canada is satisfied that the investment is likely to be of
net benefit to Canada (as compared with the test under the prior investment act
that the investment is of "significant benefit" to Canada), then the
non-Canadian may proceed to implement the investment. If Investment Canada is
not satisfied that the investment is likely to be of net benefit to Canada, then
the non-Canadian shall not make the proposed investment or, if the investment
has been implemented, shall divest itself of control of the Canadian business
that is the subject of the investment.
ITEM 7. TAXATION
The following discussion summarizes some of the primary Canadian income
tax considerations to nonresidents of Canada owning common shares of a
corporation resident in Canada. The comments are confined to a consideration of
the Income Tax Act (Canada) (the "Tax Act"), the regulations thereunder and
counsel's understanding of the current administrative practices of Revenue
Canada, Taxation.
Cash dividends paid by a corporation resident in Canada on common shares
held by nonresidents of Canada will generally be subject to Canadian withholding
tax under the Tax Act. This withholding tax is levied at the basic rate of 25%,
but may be reduced by the terms of any applicable tax treaty. For residents of
the United States not having a "permanent establishment" in Canada, the
Canada-US Income Tax Convention reduces the rate of withholding tax to 15%
generally and to 6% for corporations owning at least 25% of the voting stock of
the payor corporation.
Stock dividends paid by Canadian public companies are treated as taxable
dividends and are subject to withholding tax as discussed above. The amount of a
stock dividend paid by a corporation is deemed to be equal to the amount of the
increase in the paid-up capital of the corporation arising by virtue of the
payment of the stock dividend. A shareholder receiving a stock dividend is
deemed to acquire the shares that are the subject of the dividend at a cost
equal to the amount of the dividend.
A nonresident of Canada who holds common shares as capital property will
not be subject to tax in Canada under the Tax Act on capital gains realized on
the disposition of the shares, unless the shares are "taxable Canadian property"
within the meaning of the Tax Act. Generally, the common shares of a public
company would not be taxable Canadian property unless the nonresident used the
shares in carrying on a business in Canada, the nonresident was previously a
resident of Canada and elected to deem the common shares to be taxable Canadian
property on ceasing to be a Canadian resident or, at any time during the five
years before the disposition of the shares, the nonresident owned, together with
other persons with whom he did not deal at arm's length, greater than 25% of the
issued shares of any class of the capital stock of the public company. The
Canada-US Income Tax Convention provides that US residents will be subject to
tax in Canada under the Tax Act on capital gains realized on the disposition of
shares in a Canadian resident public company where such shares comprise taxable
Canadian property as discussed above and more than 50% of the share value is
derived from real property situated in Canada.
ITEM 8. SELECTED FINANCIAL DATA
(a) SUMMARY FINANCIAL INFORMATION
Beginning on page F-1 of this annual report are the Company's audited
consolidated financial statements for the fiscal years ended January 31, 1996,
1995 and 1994. Beginning below is a summary of
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the Company's operating and balance sheet data. The results presented below are
shown in accordance with Canadian GAAP and in accordance with US GAAP. The
differences between Canadian and US GAAP are set forth in Note 21 of Notes to
Financial Statements included herein and principally pertain to the treatment of
product development costs. Under Canadian GAAP, product development costs that
meet the criteria of the Canadian Institute of Chartered Accountants are
deferred to the extent that their recovery can be reasonably regarded as assured
until the product reaches commercial production, at which time they are
amortized on a systematic basis by reference to the sale or use of the product
or until the product is sold or abandoned, at which time the costs are written
off. Under US GAAP, development costs must be expensed as incurred.
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SUMMARY OF OPERATIONS
SUMMARY OF OPERATIONS -- PREPARED IN ACCORDANCE WITH CANADIAN GAAP
FISCAL YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------
Sales.................... $42,570,941 $43,572,279 $23,675,496 $13,869,571 $5,768,286
Net Earnings (Loss)...... (8,551,043) (956,150) (776,941) 607,570 (574,000)
Earnings (Loss) Per Share (0.46) (0.05) (0.05) 0.06 (0.07)
SUMMARY BALANCE SHEET -- PREPARED IN ACCORDANCE WITH CANADIAN GAAP
FISCAL YEAR ENDING JANUARY 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- -----------
Working Capital.......... $(1,103,243) $6,107,236 $7,587,908 $1,817,571 $ (96,385)
Total Assets............. 20,796,255 27,493,273 16,237,382 8,726,747 3,060,572
Total Current Liabilities 16,374,291 14,037,195 5,127,515 4,988,462 2,201,901
Long Term Debt........... 275,676 1,182,135 1,026,535 3,076,416 840,000
Shareholders' Equity..... 4,146,288 12,273,943 10,083,332 661,869 18,671
Net Book Value Per Share 0.22 0.66 0.58 0.07 0
SUMMARY OF OPERATIONS -- PREPARED IN ACCORDANCE WITH US GAAP
FISCAL YEAR ENDING JANUARY 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------
Sales................... $42,570,941 $43,572,279 $23,675,496 $13,869,571 $5,768,286
Net Earnings (Loss)..... (7,272,713) (2,319,158) (2,185,463) 68,403 (830,371)
Earnings (Loss) Per
Share Before (0.39) (0.13) (0.15) 0.01 (0.10)
Extraordinary Items.....
SUMMARY BALANCE SHEET -- PREPARED IN ACCORDANCE WITH US GAAP
FISCAL YEAR ENDING JANUARY 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Working Capital.......... $(1,103,243) $ 6,107,236 $ 7,587,908 $ 1,817,571 $ (96,385)
Total Assets............. 19,909,971 25,764,390 14,814,477 7,852,989 2,725,981
Total Current Liabilities 16,374,291 14,037,195 5,127,515 4,988,462 2,201,901
Long Term Debt........... 275,676 1,182,135 1,026,535 3,076,416 840,000
Shareholders' Equity..... 1,779,330 8,628,655 7,801,052 (211,889) (315,920)
Net Book Value Per Share. 0.10 0.47 0.45 0 0
(b) CANADIAN AND US DOLLAR EXCHANGE RATES
A history of US-Canadian dollar exchange rates for the indicated years
is set forth below. All amounts shown represent noon buying rates for cable
transfers in New York City certified funds for customs purposes by the Federal
Reserve Bank of New York. Such rate for Canadian dollar per US dollar
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on June 30, 1996 in New York City was $0.7325. The source for this data is the
Federal Reserve Bulletin and Digest.
HIGH $CAN LOW $CAN AVERAGE
------------------- ------------------- --------------------
CAN/US US/CAN CAN/US US/CAN CAN/US US/CAN
------ ------ ------ ------ ------ -------
1991 1.1229 .8906 1.1589 .8628 1.1457 .87283
1992 1.1748 .8512 1.2858 .7777 1.214 .8237
1993 1.2497 .8002 1.3367 .7481 1.2901 .7751
1994 1.3408 .7458 1.4086 .7099 1.3736 .7280
1995 1.3507 .7404 1.4074 .7105 1.3686 .7307
(C) DIVIDENDS
The Company has not paid any cash dividends since its inception. The
Company does not intend to pay any cash dividends in the foreseeable future, but
intends to retain all earnings, if any, for use in its business operations.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The results presented in this annual report are in accordance with
Canadian GAAP. See Note 21 of Notes to Consolidated Financial Statements for an
explanation of differences between Canadian GAAP and US GAAP.
RESULTS OF OPERATIONS - FISCAL 1996 COMPARED TO FISCAL 1995 AND FISCAL 1994
Total revenues for the year ended January 31, 1996 were $42,570,941
versus revenues of $43,572,279 in fiscal 1995 and $23,675,496 in fiscal 1994, a
decrease of 2.3% from fiscal 1996 to fiscal 1995. The net loss for the year was
$8,551,043, or $.46 per share, versus a net loss of $965,150, or $.05 per share
in fiscal 1995 and a net loss of $776,941 or $.05 cents per share for fiscal
1994. The slight decrease of total revenues is attributed to two product lines:
Sound Card Products and Core Joysticks (specifically, PC Joystick and PC Pro
Joystick). The Company's product, the UltraSound MAX was replaced this year with
the UltraSound Plug & Play and UltraSound Plug & Play Pro. Delays in the
development process of the UltraSound Plug & Play caused it to be released very
late in the year. These delays resulted in delays in deliveries to members of
the press and retailers in time to generate significant sales during the
November and December buying season.
