FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of January, 2003
Perle Systems Limited
(Registrant's name)
60 Renfrew Drive, Suite 100
Markham, Ontario, Canada
L3R OE1
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file
annual reports under cover Form 20-F or Form 40-F:
Form 20-F _X_ Form 40-F ____
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information
to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act
of 1934.
Yes ____ No _X_
Documents Included as Part of this Report
No. Document
1. Shareholders Quarterly Report for the second quarter ended
November 30, 2002 dated January 30, 2003.
2. Press Release dated January 30, 2003 in connection with
financial results for the second quarter ended November 30,
2002.
Document No. 1
PERLE SYSTEMS LIMITED
QUARTERLY REPORT
For the quarter ended November 30, 2002
In accordance with accounting principles
generally accepted in Canada
Under Canadian securities regulations the Company is required to make
available to all investors consolidated financial statements prepared in
accordance with generally accepted accounting principles in Canada ("Canadian
GAAP"). The Company's filings with the United States Securities and Exchange
Commission, including press releases and other shareholder communications, are
generally prepared in accordance with accounting principles generally accepted
in the United States ("U.S. GAAP").
The enclosed Quarterly Report has been filed by the Company with Canadian
securities regulators.
President and Chief Executive Officer's Message to Shareholders - Second
Quarter Report
Dear Fellow Shareholders,
Q2 Fiscal 2003
To set the stage for sales growth this fiscal year, during the second quarter
we continued our sales channel improvement. This included a major
restructuring of the reseller channel in the US. Several new high potential
VAR's joined the Perle channel. Our marketing programs are also increasing in
intensity to generate leads to further drive increased demand for Perle
products.
We accelerated the output of our research and development programs, with
product releases in the areas of security and remote manageability such as IKE
for VPN on the Perle router line and Port Buffering on the CS9000 line, which
now offers customers the largest port buffers in the industry.
We embarked on a reorganization of our production processes to further improve
gross margins, lower expenses and further shorten delivery lead times to our
customers. We expect to begin seeing the benefits of these activities in the
third quarter.
One of our key objectives for fiscal 2003 is to deliver increasing operating
profits. To this end we continue to focus on the fundamentals of building
sales, improving margins and operating efficiencies, while containing costs.
Disciplined cost controls and good gross margins partially offset the lower
sales revenue in the second quarter. Improved collection turns on receivables
resulted in stronger cash flow.
The increasing market acceptance of Perle products, strengthening of our
distribution channel, and increasing productivity of our operations, gives me
great confidence in the long-term outlook for our company's success.
/s/ Joseph Perle
Joseph E. Perle
President and Chief Executive Officer
Perle Systems Limited
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes included in the Annual Report on
Form 20-F, prepared in accordance with generally accepted accounting
principles ("GAAP") in the United States and the Annual Report Supplement,
prepared in accordance with generally accepted accounting principles in Canada
for the fiscal year ended May 31, 2002.
Results of Operations
Six months ended November 30, 2002 and 2001
Overview
On June 5, 2001, the Company acquired the router product line of TriNexus
Communications Inc ("TiNexus"). This strategically important product line will
allow Perle to further develop its important Internet Protocol based
connectivity lines. This acquisition is expected to contribute to growth and
be accretive in the current fiscal year.
On October 4, 2001, the Company undertook a further restructuring of its staff
in terms of which 30 of 126 employees were temporarily laid off or terminated.
The Company took a one-time non-cash charge of $575,000 in respect of future
expenses for this restructuring in the quarter ended November 30, 2001.
In order to maintain a balanced cash flow stream, the Company renegotiated and
consolidated its long term and operating debt with its primary lender on May
31, 2001 to more favorable repayment terms. On October 28, 2002, the Company's
lender agreed to again revise the terms of the Credit Agreement, which has
resulted in more still favorable terms for the Company. This agreement will
result in additional working capital for the Company including a reduction in
the interest rates on its short and long-term debt to Canadian prime rate, a
conversion of $4.22 million (Cdn$6.45 million) of its operating line of credit
into a long-term loan, the deferral of principal payments on the long-term
loan for the period November 2002 to May 2003, and the extension of the
repayment terms of the long-term loan to fiscal 2004, 2005 and 2006. In
addition, the revised terms require the Company to continue to meet certain
financial targets in each fiscal year. (See Note 5(d)) to the condensed
consolidated financial statements).
Management has been responsive in matching the Company's expense base with its
lower revenue stream and has maintained a sound working relationship with its
vendors and secondary debt lenders, obtaining extended credit terms to ensure
that the Company's operations are uninterrupted. Further details on the credit
agreements and the Company's liquidity and its ability to continue as a going
concern, can be found in Notes 2 and 5 to the condensed consolidated financial
statements and in the liquidity section hereunder.
The Company continued to build on its new corporate brand logo and product
positioning tag line "Essential Network Connectivity", reflecting the broader
product offering and wider market appeal resulting from the integration of the
product lines acquired in the acquisitions of Specialix, Chase and TriNexus,
uniting the Company's portfolio of products under one brand making it easier
for customers and resellers to identify Perle's quality standards in the
products they select. The Company continues to offer limited lifetime
warranties on most of its product ranges, standing behind its reputation for
product excellence.
During the period the Company moved to streamline and develop its distributor
and reseller partners in each region. It aggressively marketed its new
Internet Protocol connectivity product offerings, the CS9000 console server,
its router product range and Remote Access server board products to its
distributors and resellers. The Company also consolidated its dominance of the
AS400 controller market and continued to capture the RAS business of the Shiva
product line following Intel's withdrawal from this market.
Perle continues to place importance on its research and development
initiatives, introducing improvements to existing product ranges and new
product lines such as the innovative market leading CS9000 Console Server.
Perle also has developed its on line Internet based training initiatives for
its distribution channel. Combined with its world class service and hot line
support offered in multiple languages and time zones, its strong marketing
campaigns supporting existing and new product lines, Perle is confident of
being able to maintain and build its reputation with VAR's and distributors
around the world.
On April 1, 2002, the Company's common shares were delisted from the Nasdaq
Stock Market and become eligible to trade on the OTC Bulletin Board ("OTCBB").
The company's listing on The Toronto Stock Exchange remains unaffected.
Sales
The global slowdown in the technology industry, which started late in fiscal
2000, has continued into fiscal 2003 resulting in reduced sales levels.
Sales for the six months ended November 30, 2002 decreased to $11.8 million
compared to sales of $15.4 million for the same period of fiscal 2002. Sales
from the European segment decreased to $4.0 million or 34% of sales in the
second quarter of fiscal 2003 from $5.3 million or 34% of sales for the same
period of fiscal 2002. Sales from the Americas segment decreased to $6.1
million or 52% of sales for the second quarter of fiscal 2003 from $8.0
million or 52% of sales for the same period of fiscal 2002. Sales from the
Asia-Pacific segment decreased to $1.6 million or 14% of sales in the second
quarter from $2.1 million or 14% of sales for the same period of fiscal 2002.
On a long-term basis it is expected that approximately 50% of the Company's
business will be generated in the U.S. segment, 35% in the European segment,
and the remaining 15% in the Asia-Pacific segment.
Gross Profit
Gross profit (sales minus cost of sales) as a percentage of sales, was 57% for
the six months ended November 30, 2002 compared to 57% for the same period of
fiscal 2002. The gross margin for fiscal 2003 is expected to continue at
approximately the 57% - 59% range, reflecting the Company's current product
mix and manufacturing initiates.
Selling, General and Administrative Expense
Selling, general and administrative expenses were $4.9 million for the six
months ended November 30, 2002 compared to $6.2 million for the same period of
fiscal 2002. As a percentage of sales, these expenses represented 41% compared
to 40% for the same period of fiscal 2002. These costs have decreased as a
result of management's focus to reduce expenses in the current operating
environment.
Research and Development
The Company's research and development activities are directed toward adding
new functions to existing products and developing new products. All of the
Company's research and development costs are expensed as incurred. In the six
months ended November 30, 2002, the Company expended $1.7 million or 14% of
sales, on research and development. This amount compares to $1.5 million or
10% of sales in the same period of fiscal 2002.
The Company's long-term target is for approximately 10% of its sales to be
invested in research and development. Current research and development
initiatives will be met by funds generated from operations. From time to time,
the Company may acquire or license technology as an alternative to internal
research and development.
