(INSIDE FRONT COVER)
Selected Financial Data
Thousands of U.S. dollars except per share amounts
1994** 1993** 1992* 1991_ 1990_ 1989_
---------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Revenues $131,323 $160,900 $119,181 $129,013 $140,366 $145,326
Research and development 14,316 17,279 13,679 13,788 13,702 13,618
Net income (loss) (47,238) (19,507) (9,912) (5,869) (9,190) 325
Basic earnings (loss) per share (2.27) (1.24) (0.63) (0.48) (0.75) 0.03
---------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Total assets 89,186 129,603 141,408 102,999 110,754 115,998
Fixed assets 20,214 30,768 38,416 22,761 27,074 29,642
Working capital 13,978 25,596 19,276 22,050 32,673 36,498
Current ratio 1.3 1.5 1.3 1.6 1.9 2.0
Bank indebtedness,
net of cash and
short-term deposits 5,239 20,670 38,357 9,030 3,196 9,339
Other long-term debt 2,020 2,998 3,290 5,548 5,330 5,336
Convertible debentures 21,681 23,862 - - - -
Shareholders' equity 19,109 34,308 55,491 59,363 67,425 74,564
<FN>
** Year ended March 31
* For eight months only, ended March 31, 1992
_ Year ended July 31
</FN>
(PAGE 12)
Consolidated Balance Sheet
March 31 March 31
1994 1993
---------------------------------------------------------------------------------------------------------
(Thousands of U.S. dollars)
Assets
Current assets:
Cash and short-term deposits $ 5,273 $ 9,737
Accounts receivable 30,182 35,950
Inventories (note 3) 20,877 25,898
Other 4,022 2,464
---------------------------------------------------------------------------------------------------------
Total current assets 60,354 74,049
Fixed assets (note 4) 20,214 30,768
Goodwill, net of accumulated amortization of $2,734 (1993-$2,441) 3,680 3,973
Other assets (note 5) 4,938 20,813
---------------------------------------------------------------------------------------------------------
Total assets $ 89,186 $ 129,603
=========================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Bank operating lines (note 6) $ 10,512 $ 10,025
Accounts payable and accrued liabilities (note 7) 27,854 28,802
Deferred revenue 7,424 8,932
Current portion of long-term debt (note 8) 586 694
---------------------------------------------------------------------------------------------------------
Total current liabilities 46,376 48,453
Long-term debt (note 8) 2,020 22,980
8.5% convertible debentures (note 9) 21,681 23,862
Shareholders' equity:
Capital stock (notes 9, 10 and 11)
Common shares, 28,072,333 issued and outstanding
(1993 - 15,864,833) 79,811 45,585
Retained earnings (deficit) (53,770) (6,532)
Cumulative translation adjustment (note 12) (6,932) (4,745)
---------------------------------------------------------------------------------------------------------
Total shareholders' equity 19,109 34,308
---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 89,186 $ 129,603
=========================================================================================================
<FN>
Commitments and contingencies (note 21)
</FN>
On behalf of the Board of Directors:
s/D.CUNNINGHAM s/D.M.GLEKLEN
D. Cunningham, Director D.M. Gleklen, Director
(See accompanying notes to consolidated financial statements)
(PAGE 13)
Consolidated Statements of Income and Retained Earnings
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
-------------------------------------------------------------------------------------------------------------
(Thousands of U.S. dollars, except per share amounts)
Income
Revenues:
Product revenue $ 90,813 $ 113,877 $ 88,339 $ 104,289
Service revenue 40,510 47,023 30,842 24,724
-------------------------------------------------------------------------------------------------------------
131,323 160,900 119,181 129,013
Operating expenses:
Cost of product sales 49,509 61,237 45,828 48,480
Service expenses 27,024 29,333 17,925 16,776
Selling and distribution 43,678 47,928 35,777 41,869
Administration and general 11,094 14,879 10,001 12,354
Research and development (note 13) 14,316 17,279 13,679 13,788
Restructuring and other costs (note 14) 28,662 5,547 3,678 686
-------------------------------------------------------------------------------------------------------------
Loss from operations (42,960) (15,303) (7,707) (4,940)
Interest expense (note 15) (4,127) (4,653) (2,715) (1,337)
Interest income and foreign exchange 991 449 510 814
Income taxes (note 16) (1,142) - - (406)
-------------------------------------------------------------------------------------------------------------
Net loss for the period $ (47,238) $ (19,507) $ (9,912) $ (5,869)
=============================================================================================================
Basic loss per share (note 17) $ (2.27) $ (1.24) $ (0.63) $ (0.48)
Weighted average number of common shares
outstanding (thousands) 20,802 15,702 15,658 12,195
=============================================================================================================
Retained Earnings
Balance at beginning of period $ (6,532) $ 12,975 $ 23,585 $ 29,454
Net loss for the period (47,238) (19,507) (9,912) (5,869)
Share issue costs - - (698) -
-------------------------------------------------------------------------------------------------------------
Balance at end of period $ (53,770) $ (6,532) $ 12,975 $ 23,585
=============================================================================================================
<FN>
(See accompanying notes to consolidated financial statements)
</FN>
Auditors' Report
To the Shareholders of Gandalf Technologies Inc.
We have audited the consolidated balance sheets of Gandalf Technologies
Inc. as at March 31, 1994 and 1993 and the consolidated statements of
income and retained earnings and changes in financial position for each of
the years ended March 31, 1994 and 1993, the eight months ended March 31,
1992 and the year ended July 31, 1991. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at March
31, 1994 and 1993 and the results of its operations and the changes in its
financial position for each of the years ended March 31, 1994 and 1993, the
eight months ended March 31, 1992 and the year ended July 31, 1991 in
accordance with generally accepted accounting principles.
s/KPMG PEAT MARWICK THORNE
Ottawa, Canada Chartered Accountants
May 27, 1994
(PAGE 14)
Consolidated Statement of Changes in Financial Position
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
---------------------------------------------------------------------------------------------------------------
(Thousands of U.S. dollars)
Operating activities:
Cash applied to operations (note 19) $ (13,925) $ (3,083) $ (2,376) $ (1,254)
Decrease (increase) in operating working
capital requirements (note 20) 305 4,532 (2,136) 4,766
---------------------------------------------------------------------------------------------------------------
Cash provided by (applied to) operating activities (13,620) 1,449 (4,512) 3,512
---------------------------------------------------------------------------------------------------------------
Financing activities:
Issue of capital stock (note 10) 34,226 343 7,703 -
Bank term debt retired (20,382) (11,791) - -
Bank term debt incurred - 792 8,987 -
Increase (decrease) in bank operating lines 487 (783) (850) 2,847
Other long-term debt incurred (retired) (459) (198) (2,977) 328
Issue of 8.5% convertible debentures - 21,665 - -
---------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 13,872 10,028 12,863 3,175
---------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of fixed assets (4,411) (3,929) (2,606) (3,362)
Disposal of fixed assets 2,246 - 3,399 -
Software development costs deferred (note 13) (1,986) (3,012) (2,640) -
Other (55) 1,338 350 (3,461)
Investments (note 22) - - (7,408) (2,350)
---------------------------------------------------------------------------------------------------------------
Cash applied to investing activities (4,206) (5,603) (8,905) (9,173)
---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash in the period (3,954) 5,874 (554) (2,486)
Effect of currency translation adjustments
on cash flows (510) 31 (949) (501)
Cash and short-term deposits,
beginning of period 9,737 3,832 5,335 8,322
---------------------------------------------------------------------------------------------------------------
Cash and short-term deposits, end of period $ 5,273 $ 9,737 $ 3,832 $ 5,335
===============================================================================================================
<FN>
(See accompanying notes to consolidated financial statements)
</FN>
(PAGE 15)
Notes to Consolidated Financial Statements
All amounts are stated in U.S. dollars unless otherwise indicated.