Gross profit margin decreased to 18.7% as compared to 24.7% in fiscal
1995 and 26.5% in the prior year. This decrease was principally due to the
write-off of inventory totaling $1,940,417. The write-down of inventories was
largely a result of the Phoenix joystick and the UltraSound ACE products. Both
of these products moved very slowly this year. A slow market acceptance and
subsequently reduced sales prices has required the Company to write-down
existing inventory.
In addition, the gross margin was negatively affected by a reserve of
$850,313 for future purchase commitments outstanding for the purchase of the PC
Joystick and PC Pro Joystick sub-assemblies. Increased competition in the market
place this year accelerated the life cycles of these two products and reduced
their sales prices.
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Other factors that affected cost of goods sold included freight and duty
increases because of increased sales activity in Europe, and the expediting of
additional product from China. Freight and duty increased by $95,621 compared
with the previous years.
For the year ended January 31, 1996, total advertising expenses were
$3,580,551 or 8% of sales versus $3,598,809 or 8.3% of sales for fiscal 1995 and
$2,086,814 or 8.8% of sales in the prior year. The major portion of the
Company's advertising expenses are cooperative advertising allowances provided
as a percentage of sales to customers.
Marketing and sales expenses that exclude advertising increased to
$2,867,328 or 6% versus $2,840,983 or 6.5% of sales in fiscal 1995 and
$1,292,561 or 5.5% of sales the prior year. The cost in this area continue to
reflect the focus on building a broad base of software developer support for
both the UltraSound products and the core product lines that started in the
previous year.
General and administrative expenses rose because of increased legal
expenses incurred in connection with the Focal Point litigation and settlement,
one-time severance and related costs, costs associated with the addition of
senior management, increased occupancy costs, and foreign exchange losses. There
was a foreign exchange loss for the year of $166,920 compared with a gain of
$216,564 in fiscal 1995 and $102,699 in fiscal 1994. It should be noted that
over 90% of the Company's revenues are denominated in US dollars. Also included
in this expense category were capital taxes payable to the federal and the
provincial governments totaling $60,950.
Research and Development costs expensed for fiscal 1996 were $1,528,075
compared to $1,361,072 in fiscal 1995 and $726,731 in fiscal 1994. The Company
continued to increase investment in research and development capability for both
core products and the UltraSound product line, in line with an increased revenue
base. It is strongly felt that internal capability to develop and maintain
technology provides an important competitive advantage. Staffing levels
increased, particularly in the software engineering category, as more
development work was brought in-house versus externally contracted.
Interest on short-term debt increased to $430,972 from $183,472 in
fiscal 1995 and $77,294 in fiscal 1994 due to utilization of a larger line of
credit used to finance growth in revenues and higher average interest rates
during the year. Interest on long-term debt indecreased to $96,617 from $84,607
in fiscal 1995 as a result of a full year of interest on capital leases that
commenced during the last fiscal year. Interest from long-term debt was $100,320
in fiscal 1994because the Company had $2,340,000 of debt for a portion of fiscal
1994 which was converted to equity.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company's growth has been funded by the combination
of bank borrowings and private placements of convertible long-term debt. During
the fiscal year ended January 31, 1996, the Company generated the majority of
its funding needs from operations through improved working capital management.
During fiscal 1996, the loss for the year resulted in a deficit from
operations of $5,810,777 compared with $647,627 being earned in the previous
year. This was offset by an increase in operating capital of $7,568,260. This
was the result of a significant decrease in the investment in accounts
receivable and inventories amounting to $4,662,080. Additionally accrued
liabilities and provisions increased over the previous year. This change,
combined with a decrease in investing activities, increased cash by $853,184 for
the year.
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Net investment in fixed assets was $881,236 compared to $1,336,257 last
year. The additions were for moulds and tooling for new products and equipment
for research and development.
Development work is done by the Company's in-house development group and
no development costs were deferred during fiscal 1996. This is a continuation of
changes made in the previous year to move development in-house. In fiscal 1995,
additions to deferred development costs were $916,741.
In fiscal 1996, additions to patents and licenses were $35,395,
primarily for applications for patents and trademarks for the Firebird,
Thunderbird and GrIP products.
The net decrease in long-term debt of $415,440 was the result of paying
down loans and scheduled lease payments.
The Company maintains a credit facility with a major banking institution
that it has done business with since it commenced operations. The Company's
payment obligations to the bank are evidenced by a demand note, as is customary
practice. As of January 31, 1996, the total amount, after netting cash balances,
of the Company's obligations under the demand note was $3,002,486 out of a total
credit facility of $4,500,000. Collateral for the demand loan is provided by
fixed and floating charges on all of the Company's assets. The Company obtained
from its bank an additional receivables discounting facility for US$2,000,000
subsequent to January 31, 1995. The Company also has leasing facilities which
amounted to obligations of $738,010 at January 31, 1996. The Company uses the
leasing facilities principally for the funding of capital expenditures of
research and development, manufacturing and information systems.
The current credit facility expired on May 15, 1996 and although the
Company has been in default of its covenant, the bank has extended the line of
credit to August 2, 1996 by which time the total credit facility will be reduced
to $4,150,000. The bank has given conditional assurance that the facility may be
extended to November 30, 1996 in the event that additional investment funds of
$2,000,000 are secured. At July 30, 1996, the Company had not successfully
negotiated a replacement source of funds or additional capital.
The independent auditors' report for the fiscal year ended January 31,
1996 contains an explanatory paragraph to the effect that the related financial
statements had been prepared assuming that the Company would continue as a going
concern but stated that there were matters that raised substantial doubt about
the Company's ability to continue as a going concern. The Company's financial
statements for such year indicated that the Company's continuation as a going
concern was dependent upon the Company's ability to generate sufficient cash
flow to meet its obligations on a timely basis, to renew its bank credit
agreement or obtain alternative financing and, ultimately, to attain
profitability. Although the Company has recently been profitable, there can be
no assurance that the Company will continue to be profitable, will continue to
be in compliance with the covenants in its loan documents or will be able to
generate sufficient cash flow in the future.
There have been significant expenditures during the past and current
fiscal years for manufacturing tooling and equipment, new product development,
and working capital requirements. The Company anticipates that such spending
levels will continue or increase with anticipated revenue growth. Additionally,
the industry in which the Company participates is characterized by rapid
technological change and intense competition, creating a continual and possibly
significant need for capital. Further funding for future growth will be derived
from increased bank borrowings, cash flow from operations, and possibly new
equity or convertible debt financing.
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ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
DATE BECAME A
NAME OFFICE HELD DIRECTOR/OFFICER
- - - ---- ----------- ----------------
John Campbell Chairman and Director July 17, 1992
Vancouver, BC
Grant Russell Chief Technology Officer, April 30, 1987
Delta, BC Vice-Chairman and Director
K. Michael Cooper President & CEO and Director September 12, 1994
N. Vancouver, B.C.
Dennis Scott-Jackson Vice President, Development April 30, 1987
Coquitlam, BC
Edward M. Pasatiempo Vice President Sales and Marketing January 2, 1996
Seattle, Washington
C. Scott Smyth Vice President, Operations November 24, 1995
Surrey, B.C.
All directors hold office until the next annual meeting of the
shareholders and until their successors have been elected and qualified. The
officers of the Company are elected annually and serve at the discretion of the
Board of Directors of the Company. There are no family relationships among any
of the directors and executive officers of the Company.
ITEM 11. COMPENSATION OF OFFICERS AND DIRECTORS
The Company does not compensate directors for their services. The
aggregate amount of cash compensation paid by the Company to all officers and
directors as a group during fiscal 1996 was $773,421.
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned by or
paid to any person who was the Chief Executive Officer during the last completed
fiscal year and to each of the Company's three most highly compensated executive
officers, other than the Chief Executive Officer, who were serving as executive
officers at the end of the last completed fiscal year, other than executive
officers whose total compensation does not exceed $100,000 (collectively the
"Named Executive Officers") for services rendered by such individuals in all
capacities to the Company for the last three completed financial years.