Amortization of Capital Assets
Amortization of capital assets was $87,244 for the six months ended November
30, 2002 as compared to $144,659 for the same period of fiscal 2002. This
decrease is due to assets becoming fully depreciated.
Amortization of Intangible Assets and Goodwill
Amortization of intangible assets was $.9 million for the six months ended
November 30, 2002 as compared to $1.3 million for the same period of fiscal
2002. This relates to the amortization of intangibles and technologies
acquired in the Zeta, Chase, PORTtel and TriNexus acquisitions. The reduction
is a result of the Company completing a review of the carrying values of its
intangible assets. Through the process, the review indicated that on an
undiscounted basis certain intangible assets, namely PORTtel Technology and
distribution rights were impaired by $45,000 and $125,000, respectively. This
write-down was recorded in the last quarter of fiscal 2002.
The Company also undertook an independent valuation an audit of its Goodwill
and Intangible Assets at November 30, 2002 and determined there was an
impairment of $750,000 in respect of the goodwill and $50,000 in respect of
the intangible assets.
Interest Expense
Interest expense for the six months ended November 30, 2002 was $.8 million,
compared to $1.0 million for the same period of fiscal 2002. The lower
interest charge is the result of prevailing lower interest rates over the
prior year comparative period.
Income Taxes
The Company's income tax recovery was $223,238 in the six months ended
November 30, 2002 compared to approximately $224,496 in the same period last
year reflecting tax liabilities and deferrals in certain jurisdictions
resulting from its historical corporate structure. The Company has unrecorded
tax losses of approximately $17.7 million that are available to reduce future
years' taxable income. In fiscal 2003, notwithstanding these tax losses the
Company may still be liable for taxes in certain jurisdictions resulting from
its historical corporate structure. The deferred tax recovery reflects the tax
impact of the amortization of intangible assets from the Chase acquisition.
Net Loss
The net loss after taxes, for the six months ended November 30, 2002 was $2.0
million. This resulted in basic and diluted loss per common share of $0.21
compared to a net loss of $1.7 million or $0.18 in basic and diluted loss per
common share in the same period of fiscal 2002. Notwithstanding the decline in
the Company's sales, the Company's management has aggressively reduced
selling, general, and administrative expenses to compensate in the overall
profitability as displayed in the equalization of the net loss.
Cash Loss Per Share
Cash loss per share in the six months ended November 30, 2002 was $0.03. In
the same period of fiscal 2002 cash loss per share was $0.03. Cash loss per
share represents net income excluding, writedown of goodwill and amortization
of intangible assets and capital assets.
Segment Operating Income (Loss)
The operating income for the America region in the six months ended November
30, 2002 was $2.2 million as compared to $2.9 million in the same period of
fiscal 2002. The decrease in profitability is a result of a decrease in sales,
not fully offset by a reduction of costs.
The operating loss for the EMEA region in the six months ended November 30,
2002 was $(0.8) million as compared to an operating loss of $(0.5) million in
the same period of fiscal 2002. The decrease in profitability was a result of
a decrease in sales not fully offset by a reduction in costs.
The operating profit for the Asia-Pacific region in the six months ended
November 30, 2002 was $0.3 million as compared to operating income of $0.3
million in the same period of fiscal 2002.
Liquidity, Financial Resources and Working Capital
To finance the acquisition of the Affinity and Zeta product lines and the
Specialix and Chase businesses, the Company incurred term and operating debt,
which, as at May 31, 2002, totaled $17.3 million, the current portion of which
totaled $9.4 million. At that date, the Company had cash of $470,000 and
accounts receivable of $5.7 million. In addition during December 1999, the
Company issued 670,000 special warrants at a price of Cdn$17.55 raising a
total of approximately $7.2 million. In August 2000, the Company financed the
acquisition of the Remote Access server board business and USB Multiport
Controller product line from PORTtel Pty Ltd of Australia by the issue of
125,000 shares of Perle stock for $0.3 million. In order to finance the June
2001 acquisition of the router product line of TriNexus Communications, on May
31, 2001 the Company undertook a private placement of 300,000 common shares of
Perle stock combined with a warrant to acquire 75,000 common shares, which
raised gross proceeds of Cdn$315,000. Further details of the Company's
indebtedness can be found in Note 5 to the consolidated financial statements
of the Company.
As at May 31, 2001, the Company had incurred term and operating debt that
totaled $18.7 million, the current portion of which totaled $10.2 million. At
that date, the Company had cash of $1.0 million and accounts receivable of
$8.5 million.
Working capital, as defined by current assets less current liabilities, was a
deficiency of $7.3 million as at May 31, 2002 compared to a working capital
deficiency of $3.7 million at November 30, 2002. The working capital
deficiency was reduced by approximately $4.22 million (Cdn$6.45 million)
following the conversion of a portion of the short-term operating credit line
to long-term loan as part of the revision to the Company's Credit Agreement on
October 28, 2002 (See discussion below).
Pursuant to the terms of the Company's credit facilities with it's lender, the
Company is required within 60 days following completion of an equity offering
by the Company to apply the net proceeds of such an offering towards repayment
of the Company's term debt. The Company's lender agreed to waive this
requirement for the private equity offering at June 2001.
The Company has experienced recurring net losses of $2,507,181, $2,296,884 and
$23,709,792 for the years ended May 31, 2002, 2001 and 2000, respectively. The
significant slowdown in the technology industry and a general reduction in
sales of the Company's older products, not fully offset by sales from its new
product range, has resulted in reduced sales levels in the third and fourth
quarters of fiscal 2000. This trend has continued during fiscal 2001 and 2002.
Although management has significantly restructured operations with resulting
reductions in operating costs and has improved working capital management for
fiscal 2002, the changes were not sufficient to enable the Company to meet
certain terms and covenants in its existing credit agreements.
The Company obtained waivers for non-compliance at February 29, 2001, and on
May 31, 2001, a Third Amended and Restated Senior Credit Agreement was
executed (the "Credit Agreement" or the "Credit Facility") whereby the lender
extended the debt repayment terms and agreed to amend financial covenants for
fiscal 2001 and subsequent periods. As described in Note 5, the Credit
Agreement requires compliance with a number of covenants. On August 30, 2001,
the lender agreed to further revise the terms of the Credit Facility. The
revised terms required the Company to continue to meet certain financial
targets in each fiscal year as described above and postponed the reduction in
the Company's operating line of credit. The Company failed to meet certain of
these amended covenants at May 31, August 31, November 30, 2001 and February
28, May 31, August 31, 2002 and obtained waivers of non-compliance from its
lender.
On October 28, 2002, the Company's lender agreed to revise the terms of the
Credit Agreement, which has resulted in more favorable terms for the Company.
This agreement will result in additional working capital for the Company,
including a reduction in the interest rates on its short and long-term debt to
Canadian prime rate, a conversion of $4.22 million (Cdn$6.45 million) of its
operating line of credit into a long-term loan, the deferral of principal
payments on the long-term loan for the period November 2002 to May 2003 and
waivers for principal payments in September and October 2002, and the
extension of the repayment terms of the long-term loan to fiscal 2004, 2005
and 2006. In addition, the revised terms require the Company to continue to
meet certain financial targets in each fiscal year. The revised lending
agreement is subject to certain standard conditions precedent which have not
been completed as of October 28, 2002. (See Note 5(d)).
This agreement indicates the strong support of the Company's lender for the
Company's business plan. Notwithstanding the sales trend during the last three
years, and the Company's negative working capital position, management
believes that the Company will be in compliance with the terms of the Credit
Agreement during fiscal 2003. Accordingly, the debt has been classified
according to its revised repayment terms. If the slowdown in the technology
sector continues and the Company is unable to comply with the covenants, it
may seek to obtain a waiver or further revisions of the Credit Agreement.
However, there can be no assurance that the Company's lender will agree to any
such additional revisions or waivers.
Management has re-set its sales budget for fiscal 2003 to current industry
levels. It continues in a disciplined manner, with its cost reduction
initiatives, to maintain the operating costs expense ratio in line with the
lower sales levels. These initiatives follow on from the restructurings in May
2000 and October 2001 and continued through to the current period with the
ongoing integration of the Company's operations. (See Note 2 to the
consolidated financial statements). The Company's lender has been supportive
of the actions taken by management.