1. Summary of Accounting Principles
These consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in Canada, the
application of which, in the case of the Company, conforms in all material
respects for the years presented with accounting principles generally
accepted in the United States. The significant accounting principles are
outlined below.
(a) Basis of Consolidation and Reporting Currency
The consolidated financial statements include the accounts of Gandalf
Technologies Inc. and its subsidiaries. All significant intercompany
transactions and balances are eliminated.
During the fiscal 1992 period, the Company adopted the U.S. dollar as the
unit of measurement for presentation in its consolidated financial
statements. This change was made due to the significant increase in the
Company's activities in the United States as a result of the merger with
Infotron Systems Corporation ("Infotron") on August 2, 1991. The
comparative figures for the fiscal year 1991 were restated in U.S. dollars
using a translation method of convenience by which amounts previously
stated in Canadian dollars were converted to U.S. dollars using the July
31, 1991 exchange rate of $0.8683, without any other effects on previous
results stated in Canadian dollars. The results of operations for the
eight month period ended March 31, 1992 were converted at the average
exchange rate for the period of $0.8690. As a result of this change, the
Company considers that for translation purposes, operations using a unit of
measurement and presentation other than the U.S. dollar are foreign
operations.
(b) Foreign Currency Translation
The assets and liabilities of self-sustaining foreign operations are
translated into U.S. dollars at period-end exchange rates and the resulting
unrealized exchange gains or losses are included in a separate component of
shareholders' equity. The income statements of such operations are
translated at exchange rates prevailing during the period.
(c) Revenue Recognition
Revenue from the sale of products is recognized at the time goods are
shipped to customers. Revenue from service is recognized at the time
services are rendered. Billings in advance of services are included in
deferred revenue.
(d) Inventories
Work-in-process and finished goods inventories are valued at the lower of
cost and net realizable value. Raw materials are valued at the lower of
cost and replacement cost. Cost is determined on a first-in first-out
basis and includes material, labour and manufacturing overhead where
applicable.
(e) Fixed Assets
Fixed assets are recorded at cost net of government grants and investment
tax credits. Prior to the 1993 fiscal year, equipment was depreciated and
amortized using the straight-line method over five years. During fiscal
1993, the Company reviewed the estimated service life of certain such
assets and determined based on experience that the estimated useful life
exceeds five years. As a result of this change in the estimated period of
benefit, the Company is now amortizing the cost of certain equipment, from
fiscal 1993 onward, using the declining balance method at an annual rate of
20% (see note 24). Service spares and related equipment are depreciated
using the straight-line method over 3-5 years. Buildings are depreciated
using the straight-line method based on a useful life of 20 years.
Leasehold improvements are amortized using the straight-line method over
the term of the related lease.
(f) Research and Development Cost
Research costs are expensed as incurred. Development costs are expensed in
the year incurred unless management believes a development project meets
the generally accepted accounting criteria for deferral and amortization.
Computer software development costs for products where the technological
feasibility has been established are deferred and amortized over the
economic life of the underlying products. No other development costs have
met all the criteria for deferral and amortization, and accordingly, all
such costs have been expensed as incurred.
(g) Goodwill
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired of subsidiary companies and is amortized using the
straight-line method over a period not exceeding 20 years.
(h) Comparative Figures
Prior year financial statements have been reclassified to conform with the
current year's presentation.
(PAGE 16)
Notes (Cont'd)
2. Change in Fiscal Year
During the 1992 fiscal period, the Company changed the date on which its
fiscal year ends from July 31 to March 31. Accordingly, results of
operations for the transition period which ended March 31, 1992 covered an
eight-month period. The following are selected financial data for the
fiscal 1992 transition period. Unaudited financial data has also been
presented for the nine months ended April 27, 1991, representing the
closest practicable date in the previous year for purposes of comparison to
the 1992 fiscal period. The comparability of the two periods presented is
limited by the impact of the acquisition of Infotron on the results for the
1992 fiscal period.
8 Months 9 Months
Ended Ended
March 31 April 27
1992 1991
---------------------------------------------------------------------------------------------
(Unaudited)
(Thousands of dollars)
Revenues:
Product revenue $ 88,339 $ 78,982
Service revenue 30,842 18,486
---------------------------------------------------------------------------------------------
119,181 97,468
=============================================================================================
Gross profit:
Product 42,511 43,480
Service 12,917 5,983
---------------------------------------------------------------------------------------------
55,428 49,463
Operating expenses including
restructuring and other costs 63,135 51,524
---------------------------------------------------------------------------------------------
Loss from operations (7,707) (2,061)
Net financial expenses (2,205) (298)
Income taxes - 322
---------------------------------------------------------------------------------------------
Net loss $ (9,912) $ (2,037)
=============================================================================================
Basic loss per share $ (0.63) $ (0.17)
=============================================================================================
Weighted average number of
common shares outstanding
(thousands) 15,658 12,195
=============================================================================================
3. Inventories
March 31 March 31
1994 1993
---------------------------------------------------------------------------------------------
(Thousands of dollars)
Raw materials $ 5,587 $ 7,167
Work-in-process 4,007 3,271
Finished goods 11,283 15,460
---------------------------------------------------------------------------------------------
$ 20,877 $ 25,898
=============================================================================================
4. Fixed Assets
March 31 March 31
1994 1993
----------------------------------------------------------------------------------------
(Thousands of dollars)
Cost:
Land $ 213 $ 216
Buildings 4,535 4,756
Equipment 53,340 72,185
Leasehold improvements 1,779 4,056
----------------------------------------------------------------------------------------
59,867 81,213
Accumulated depreciation 39,653 50,445
----------------------------------------------------------------------------------------
Net book value $ 20,214 $ 30,768
========================================================================================
<FN>
Reductions in the cost of equipment and leasehold improvements and accumulated depreciation during fiscal 1994
primarily relate to writedowns associated with restructuring (note 14).
</FN>
5. Other Assets
March 31 March 31
1994 1993
----------------------------------------------------------------------------------------
(Thousands of dollars)
Software development costs
(notes 13 and 14) $ 847 $ 5,437
Deferred financing costs 1,541 2,122
Other 2,046 2,388
Deferred income taxes
(notes 14 and 16) 504 8,381
Assets held for disposal - 2,485
----------------------------------------------------------------------------------------
$ 4,938 $ 20,813
========================================================================================
6. Bank Operating Lines
At March 31, 1994, the Company's authorized bank operating lines totalled
$17.9 million. Of this amount, $15.3 million related to two committed
credit facilities with a Canadian chartered bank up to July 31, 1994 (the
annual review date when the loan agreements mature), bearing interest at
the bank's prime rate plus 1.375%. The other authorized amount of $2.6
million related to a demand facility with a bank in the United Kingdom
bearing interest at 2.5% above the bank's prime rate. These operating
lines are secured by certain of the accounts receivable, inventories and
other assets of the Company. The amount available for borrowing at any
time under these facilities is determined based on margin formulas relating
to levels of accounts receivable, inventories and other bank covenants.