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LONG TERM
ANNUAL COMPENSATION COMPENSATION(6)
---------------------------------- ---------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION UNDER OPTIONS COMPENSATION
POSITION YEAR ($) ($) (5) GRANTED (#)(7) ($)(8)
- - - ------------------- ---- -------- ------- ------------ -------------- -------------
K. Michael 1996 $238,994 $60,000 -- Nil $32,864
Cooper 1995 $79,659 -- -- 200,000 $ 9,615
President & CEO(1) 1994 -- -- Nil
Grant Russell 1996
President & CEO(2) 1995 $129,007 -- -- -0- $ 6,000
1994 $118,049 $23,068 -- 100,000 $ 6,000
David Reid 1996
Vice-President, 1995 $90,426 $64,559 -- -0- $ 6,000
Sales(3) 1994 $81,242 $24,930 -- 50,000 $ 6,000
Steven Cherry 1996 $96,880 -- -- Nil $ 6,900
Vice-President of 1995 $13,888 -- -- 100,000
Marketing(4) 1994 -- -- -- Nil
(1) K. Michael Cooper served as President and Chief Executive Officer
commencing June 8, 1995, during the last completed financial year. Prior
to that date he had served as Chief Operating Officer and Chief Financial
Officer of the Company from September 15, 1994.
(2) Grant Russell served as President and Chief Executive Officer of the
Company until June 8, 1995, when he accepted a newly created officer
position as Chief Technology Officer of the Company. In connection with
this change, the Company entered into an employment agreement with Mr.
Russell under which the Company has the right to terminate Mr. Russell at
any time. If so terminated, Mr. Russell would continue to receive his base
salary for 24 months as severance. Mr. Russell agreed to occupy the new
position for at least 12 months, after which he could elect to leave the
Company and his position at any time and receive the same base salary as
severance as outlined above.
(3) David Reid was given 12 months' advance notice of his termination on
August 31, 1995. David Reid performed his regular duties until December
31, 1995, at which time he ceased being an active full-time employee. As
result, in addition to the disclosed compensation amounts for Mr. Reid,
the Company is obligated to pay him a total of $53,200 in salary and
$6,000 in other compensation over the seven-month period ending August 31,
1996. Options granted to David Reid expire on June 30, 1996 unless
exercised.
(4) Steve Cherry worked for the Company from January 2, 1995 to May 15, 1995.
Mr. Cherry's compensation expense for the last completed fiscal year
included $48,300 as severance and $6,900 in other compensation.
-23-
24
(5) Perquisites and other personal benefits that do not exceed the lesser of
$50,000 and 10% of the total of the annual salary and bonus for any of the
Named Executive Officers are not disclosed.
(6) No stock appreciation rights (SARs) or similar rights were granted by the
Company during the last financial year, and there are no outstanding
restricted shares or units. Other than its Stock Option Plan, the Company
does not have a long term incentive plan, pension plan, or other
compensatory plan for its executive officers.
(7) During the last completed financial year options previously granted to
insiders and employees were repriced from $3.32 to $1.18 per share as
approved by members at the Company's last annual general meeting.
(8) Includes all other compensation for the covered financial year that is not
properly reported in any other column of this table.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
DIRECTORS', OFFICERS' AND EMPLOYEES' STOCK OPTION PLAN
The Company has received shareholder approval of its Directors',
Officers' and Employees' Stock Option Plan, as amended (the "Plan"). The Plan is
administered by the Company's Compensation Committee (the "Committee"),
currently comprised of Grant Russell and N. John Campbell, each a director of
the Company. Under the Plan, the Committee may grant to directors, officers and
eligible employees of the Company and of its subsidiaries options to purchase
shares of common stock of the Company on terms that the Committee may determine,
within the limitations of the Plan. The aggregate number of shares of common
stock reserved for issuance under the Plan may not exceed 1,000,000 shares,
subject to adjustment as provided under the terms of the Plan in the event of
certain changes in the capital of the Company or in the event of an amalgamation
or merger by the Company with another body corporate, and options granted to any
one person may not exceed 5% of the issued and outstanding shares of common
stock of the Company. As of June 30, 1996, director and employee incentive
options to purchase a total of 1,413,715 shares of the Company were outstanding.
As of such date, a total of 700,008 options have been reserved for issuance or
granted under the Plan and there were a total of 705,715 shares issuable
pursuant to stock options granted before the Plan was in place.
In addition, the aggregate number of shares reserved for issuance for
insiders under the Plan and any other share compensation arrangement will not
exceed the following limitations ("insiders" and "associates" having the meaning
ascribed to those terms under the stock option policy issued by the TSE, as
revised):
(a) 10% of the issued shares of the Company outstanding from time to
time (on a non-diluted basis) (the "Outstanding Issue");
(b) 10% of the Outstanding Issue within a one-year period, excluding
shares issued pursuant to options granted under the Plan, or otherwise, within
the one-year period preceding a proposed reservation of shares for issuance (the
"One Year Exercised Options"); and
(c) 5% of the Outstanding Issue to any one insider and such insider's
associates within a one-year period, excluding the One Year Exercised Options.
-24-
25
The exercise price for an option issued under the Plan is determined by
the Committee at the time of the granting and may not be less than the closing
price of the common shares of the Company quoted on the TSE on the trading day
preceding the date on which an option is granted. An option is exercisable:
(i) in the case of an optionee who is a member of the
Board of Directors and has not been an employee or
officer of the Company within one year preceding the
date of grant, within one year after the date the
option is granted,
(ii) in the case of all other optionees, within one year
after the date the option is granted as to 25% of the
option and at the end of each calendar quarter
thereafter for the next 36 months as to 6.25% per
quarter, and
(iii) for a maximum period of 10 years from the date of
granting, subject to earlier termination if the
optionee ceases for any reason to be a director or
employee of the Company or its subsidiaries.
Under the Plan, an optionee, at the sole discretion of the Committee,
may elect to surrender his right to purchase shares of common stock of the
Company pursuant to his or her option, in consideration of payment in cash or
shares of common stock, or a combination thereof ("Stock Appreciation Right" or
"SAR"), equal in value to the difference if any, after deducting the aggregate
option price of his or her shares under option from an average of the daily high
and low board lot trading prices of the Company's shares quoted on the TSE at
the close of business on the five trading days immediately preceding the day of
such surrender. The term of a SAR may not exceed, nor be exercised earlier than,
the original option term. The Committee has sole discretion to consent to or to
disapprove the election of an optionee to receive cash in full or partial
settlement of a SAR. No SARs have been granted to date.
Options on 469,715 shares are exercisable on or before November 19,
2001 at the price of $0.25 per share. Options on 17,700 shares at $1.15 per
share are exercisable at various dates starting March 1993 and expiring on or
before August 17, 2002. Options on 57,500 shares at $1.18 per share expire on or
before March 29, 2003. Options on 394,000 shares at $1.18 per share are
exercisable on or before November 8, 2003. Options on 75,000 shares at $1.18 per
share are exercisable on or before February 26, 2004. Options on 489,500 shares
at $1.18 per share are exercisable on or before November 18, 2004. Options on
121,000 shares at $1.18 are exercisable on or before September 28, 2005. Options
on 364,000 shares are exercisable on or before January 31, 2006 at $.80 per
share.
As of June 30, 1996, outstanding options held by directors and senior
officers of the Company were held individually as follows:
SHARES UNDER OPTION SHARES UNDER OPTION SHARES UNDER OPTION
OPTIONEE AT $0.25 PER SHARE AT $1.18 PER SHARE AT $.80 PER SHARE
Grant Russell 175,000 100,000
K. Michael Cooper -- 200,000
Dennis Scott-Jackson 100,000 25,000
N. John Campbell -- 100,000
Carlton H. Baab -- 100,000
-25-
26
Eddy Pasatiempo -- -- 125,000
Scott Smyth -- 60,000 40,000
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
None.
PART II
ITEM 14.
Not applicable.
PART III
ITEM 15. DEFAULTS ON SENIOR SECURITIES
Not applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
The authorized share capital of the Company was increased from
20,000,000 shares to 50,000,000 shares in fiscal 1994.