Management believes that inflation did not have a material effect on
operations during the fiscal year ended May 31, 2002 or the fiscal year ended
May 31, 2001 and has not had a material impact in the second quarter of fiscal
year 2003.
The Company has no material commitment for capital expenditure projects at
present.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company or statements made by
its employees may contain "forward-looking" information, which involves risks
and uncertainties. Forward-looking statements in the Management's Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere in
this report are made pursuant to the "safe harbor" provisions of the United
States Private Securities Litigation Reform Act of 1995. In particular,
statements, which are not historical facts, may be forward-looking statements.
The Company's actual future results may differ significantly from those stated
in any forward-looking statements. Factors that may cause such differences
include, but are not limited to, the factors discussed below and the accuracy
of the Company's internal estimates of revenues and operating expense levels.
The Company bases its forward-looking statements on information currently
available to it and does not assume any obligation to update such statements.
Going Concern
The Company has experienced a substantial downturn in sales and operating
earnings, has both working capital and shareholder's equity deficiencies for
the year ended May 31, 2002 and the quarter ended November 30, 2002.
Management has acted decisively to reduce and match the Company's expense base
with its revenue stream and has implemented aggressive marketing and research
and development programs to grow its sales. Despite management's efforts,
should the slowdown in the technology sector continue, it may not be possible
for the Company to meet its restrictive covenants under it's credit agreement
and continue to operate as a going concern. Under these circumstances the
Company may seek to obtain waivers of its loan covenants and to secure
additional financing. However there can be no assurance that the Company's
lender will agree to any such waivers or that additional financing will be
available on terms acceptable to the Company, if at all.
Rapid Technological Change
The computer networking and data communications industries are characterized
by rapidly changing technology, evolving industry standards and frequent new
product introductions, any of which could make the Company's existing products
obsolete. The Company's success depends upon its ability to enhance existing
products and to introduce new products to meet changing end-user requirements
and emerging industry standards. The Company must devote continued efforts and
financial resources to develop and enhance existing products and conduct
research to develop new products. The development of new, technologically
advanced products is a complex and uncertain process requiring high levels of
innovation, as well as the accurate anticipation of technological and market
trends. The Company may not be able to identify, develop, manufacture, market
or support new or enhanced products successfully or on a timely basis and may
not be able to respond effectively to product announcements by competitors,
technological changes or emerging industry standards. The Company may also
announce new products or product enhancements, capabilities or technologies
that have the potential to replace or shorten the life cycle of its existing
product offerings and that may cause customers to defer purchasing its
existing products.
Proprietary Rights of the Company and Others
The Company does not hold any patents on its technology. Instead, it currently
relies upon copyrights, trade secrets, unpatented proprietary know-how and
continuing technology innovation to protect the technology that it considers
important to the development of its business. The Company relies on various
methods to protect its proprietary rights, including confidentiality
agreements with its employees and suppliers and license agreements with its
customers that contain terms and conditions prohibiting the unauthorized
reproduction, disclosure or transfer of its software products. In addition,
the Company does not provide the source code to its customers. These efforts
may not provide meaningful protection or adequate remedies in the event of
unauthorized use or disclosure of the Company's proprietary information. It is
also possible that others could independently develop such know-how or obtain
access to it or independently develop technologies that are substantially
equivalent or superior to the Company's technology. If the Company's
protective measures are not successful, its business, operating results and
financial condition could be materially and adversely affected. The laws of
certain foreign countries do not protect the Company's intellectual property
rights to the same extent, as do the laws of the United States or Canada.
The patent position of technology is often uncertain and involves complex
legal and factual questions. The Company does not know whether any future
patent applications will result in the issuance of any patents. Even if
patents are issued, they may be challenged, invalidated or circumvented. Any
such patents may not provide a competitive advantage or afford protection
against competitors with similar technology. Competitors or potential
competitors may have filed applications for, or may have received patents and
may obtain additional and proprietary rights to, technologies used by or
competitive with those of the Company. Patent litigation is becoming
widespread among technology companies. If challenged, any patents that the
Company is issued in the future may not be held valid. The Company may also
become involved in interference proceedings in connection with one or more of
its patents or patent applications to determine priority of invention.
The Company's commercial success also depends significantly on its ability to
operate without infringing the patents and other proprietary rights of others.
However, patent applications are, in many cases, maintained in secrecy until
patents are issued. Consequently, the Company cannot be certain that it is the
first inventor of technologies covered by pending patent applications or that
it is not infringing on the patents of others.
Litigation may be necessary to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement. If
the Company becomes involved in any litigation, interference or other
administrative proceedings relating to its proprietary rights, it will incur
substantial expenses and the efforts of its technical and management personnel
will be significantly diverted. In addition, an adverse determination could
subject the Company to significant liabilities or require the Company to seek
licenses that may not be available on favorable terms, if at all. The Company
may be restricted or prevented from manufacturing and selling its products in
the event of an adverse determination in a judicial or administrative
proceeding or if it fails to obtain necessary licenses.
Risks Inherent with Acquisitions
An important element of the Company's growth strategy is to review acquisition
prospects that would complement its existing products, augment its market
coverage and distribution ability or enhance its technological capabilities.
Future acquisitions could result in restructuring charges, potentially
dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, any of which could materially adversely affect the Company's business,
financial condition and results of operations and the market price of its
Common Shares.
Acquisitions involve numerous risks, including risks associated with the
integration of acquired operations, technologies and products, diversion of
management's attention and potential loss of key employees of acquired
organizations. The Company may not be able to successfully integrate the
products, technologies or personnel of any business that might be acquired in
the future. Failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations.
Cost Reduction Program: Significant Leverage
The Company implemented a cost reduction program, including a restructuring to
integrate recent acquisitions and to reduce duplication of job functions. This
restructuring initiated in the fourth quarter of fiscal 2000 and again in the
second quarter of fiscal 2002 has significantly reduced operating costs.
Notwithstanding these cost reductions, economic factors outside of the
Company's control may impact on the financial condition of the Company and it
may not be able to return to profitable operations. This may require the
Company to seek additional capital through the issuance of additional common
shares or debt. The Company has a significant amount of debt (see Note 11 to
the Consolidated Financial Statements). There is no assurance that additional
equity or debt would be available to the Company on terms favorable to the
Company, if at all.
Growth
The Company's growth, both internally and through the acquisitions of
Specialix, Chase, the Affinity product line and the product division of Zeta,
the remote access server board business of PORTtel and the router product line
of TriNexus Communications Inc. has placed additional demands on its
management, financial personnel, information systems and controls. The Company
may not be able to successfully manage expanding operations with the effect
that a delay or failure to implement new and enhance existing systems and
controls may have a material adverse effect on its business, operating results
and financial condition.
Detection of Product Defects
The Company's products are highly complex and sophisticated and could contain
design defects or software errors that are difficult to detect and correct.
The Company cannot assure that errors will not be found in new products after
it begins commercial shipments or, if discovered, that it will be able to
successfully correct errors in a timely manner. The occurrence of product
defects, and the inability to correct errors, could result in the delay or
loss of market acceptance of the Company's products, material warranty expense
under the Company's limited lifetime warranty, diversion of engineering and
other resources from its product development efforts and the loss of
credibility with its customers, system integrators and end users, any of which
could have a material adverse effect on its business, operating results and
financial condition. Although the Company maintains insurance coverage for
product liability claims, it does not assure that coverage will be adequate or
that all claims will be covered.
Market Acceptance of Products
The Company designs and develops devices for the computer networking and data
communications industries. As with any new technologies, there is a
substantial risk that the marketplace may not accept the Company's new
products. Market acceptance of the Company's products depends, in large part,
upon its ability to demonstrate its products' performance and
cost-effectiveness over competing products and the success of its sales
efforts as well as those of its customers. The Company may not be able to
continue to market its technology successfully and may not assure that any of
its current or future products will be accepted in the marketplace.
Competition
The markets for networking and data communications products are intensely
competitive and subject to frequent product introductions with improved price
and performance characteristics, rapid technological change and new industry
standards. The Company competes with numerous types of companies including
companies which have been established for many years and have considerably
greater financial, marketing, technical, human and other resources, as well as
greater name recognition and a larger installed customer list, than it does.