Under such formulas, $15.4 million was available to the Company at March
31, 1994 and $10.5 million was being utilized, all of which related to the
Canadian operating lines. Cash and short-term deposits held as of that
date represented a further $5.3 million in cash resources available to the
Company. At March 31, 1994 the
(PAGE 17)
Company was not in compliance with certain financial covenants contained in
the bank loan agreements with the Canadian chartered bank. These financial
covenants measure among other items the tangible net worth of the Company,
the current ratio and the debt to tangible net worth ratio. The breach of
these financial covenants constitutes an event of default under the terms
of the loan agreements for which the Company obtained a waiver from the
bank for the balance of the committed period. Upon maturity of the
Canadian operating loans on July 31, 1994, the outstanding borrowings
convert to facilities which are repayable on demand unless a renewal of the
committed operating facility is agreed between the Company and the bank.
While the Company currently believes that the facilities will be renewed at
satisfactory levels, there can be no assurance that such renewal will occur
since the future availability of these credit facilities will in part be
determined by future operating performance.
7. Accounts Payable and Accrued Liabilities
March 31 March 31
1994 1993
------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
Trade accounts payable $ 9,784 $ 14,989
Payroll, commissions and related taxes 3,594 5,055
Other payables including accrued restructuring charges 13,012 8,502
Income and other taxes payable 1,464 256
------------------------------------------------------------------------------------------------------------
$ 27,854 $ 28,802
============================================================================================================
8. Long-term Debt
March 31 March 31
Description Interest Rate Security 1994 1993
------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
Obligation under capital lease 12.9% Printed Circuit Board $ 2,078 $ 2,235
denominated in Canadian dollars; Manufacturing Facility,
lease term ending during 2009. Nepean, Ontario
Other Various Various 528 1,057
Bank loans - 20,382
------------------------------------------------------------------------------------------------------------
2,606 23,674
Classified as current 586 694
------------------------------------------------------------------------------------------------------------
$ 2,020 $ 22,980
============================================================================================================
<FN>
The aggregate amount of long-term debt scheduled to be repaid in the five
fiscal years ending March 31, 1999 is $943,000 with the balance of
$1,663,000 due thereafter.
</FN>
9. 8.5% Convertible Debentures
The 8.5% convertible debentures have an aggregate principal amount of $30.0
million (Cdn.) and are unsecured direct obligations of the Company. They
mature in November, 2002 and are convertible at any time into common shares
of the Company at the option of the holder at the rate of approximately 426
common shares for each $1,000 (Cdn.) of principal amount of debentures
held. The maximum number of common shares which could be issued if all the
debentures were converted is 12,765,957, representing approximately 30% of
the shares of the Company at March 31, 1994 on a fully diluted basis. The
debentures are redeemable by the Company after November 10, 1995 provided
certain conditions are met relating to the trading price of the Company's
common stock during a period prior to the redemption date.
(PAGE 18)
Notes (Cont'd)
10. Capital Stock
The authorized capital stock of the Company consists of an unlimited number
of common shares without par value. During the third quarter of fiscal
1994, the Company completed the sale of 12,000,000 common shares through a
public offering. An analysis of the capital stock account for the year
ended March 31, 1994 and each of the preceding three periods is as follows:
Shares Dollars
----------------------------------------------------------------------------------------
(Thousands)
Balance July 31, 1990 and 1991 12,195,375 $ 37,539
Issued upon merger
with Infotron 3,476,532 7,703
----------------------------------------------------------------------------------------
Balance March 31, 1992 15,671,907 45,242
Issued for cash 198,000 354
Cancelled (5,074) (11)
----------------------------------------------------------------------------------------
Balance March 31, 1993 15,864,833 45,585
Issued for cash, net of
share issue costs 12,207,500 34,226
----------------------------------------------------------------------------------------
Balance March 31, 1994 28,072,333 $ 79,811
========================================================================================
11. Stock Options
The Company had five stock option plans in effect at March 31, 1994. The following table summarizes the activity in
the plans during the year ended March 31, 1994 and each of the preceding three periods.
Shares Available Outstanding
for Grant Options
----------------------------------------------------------------------------------------
Balance July 31, 1990 401,582 572,878
Granted (6,000) 6,000
Terminated 125,047 (125,047)
----------------------------------------------------------------------------------------
Balance July 31, 1991 520,629 453,831
Granted (918,000) 918,000
Terminated 475,831 (475,831)
----------------------------------------------------------------------------------------
Balance March 31, 1992 78,460 896,000
Reserved for issuance 600,000 -
Granted (575,000) 575,000
Terminated 125,000 (125,000)
Exercised - (198,000)
----------------------------------------------------------------------------------------
Balance March 31, 1993 228,460 1,148,000
Reserved for issuance 1,000,000 -
Granted (700,000) 700,000
Terminated 376,000 (376,000)
Exercised - (207,500)
----------------------------------------------------------------------------------------
Balance March 31, 1994 904,460 1,264,500
========================================================================================
<FN>
The options to purchase common shares granted under the above stock option plans expire between April 15, 1994 and
March 17, 2004. Of the 1,264,500 options outstanding at March 31, 1994, 461,168 were exercisable as of that date, and
the prices at which the outstanding options may be exercised approximated market value at the dates of grant and
average $3.10 (Cdn.) per share. Options held by all directors and executive officers as a group comprise 912,000 of
the outstanding options.
</FN>
12. Cumulative Translation Adjustment
The following table summarizes the change in the cumulative translation
adjustment for each of the years ended March 31, 1994 and 1993.
March 31 March 31
1994 1993
----------------------------------------------------------------------------------------
(Thousands of dollars)
Balance at beginning of year $ (4,745) $ (2,726)
Adjustment arising on translation
of foreign subsidiaries'
financial statements to
U.S. dollars (1,252) (1,524)
Adjustment relating to
subsidiary loans designated
as long-term investments (935) (495)
----------------------------------------------------------------------------------------
Balance at end of year $ (6,932) $ (4,745)
========================================================================================
(PAGE 19)
Notes (Cont'd)
13. Research and Development
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
--------------------------------------------------------------------------------------------------------
(Thousands of dollars)
Research and development expenditures $ 14,980 $ 20,504 $ 18,078 $ 16,841
Investment incentives (798) (2,028) (1,759) (3,053)
Software development costs:
Amortized 2,120 1,815 - -
Deferred (1,986) (3,012) (2,640) -
--------------------------------------------------------------------------------------------------------
$ 14,316 $ 17,279 $ 13,679 $ 13,788
========================================================================================================
14. Restructuring and Other Costs
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
--------------------------------------------------------------------------------------------------------
(Thousands of dollars)
Restructuring $ 15,760 $ 5,547 $ 2,806 $ 686
Other 12,902 - 872 -
--------------------------------------------------------------------------------------------------------
$ 28,662 $ 5,547 $ 3,678 $ 686
========================================================================================================
The Company has undertaken downsizing and restructuring activities in each
of the last four fiscal years. Three significant reductions in the size of
the Company's workforce have occurred since the August 1991 merger with
Infotron, the largest of which occurred in the fourth quarter of fiscal
1994.
Restructuring costs recorded in fiscal 1994 relate to decisions made by the
Company in February 1994 to reduce its workforce by approximately 300
positions worldwide and consolidate its North American operations under a
single organization structure. Restructuring costs include $5.3 million
relating to severance, $4.2 million in provisions for redundant facilities
representing the estimated future lease costs and the unamortized cost of
leasehold improvements for vacant facilities worldwide, and $6.3 million in
fixed asset writedowns to adjust the net book value of equipment and spare
parts inventory in North America to their estimated net realizable value.