PART IV
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See Item 19 below for Financial Statements filed as a part of this
annual report.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
1. Auditors' Report to the Shareholders
2. Consolidated Balance Sheets
3. Consolidated Statements of Earnings and Deficit
4. Consolidated Statements of Changes in Financial Position
5. Notes to Consolidated Financial Statements
6. Financial Statement Schedules
-26-
27
(B) EXHIBITS
10.1 Advanced Gravis Computer Technology Ltd. Directors',
Officers', and Employees' Stock Option Plan
10.2 Warehouse Lease between Marine Way Estates LTD and
Advanced Gravis Computer Technology Ltd. dated March
1, 1995
-27-
28
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned.
Dated: July 30, 1996 ADVANCED GRAVIS COMPUTER
TECHNOLOGY LTD.
By /s/ K. Michael Cooper
----------------------------------------
K. Michael Cooper
President and Chief Executive Officer
29
INDEX TO FINANCIAL STATEMENTS
Page
AUDITORS' REPORT TO THE SHAREHOLDERS............................... F-1
CONSOLIDATED BALANCE SHEETS AS AT JANUARY 31, 1996 AND 1995 ....... F-2
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT FOR
THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994............. F-3
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994......... F-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED JANUARY 31, 1996, 1995 AND 1994....................... F-5
SCHEDULES TO FINANCIAL STATEMENTS.................................. F-21
30
AUDITORS' REPORT
TO THE SHAREHOLDERS OF ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
We have audited the consolidated balance sheets of Advanced Gravis Computer
Technology Ltd. as at January 31, 1996 and 1995 and the consolidated statements
of loss and deficit and changes in financial position for the years ended
January 31, 1996, 1995 and 1994. 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 Canadian 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 January 31, 1996
and 1995 and the results of its operations and the changes in its financial
position for the years ended January 31, 1996, 1995 and 1994 in accordance with
Canadian generally accepted accounting principles. As required by the British
Columbia Company Act, we report that, in our opinion, these principles have been
applied on a consistent basis.
COOPERS & LYBRAND
- - - ---------------------
Vancouver, B.C., Canada
May 03, 1996 (except notes 1, 9, 11 and 20 which are as at June 13, 1996)
COMMENTS BY AUDITORS FOR U.S. READERS ON
CANADA-U.S. REPORTING CONFLICT
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is
substantial doubt about a company's ability to continue as a going concern for a
reasonable period of time, such as that referred to in note 1 to the
consolidated financial statements. Our report dated May 3, 1996, except as to
notes 1, 9, 11 and 20, which are as at June 13, 1996, is expressed in accordance
with Canadian reporting standards which do not permit a reference to such going
concern doubts in the auditors' report when such matter is adequately disclosed
in the consolidated financial statements.
COOPERS & LYBRAND
- - - ---------------------
Vancouver B.C.
May 03, 1996 (except notes 1, 9, 11 and 20 which are as at June 13, 1996)
- - - --------------------------------------------------------------------------------
F-1
31
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
CONSOLIDATED BALANCE SHEETS
AS AT JANUARY 31, 1996 AND 1995
(Expressed in Canadian dollars)
-------------------------------
1996 1995
-------------------------------
ASSETS
CURRENT ASSETS
Cash $ 247,514 $ 385,411
Accounts receivable (note 4) 7,781,478 9,205,464
Inventories (note 5) 7,184,261 10,422,355
Prepaid expenses 57,795 131,201
-------------------------------
15,271,048 20,144,431
FIXED ASSETS (note 6) 2,215,037 2,807,173
INTELLECTUAL PROPERTY (note 7) 2,423,886 2,771,195
DEFERRED DEVELOPMENT COSTS (note 8) 886,284 1,770,474
-------------------------------
$ 20,796,255 $27,493,273
===============================
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (note 9) $ 3,250,000 $ 4,241,081
Accounts payable and accrued liabilities (note 10) 10,575,833 9,235,879
Current portion of long-term debt (note 11) 1,055,638 560,235
Provisions for restructuring (note 18) 679,440
Provision for settlement of litigation (note 20) 813,380
-------------------------------
16,374,291 14,037,195
LONG-TERM DEBT (note 11) 275,676 1,182,135
-------------------------------
16,649,967 15,219,330
-------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 12)
Authorized -
50,000,000 common shares without par value
(1995 - 50,000,000)
Issued -
18,558,857 (1995 - 18,465,307) 17,614,933 17,591,545
Commitment to issue shares (note 20) 400,000
-------------------------------
18,014,933 17,591,545
DEFICIT (13,868,645) (5,317,602)
-------------------------------
4,146,288 12,273,943
-------------------------------
$ 20,796,255 $27,493,273
===============================
APPROVED BY THE DIRECTORS
NATURE OF OPERATIONS (note 1)
CERTAIN SIGNIFICANT ESTIMATES AND RISKS (note 3)
COMMITMENTS (note 16)
CONTINGENCIES (note 20)
/s/ ?????????
- - - -------------------------
Director
/s/ ???????????
- - - -------------------------
Director
The accompanying notes are an integral part of these consolidated financial
statements.
- - - --------------------------------------------------------------------------------
F-2
32
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
--------------------------------------------------
1996 1995 1994
--------------------------------------------------
SALES $ 42,570,941 $43,572,279 $23,675,496
COST OF SALES 34,599,377 32,811,869 17,397,788
--------------------------------------------------
GROSS PROFIT 7,971,564 10,760,410 6,277,708
--------------------------------------------------
EXPENSES
Selling 6,447,879 6,439,792 3,379,375
General and administrative 3,519,978 2,043,840 1,814,237
Research and development 1,528,075 1,361,072 726,731
Depreciation 1,051,439 531,876 305,547
Amortization of intellectual property 382,704 405,097 26,757
Amortization of deferred development costs 884,190 663,540 594,681
Interest 430,972 183,472 77,294
Interest on long-term debt 96,617 84,607 100,320
Loss on sale of fixed and other assets 333 3,264 29,707
Restructuring costs (note 18) 967,040
Settlement of litigation (note 20) 1,213,380
--------------------------------------------------
16,522,607 11,716,560 7,054,649
--------------------------------------------------
LOSS FOR THE YEAR (8,551,043) (956,150) (776,941)
DEFICIT - BEGINNING OF YEAR (5,317,602) (4,361,452) (3,584,511)
--------------------------------------------------
DEFICIT - END OF YEAR $(13,868,645) $(5,317,602) $(4,361,452)
==================================================
LOSS PER SHARE (NOTE 15) $ (0.46) $ (0.05) $ (0.05)
==================================================
The accompanying notes are an integral part of these consolidated financial
statements.
- - - --------------------------------------------------------------------------------
F-3
33
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
----------------------------------------------
1996 1995 1994
----------------------------------------------
CASH PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
Loss for the year $ (8,551,043) $ (956,150) $ (776,941)
Items not affecting cash -
Depreciation 1,051,439 531,876 305,547
Amortization of intellectual property 382,704 405,097 26,757
Amortization of deferred development costs 884,190 663,540 594,681
Restructuring costs 421,600
Loss on sale of fixed assets and other assets 333 3,264 29,707
----------------------------------------------
(5,810,777) 647,627 179,751
Operating working capital changes (note 19) 7,568,260 (2,011,794) (4,844,491)
----------------------------------------------
1,757,483 (1,364,167) (4,664,740)
----------------------------------------------
FINANCING ACTIVITIES
Long-term debt (411,056) 415,440 549,821
Issue of common shares 23,388 3,146,761 10,198,404
Commitment to issue shares 400,000
Conversion of long-term debt to common shares (2,340,000)
Decrease in amounts due to shareholder (555,225)
Deferred finance fees 60,871
----------------------------------------------
12,332 3,562,201 7,913,871
----------------------------------------------
INVESTING ACTIVITIES
Proceeds on disposal of fixed assets
and other assets 2,049 3,151 19,501
Purchase of fixed assets (883,285) (1,339,408) (1,540,505)
Intellectual property (35,395) (3,132,662) (10,588)
Deferred development costs (961,741) (1,087,216)
----------------------------------------------
(916,631) (5,430,660) (2,618,808)
----------------------------------------------
INCREASE (DECREASE) IN CASH 853,184 (3,232,626) 630,323
NET BANK INDEBTEDNESS -
Cash 385,411 476,956 59,249
Operating line of credit (4,241,081) (1,100,000) (1,312,616)
----------------------------------------------
BEGINNING OF YEAR (3,855,670) (623,044) (1,253,367)
----------------------------------------------
NET BANK INDEBTEDNESS -
Cash 247,514 385,411 476,956
Operating line of credit (3,250,000) (4,241,081) (1,100,000)
----------------------------------------------
END OF YEAR $ (3,002,486) $ (3,855,670) $ (623,044)
==============================================
The accompanying notes are an integral part of these consolidated financial
statements.