This may give these competitors certain advantages, including the ability to
negotiate lower prices on components than those available to the Company. In
addition, many of the Company's large competitors offer customers broader
product lines, which provide more comprehensive solutions than those which it
currently offers. The Company expects that other companies will also enter
markets in which it competes. Increased competition could result in
significant price competition, reduced profit margins or loss of market share.
The Company may not be able to compete successfully with existing or future
competitors and cannot assure that competitive pressures will not materially
and adversely affect its business, operating results and financial condition.
Fluctuations in Operating Results
The Company's revenue and operating results could fluctuate substantially from
quarter to quarter and from year to year. This could result from any one or a
combination of factors, including:
o the cancellation or postponement of orders;
o the timing and amount of significant orders from the Company's largest
customers;
o the Company's success in developing, introducing and shipping product
enhancements and new products;
o the Company's product mix;
o impact on financial operations resulting from possible future
acquisitions;
o new product introductions by the Company's competitors;
o pricing actions by the Company or its competitors;
o the timing of delivery and availability of components from suppliers;
o changes in material costs;
o general economic conditions; and
o foreign exchange fluctuations.
The volume and timing of orders received during a quarter are difficult to
forecast. The Company's customers from time to time encounter uncertain and
changing demand for their products. Customers generally order based on their
forecasts. If demand falls below such forecasts or if the Company's customers
do not control inventories effectively, they may cancel or reschedule
shipments. The Company's expense levels during any particular period are based
in part on expectations of future sales. If sales in a particular quarter do
not meet expectations, the Company's operating results could be materially
adversely affected. The Company may not be able to sustain its recent rate of
growth or return to profitable operations.
Risks Associated with Sales to Customers in Foreign Countries
Sales outside of the U.S. segment contribute significantly to the Company's
revenues. Sales to customers in foreign countries are subject to government
controls and other risks, including difficulties in obtaining export licenses,
fluctuations in currency exchange rates, political instability, trade
restrictions and changes in duty rates. Although the Company has not
experienced any material difficulties in this regard to date, it may
experience difficulties in the future.
The Company's results are reported in U.S. dollars, although the functional
currency of the Company is the Canadian dollar. Due to the geographic mix of
the Company's customers, any fluctuation in the value of the Canadian dollar
relative to the U.S. dollar or other foreign currency may result in variations
in its sales and earnings expressed in US dollars. A significant portion of
the Company's revenues are generated in U.S. dollars. The Company makes a
portion of its component purchases in US dollars, creating a natural hedge
that partially offsets this risk. In order to further manage this risk, the
Company continually reviews its foreign exchange exposure and takes steps to
reduce it by using a variety of methods including, when appropriate, the
conversion of surplus foreign currency to U.S. or Canadian dollars and
borrowing in foreign currencies. The Company may not always be successful in
its efforts.
The Company's operating results could also be adversely affected by
seasonality of sales in different regions. This could have a material adverse
effect on future sales of the Company's products and, consequently, its
business, operating results and financial condition.
Dependence on Suppliers and Third Party Manufacturers
The Company subcontracts the assembly of its products to manufacturers that
assemble and test the products. The Company's dependence on independent
manufacturers exposes it to delays in obtaining adequate supplies of products
and reduced control of manufacturing quality and production costs. If the
Company's contract manufacturers fail to deliver products in the future on a
timely basis, it could be difficult to obtain adequate supplies of products
from other sources in the near term. A change in vendors may require
significant lead-time and may result in shipment delays and expenses. The
inability to obtain products on a timely basis, the loss of a vendor or a
change in the terms and conditions of the outsourcing could have a material
adverse effect on the Company's business, operating results and financial
condition.
Dependence on Key Personnel
The Company is substantially dependent upon a number of key employees,
including Joseph Perle, founder, President and Chief Executive Officer, John
Feeney, Senior Vice-President and Chief Operating Officer, and Derrick
Barnett, Vice-President, Finance and Chief Financial Officer. The loss of the
services of these or any one or more of the Company's other key officers could
have a material adverse effect on its business. Additionally, the Company's
ability to develop, manufacture and market its products and compete with
current and future competitors depends on its ability to attract and retain
qualified personnel. The Company has contingent severance agreements with its
senior executive officers. The Company does carry "Key Man" insurance coverage
for its key employees; however, failure due to economic and business
conditions to attract and retain qualified personnel could have a material
adverse effect on the Company's business, operating results and financial
condition.
Market Volatility of Common Shares
The market price of the Company's common shares has been volatile and is
likely to continue to be volatile. Factors that could affect the market price
for the Company's common shares include:
o actual or anticipated fluctuations in its operating results;
o announcement of technological innovations or new product
introductions by the Company or its competitors;
o changes of estimates of its future operating results by securities
analysts;
o developments with respect to patents, copyrights or proprietary
rights;
o general market conditions; and
o continued listing on The Toronto Stock Exchange and the OTCBB market.
The stock market has recently experienced significant price and volume
fluctuations that have particularly affected the market prices for shares of
technology companies. These broad market fluctuations may adversely affect the
market price of the Company's common shares.
Stock Exchange Listing Requirements
The capital markets on which the Company's common shares trade have certain
asset, earnings, stock price and other requirements for the continued listing
of a company's stock. Due to economic factors and market volatility factors
which impacted upon the Company's stock price, the Company did not comply with
certain of these requirements and as a result on April 1, 2002 the Company's
common shares were delisted from the Nasdaq Stock Market and became eligible
to trade on the OTC Bulletin Board. This change could negatively impact the
market for the Company's stock. Company's listing on the Toronto Stock
Exchange remains unaffected.
Support of Company's Lender
The Company is required to meet certain covenants in terms of its lending
agreement. In the event that the Company fails to meet these covenants, the
Company will seek to obtain further waivers or revisions to its credit
agreement from its lender. There can be no assurances that the Company's
lender will agree to any such waivers or revisions and failure to obtain
waivers or revisions may result in the lender accelerating payments due under
the credit agreement. This may impact on the Company's ability to raise
sufficient working capital and to continue as a going concern. The Company has
in the past failed to meet certain of these covenants but has obtained waivers
of non-compliance and revisions of its credit agreement from its lender.
Payment of Dividends
The Company has never paid cash dividends on its Common Shares and does not
intend to pay any dividends for the foreseeable future. Subject to certain
limited exceptions, the credit arrangements entered into with its lender
prohibit the Company from paying dividends on its common shares.