During fiscal 1994, other costs include a writedown of $7.5 million in
deferred tax assets which primarily relate to investment tax credits earned
in Canada prior to the third quarter of fiscal 1993 on research and
development expenditures. These tax credits remain available to the
Company to reduce future federal income taxes payable in Canada and the
benefit of these tax credits will instead be recognized in the financial
statements as they are utilized through future profitable operations. For
financial reporting purposes, as a result of sustaining several consecutive
years of losses, including incurring significantly higher operating losses
in the second half of fiscal 1994 compared to the first half, management
believes that the accounting criteria for continuing to recognize these
amounts as an asset are no longer met. Other costs also include a
writedown of $4.5 million in deferred software development costs relating
to the Company's wide-area networking products which are not expected to be
recovered in the future. This followed a comprehensive review by
management in the fourth quarter of fiscal 1994 of revised revenue
projections for these products as a result of performance in the third
quarter. Other costs also include a $0.9 million writedown of assets held
for disposal to their net realizable value.
15. Interest Expense
Interest expense appearing on the consolidated statement of income relates
only to bank operating lines, bank term debt and convertible debentures.
It does not include interest on the capital lease obligation for the
manufacturing facility or, where applicable in fiscal periods prior to
1993, mortgage interest. Such interest is considered to be a cost of
occupancy which is allocated to operating expenses. Total interest
expense, including these amounts, during the year ended March 31, 1994
amounted to $4,402,000 (1993 - $4,952,000; 1992 (8 months) - $3,072,000;
1991 - $2,003,000). Of this amount, $3,578,000 (1993 - $3,568,000; 1992 -
$2,371,000; 1991 - $666,000) represented interest on indebtedness initially
incurred for a term of more than one year.
(PAGE20)
Notes (Cont'd)
16. Income Taxes
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
---------------------------------------------------------------------------------------------------------
(Thousands of dollars)
Current:
Canadian $ (342) $ - $ - $ (345)
Foreign (800) - - (1,036)
Deferred:
Canadian - - - 43
Foreign - - - 932
---------------------------------------------------------------------------------------------------------
$ (1,142) $ - $ - $ (406)
=========================================================================================================
The income tax expense reported differs from the amount computed by
applying the Canadian tax rates to the loss before income taxes. This is
primarily due to the non-recognition of tax benefits related to the losses
in these fiscal periods.
At March 31, 1994, the Company had available, in certain jurisdictions and
subject to certain restrictions, accumulated accounting losses of
approximately $76.0 million the potential tax benefit of which have not
been recognized in the consolidated financial statements. These include
loss carry-forwards for income tax purposes of approximately $53.0 million
which begin to expire after the 1999 fiscal year. The remaining amount
relates to items expensed in the consolidated financial statements which
have not yet been claimed for income tax purposes.
Included in the loss carry-forwards for income tax purposes are
approximately $37.0 million of net operating loss
carry-forwards ("NOLs") in the United States. The Company's ability to use
these NOLs to offset future taxable income is subject to restrictions
enacted in the United States Internal Revenue Code of 1986 as amended (the
"Code"). These restrictions would limit the Company's future use of its
NOLs when certain stock ownership changes described in the Code have
occurred. These ownership changes may arise from the public sale of
securities. As a result of the sale of the shares by the Company during
fiscal 1994 the Company is currently determining what restrictions, if any,
would exist on future use of NOLs.
The Company, for reporting purposes, has adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109") "Accounting for Income Taxes"
effective April 1, 1993 on a prospective basis. SFAS 109 requires the
Company to account for income taxes using the asset and liability method
for purposes of generally accepted accounting principles in the United
States ("U.S. GAAP"). There was no cumulative effect, or effect on current
results, as a consequence of adopting SFAS 109.
The following table shows the tax effect of temporary differences and
credits that give rise to deferred tax assets and liabilities under U.S.
GAAP.
(Thousands of dollars)
Operating loss carry-forwards $ 20,000
Depreciation 2,700
Restructuring reserves 3,200
Investment tax credits 11,000
Other 2,500
---------------------------------------------------------------------------
39,400
Valuation allowance (38,896)
---------------------------------------------------------------------------
$ 504
===========================================================================
At March 31, 1994 the balance of unremitted earnings of subsidiaries that
would be subject to foreign withholding tax on repatriation was $7,761,000
(1993 - $9,676,000; 1992 - $10,928,000; 1991 - $10,412,000). No provision
has been made for withholding taxes on such earnings.
17. Basic Loss Per Share
Fully diluted earnings per share information has not been presented as
potential conversions are anti-dilutive. Basic loss per share figures are
calculated using the monthly weighted average number of common shares
outstanding during the fiscal period.
(PAGE 21)
Notes (Cont'd)
18. Supplementary Expense Information to Consolidated Statement of Income
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
(Thousands of dollars)
Advertising $ 1,360 $ 1,283 $ 991 $ 1,859
==========================================================================================================
Depreciation and amortization $ 9,658 $ 11,675 $ 8,255 $ 7,893
==========================================================================================================
19. Cash Applied to Operations
Cash applied to operations is computed as follows:
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
(Thousands of dollars)
Loss from operations $ (42,960) $ (15,303) $ (7,707) $ (4,940)
Depreciation and amortization 9,658 11,675 8,255 7,893
Other reserves and writedowns not involving
an outlay of cash 22,004 6,182 872 -
Gain on disposal of assets (542) - - -
Interest paid (3,546) (4,653) (2,715) (1,337)
Interest received and foreign exchange 991 449 510 814
Income taxes 470 (1,433) (1,591) (3,684)
----------------------------------------------------------------------------------------------------------
$ (13,925) $ (3,083) $ (2,376) $ (1,254)
==========================================================================================================
20. Changes in Operating Working Capital
The decrease (increase) in operating working capital requirements is
computed as follows:
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
(Thousands of dollars)
Accounts receivable $ 4,103 $ 3,775 $ 1,146 $ 6,120
Inventories 1,750 2,488 (2,462) 929
Other current assets 73 8 (289) 402
Accounts payable and accrued liabilities (1,602) (3,462) (2,371) (2,459)
Deferred revenue (1,075) 2,271 1,263 887
Foreign currency translation adjustment (2,944) (548) 577 (1,113)
-----------------------------------------------------------------------------------------------------------
$ 305 $ 4,532 $ (2,136) $ 4,766
===========================================================================================================
(PAGE 22)
Notes (Cont'd)
21. Commitments and Contingencies
The Company has entered into various lease commitments primarily for office
premises and automobiles. At March 31, 1994, the minimum amounts payable
under such leases in future fiscal years are as follows:
(Thousands of dollars)
1995 $ 7,400
1996 6,000
1997 4,700
1998 3,000
1999 1,900
Thereafter 5,600
--------
$ 28,600
========
The Company has provided guarantees totalling approximately $1.2 million
(1993 - $1.5 million) pursuant to certain contracts and agreements.
Tax authorities in the Netherlands have advised the Company's Dutch
subsidiary that as a result of an audit it proposes to disallow substantial
amounts which have been deducted for income tax purposes in prior years.
The income tax returns in the years involved have not yet been reassessed
and the Company is vigorously contesting the proposed adjustments. It is
not possible at this time to make an estimate of the amount, if any, of
income taxes which may result and accordingly, no provision has been made
for any additional income taxes. If the Company is not completely
successful, any additional taxes will be accounted for as a prior period
adjustment.
Since 1991, the Company has received grants of approximately $3.9 million
under the Canadian Federal Government's Microelectronics and Systems
Development Program ("MSDP") of which $1.1 million was received in fiscal
1994. This funding is required to be repaid if certain conditions are met
relating to the commercialization of resulting technology. The Company
believes these conditions were substantially met during fiscal 1994 and
accordingly this funding will be required to be repaid in the future
following completion of the approved programs, which is expected to occur
during fiscal 1995. Repayment of annual amounts will be accrued in the
form of a royalty based on revenue and will be paid in the following year.