- - - --------------------------------------------------------------------------------
F-4
34
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
1. NATURE OF OPERATIONS AND GOING CONCERN
(a) NATURE OF OPERATIONS
Advanced Gravis Computer Technology Ltd. (the Company) is
engaged in manufacturing and distributing computer
peripherals, input devices and sound cards. The principal
markets for the Company's products are North America and
Europe.
(b) GOING CONCERN
These consolidated financial statements have been prepared on
a going concern basis.
The Company has experienced significant recurring operating
losses. At January 31, 1996, there was an accumulated deficit
of $13,868,645 and a working capital deficiency of $1,103,243.
Certain risks and uncertainties affecting the Company's
operations are set out in notes 3 and 20.
The Company has an operating line of credit with a major bank,
repayable on demand, of $4,500,000 which expired on May 15,
1996 (see note 9). Although the Company has been in default of
its covenant, the bank has extended the line of credit to
August 2, 1996 by which time the total credit facility will be
reduced to $4,150,000. The bank has given conditional
assurance that the facility may be extended to November 30,
1996 in the event that additional investment funds of
$2,000,000 are secured. At June 13, 1996, the Company has not
successfully negotiated a replacement source of funds or
additional capital.
The Company also has a term loan with the Government of Canada
- Western Economic Diversification Program (see note 11). At
January 31, 1996, the Company was in arrears of repayments and
in default of the terms, rendering the full outstanding
balance of $678,464 repayable on demand. In April 1996, the
Company successfully re-negotiated the terms but since that
date has fallen into arrears as to repayment and is now in
default. Accordingly, this amount is now repayable on demand.
These consolidated financial statements do not reflect
adjustments in the carrying values of the assets and
liabilities, the reported revenues and expenses and the
balance sheet classifications used, that would be necessary if
the going concern assumption were not valid. Management is
rigorously seeking the required financing. Accordingly,
management is of the opinion that the going concern assumption
is valid. However, there can be no assurance that financing
will be available and that the Company will be able to realize
its assets and discharge its liabilities in the normal course
of operations in the event that adequate financing is not
found.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in
accordance with accounting principles and practices generally
accepted in Canada, which, as explained in note 21, are
different in certain respects from those in the United States.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company, its wholly owned subsidiaries, Advanced Gravis
Computer Technology (U.S.) Inc., a Wyoming corporation, which
is not yet active; Abaton Resources Inc., an inactive
Washington state corporation and a Dutch subsidiary company,
Gravis Europe B.V.
- - - --------------------------------------------------------------------------------
F-5
35
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(c) RESEARCH, DEVELOPMENT AND ENGINEERING COSTS
Research, development, and engineering costs, including
computer software costs relating to software products, are
expensed in the year incurred except where, in the opinion of
management, the deferral criteria established by the Canadian
Institute of Chartered Accountants are satisfied in all
material respects. In this case, the expenditures are
capitalized as deferred development costs and amortized over
the estimated period of production to a maximum of five years
from the date the related product sales commence. All costs
included in deferred development costs are external. Costs
relating to abandoned projects are written off in the year of
abandonment.
(d) INVENTORIES
Inventories are recorded as follows:
Raw materials - at lower of cost (first-in,
first-out) and replacement cost
Work in progress - at lower of cost (first-in,
first-out) and net realizable value
Finished goods - at lower of cost (first-in,
first-out) and net realizable value
(e) FIXED ASSETS
The Company records its fixed assets, including assets under
capital lease, at cost and depreciation is calculated on a
straight-line basis over five years.
(f) INTELLECTUAL PROPERTY
The Company defers costs relating to the filing of patents and
the acquisition of licenses, trademarks and technology. These
costs are amortized against income on a straight-line basis
over five to ten years. Costs relating to abandoned patent
applications are written off in the year of abandonment.
(g) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities in foreign currencies are
translated into Canadian dollars at the year-end rates of
exchange. Non-monetary assets are translated at the historical
rate of exchange in effect at the date of the transaction.
Revenues and expenses are translated at average exchange rates
or at the rate of exchange in effect at the date of the
transaction, if identifiable. All exchange gains or losses are
recognized in earnings or loss.
- - - --------------------------------------------------------------------------------
F-6
36
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
3. CERTAIN SIGNIFICANT ESTIMATES AND RISKS
(a) USE OF ESTIMATES
The preparation of financial statements in conforming with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from
those reported.
(b) CERTAIN SIGNIFICANT ESTIMATES
The Company has made certain significant estimates which are
set out below. It is reasonably possible that the estimates
will change in the near term due to future confirming events
and that the effect of such change could be material to the
consolidated financial statements.
i) The Company manufactures peripheral equipment for the
retail computer industry and as such its products are
subject to rapid technological obsolesence. The
Company has made provisions against currently known
slow-moving and obsolete inventory (see note 5).
ii) The Company defers the cost of acquiring its sound
card technology and amortizes this cost over an
estimated period of 100 months against anticipated
revenues from the sale of that product. This
technology is included in Intellectual Property at
January 31, 1996 at a net book value of $2,372,568.
iii) The Company has plans to restructure its
manufacturing and assembly operations and has made
provisions for costs relating to that restructuring
(see note 18).
(c) CERTAIN CONCENTRATION OF RISKS
i) A significant part of the cost of goods represents
purchases from one supplier in China, which
manufactures sub-assemblies and finished products.
While the Company owns the tooling used by the
supplier and there are other sources of supply, a
change in supplier could materially disrupt the
ongoing operations of the Company.
ii) The Company's only activity is the manufacture and
sale of peripherals to the computer industry. While
the Company has many years of experience and brand
recognition in its products, the industry is highly
competitive and subject to rapid technological
progress and obsolesence. Consequently, the Company
must continually anticipate and adapt its products to
emerging software platforms and evolving consumer
preferences. The introduction of new platforms and
technologies can render existing products obsolete
and unmarketable.
- - - --------------------------------------------------------------------------------
F-7
37
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
4. ACCOUNTS RECEIVABLE
1996 1995
---------------------------
Trade accounts receivable $ 7,876,785 $ 9,482,278
Less: Allowances (95,307) (276,814)
---------------------------
$ 7,781,478 $ 9,205,464
===========================
5. INVENTORIES
--------------------------
1996 1995
--------------------------
Raw materials $ 2,870,017 $ 6,450,894
Work in progress 624,159 462,636
Finished goods 3,690,085 3,508,825
--------------------------
$ 7,184,261 $10,422,355
==========================
The Company has provided for $1,940,417 (1995 - $736,474) against
slow-moving and obsolete inventory as a charge to Cost of Sales during
the year.
In addition, included in Accrued Liabilities, is a further provision of
$850,313 (1995 - $nil) which has been made against purchase commitments
of products that have been either superseded or discontinued.
6. FIXED ASSETS
--------------------------------------
1996
--------------------------------------
Cost Accumulated Net Book
Depreciation Value
Computer equipment and software $1,008,122 $ 522,992 $ 485,130
Office furniture and equipment 1,521,456 828,278 693,178
Manufacturing equipment 2,538,603 1,595,607 942,996
Trade show equipment 215,729 121,996 93,733
--------------------------------------
$5,283,910 $3,068,873 $2,215,037
======================================
--------------------------------------
1995
--------------------------------------
Cost Accumulated Net Book
Depreciation Value
Computer equipment and software $ 879,106 $ 379,349 $ 499,757
Office furniture and equipment 1,402,120 367,301 1,034,819
Manufacturing equipment 1,908,772 757,809 1,150,963
Trade show equipment 210,626 88,992 121,634
--------------------------------------
$4,400,624 $1,593,451 $2,807,173
======================================
Included in office furniture and equipment are assets under capital
lease of $869,880 (1995 -$846,769) with accumulated depreciation of
$394,621 (1995 - $157,242).