PERLE SYSTEMS LIMITED
CONSOLIDATED BALANCE SHEETS
In accordance with the Canadian Generally Accepted Accounting Principles (US dollars)
-------------------------------------------------------------------------------------------------------------------
As at November 30, 2002 May 31, 2002
-------------------------------------------------------------------------------------------------------------------
ASSETS
Current:
Cash and cash equivalents $396,322 $470,064
Accounts receivable 3,758,687 5,716,445
Inventories 3,472,217 3,646,673
Prepaid expenses 260,360 284,654
Income taxes receivable 80,234 227,728
-------------------------------------------------------------------------------------------------------------------
Total current assets 7,967,820 10,345,564
-------------------------------------------------------------------------------------------------------------------
Capital assets, net 736,512 832,247
Other assets 701,094 496,604
Technology, net 1,212,005 1,562,946
Brand names, net 1,469,364 1,737,573
Sales channel, customer list and distribution rights, net 1,602,737 1,966,840
Goodwill 6,392,105 7,320,079
-------------------------------------------------------------------------------------------------------------------
Total assets $20,081,637 $24,261,853
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current:
-------------------------------------------------------------------------------------------------------------------
Bank indebtedness $4,915,786 $8,683,648
Accounts payable and accrued liabilities 5,302,901 6,334,023
Income taxes payable 109,869 109,280
Deferred revenue 1,096,911 1,225,808
Current portion of long-term loan - 736,500
Current portion of notes payable 257,130 463,341
Current portion of obligation under capital lease 26,462 52,923
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 11,709,059 17,605,523
-------------------------------------------------------------------------------------------------------------------
Long-term loan 11,330,970 7,389,523
Obligation under capital lease 27,216 26,910
Accrued facilities cost 85,517 90,768
Deferred tax liabilities 1,046,338 1,300,121
-------------------------------------------------------------------------------------------------------------------
Total liabilities 24,199,100 26,412,845
-------------------------------------------------------------------------------------------------------------------
Commitment and contingencies
Shareholders' Equity (Deficiency):
Share capital -- Authorized: Unlimited Common Shares, issued and
outstanding: 9,592,293 (2002 -- 9,592,293) 32,130,345 32,130,345
Cumulative translation account (301,407) (365,514)
Deficit (35,946,401) (33,915,823)
-------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficiency) (4,117,463) (2,150,992)
-------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficiency) $20,081,637 $24,261,853
===================================================================================================================
PERLE SYSTEMS LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS
In accordance with the Canadian Generally Accepted Accounting Principles (US dollars)
---------------------------------------------------------------------------------------------------------------------
For the six month period ended November 30, 2002 2001
---------------------------------------------------------------------------------------------------------------------
Sales $11,814,376 $15,427,263
---------------------------------------------------------------------------------------------------------------------
Expenses:
Cost of sales 5,054,255 6,581,288
Selling, general and administration 4,869,707 6,190,619
Research and development expenditures (net of ITCs) 1,666,062 1,525,266
Amortization of intangible assets 860,972 1,297,817
Write down of goodwill 750,000 -
Depreciation of capital assets 87,244 144,659
Interest expense 779,952 1,026,700
---------------------------------------------------------------------------------------------------------------------
Total expenses 14,068,192 16,766,349
---------------------------------------------------------------------------------------------------------------------
Loss before income taxes and non-recurring items (2,253,816) (1,339,086)
Income tax expense (recovery) 223,238 224,496
---------------------------------------------------------------------------------------------------------------------
Loss before non-recurring items, net of $nil tax $(2,030,578) $(1,114,590)
---------------------------------------------------------------------------------------------------------------------
Non-recurring items, net of $nil tax - (575,000)
---------------------------------------------------------------------------------------------------------------------
Net loss for the period $(2,030,578) $(1,689,590)
=====================================================================================================================
Loss per common share - basic and fully diluted:
Before non-recurring items and cumulative effect of change in
accounting principles $(0.21) $(0.12)
Non-recurring items $ - $(0.06)
---------------------------------------------------------------------------------------------------------------------
Loss per common share - basic and diluted $(0.21) $(0.18)
=====================================================================================================================
PERLE SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
------------------------------------------------------------------------------------------------------------------------------
In accordance with the Canadian Generally Accepted Accounting Principles (US dollars)
---------------------------------------------------------------------------------------------
For the six month period ended November 30, 2002 2001
---------------------------------------------------------------------------------------------
Common Share Capital:
Shares
Opening balance 9,592,293 9,592,293
---------------------------------------------------------------------------------------------
Closing balance 9,592,293 9,592,293
---------------------------------------------------------------------------------------------
Amount
Opening balance $32,130,345 $32,130,345
---------------------------------------------------------------------------------------------
Closing balance $32,130,345 $32,130,345
---------------------------------------------------------------------------------------------
Other comprehensive income:
Opening balance (365,514) (323,920)
Net change for the period 64,107 (31,838)
---------------------------------------------------------------------------------------------
Closing balance (301,407) (355,758)
---------------------------------------------------------------------------------------------
Deficit:
Opening balance (33,915,823) (28,733,642)
Net loss for the period (2,030,578) (1,689,590)
---------------------------------------------------------------------------------------------
Closing balance (35,946,401) (30,423,232)
---------------------------------------------------------------------------------------------
Total shareholders' equity (deficiency) $(4,117,463) $1,351,355
=============================================================================================
PERLE SYSTEMS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------------------------
In accordance with the Canadian Generally Accepted Accounting Principles (US dollars)
-----------------------------------------------------------------------------------------------------------------------------
For the six months ended November 30, 2002 2001
-----------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities
Net loss for the year $(2,030,578) $(1,689,590)
Add (deduct) items not affecting cash:
Amortization of intangible assets 860,972 1,297,817
Write down of goodwill 750,000 -
Depreciation of capital assets 87,244 144,659
Deferred income taxes (223,238) (224,496)
-----------------------------------------------------------------------------------------------------------------------------
(555,600) (471,610)
Net change in non-cash working capital balances related to
operations 1,101,484 1,418,282
----------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 545,884 946,672
-----------------------------------------------------------------------------------------------------------------------------
Investing activities
Additions to capital assets (11,633) (77,521)
Purchase of technology and other intangible assets - (341,092)
-----------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (11,633) (418,613)
-----------------------------------------------------------------------------------------------------------------------------
Financing activities
Increase (decrease) in bank indebtedness (3,560,502) 93,839
Deferred financial cost (216,753) (25,830)
Repayment of notes payable (206,211) (126,350)
Repayment of obligation under capital lease (24,186) (15,978)
Increase (repayment) of long-term loan 3,415,314 (434,503)
Issuance of common shares (net) - (4,366)
-----------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (592,338) (513,188)
-----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (16,032) (30,766)
-----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents during the year (74,119) (15,895)
Cash and cash equivalents, beginning of the year 470,441 962,046
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year $396,322 $946,151
-----------------------------------------------------------------------------------------------------------------------------
Components of net change in non-cash working capital balances related to
operations:
Accounts receivable $1,843,944 $2,030,679
Inventories 80,853 980,065
Prepaid expenses 18,838 174,334
Income taxes 144,519 23,684
Accounts payable and accrued liabilities (886,159) (1,645,370)
Deferred revenue (100,511) (145,110)
-----------------------------------------------------------------------------------------------------------------------------
$1,101,484 $1,418,282
=============================================================================================================================
C
PERLE SYSTEMS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS (CONT'D)
In accordance with the Canadian Generally Accepted Accounting Principles (US dollars)
----------------------------------------------------------------------------------------------------------
For the six month period ended November 30, 2002 2001
----------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $779,952 $1,026,700
Income taxes paid $41,224 $83,411
==========================================================================================================
Non-cash investing and financing activities:
Vender take back debt $ - $34,462
==========================================================================================================
PERLE SYSTEMS LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Perle Systems Limited (the "Corporation") together with its
subsidiaries (collectively, the "Company" or "Perle") develops,
manufactures, markets, sells and supports networking products that
are used by customers to connect remote users to central servers for
a wide variety of e-business and general business applications. The
Company specializes in Internet Protocol ("IP") connectivity with an
increasing focus on mid-size IP routing solutions. Product lines
include routers, remote access servers, serial servers, emulation
adapters, multi-port serial cards and network controllers. Perle
distinguishes itself by its ownership of extensive networking
technology, depth of experience in major network connectivity
environments and long-term channel relationships in major world
markets. The Company sells these products worldwide through a
combination of distribution channels, systems integrators and
original equipment manufacturers ("OEMs").
2. Going Concern
These financial statements have been prepared on the "going concern"
basis, which presumes that the Company will be able to realize its
assets and discharge its liabilities in the normal course of business
for the foreseeable future.
The Company has experienced net losses of $2,507,181, $2,296,884, and
$23,709,792 for the years ended May 31, 2002, 2001 and 2000
respectively, and at May 31, 2002 has had a working capital
deficiency of $7,259,959 compared to a deficiency of $4,674,866 in
fiscal 2001. At November 30, 2002 the working capital deficiency was
$3,741,239. The working capital deficiency was reduced by
approximately $4.22 million (Cdn$6.45 million) following the
conversion of a portion of the short-term operating credit line to
long-term loan as part of the revision to the Company's Credit
Agreement on October 28, 2002. The Company's total assets at November
30, 2002 are $20,081,637 compared to total liabilities of
$24,199,100.
The significant slowdown in the technology industry has resulted in
reduced sales levels during the fiscal years 2002, 2001 and 2000.
Although management has restructured operations with resulting
reductions in operating costs, the changes were not sufficient to
improve working capital or to allow the Company to meet certain
covenants in its existing Credit Agreement. There is no certainty of
a return to former sales levels and the Company may not be able to
further reduce costs without substantially damaging its business.
The Company has generated cash from operating activities of
$1,922,499 in fiscal 2002 and $(1,018,517) in fiscal 2001
respectively and repaid $1,199,079 of long-term bank debt in 2002 and
$1,175,150 in fiscal 2001. At May 31, 2002, the Company was current
on all principal and interest payments in connection with its bank
facilities.