During fiscal 1994, a third party claim in the amount of $25 million (Cdn.)
for contribution and indemnity was made against the Company by defendants
in a breach of contract and negligence action arising from an alleged
failure of a computer system designed, supplied and installed by such
defendants. The Company believes that it has good defences in such third
party claim. However, at this time, the outcome of this claim is not
determinable.
22. Acquisition
On August 2, 1991, the Company's subsidiary in the United States, Gandalf
Data, Inc. completed a merger with Infotron, an international data
communications company headquartered in Cherry Hill, New Jersey, U.S.A..
Concurrent with the merger the subsidiary was renamed Gandalf Systems
Corporation ("GSC"). The acquisition equation, used in applying the
purchase method of accounting to the transaction, is as follows:
Consideration paid:
(Thousands of dollars)
Issuance of 3,476,532 Gandalf
common shares $ 7,703
Pre-merger loan to Infotron,
converted to equity in GSC upon merger 3,002
Merger-related expenses 2,479
--------------------------------------------------------------------
$ 13,184
====================================================================
Net assets acquired, represented by:
Cash $ 945
Non-cash working capital 6,091
Fixed assets at assigned value 22,398
Other non-current assets 5,486
Long-term debt (21,736)
--------------------------------------------------------------------
$ 13,184
====================================================================
23. Geographic Segment Information
The Company has one line of business, providing networking solutions to
customers through designing, manufacturing, marketing and servicing a broad
line of computerized communications systems.
The Company has defined five geographic regions for the segments in which
it operates: the United States of America, the United Kingdom, Canada,
Holland/France and other international markets. The following table sets
forth information concerning these geographic segments for each of the
years ended March 31, 1994 and 1993, the eight months ended March 31, 1992
and the year ended July 31, 1991.
Notes (Cont'd)
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
(Thousands of dollars)
Sales to customers:
United States $ 35,157 $ 45,347 $ 35,125 $ 30,636
United Kingdom 39,309 41,996 30,795 28,650
Canada 23,341 32,887 26,665 39,142
Holland/France 14,867 19,327 12,334 23,544
Other International 18,649 21,343 14,262 7,041
Segment transfers:
United States 5,360 3,573 2,670 1,968
United Kingdom 2,385 7,387 5,637 6,129
Canada 24,702 20,846 11,076 14,832
Holland/France 476 938 271 081
Eliminations (32,923) (32,744) (19,654) (23,010)
----------------------------------------------------------------------------------------------------------
Total revenue $ 131,323 $160,900 $ 119,181 $ 129,013
==========================================================================================================
Segment operating profit (loss):
United States $ (1,621) $ 603 $ 4,446 $ 2,229
United Kingdom 6,908 8,488 6,467 3,339
Canada (226) 4,802 3,855 6,562
Holland/France 2,550 4,200 2,534 8,013
Other International 2,574 1,627 (409) 208
----------------------------------------------------------------------------------------------------------
Total segment operating profit 10,185 19,720 16,893 20,351
==========================================================================================================
Expenses:
Research and development 14,316 17,279 13,679 13,788
General corporate 10,167 12,197 7,243 10,817
Restructuring and other costs 28,662 5,547 3,678 686
Interest expense 4,127 4,653 2,715 1,337
Interest income and foreign exchange (991) (449) (510) (814)
Income taxes 1,142 - - 406
----------------------------------------------------------------------------------------------------------
Net loss $ (47,238) $ (19,507) $ (9,912) $ (5,869)
==========================================================================================================
Identifiable assets:
United States $ 14,919 $ 35,086 $ 43,987 $ 16,975
United Kingdom 23,336 25,560 30,217 19,347
Canada 33,440 58,718 55,337 51,898
Holland/France 7,308 8,869 10,072 13,350
Other International 10,183 1,370 1,795 1,429
----------------------------------------------------------------------------------------------------------
Total assets $ 89,186 $ 129,603 $ 141,408 $ 102,999
==========================================================================================================
(PAGE 24)
Notes (Cont'd)
24. Quarterly Financial Information (Unaudited)
Quarterly unaudited financial information for each of the years ended March 31,
1994 and 1993 is as follows:
Year Ended March 31, 1994 First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------------------------------------------------------------------------------------------------
(Thousands of dollars, except per share amounts)
Revenues:
Product revenue $ 23,453 $ 24,632 $ 20,301 $ 22,427
Service revenue 10,720 10,386 9,965 9,439
---------------------------------------------------------------------------------------------------------------
34,173 35,018 30,266 31,866
---------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of product sales 11,820 12,639 11,295 13,755
Service expenses 6,837 6,769 6,963 6,455
Selling and distribution 10,577 11,176 11,274 10,651
Administration and general 2,679 2,434 2,825 3,156
Research and development 3,083 3,359 4,204 3,670
Restructuring and other costs - - - 28,662
---------------------------------------------------------------------------------------------------------------
Loss from operations (823) (1,359) (6,295) (34,483)
Interest expense (1,298) (1,160) (1,010) (659)
Interest income and foreign exchange 174 172 517 128
Income taxes - - - (1,142)
---------------------------------------------------------------------------------------------------------------
Net loss $ (1,947) $ (2,347) $ (6,788) $ (36,156)
===============================================================================================================
Basic loss per share $ (0.12) $ (0.15) $ (0.29) $ (1.29)
===============================================================================================================
<FN>
During the fourth quarter of fiscal 1994 the Company recorded additional
inventory provisions of $1.5 million on mature product lines, which were
included in the caption "Cost of product sales". Restructuring and other
costs of $28.7 million in the fourth quarter of fiscal 1994 are described
in Note 14 to the consolidated financial statements. Quarterly earnings
per share figures are calculated based on the weighted average shares
outstanding in the quarter.
</FN>
Year Ended March 31, 1994 First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------------------------------------------------------------------------------------------------
(Thousands of dollars, except per share amounts)
Revenues:
Product revenue $ 28,474 $ 29,250 $ 29,365 $ 26,788
Service revenue 11,184 12,216 11,926 11,697
--------------------------------------------------------------------------------------------------------------
39,658 41,466 41,291 38,485
--------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of product sales 13,630 19,118 14,569 13,920
Service expenses 7,095 7,497 7,378 7,363
Selling and distribution 12,885 12,891 11,323 10,829
Administration and general 3,536 5,479 3,073 2,791
Research and development 5,064 4,935 3,671 3,609
Restructuring and other costs - 5,547 - -
--------------------------------------------------------------------------------------------------------------
Income (loss) from operations (2,552) (14,001) 1,277 (27)
Interest expense (984) (1,017) (1,395) (1,257)
Interest income and foreign exchange (56) 70 126 309
--------------------------------------------------------------------------------------------------------------
Net income (loss) $ (3,592) $ (14,948) $ 8 $ (975)
==============================================================================================================
Basic loss per share $ (0.23) $ (0.95) $ - $ (0.06)
==============================================================================================================
<FN>
During the fourth quarter of fiscal 1993 the Company recorded an adjustment
of $3.0 million to reduce depreciation charges for the year based on
revisions made to the estimated useful lives of certain classes of
equipment (see note 1(e)). Approximately 75% of this amount can be
attributed to depreciation charges that were recorded during the first
three quarters of the 1993 fiscal year.
The Company increased its provisions for inventory and other reserves
during the second quarter of fiscal 1993 to reflect current and expected
future levels of revenue. These additional reserves of $6.2 million were
included in determining the loss from operations in the second quarter,
with $4.3 million included under the caption "Cost of product sales" and
the remaining amount of $1.9 million included under "Administration and
general".