- - - --------------------------------------------------------------------------------
F-8
38
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
7. INTELLECTUAL PROPERTY
--------------------------------------
1996
--------------------------------------
Cost Accumulated Net Book
Amortization Value
Licenses and technology $3,120,414 $ 747,846 $2,372,568
Patents 74,919 45,139 29,780
Trademarks 41,092 19,554 21,538
--------------------------------------
$3,236,425 $ 812,539 $2,423,886
======================================
--------------------------------------
1995
--------------------------------------
Cost Accumulated Net Book
Amortization Value
Licenses and technology $3,120,414 $ 373,782 $2,746,632
Patents 48,976 41,758 7,218
Trademarks 31,640 14,295 17,345
--------------------------------------
$3,201,030 $ 429,835 $2,771,195
======================================
8. DEFERRED DEVELOPMENT COSTS
--------------------------------------
1996
--------------------------------------
Cost Accumulated Net Book
Amortization Value
Product development $3,135,293 $2,295,290 $ 840,003
Computer software costs 109,744 63,463 46,281
--------------------------------------
$3,245,037 $2,358,753 $ 886,284
======================================
--------------------------------------
1995
--------------------------------------
Cost Accumulated Net Book
Amortization Value
Product development $3,135,293 $1,423,672 $1,711,621
Computer software costs 109,744 50,891 58,853
--------------------------------------
$3,245,037 $1,474,563 $1,770,474
======================================
- - - --------------------------------------------------------------------------------
F-9
39
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
9. BANK INDEBTEDNESS
---------------------------
1996 1995
---------------------------
Operating line of credit $3,250,000 $4,241,081
===========================
As at January 31, 1996, out of a total facility of $4,500,000 Cdn. or
equivalent (1995 - $4,500,000), the Company had drawn down $3,250,000
(1995 - $4,241,081). An assignment of accounts receivable and
inventories, and a registered floating charge debenture for $2,500,000,
being a first charge on all assets of the Company, have been pledged as
collateral for the operating line. Interest on the operating line is
calculated at prime rate plus 2% for Canadian-dollar-denominated
balances and at the U.S. base rate of the bank plus 2% for
U.S.-dollar-denominated balances. The line provides for restrictions on
the ratio of maximum specified debt to tangible net worth. The Company
did not maintain these restrictions as at January 31, 1996. The bank is
aware of this default and has not taken any action other than that
which is disclosed in note 1.
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
--------------------------
1996 1995
--------------------------
Trade accounts payable $ 6,786,431 $ 7,608,126
Accrued liabilities 3,789,402 1,627,753
--------------------------
$10,575,833 $ 9,235,879
==========================
11. LONG-TERM DEBT
---------------------------
1996 1995
---------------------------
Government of Canada $ 678,464 $ 875,000
Obligation under capital leases (note 16) 652,850 867,370
---------------------------
1,331,314 1,742,370
Less: Current portion (1,055,638) (560,235)
---------------------------
$ 275,676 $ 1,182,135
===========================
The amount due to the Government of Canada is unsecured, interest-free,
and repayable in 16 equal quarterly installments commencing August 01,
1994. The Company was in default during the year ended January 31, 1996
as a result of repayments falling into arrears. The Company has since
successfully negotiated a revised repayment schedule of 11 unequal
repayments totaling $625,000 commencing August 1, 1996 and terminating
on February 1, 1999 and one payment due May 1, 1996 of $53,464. All
other terms remain the same. The Company has since fallen into arrears
and is in default of the revised terms. In accordance with generally
accepted accounting principles, the full amount has been reclassified
as current.
The Company may not issue dividends without the prior written consent
of the Minister of Western Economic Diversification until all repayment
installments have been made.
- - - --------------------------------------------------------------------------------
F-10
40
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995, 1994
(Expressed in Canadian dollars)
12. SHARE CAPITAL
Number of
shares Amount
-----------------------------
(a) AUTHORIZED -
50,000,000 common shares
without par value (see note 12(h))
Issued -
Balance - January 31, 1993 9,467,470 $ 4,246,380
Issued during the year -
For conversion of debt:
- at $0.56 per share (note 12(f)) 1,500,000 840,000
- at $1.10 per share (note 12(f)) 1,363,637 1,500,000
For share purchase and special
warrants exercised:
- at $0.70 per share (note 12(f)) 1,500,000 1,050,000
- at $1.10 per share (note 12(f)) 1,363,637 1,500,000
Less: Share issue costs (93,235)
- at $2.90 per share (note 12(g)) 2,000,000 5,800,000
Less: Share issue costs (617,530)
- at $2.90 per share 100,000 190,000
Director and employee stock
options exercised for cash:
- at $0.25 per share 83,095 20,774
- at $1.15 per share 7,300 8,395
-----------------------------
Balance - January 31, 1994 17,385,139 14,444,784
Issued during the year -
Director and employee stock
options exercised for cash:
- at $0.25 per share 50,480 12,620
- at $1.15 per share 29,688 34,141
For acquisition of the UltraSound
PC sound card technology (note 12(b)) 1,000,000 3,100,000
-----------------------------
Balance - January 31, 1995 18,465,307 17,591,545
Issued during the year -
Director and employee stock
options exercised for cash:
- at $0.25 per share 93,550 23,388
-----------------------------
Balance - January 31, 1996 18,558,857 $17,614,933
=============================
- - - --------------------------------------------------------------------------------
F-11
41
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995, 1994
(Expressed in Canadian dollars)
12. SHARE CAPITAL (continued)
(b) SHARE ISSUE
On February 7, 1994, the Company issued 1,000,000 shares
valued at $3,100,000 for the acquisition of the technology
related to the UltraSound PC sound card from Forte
Technologies, Inc. (Forte). The technology was previously
utilized through a licensing agreement with Forte. At January
31, 1995, 300,000 of the shares were held in escrow in
accordance with the purchase agreement. The escrow
restrictions provided that the shares could not be traded in,
or dealt with, in any manner whatsoever. During 1995, these
shares were released from escrow.
The Company also signed a ten-year development and royalty
agreement to exclusively license major portions of its
UltraSound PC sound card technology to Advanced Micro Devices,
Inc.
(c) DIRECTOR AND EMPLOYEE STOCK OPTIONS
The following were outstanding at the respective year ends:
Number of options
-------------------------------------
1996 1995 1994
-------------------------------------
Exercisable at $0.25 on or before
November 19, 2001 465,715 558,675 558,675
Exercisable at $1.15 on or before
August 17, 2002 19,700 19,700 94,700
Exercisable at $1.18 on or before
March 29, 2003 57,500 93,000 98,000
Exercisable at $1.18 on or before
November 08, 2003 394,000 419,000 419,000
Exercisable at $1.18 on or before
February 26, 2004 75,000 75,000
Exercisable at $1.18 on or before
November 18, 2004 489,500 537,500
Exercisable at $1.18 on or before
September 28, 2005 114,000
Exercisable at $0.80 on or before
January 31, 2006 364,000
-------------------------------------
1,979,415 1,702,875 1,170,375
=====================================
- - - --------------------------------------------------------------------------------
F-12
42
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995, 1994
(Expressed in Canadian dollars)
12. SHARE CAPITAL (continued)
(d) SHARE PURCHASE WARRANTS
Number of warrants
------------------------------
1996 1995 1994
------------------------------
Exercisable at $2.20 on or before
December 26, 1994 68,182
Exercisable at $2.90 on or after
October 13, 1993 and on or
before October 12, 1995 (note 12(g)) 100,000 100,000
------------------------------
Nil 100,000 168,182
==============================
(e) SHARES HELD IN ESCROW
At January 31, 1994, 515,624 shares (1993 - 687,499 shares)
were held in escrow subject to the direction or determination
of the Vancouver Stock Exchange (VSE). The escrow restrictions
provide that the shares may not be traded in, dealt with in
any manner whatsoever, or released, nor may the Company, its
transfer agent, or escrow holder make any transfer or record
any tradings of the shares without prior consent of the VSE
while the shares of the Company are listed on the VSE. During
the year ended January 31, 1995, all of these escrow shares
were released (see also note 12(b)).