The sales trend during the last three years, together with the
Company's negative working capital position, significant operating
line of credit and long-term loan and the deficiency in shareholder's
equity (which includes the non-cash write-down of goodwill and
intangible assets), cast substantial doubt about the ability of the
Company to continue as a going concern.
As described in Note 5, the Company was not in compliance with
certain of its restrictive covenants, during fiscal 2002, as at May
31, 2002, which were subsequently waived by the lender.
On October 28, 2002, the Company's lender agreed to revise the terms
of the Credit Agreement, which has resulted in more favorable terms
for the Company. This agreement will result in additional working
capital for the Company including a reduction in the interest rates
on its short and long-term debt to Canadian prime rate, a conversion
of $4.22 million (Cdn$6.45 million) of its operating line of credit
into a long-term loan, the deferral of principal payments on the
long-term loan for the period November 2002 to May 2003, and waivers
for principal payments in September and October 2002, and the
extension of the repayment terms of the long-term loan to fiscal
2004, 2005 and 2006. In addition, the revised terms require the
Company to continue to meet certain financial targets in each fiscal
year.
This agreement indicates the strong support of the Company's lender
for the Company's business plan. Notwithstanding the sales trend
during the last three years, and the Company's negative working
capital position, management believes that the Company will be in
compliance with the terms of the Credit Agreement during fiscal 2003.
Accordingly, the debt has been classified according to its revised
repayment terms. If the slowdown in the technology sector continues
and the Company is unable to comply with the covenants, it may seek
to obtain a waiver or further revisions of the Credit Agreement.
However, there can be no assurance that the Company's lender will
agree to any such additional revisions or waivers.
These consolidated financial statements do not include any
adjustments to the amounts and classifications of assets and
liabilities that might be necessary should the Company be unable to
continue business in the normal course. Such adjustments could be
material.
3. Purchase of Technology
TriNexus Communications and Products
On June 5, 2001, the Company purchased the router product line from
TriNexus Communications Inc. ("TriNexus"). TriNexus is based in
Saskatoon, Canada and is a developer, manufacturer and vendor of data
communications products. The acquisition has been accounted for under
the purchase method of accounting and the results of operations are
included in the Company's financial statements from the date of
acquisition. The estimated purchase price was allocated to the fair
value of identifiable assets acquired. The estimated total cost of
the purchase was $514,000 consisting of cash consideration and
acquisition expenses of $181,000.
The total amount of the purchase price will be allocated to the
intangible asset technology, customer base, inventory and capital
assets. The vendor has deferred payment of $210,261 of the cash
consideration over a six-month period with the final installment due
and paid on December 5, 2001.
The technology is recorded at cost on the balance sheet and is to be
amortized on a straight-line basis over a period of five years.
4. Segmented Information
Substantially all of the Company's operations are related to a single
industry segment, the business of designing, manufacturing and
selling proprietary computer connectivity products.
Geographic segments are determined based on management reporting
requirements. Current segments disclosed are managed and evaluated
independently by the Company executives. Segment profit is defined as
operating income before corporate expenses, interest and income
taxes.
The Company had no individual customer whose accumulated sales
represented more than ten percent of total sales during the six-month
period.
The following information relates to geographic segments of the
Company:
--------------------------------------------------------------------------------------------------------------
For the six month period ended November 30, 2002 2001
--------------------------------------------------------------------------------------------------------------
Sales
America
Customer revenues $6,142,565 8,006,534
Inter-segment revenues 2,647,464 3,710,227
--------------------------------------------------------------------------------------------------------------
8,790,029 11,716,761
--------------------------------------------------------------------------------------------------------------
EMEA
Customer revenues 4,024,426 5,293,532
Inter-segment revenues - -
--------------------------------------------------------------------------------------------------------------
4,024,426 5,293,532
--------------------------------------------------------------------------------------------------------------
Asia-Pacific
Customer revenues 1,647,385 2,127,197
Inter-segment revenues - -
--------------------------------------------------------------------------------------------------------------
1,647,385 2,127,197
--------------------------------------------------------------------------------------------------------------
Elimination of inter-segment revenues (2,647,464) (3,710,227)
--------------------------------------------------------------------------------------------------------------
Total sales $11,814,376 $15,427,263
==============================================================================================================
--------------------------------------------------------------------------------------------------------------
Operating income (loss)
America $2,151,631 $2,944,477
EMEA (846,565) (519,857)
Asia-Pacific 276,879 262,947
--------------------------------------------------------------------------------------------------------------
Segment operating income 1,581,945 2,687,567
Research and development expenditures (1,666,062) (1,525,266
Interest expense (779,952) (1,026,700)
General corporate expenses (1,389,747) (1,474,687)
--------------------------------------------------------------------------------------------------------------
Consolidated loss before income taxes, non-recurring items, and
cumulative effect of change in accounting policy $(2,253,816) (1,339,086)
==============================================================================================================
--------------------------------------------------------------------------------------------------------------
November 30, 2002 2001
--------------------------------------------------------------------------------------------------------------
Identifiable assets
America $11,623,537 $7,750,498
EMEA 6,038,434 19,005,330
Asia-Pacific 1,374,792 1,150,066
--------------------------------------------------------------------------------------------------------------
Total assets for reportable segments 19,036,763 27,905,894
Corporate assets 1,044,874 1,428,869
--------------------------------------------------------------------------------------------------------------
Consolidated total assets $20,081,637 $29,334,763
==============================================================================================================
The America segment includes sales in the United States and Canada.
The EMEA segment includes sales in the United Kingdom, continental
Europe, Middle East and Africa. The Asia-Pacific segment includes
sales in China, Japan, Singapore, India and Australia. Inter-segment
revenues between geographic areas are transacted at fair value.
Segmented operating income (loss) represents income (loss) after the
elimination of profits on intercompany transactions. General
corporate items include foreign exchange, salaries and general
administrative expenses of the corporate group. Corporate assets
include cash and cash equivalents, loans to shareholders, officers
and directors, and investment tax credits recoverable.
5. Bank Indebtedness, Long-Term Loan, and Revised Credit Agreement
(a) Bank indebtedness consists of the following:
-------------------------------------------------------------------------------------------------------------------------
November 30, 2002 May 31, 2002
-------------------------------------------------------------------------------------------------------------------------
Line of credit with permitted borrowing of Cdn$7,550,000, including
letters of credit guarantees, can be drawn on in either Canadian or
US dollars. As at May 31, 2002, the borrowings are as follows:
Canadian dollar borrowing bearing interest at the Canadian bank prime
rate plus 2.5% per annum which were subsequently revised. (See (d)
below) on October 28, 2002. $4,915,786 $8,683,648
=========================================================================================================================
As at May 31, 2002, the Company had no additional amounts (2001 -
nil) available under these lines of credit.
As at May 31, 2002 and November 30, 2002, the Canadian bank prime
rate was 4.00%, and 4.5%, respectively.
The aggregate effective rate of interest of the Company's outstanding
bank indebtedness as at May 31, 2002 was 10.89% (2001 - 9.00%), which
includes punitive interest rates for borrowings over the secured
asset base.
(b) Long-term loan consists of the following:
--------------------------------------------------------------------------------------------------------------------------
November 30, 2002 May 31, 2002
--------------------------------------------------------------------------------------------------------------------------
Term loan of Cdn$20,775,000, bearing interest at the Canadian bank
prime rate. The principal payments have been set out in the table
below. For the fiscal years ending May 2004, 2005 and 2006, principal
payments are flexible based on operating profits subject to the
minimum payments set out below. As at November 30, 2002 and May 31,
2002, the principal amount outstanding was Cdn$17,737,500 and
Cdn$12,412,500, respectively. $11,330,970 $8,126,023
--------------------------------------------------------------------------------------------------------------------------
Less current portion - 736,500
--------------------------------------------------------------------------------------------------------------------------
Total long-term loan $11,330,970 $7,389,523
==========================================================================================================================
Minimum Principal repayments of the long-term loan are approximately
as follows:
-------------------------------------------------------------------------------------------------------------------------
2003 $736,500
2004 1,178,000
2005 2,550,000
2006 6,866,470
-------------------------------------------------------------------------------------------------------------------------
$11,330,970
=========================================================================================================================
Pursuant to the terms of the Corporation's banking arrangements, the
Company is required, within 60 days following completion of any
public or private debt or equity financing by the Company, to apply
the net proceeds of such financing towards repayment of the Company's
term debt facilities.