</FN>
(PAGE 25)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Introduction
The consolidated financial statements together with accompanying notes and
supplementary data, should be read as an integral part of this review.
These financial statements have been prepared by management in accordance
with accounting principles generally accepted in Canada, the application of
which, in the case of the Company, conform in all material respects for the
periods presented with accounting principles generally accepted in the
United States. All amounts are stated in U.S. dollars unless otherwise
indicated. "C$" refers to Canadian dollars. During the 1992 fiscal
period, the Company changed its fiscal year end from July 31 to March 31
and accordingly the fiscal period ended March 31, 1992 was eight months in
duration.
Fiscal 1994 represented a year of transition for the Company from selling
traditional product lines, which are primarily sold directly to end user
customers, to a series of LAN internetworking products introduced by the
Company in fiscal 1994 which are intended to be sold through multiple
channels of distribution. The Company had not anticipated that quarterly
revenues in the final three quarters of fiscal 1994 would fall below the
level of $34.2 million achieved in the first quarter of fiscal 1994.
However, an unexpected 18% decline in product revenue in the third quarter
of fiscal 1994 compared with the second quarter led to a previously
unplanned significant restructuring and downsizing of the Company's
operations in the fourth quarter, particularly in North America.
The Company has undertaken downsizing and restructuring activities in each
of the last four fiscal years. Three significant reductions in the size of
the Company's workforce have occurred since the August 1991 merger with
Infotron Systems Corp. (Infotron), the largest of which occurred in the
fourth quarter of fiscal 1994. At the time of the merger, the combined
workforce was approximately 1,950 employees. Following the completion of
notice periods associated with the terminations in the fourth quarter of
fiscal 1994, the Company anticipates the workforce will be approximately
1,000 employees.
Results of Operations
The following table sets forth items derived from the consolidated
statement of income, expressed as a percentage of revenues for the fiscal
year ended March 31, 1994 and each of the preceding three fiscal periods.
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
Percentage of Revenues 1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
Revenues:
Product revenue 69.2% 70.8% 74.1% 80.8%
Service revenue 30.8 29.2 25.9 19.2
----------------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0%
==========================================================================================================
Gross profit:
Product 45.5% 46.2% 48.1% 53.5%
Service 33.3 37.6 41.9 32.1
Combined 41.7 43.7 46.5 49.4
Expenses:
Selling and distribution 33.3 29.8 30.0 32.4
Administration and general 8.4 9.2 8.4 9.6
Research and development 10.9 10.7 11.5 10.7
Restructuring and other costs 21.8 3.5 3.1 0.5
----------------------------------------------------------------------------------------------------------
Loss from operations (32.7) (9.5) (6.5) (3.8)
Financial expense (2.4) (2.6) (1.8) (0.4)
Income taxes (0.9) - - (0.3)
----------------------------------------------------------------------------------------------------------
Net loss (36.0)% (12.1)% (8.3)% (4.5)%
==========================================================================================================
(PAGE 26)
Management's Discussion and Analysis (Cont'd)
Restructuring and Other Costs
During the fourth quarter of fiscal 1994 the Company recorded a $28.7
million charge for restructuring and other costs which do not form part of
the Company's ongoing operations. The Company's financial results during
the third quarter ended January 1, 1994 were weaker than the first two
quarters of fiscal 1994 and were significantly below management's
expectations. These poor results occurred primarily as a result of
accelerated declines in the revenues from the Company's traditional product
lines and weak operating margins in North America. In response, a number
of restructuring initiatives were undertaken in the final quarter of fiscal
1994 designed to reduce operating costs in future periods. These
initiatives will reduce the Company's workforce by approximately 300
positions worldwide and consolidate its North American operations under a
single infrastructure at its corporate headquarters near Ottawa, Canada.
In addition the Company reassessed the carrying value of certain intangible
assets in response to revised revenue forecasts. This reassessment
resulted in the decision to writedown the carrying value of deferred tax
assets and deferred software costs.
Restructuring charges of $15.8 million includes $5.3 million relating to
severance, $4.2 million in provisions for redundant facilities and $6.3
million in fixed asset writedowns. The provision for redundant facilities
represents the estimated future lease costs and the unamortized balance of
leasehold improvements for vacant facilities worldwide, including the
facility of approximately 120,000 square feet in Cherry Hill, New Jersey
which had been the former corporate headquarters of Infotron. After
consolidating the North American manufacturing, distribution and
administrative functions near Ottawa, Canada, the Company's remaining U.S.
operation will be relocated to a facility of approximately 25,000 square
feet. The writedown of fixed assets will adjust the book value of
equipment and spare parts inventory in North America to estimated net
realizable value. It is the Company's intention to sell fixed assets that
are no longer required in the Company's ongoing operations.
Other costs recorded in the fourth quarter of fiscal 1994 include the
writedown of $7.5 million in deferred tax assets which primarily relate to
investment tax credits earned in Canada prior to the third quarter of
fiscal 1993 on research and development expenditures. These tax credits
remain available to the Company in order to reduce federal income taxes
payable in Canada and the benefit of these tax credits will instead be
recognized in the financial statements as they are utilized through future
profitable operations. However, for financial reporting purposes, as a
result of sustaining several consecutive years of losses for tax purposes
in Canada, including incurring significantly higher operating losses in the
second half of fiscal 1994 compared to the first half, management believes
that the accounting criteria for continuing to recognize these amounts as
an asset are no longer met. At March 31, 1994, the Company had available
subject to audit unused investment tax credits totalling approximately
$11.0 million.
Other costs also include a writedown of $4.5 million in deferred software
development costs incurred in prior years relating to the Company's
wide-area networking products. Declining revenue trends for these
products, which were more pronounced in the third quarter of fiscal 1994,
led to a comprehensive review by management of revenue projections for
these products. Following review of these projections management
determined that the carrying value of the associated deferred software
development costs would not be recovered through future cash flows and
accordingly its carrying value was written down to nil. Other costs also
include a $0.9 million writedown of the carrying value of assets held for
disposal to their estimated net realizable value.
Restructuring costs of $5.5 million recorded in fiscal 1993 related to
severance costs associated with the elimination of positions within the
Company and the estimated future cost of leased property which had become
redundant. In fiscal 1992, severance costs of $2.8 million were recorded.
In addition, in fiscal 1992, the Company recorded a charge to income of
$0.7 million, representing excess professional fees incurred in arranging
financing for the Infotron merger.
(PAGE 27)
Management's Discussion and Analysis (Cont'd)
Revenues
The following table sets forth revenues by geographic segment for the year
ended March 31, 1994 and each of the three preceding fiscal periods.
Year Year 8 Months Year
Ended Ended Ended Ended
March 31 March 31 March 31 July 31
1994 1993 1992 1991
---------------------------------------------------------------------
(Millions of dollars)
United States $ 35.2 $ 45.4 $ 35.1 $ 30.6
United Kingdom 39.3 42.0 30.8 28.7
Canada 23.3 32.9 26.7 39.1
Holland/France 14.9 19.3 12.3 23.6
Other International 18.6 21.3 14.3 7.0
---------------------------------------------------------------------
$ 131.3 $ 160.9 $ 119.2 $ 129.0
=====================================================================
Revenues in the fiscal year ended March 31, 1994 were $131.3 million
compared to $160.9 million in fiscal 1993 and $119.2 million during the
eight-month period ended March 31, 1992. Approximately 70% of revenues in
fiscal 1994 were derived from the sale of products with the balance
represented by service revenue. This proportion was not significantly
different from fiscal 1993 but was lower than the 74% figure for product
sales in fiscal 1992. The downward trend in the proportion of revenues
derived from the sale of products has occured as a result of larger
year-over-year percentage declines in product revenue than those which have
occurred in service revenue since fiscal 1992.