(f) During the year ended January 31, 1994, debentures of $840,000
and $1,500,000 were converted into 2,863,637 common shares at
a conversion price of $0.56 per common share and $1.10 per
common share, respectively.
Attached to the $840,000 debenture and the $1,500,000
debenture were 1,500,000 and 1,363,637 special warrants which
were exercised at a price of $0.70 per share and $1.10 per
share respectively, for the issuance of 2,863,637 common
shares.
(g) During the year ended January 31, 1994, 2,000,000 common
shares were issued on the exercise of 2,000,000 previously
issued special warrants. The special warrants were sold for
total proceeds of $5,800,000. In addition, warrants were
issued to the agent for the offering for the purchase of up to
100,000 common shares of the Company. During the year ended
January 31, 1996 these warrants expired unexercised.
(h) On August 16, 1993, the authorized capital of the Company was
increased from 20,000,000 common shares without par value
to50,000,000 common shares without par value.
- - - --------------------------------------------------------------------------------
F-13
43
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995, 1994
(Expressed in Canadian dollars)
13. EXPORT SALES
The Company operates primarily in the computer accessory products
industry. The Company's net sales by major geographical location were:
----------------------------------------------
1996 1995 1994
----------------------------------------------
United States $23,678,328 $24,202,730 $12,761,943
Europe 12,656,552 11,726,939 7,368,787
Other 2,930,458 3,514,372 705,672
Canada 3,305,603 4,128,238 2,839,094
----------------------------------------------
$42,570,941 $43,572,279 $23,675,496
==============================================
All of the Company's assets, except for certain finished goods
inventories (U.S. and Europe) and manufacturing tooling (China), are
situated in Canada.
14. FUTURE INCOME TAXES
The Company estimates that it has future tax benefits, which have not
been recognized in the accounts, as follows:
(a) The Company has estimated the total amount of losses for
income tax purposes for the years ended January 31, 1995 and
1996 to be $3,000,000. The Company has not yet filed its
fiscal 1995 and 1996 returns.
At January 31, 1994, accumulated losses for income tax
purposes were $40,227. These losses may be carried forward and
used to reduce taxable income in future years and expire in
1999.
(b) The Company has filed claims under the federal Scientific
Research and Experimental Development (SR&ED) program under
the Income Tax Act in the amount of $3,513,485 for taxation
years to January 31, 1994. Claims for fiscal 1995 and 1996 are
estimated to be $2,200,000 but have not yet been filed with
Revenue Canada.
The claims have the effect of reducing the amount of loss
carryforwards otherwise available. The amount of the claims is
added to a pool of SR&ED expenditures which, barring a change
in control, can be carried forward indefinitely and applied to
reduce taxable income in future years.
The amount of loss carryforwards shown in (a) above are net of
the SR&ED claim.
(c) The Company has Canadian Exploration Expenses of approximately
$200,000 for taxation years to January 31, 1993. These amounts
are available to reduce future taxable income.
(d) The Company has filed claims for federal investment tax
credits in the amount of $871,461 for taxation years to
January 31, 1994. These claims are available to reduce federal
taxes payable over a ten year period.
- - - --------------------------------------------------------------------------------
F-14
44
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
15. LOSS PER SHARE
Loss per share is calculated using the weighted average number of
shares outstanding during the year of 18,490,334 (1995 - 18,373,318;
1994 - 14,661,765). The assumed exercise of all options and warrants
would not be dilutive and has not been disclosed.
16. COMMITMENTS
(a) At January 31, 1996, the Company is committed to lease
payments as follows:
Capital Operating
lease payments lease payments
--------------------------------
1997 $ 420,528 $ 535,908
1998 235,218 475,833
1999 67,495 78,148
2000 6,769
----------------------------
Total minimum lease payments 738,010 $1,089,889
==========
Less: Amount representing interest at
rates varying between 9% and 21% (85,160)
---------
652,850
Less: Current portion (377,174)
---------
Obligations under capital lease $ 275,676
=========
Rent expense for the years ended January 31, 1996, 1995, and
1994 was $321,246, $324,361, and $185,912, respectively.
(b) At January 31, 1996, the Company has committed to unfulfilled
purchase orders amounting to $4,603,770 from its principal
supplier in China. Some of the products included in these
orders are expected to be either superseded or discontinued
and have been fully provided for (see note 5).
17. RELATED PARTY TRANSACTIONS
During the year ended January 31, 1996:
(a) an amount of $nil (1995 - $108,456; 1994 - $880,043) in
commissions was paid to Logitech International S.A. (Logitech)
on sales made on behalf of the Company.
(b) interest paid by the Company to Logitech on the note payable
and long-term debt totaled $nil (1995 - $ nil; 1994 -
$72,521).
(c) the Company also made sales of $nil (1995 - $nil; 1994 -
$1,187,025) to Logitech. These sales were made in the United
States under substantially the same terms and conditions as
sales to non-related parties. At January 31, 1996, a balance
of $nil (1995 - $nil; 1994 - $573,217) was included with
accounts receivable and a balance of $nil (1995 - $nil; 1994
-$260,187) was included with accounts payable.
Logitech owned 10.4% of the Company until the year ended January 31,
1995, during which it reduced its share holding to nil.
- - - --------------------------------------------------------------------------------
F-15
45
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
18. RESTRUCTURING COSTS
In fiscal 1996, the Company approved a plan to migrate gradually
manufacturing activities during fiscal 1997. The Company has provided
an amount of $967,040 for transition costs which comprise certain fixed
costs, fixed asset write downs and other rationalization costs.
19. ANALYSIS OF CHANGES IN OPERATING WORKING CAPITAL
------------------------------------------
1996 1995 1994
------------------------------------------
Accounts receivable $ 1,423,986 $(2,083,618) $(3,227,782)
Inventories 3,238,094 (5,014,095) (2,574,416)
Prepaid expenses 73,406 54,116 (107,192)
Accounts payable and accrued liabilities 1,339,954 5,031,803 1,064,899
Provisions 1,492,820
------------------------------------------
$ 7,568,260 $(2,011,794) $(4,844,491)
==========================================
20. CONTINGENCIES
(a) During fiscal 1995, the Company received a US$20 million claim
for copyright and trademark infringement from Focal Point 3D
Audio. The claim was voluntarily discontinued and moved to
binding arbitration during fiscal 1996, when the arbitrator
declined all the claims of Focal Point 3D Audio except for one
for which it was awarded US$419,000. Focal Point 3D Audio
subsequently refiled the US$20 million claim against Gravis
and management was successful in obtaining an out-of-court
settlement for which the Company has fully provided as
follows:
Cash payments $ 622,349
1,000,000 common shares at $0.40 per share 400,000
Other costs 191,031
----------
$1,213,380
==========
(b) In 1994, the Company received notice of claim that one of its
products infringed on a recent U.S. patent. In the Company's
view, the alleged claim is without substance and the ultimate
outcome is not determinable. There has been no activity in
connection with this claim since 1994 and management believes
the matter will not be pursued.
- - - --------------------------------------------------------------------------------
F-16
46
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
21. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
AND THOSE IN THE UNITED STATES
(a) The material differences between accounting principles in
Canada and the United States pertain to the Company's
treatment of the following items:
DEVELOPMENT COSTS
Development costs that meet the criteria established by the
Canadian Institute of Chartered Accountants are deferred to
the extent that their recovery can reasonably be regarded as
assured, until the processes to which they relate reach
commercial production, at which time they are amortized over
the estimated period of production, or until the project is
sold or abandoned, at which time the costs are written off.
Under U.S. accounting principles, development costs, except
those relating to the cost of development of computer software
to be marketed and sold, must be expensed as incurred.
STATEMENTS OF CASH FLOWS
The U.S. statement of cash flows differs from the Canadian
statement of changes in financial position in that the U.S.
statement requires separate disclosure of non-cash
transactions and disclosure of interest and taxes actually
paid.