Covenants and Securities
The Credit Agreement with the prime lender requires compliance with a
number of covenants including sales and pre tax and interest earnings
levels, expenditure guidelines, reduction in accounts receivable and
inventory levels, limits on the permitted borrowing base and a
reduction in the Company's operating line of credit. The Company is
also restricted from declaring dividends on its Common Shares.
In terms of the agreement at October 28, 2002 these covenants have
been changed to a 10% negative variance on earnings before interest,
taxes, depreciation and amortization (EBITDA), selling general and
administrative expenses including research and development expenses
and gross profit.
Substantially all of the assets of the Company have been pledged as
collateral for the long-term loan and bank indebtedness of the
Company.
As at May 31, 2002 and August 31, 2002, the Company was not in
compliance with these covenants. The bank has waived the requirement
to meet these covenants at May 31, 2002 and August 31, 2002. See (e)
below.
(c) Letters of Credit and Guarantees
The Company had letters of guarantee outstanding as at November 30,
2002 and May 31, 2002 of approximately $327,000 for other general and
corporate purposes.
(d) Revised Credit Agreement
On October 28, 2002, the Company has signed terms and commitment
letter with its lender, setting out the revised terms and conditions
of the Credit Agreement. The major terms of this agreement are as
follows:
[i] reduction of interest rates on the Company's operating line of credit
and term loan borrowings to prime rate;
[ii] conversion of $4.22 million (Cdn$6.45 million) of its operating line
of credit into a long-term loan;
[iii] deferral of principal payments on the long-term loan from November
2002 through May 2003;
[iv] extension of the repayment terms of the long-term loan to fiscal
2004, 2005 and 2006, on a flexible repayment schedule, based a
percentage between 33.3% and 50% of the Company's EBITDA less
interest, subject to certain minimum payments; and
[v] revision of certain restrictive covenants.
[vi] repayment of the Company's operating line of credit and long-term
debt by May 31, 2006
In addition, the Company agreed to issue up to 2,400,000 new warrants
to its lender. These warrants will expire in five years and will be
priced at the closing price of the Common Shares of the Company on
the trading day preceding the date of the application submission for
approval by the Toronto Stock Exchange. The Company is entitled to
purchase, at any time prior to May 31, 2006, up to 1,400,000 of these
warrants at a nominal amount and on a pro rata basis on early
repayment in amounts not less than Cdn$1,000,000 of the portion of
the operating line of credit converted to long-term debt, subject to
regulatory approval. The Company will re-price the 500,000 existing
warrants held by its lender to the market price, as detailed above.
These warrants expire on May 31, 2005.
SELECTED FINANCIAL INFORMATION
For the six month period ended November 2002 2001
--------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
--------------------------------------------------------------------------------------------------------------------
Gross profit margin 57% 57%
Selling, general and administrative as a percentage of sales 41% 40%
Research and development as a percentage of sales 14% 10%
Total assets $20,081,637 $29,334,763
Common shareholders' capital 32,130,345 32,130,345
Common shares outstanding 9,592,293 9,592,293
Weighted average shares outstanding 9,592,293 9,592,293
Current ratio .68 .62
Quick ratio .38 .41
====================================================================================================================
Stockholder Information
==========================================
Investor Relations External Reporting
Shareholders and other individuals The consolidated financial statements and
requesting information about Perle Systems notes thereto of Perle Systems Limited ("Perle"
or wishing to receive, free of charge, or the "Company") included in this Quarterly
copies of the annual and quarterly Report are prepared in accordance with
reports, including the annual report on Canadian generally accepted accounting
Form 20-F and quarterly reports on Form principles.
6-K which are filed with the U.S.
Securities and Exchange Commission and The consolidated financial statements, notes
Canadian regulatory authorities, should thereto and all financial information included
call, e-mail or write to: in this Quarterly Report Supplement are
presented in U.S. dollars. All references to
Perle Systems Limited "$" or "dollars" are references to U.S.
Investor Relations Department dollars, unless otherwise specified.
60 Renfrew Drive, Suite 100
Markham, Ontario, Canada L3R 0E1
Telephone: 905 946-5004
Facsimile: 905 944-2059
Web site: www.perle.com
E-mail: invest@perle.com
All of the Company's publicly filed
documents can be obtained from the
Canadian regulatory authority website
www.sedar.com.
Stock Listings
The Over the Counter Bulletin Board ("OTCBB") (symbol: PERL)
Toronto Stock Exchange (symbol: PL)
For more information on Perle and its products, please access the Company's
web site at www.perle.com.
Register and Transfer Agents
Inquiries regarding a lost certificate, consolidation of accounts and changes
in address, name or ownership should be addressed to either of the following:
American Stock Transfer & Trust Company CIBC Mellon Trust Company
59 Maiden Lane 320 Bay Street, P.O. Box 1
New York, New York, USA 10007 Toronto, Ontario, Canada, M5H 4A6
Web site: www.amstock.com Telephone: 1-800-387-0825
E-mail: info@amstock.com Facsimile: 416 643-5570
Web site: www.cibcmellon.com
E-mail: inquiries@cibcmellon.com
Special Note Regarding Forward Looking Statements:
From time to time, information provided by the Company or statements made
by its employees may contain "forward-looking" information, which involves
risks and uncertainties. Forward-looking statements discussed herein,
including statements in the Management's Discussion and Analysis, are made
pursuant to the "safe harbor" provisions of the United States Private
Securities Litigation Reform Act of 1995. In particular, statements, which
are not historical facts, may be "forward-looking" statements. When used
herein, words such as "anticipate", "intend", "believe", "estimate", and"
expect" and similar expression, as they relate to the Company or its
management, are intended to identify "forward-looking" statements. The
Company's actual future results may differ significantly from those
expressed or implied by any "forward-looking" statements. Forward-looking
statements are based on assumptions made by and information available to
the Company. Factors that may cause such differences include, but are not
limited to, rapid technological change; proprietary rights of the Company
and others; risks inherent with acquisitions; the Company's ability to
manage growth; risks associated with the Company's cost reduction programs;
significant leverage; the Company's ability to maintain compliance with the
convenants contained in its credit agreement; the Company's ability to
continue as a going concern; recent rapid growth; the Company's ability to
detect and prevent product defects; market acceptance of the Company's
products; increased levels of competition; fluctuations in the Company's
operating results; risks associated with sales to customers in foreign
countries; dependence on third party suppliers and third party
manufacturers; dependence on key personnel; market volatility of common
shares; risks associated with the Company's shareholder rights plan; and
other risks detailed from time to time in the Company's periodic reports
filed with the United States Securities and Exchange Commission.
DOCUMENT NO. 2
FOR IMMEDIATE RELEASE:
Perle Systems Reports Second Quarter Fiscal 2003 Financial Results
Increased operating profit for the second quarter
TORONTO, CANADA - January 30, 2003 - Perle Systems Limited (OTCBB: PERL; TSE:
PL), a leading provider of networking products for Internet Protocol ("IP")
and e-business access, today reported unaudited financial results for the
second quarter fiscal 2003 ended November 30, 2002.
Financial Highlights
Based on US GAAP, the Company's revenue for the second quarter of fiscal 2003
totaled $6.5 million, compared to revenue of $7.8 million in the second
quarter of fiscal 2002.
Net operating profit for the quarter was approximately $102,000 compared to a
net operating loss of $724,000 in the same period last year. Cash earnings per
share was $0.01 for the quarter compared to a cash loss per share of $0.08 in
the same period last year.
Net operating earnings/(loss) and cash earnings/(loss) per share figures
exclude writedown of goodwill, depreciation of capital assets and intangibles
and one time costs.
The Company undertook an independent valuation and audit of its Goodwill and
Intangible Assets at November 30, 2002 and determined that there was a
non-cash impairment of $750,000 in respect of the goodwill and $50,000 in
respect of the intangible assets. A further review will be undertaken in 12
months.
Net loss for the quarter was approximately $1,100,000, which includes the
writedown of goodwill of $750,000, compared to a net loss of approximately
$780,000, which includes no writedown of goodwill, in the same period of last
year. Disciplined cost controls and a sustained level of gross margin, offset
the lower sales, resulting in a reduced net loss on an operating basis. Loss
per share was $0.11, of which $0.08 loss per share is from the writedown of
goodwill, compared to a loss per share of $0.08 in the same period last year.