Service revenue was $40.5 million in fiscal 1994 compared with $47.0
million in fiscal 1993 and $46.3 million (annualized) in fiscal 1992.
Service revenue declined in fiscal 1994 compared to fiscal 1993 and fiscal
1992 as a result of declining product revenue during the last two fiscal
years.
The decrease in revenues in fiscal 1994 compared to fiscal 1993 of 18% is
attributable to a decline in demand for the Company's traditional products
in the areas of wide-area networking, data switching and data transmission.
This decline was the continuation of a trend that also existed in fiscal
1993 when revenues were 10% lower than revenues for fiscal 1992 on an
annualized basis. Revenues from the Company's LAN connection products,
representing approximately one third of total product revenue in fiscal
1994, grew 65% in fiscal 1994 compared to fiscal 1993. However, revenues
from the Company's traditional product lines declined 27% in fiscal 1994
compared to fiscal 1993. In addition, approximately 40% of the Company's
product revenue in fiscal 1994 were sold through indirect channels of
distribution compared to approximately 30% in fiscal 1993. These general
trends also occurred within the individual quarters of fiscal 1994. The
Company anticipates that in fiscal 1995, growth will continue in the LAN
connection products, sales of traditional products will continue to decline
and a greater proportion of sales will occur through indirect channels of
distribution. The Company believes that making greater use of multiple
channels of distribution provides opportunities for revenue growth.
Revenues in each of the Company's major markets declined in fiscal 1994
compared to fiscal 1993. Revenues in North America (United States and
Canada) were $58.5 million in fiscal 1994, down 25.3% from fiscal 1993 and
36.9% from the annualized level of fiscal 1992. These trends led to
restructuring the North American operations during the fourth quarter of
fiscal 1994 to significantly reduce operating costs in future periods.
The Company's European direct sales markets (United Kingdom, Holland and
France) reported revenues of $54.2 million in fiscal 1994, 11.6% lower than
in fiscal 1993 and 16.2% below the annualized level in fiscal 1992.
Revenues in the Company's other international markets were $18.6 million in
fiscal 1994, $21.3 million in fiscal 1993 and $21.5 million (annualized) in
fiscal 1992.
Gross Profit
The gross margin on revenues (revenues less cost of product sales and
service expenses expressed as a percentage of revenues) was 41.7% in fiscal
1994 compared with 43.7% in fiscal 1993 and 46.5% in fiscal 1992. The
gross margin on total revenues declined in both fiscal 1994 and fiscal 1993
compared to the previous year as a result of lower margins earned on both
product revenue and service revenue and a trend to a higher proportion of
total revenue being derived from service which has inherently lower margins
than product revenue.
The gross margin on product revenue (product revenue less cost of product
sales expressed as a percentage of product revenue) was 45.5% in fiscal
1994, 46.2% in fiscal 1993 and 48.1% in fiscal 1992. The gross margin on
product revenue in both fiscal 1994 and 1993 was adversely affected by
additional inventory reserves on mature product lines of $1.6 million and
$4.3 million respectively, taken in the fourth quarter of fiscal 1994 and
the second quarter of fiscal 1993. Exclusive of these additional
provisions, the gross margin on product revenue was 47.2% in fiscal 1994
and 50.0% in fiscal 1993.
(PAGE 28)
Management's Discussion and Analysis (Cont'd)
The gross margin on service revenue (service revenue less service expenses
expressed as a percentage of service revenue) was 33.3% in fiscal 1994,
37.6% in fiscal 1993 and 41.9% in fiscal 1992. The decline in the margin
earned on service revenue during fiscal 1994 resulted from service revenue
declining at a faster rate than service expenses. Service revenue declined
13.9% in fiscal 1994 compared to fiscal 1993 while service expenses
declined 7.9% during the same period. The decline in service margin during
fiscal 1993 compared to fiscal 1992 occurred as a result of higher costs
involved in servicing the existing customer base.
Restructuring actions undertaken in North America during the fourth quarter
of fiscal 1994 reduced overhead and infrastructure costs associated with
manufacturing, distribution and service. As a result of these actions,
management anticipates the gross margin on product and service revenue will
show improvement in fiscal 1995 compared to fiscal 1994. In addition, the
Company's LAN internetworking products introduced in fiscal 1994 earned
product margins that were higher than the average margin for all products
sold. The Company is anticipating an improvement in product margins in the
future based on continuing the trend in 1994 to derive a higher proportion
of revenues from these products.
Operating Expenses
Operating expenses in fiscal 1994 were $97.8 million compared to $85.6
million in fiscal 1993. Fiscal 1994 operating expenses included $28.7
million of restructuring and other costs which do not form part of the
Company's ongoing operations. Restructuring costs included in 1993
operating expenses were $5.5 million.
Selling and distribution, administration and general and research and
development costs were $69.1 million in fiscal 1994, 13.7% lower than the
$80.1 million expended in these areas during fiscal 1993. However, as a
result of lower revenues in fiscal 1994, these expenses represented 52.6%
of revenues in fiscal 1994 compared to 49.8% of revenues in fiscal 1993.
In fiscal 1992, these expenses were $89.2 million (annualized) or 49.9% of
revenues. Since the 1991 merger with Infotron, the Company has continued
to reduce staff in these areas with significant reductions in personnel
occurring in the first quarter of fiscal 1992, the second quarter of fiscal
1993 and most recently in the fourth quarter of fiscal 1994. As a result
of changes in the fourth quarter of fiscal 1994, the sales management,
order administration and finance activities for North America are all
centrally located at the Company's headquarters near Ottawa, Canada.
Since 1991, the Company has received grants of aproximately $3.9 million
under the Canadian Federal Government's Microelectronics and Systems
Development Program ("MSDP") of which $1.1 million was received in fiscal
1994. This funding is required to be repaid if certain conditions are met
relating to the commercialization of resulting technology. The Company
believes these conditions were substantially met during fiscal 1994 and
accordingly this funding will be required to be repaid in the future
following completion of the approved programs, which is expected to occur
during fiscal 1995. Repayment of annual amounts will be accrued in the
form of a royalty based on revenue and will be paid in the following year.
Operating Loss
The Company reported an operating loss of $43.0 million in fiscal 1994.
The respective operating losses in fiscal 1993 and 1992 (8 months) were
$15.3 million and $7.7 million. The operating loss for the first half of
fiscal 1994 was $2.2 million on revenue of $69.2 million. The operating
loss and revenue figures for the second half of fiscal 1994 were $40.8
million and $62.1 million respectively. The operating loss for the second
half included $28.7 million of restructuring and other costs. The majority
of the restructuring actions in fiscal 1994 were not taken until late in
the fourth quarter and accordingly did not significantly impact operating
expenses in the final quarter. Reduced operating expenses and associated
improved operating performance are anticipated in fiscal 1995 as a result
of the downsizing and restructuring actions taken late in fiscal 1994.
Financial Expense
Interest expense was $4.1 million in fiscal 1994 compared with $4.7 million
in fiscal 1993 and $2.7 million in fiscal 1992 (8 months). Interest
expense was significantly lower in the second half of fiscal 1994 following
the November 1993 public issue of common shares by the Company which raised
funds which were used to retire $19.7 million in term bank loans and repay
outstanding borrowings under the Company's short-term bank credit lines.
As a result of the retirement of the term bank loans during fiscal 1994,
the Company anticipates financial expenses will decline in fiscal 1995
compared to 1994.