INCOME TAXES
The Financial Accounting Standards Board Statement No. 109
(FAS 109), which requires a change from the deferred method to
the liability method of accounting for income taxes, has no
impact on these consolidated financial statements as any
deferred tax charge recognized would be offset by a valuation
allowance.
ESCROWED SHARES
On the transfer of the original joystick technology to the
Company, certain shares were issued at a nominal price and
held in escrow. In 1995, 515,624 shares were released from
escrow. Under U.S. generally accepted accounting principles,
the difference between the issue price and the fair market
value at the date of release from escrow must be treated as
compensation expense.
FAIR VALUE OF FINANCIAL INSTRUMENTS
U.S. GAAP requires the disclosure of the fair value of
financial instruments as presented below. Such fair value
estimates are made on the balance sheet dates based on
relevant market information and the nature of terms of the
financial instruments.
The following method and assumption were used to estimate the
fair value of each class of financial instruments:
The historical cost carrying amount of receivables and
payables subject to normal trade credit terms
approximates fair value. Cash and other deposits are
recorded at their face value plus accrued interest.
Fair value approximates the amounts reflected in the
consolidated financial statements for the following
balances: cash, accounts receivable and accounts
payable.
STOCK COMPENSATION
The United States Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," which became
effective for fiscal years beginning after December 15, 1995.
The Company has not determined the effect of this statement on
the current or prior years' consolidated financial statements.
- - - --------------------------------------------------------------------------------
F-17
47
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
21. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
AND THOSE IN THE UNITED STATES (continued)
(b) Loss and deficit as determined under U.S. generally accepted
accounting principles are as follows:
----------------------------------------------
1996 1995 1994
----------------------------------------------
Deficit - beginning of year
as determined under U.S.
accounting principles $ (8,962,890) $ (6,643,732) $ (4,458,269)
----------------------------------------------
Loss for the year
determined under Canadian
accounting principles (8,551,043) (956,150) (776,941)
Compensation expense due to
release of shares from escrow Nil (1,057,030) (859,375)
Adjustment due to write-
off of development costs Nil (955,250) (1,047,932)
Amortization of deferred
development costs 892,830 649,272 498,785
Restructuring provision 385,500
----------------------------------------------
Loss for the year
as determined under U.S.
accounting principles (7,272,713) (2,319,158) (2,185,463)
----------------------------------------------
Deficit - end of year as
determined under U.S.
accounting principles $(16,235,603) $ (8,962,890) $ (6,643,732)
==============================================
Primary loss per share (note 15) $ (0.39) $ (0.13) $ (0.15)
==============================================
Fully diluted earnings
per share (note 15) $N/A $N/A $N/A
==============================================
- - - --------------------------------------------------------------------------------
F-18
48
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
21. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
AND THOSE IN THE UNITED STATES (continued)
(c) Material effects of the different generally accepted
accounting principles on the Company's balance sheets are as
follows:
----------------------------------------------
1996 1995 1994
----------------------------------------------
DEFERRED DEVELOPMENT COSTS
As determined under
Canadian accounting
principles, net of
accumulated amortization of
$2,358,752 (1995 - $1,474,562;
1994 - $821,271) $ 886,284 $ 1,770,474 $ 1,493,172
Deduct: Costs written off
under U.S. GAAP (886,284) (1,728,883) (1,422,905)
----------------------------------------------
As determined under U.S.
accounting principles $Nil $ 41,591 $ 70,267
==============================================
Total Assets
As determined under
Canadian accounting
principles $ 20,796,255 $ 27,493,273 $ 16,237,382
Deduct: Deferred
development costs
written off (886,284) (1,728,883) (1,422,905)
----------------------------------------------
As determined under U.S.
accounting principles $ 19,909,971 $ 25,764,390 $ 14,814,477
==============================================
Deficit
As determined under
Canadian accounting
principles $(13,868,645) $ (5,317,602) $ (4,361,452)
==============================================
As determined under U.S.
accounting principles (see (b)) $(16,235,603) $ (8,962,890) $ (6,643,732)
==============================================
- - - --------------------------------------------------------------------------------
F-19
49
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(Expressed in Canadian dollars)
21. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
AND THOSE IN THE UNITED STATES (continued)
(d) Material effects of the different generally accepted
accounting principles on the Company's statements of changes
in financial position are as follows:
-------------------------------------------
1996 1995 1994
-------------------------------------------
CASH PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
As determined under Canadian
accounting principles $ 1,757,483 $(1,364,167) $(4,664,740)
Shares issued for settlement of litigation 400,000
-------------------------------------------
As determined under U.S.
accounting principles $ 2,157,483 $(1,364,167) $(4,664,740)
===========================================
FINANCING ACTIVITIES
As determined under Canadian
accounting principles 12,332 3,562,201 7,913,871
Shares issued for licence (3,100,000)
Shares issued for settlement of litigation (400,000)
(Decrease) increase in
bank indebtedness (853,184) 3,232,626 (630,323)
-------------------------------------------
As determined under U.S.
accounting principles $(1,240,852) $ 3,694,827 $ 7,283,548
===========================================
INVESTING ACTIVITIES
As determined under Canadian
accounting principles (916,631) (5,430,660) (2,618,808)
Acquisition of licence
in exchange for shares 3,100,000
As determined under U.S.
accounting principles (916,631) (2,330,660) (2,618,808)
-------------------------------------------
Change in cash $Nil $Nil $Nil
===========================================
Taxes paid $ 108,616 $ 11,976 $Nil
===========================================
Interest paid $ 527,589 $ 268,079 $ 177,614
===========================================
- - - --------------------------------------------------------------------------------
F-20
50
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
SCHEDULE IX
SHORT-TERM BORROWINGS
AS AT JANUARY 31, 1996, 1995, 1994
MONTHLY
WEIGHTED MAXIMUM AVERAGE WEIGHTED
AVERAGE AMOUNT AMOUNT AVERAGE
INTEREST RATE OUTSTANDING OUTSTANDING INTEREST
BALANCE AT AT END OF DURING DURING RATE DURING
NATURE OF BORROWING END OF PERIOD PERIOD PERIOD PERIOD PERIOD
------------------- ------------- ------------- ----------- ----------- -----------
1996
----------------------------------------------------------------------------------
BANK INDEBTEDNESS $3,250,000 8.83% $4,807,500 $3,943,875 9.87%
DUE TO SHAREHOLDERS 0 N/A 0 0 N/A
DUE TO SHAREHOLDERS 0 N/A 0 0 N/A
1995
----------------------------------------------------------------------------------
BANK INDEBTEDNESS $4,241,081 10.59% $4,241,081 $1,911,938 8.75%
DUE TO SHAREHOLDERS 0 N/A 0 0 N/A
DUE TO SHAREHOLDERS 0 N/A 0 0 N/A
1994
----------------------------------------------------------------------------------
BANK INDEBTEDNESS $ 623,044 7.69% $1,473,062 $ 662,442 7.87%
DUE TO SHAREHOLDERS 0 N/A 18,336 16,808 0.00%
DUE TO SHAREHOLDERS 0 N/A 575,520 137,018 10.00%
NOTES TO SCHEDULE
1. The amounts due to shareholders bear interest at either 0%, 10% or prime
plus 5% per annum, payable on demand.
2. The terms of the bank indebtedness are disclosed in note 9 to the
financial statements.
3. The average amounts outstanding were determined using the average of the
month end balances.
4. The weighted average rate during the period was determined using
month-end rates on the assumption that the indebtedness was similar
throughout the period.
F-21
51
ADVANCED GRAVIS COMPUTER TECHNOLOGY LTD.
SCHEDULE X
SUPPLEMENTAL INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
Maintenance and Repair Costs $ 23,565 $ 10,912 $ 27,988
Amortization of Deferred Costs 884,190 1,037,491 621,438
Taxes 23,470 88,001 70,887
Royalties 30,274 388,705 500,327
Advertising Costs 3,580,551 3,598,809 2,086,814
F-22
52
EXHIBIT INDEX
EXHIBIT NUMBER
EXHIBIT
10.1 Advanced Gravis Computer Technology Ltd. Directors',
Officers', and Employees' Stock Option Plan
10.2 Warehouse Lease between Marine Way Estates LTD and Advanced
Gravis Computer Technology Ltd. dated March 1, 1995