Net Loss
The Company reported a net loss of $47.2 million in fiscal 1994 which
included $28.7 million in restructuring and other charges. The respective
net loss figures for fiscal 1993 and fiscal 1992 (8 months) were $19.5
million and $9.9 million.
(PAGE 29)
Management's Discussion and Analysis (Cont'd)
Liquidity and Capital Resources
Cash and short-term deposits declined during fiscal 1994 from $9.7 million
at March 31, 1993 to $5.3 million at March 31, 1994. Borrowings under bank
operating lines increased from $10.0 million at March 31, 1993 to $10.5
million at March 31, 1994. Negative cash flow from operations during
fiscal 1994 of $13.6 million related primarily to the loss of $18.6 million
before restructuring charges. Cash provided by financing activities was
$13.9 million. Financing activities included the sale of 12,000,000 common
shares through a public offering during the third quarter of fiscal 1994
which yielded proceeds of C$45.1 million (approximately $33.8 million) net
of underwriters' fees and before deducting expenses of the issue. Term
bank indebtedness of $19.7 million was retired from the proceeds of the
share issue representing the full amount outstanding under these loans.
The balance of the proceeds of approximately $13.5 million following
payment of expenses of the issue was retained for working capital purposes.
This latter amount was initially applied in November 1993 to eliminate the
utilization of short-term bank operating lines thereby making those lines
available for future working capital purposes and reducing interest costs
to the Company. At the end of the third quarter of fiscal 1994 the Company
was borrowing $1.2 million under these lines, net of cash and short-term
deposits of $1.8 million. At March 31, 1994, utilization of these
operating lines on a net basis was $5.2 million, representing negative cash
flow of $4.0 million during the fourth quarter of fiscal 1994 which
occurred primarily as a result of the net loss sustained in the third
quarter.
At March 31, 1994, the Company's authorized bank operating lines totalled
$17.9 million. Of this amount, $15.3 million related to two committed
credit facilities with a Canadian chartered bank up to July 31, 1994 (the
annual review date when the loan agreements mature) bearing interest at the
bank's prime rate plus 1.375%. The other authorized amount of $2.6 million
related to a demand facility with a bank in the United Kingdom bearing
interest at 2.5% above the bank's prime rate. These operating lines are
secured by certain of the accounts receivable, inventories and other assets
of the Company. The amount available for borrowing at any time under these
facilities is determined based on margin formulas relating to levels of
accounts receivable, inventories and other bank covenants. Under such
formulas, $15.4 million was available to the Company at March 31, 1994 and
$10.5 million was being utilized (all of which related to the Canadian
operating line). Cash and short-term deposits held as of that date
represented a further $5.3 million in cash resources available to the
Company. At March 31, 1994 the Company was not in compliance with certain
financial covenants contained in the bank loan agreements with the Canadian
chartered bank. These financial covenants measure among other items the
tangible net worth of the Company, the current ratio and the debt to
tangible net worth ratio. The breach of these financial covenants
constitutes an event of default under the terms of the loan agreements for
which the Company obtained a waiver from the bank for the balance of the
committed period. Upon maturity of the Canadian operating loans on July
31, 1994, the outstanding borrowings convert to facilities which are
repayable on demand unless a renewal of the committed operating facility is
agreed between the Company and the bank. While the Company currently
believes that the facilities will be renewed at satisfactory levels, there
can be no assurance that such renewal will occur since the future
availability of these credit facilities will in part be determined by
future operating performance.
The Company believes that its current financial base together with
currently available credit facilities can provide sufficient financial
resources for continued operations in the short-term. Negative cash flow
from operations is anticipated during the first half of fiscal 1995
primarily as a result of restructuring actions taken in the fourth quarter
of fiscal 1994. As a result of this restructuring the Company believes
that the adjusted break even levels for annual revenues is approximately
$130 million. The Company's ability to generate positive cash flow is
ultimately dependent on its ability to attain this break even revenue
level.
Capital spending was $4.4 million in fiscal 1994, $3.9 million in fiscal
1993 and $2.6 million in fiscal 1992 (8 months). The Company believes it
must continue to invest in its capital asset base at fiscal 1994 or
moderately higher levels.
Accounts receivable and inventories at March 31, 1994 were $51.1 million
(accounts receivable - $30.2 million; inventories - $20.9 million) versus
$61.8 million at March 31, 1993 (accounts receivable - $35.9 million;
inventories - $25.9 million). The decrease is primarily attributable to
lower revenue levels in fiscal 1994 than 1993, thereby reducing working
capital requirements. The additional inventory provisions of $1.5 million
taken in the fourth quarter of fiscal 1994 also contributed to the decrease
in inventory levels.
The Company's current ratio was 1.3:1 at March 31, 1994 compared to 1.5:1
at March 31, 1993. The decline in the current ratio is primarily due to
the accrued restructuring costs recorded in the fourth quarter of fiscal
1994.
(PAGE 30)
Market for Gandalf Stock and Related Security Holder Matters
Markets Information
The common shares of Gandalf Technologies Inc. are listed on The Toronto
Stock Exchange in Canada (Symbol GAN) and on The Nasdaq Stock Market (NMS)
in the United States (Symbol GANDF).
The Toronto Stock Exchange The Nasdaq Stock Market
(Canadian Dollars) (U.S. Dollars)
Fourth Third Second First | Fourth Third Second First
Quarter Quarter Quarter Quarter | Quarter Quarter Quarter Quarter
----------------------------------------------------------------------------------------------------
Fiscal 1994
High 3.75 4.60 4.00 4.60 | 3 3 - 1/2 3 - 1/4 3 - 19/32
Low 0.95 3.40 2.85 3.60 | 13/16 2 - 1/2 2 - 1/8 2 - 3/4
Volume (000's) 20,284 9,167 1,633 3,008 | 1,418 798 453 605
----------------------------------------------------------------------------------------------------
Fiscal 1993
High 5.50 4.10 3.35 3.65 | 4 - 1/2 3 - 1/4 2 - 7/8 3 - 1/8
Low 3.90 1.85 2.25 2.50 | 3 1 - 1/2 1 - 3/4 2 - 1/8
Volume (000's) 6,356 4,266 417 1,161 | 1,393 826 459 920
----------------------------------------------------------------------------------------------------
Fiscal 1992
High n/a 3.90* 3.00 3.45 | n/a 3- 3/8 * 2- 5/8 3- 1/8
Low n/a 2.50* 1.50 2.70 | n/a 2* 1- 1/8 2- 1/4
Volume (000's) n/a 1,042* 1,083 357 | n/a 1,217* 815 639
---------------------------------------------------------------------------------------------------
<FN>
* 9 weeks
</FN>
Shareholders
As at June 2, 1994, there were 28,072,333 shares issued and outstanding
with 2,197 record holders. The stock closed on The Toronto Stock Exchange
at $0.98 (Cdn.) on June 2, 1994, and on The Nasdaq Stock Market at $0.625.
Dividends
Individuals and corporations resident in the United States are subject
generally to a 15 percent withholding tax on dividends, and individuals and
corporations resident in countries that do not have a treaty with Canada
are subject to a 25 percent withholding tax. For United States
corporations only, however, the United States/Canada Tax Treaty reduces the
withholding tax to 10 percent if the United States corporation owns at
least 10 percent of the Company's voting shares.
It is the Company's present policy not to pay cash dividends and to retain
its earnings to finance expansion and growth. Payment of future dividends
will be at the discretion of the Board of Directors and will be dependent
on earnings, capital requirements and the financial condition of the
Company.
Capital gains derived in Canada from the sale or exchange of the Company's
shares by an individual or corporation resident in the United States and
without a permanent establishment in Canada are exempt from taxation in
Canada with limited exceptions.