For the six months to November 30, 2002, the net loss was approximately $2.0
million compared to $1.7 million in the same period last year. The loss per
share was $0.21 compared to $0.18 in the same period last year.
Chief Executive Officer's comments:
"Through disciplined cost and production controls we delivered increased
operating profit for the quarter, one of our key objectives for 2003. Our
focus for this fiscal year is to grow sales," stated Joe Perle, President and
Chief Executive Officer.
"In this regard we have accelerated the output of our research and development
programs, with product releases in the areas of security and remote
manageability such as IKE for VPN on the Perle router line and Port Buffering
on the CS9000 line which now offers customers the largest port buffers in the
industry. We have also stepped up our aggressive marketing campaigns and
continued improving our sales and distribution channels, in North America and
Europe. Several new high potential VAR's have joined the Perle channel, with
the goal of driving increasing demand for Perle products."
Chief Financial Officer's comments:
"Following the conclusion of our new credit agreement with our major lender
last quarter, we continue to focus on building cash flow through the
fundamentals of increasing sales, improving margins and driving operating
efficiencies from within the business, while containing costs," stated Derrick
Barnett, Vice President, Finance and Chief Financial Officer. "We have made
significant progress in all of these areas and I am confident that there is
ample room for further productivity improvements allowing us to support sales
growth without proportional increase in costs."
Company Profile
Perle Systems is a leading developer, manufacturer and vendor of award-winning
networking products. These products are used to connect remote users reliably
and securely to central servers for a wide variety of e-business and general
business applications. Perle specializes in Internet Protocol (IP)
connectivity applications, with an increasing focus on mid-size IP routing
solutions. Product lines include routers, remote access servers,
serial/console servers, emulation adapters, multi-port serial cards,
multi-modem cards, print servers and network controllers. Perle distinguishes
itself by its ownership of extensive networking technology, depth of
experience in major network connectivity environments and long-term channel
relationships in major world markets. Perle Systems has offices and
representative offices in 12 countries in North America, The United Kingdom,
Europe and Asia and sells its products through distribution channels
worldwide. Its stock is traded on the OTCBB (symbol PERL) and the Toronto
Stock Exchange (symbol PL). For more information about Perle and its products,
access the Company's Web site at http://www.perle.com.
Forward-looking statements in this release, including statements relating to
the Company's future growth prospects, future profits, anticipated revenue and
earnings results revenue and earnings guidance for fiscal 2002, and the
success of the Company's growth and restructuring initiatives are made
pursuant to the "safe harbor" provisions of the United States Private
Securities Litigation Reform Act of 1995. Investors are cautioned that such
forward-looking statements involve risks and uncertainties, including, without
limitation, risks relating to the company's ability to maintain compliance
with the covenants contained in its credit agreement, to meet its sales
forecasts while maintaining control over its costs, to continue to operate as
a going concern, the Company's ability to manage growth, the implementation of
the Company's restructuring plan, the impact of FASB 141 and FASB 142 on the
Company's results of operations and financial condition, continued acceptance
of the Company's products, increased levels of competition for the Company,
new products and technological changes, the Company's dependence upon third
party suppliers, intellectual property rights and other risks detailed from
time to time in the Company's periodic reports filed with the United States
Securities and Exchange Commission.
###
Contacts: Derrick Barnett
Vice President, Finance & CFO
Perle Systems Limited
Phone: 905-946-5034
Fax: 905-944-2116
Email: dbarnett@perle.com
Financial statements to follow -
PERLE SYSTEMS LIMITED
CONSOLIDATED BALANCE SHEETS
(US dollars)
-----------------------------------------------------------------------------------------------------------
As at November 30, 2002 May 31, 2002
-----------------------------------------------------------------------------------------------------------
ASSETS (Unaudited) (Audited)
Current:
Cash and cash equivalents $396,322 $470,064
Accounts receivable 3,758,687 5,716,445
Inventories 3,472,217 3,646,673
Prepaid expenses 260,360 284,654
Income taxes receivable 80,234 227,728
-----------------------------------------------------------------------------------------------------------
Total current assets 7,967,820 10,345,564
-----------------------------------------------------------------------------------------------------------
Capital assets, net 736,512 832,247
Other assets 701,094 496,604
Technology, net 1,212,005 1,542,946
Brand names, net 1,469,364 1,737,573
Sales channel, customer list and distribution rights, net 1,503,082 1,886,840
Goodwill 6,392,105 7,320,079
-----------------------------------------------------------------------------------------------------------
Total assets $19,981,982 $24,161,853
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current:
-----------------------------------------------------------------------------------------------------------
Bank indebtedness $4,915,786 $8,683,648
Accounts payable and accrued liabilities 5,302,901 6,334,023
Income taxes payable 109,869 109,280
Deferred revenue 1,096,911 1,225,808
Current portion of long-term loan - 736,500
Current portion of notes payable 257,130 463,341
Current portion of obligation under capital lease 26,462 52,923
-----------------------------------------------------------------------------------------------------------
Total current liabilities 11,709,059 17,605,523
-----------------------------------------------------------------------------------------------------------
Long-term loan
Accrued facilities cost 11,330,970 7,389,523
Obligation under capital lease 27,216 26,910
Accrued facilities cost 85,517 90,768
Deferred tax liabilities 1,046,338 1,300,121
-----------------------------------------------------------------------------------------------------------
Total liabilities 24,199,100 26,412,845
-----------------------------------------------------------------------------------------------------------
Shareholders' Equity (Deficiency):
Share capital - Authorized: Unlimited, common shares, issued and
outstanding: 9,592,293 (2002- 9,592,293) 33,770,304 33,770,304
Other comprehensive income (1,815,991) (1,880,443)
Deficit (36,171,431) (34,140,853)
-----------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficiency) (4,217,431) (2,250,992)
-----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficiency) $19,981,982 $24,161,853
===========================================================================================================
PERLE SYSTEMS LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS
(US dollars)
-------------------------------------------------------------------------------------------------------
For the six month period ended November 30, 2002 2001
-------------------------------------------------------------------------------------------------------
Sales $11,814,376 $15,427,263
-------------------------------------------------------------------------------------------------------
Expenses:
Cost of sales 5,054,255 6,581,288
Selling, general and administration 4,869,707 6,190,619
Research and development expenditures (net of ITCs) 1,666,062 1,525,266
Amortization of intangible assets 860,972 1,297,817
Write down of goodwill 750,000 -
Depreciation of capital assets 87,244 144,659
Interest expense 779,952 1,026,700
-------------------------------------------------------------------------------------------------------
Total expenses 14,068,192 16,766,349
-------------------------------------------------------------------------------------------------------
Loss before income taxes and non-recurring items (2,253,816) (1,339,086)
Income tax expense (recovery) 223,238 224,496
-------------------------------------------------------------------------------------------------------
Loss before non-recurring items, net of $nil tax $(2,030,578) $(1,114,590)
Non-recurring items, net of $nil tax - (575,000)
-------------------------------------------------------------------------------------------------------
Net loss for the period $(2,030,578) $(1,689,590)
=======================================================================================================
Loss per common share - basic and fully diluted:
Before non-recurring items and cumulative effect of change in
accounting principles $(0.21) $(0.12)
Non-recurring items $ - $(0.06)
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Loss per common share - basic and diluted $(0.21) $(0.18)
=======================================================================================================
PERLE SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(US dollars)
-------------------------------------------------------------------------------------------------------
For the six month period ended November 30, 2002 2001
-------------------------------------------------------------------------------------------------------
Common Share Capital:
Shares
Opening balance 9,592,293 9,592,293
-------------------------------------------------------------------------------------------------------
Closing balance 9,592,293 9,592,293
-------------------------------------------------------------------------------------------------------
Amount
Opening balance $33,770,304 $33,770,304
-------------------------------------------------------------------------------------------------------
Closing balance $33,770,304 $33,770,304
-------------------------------------------------------------------------------------------------------
Other comprehensive income:
Opening balance (1,880,443) (1,838,849)
Net change for the period 64,452 (27,473)
-------------------------------------------------------------------------------------------------------
Closing balance (1,815,991) (1,866,322)
Deficit:
Opening balance (34,140,853) (28,858,671)
Net loss for the period (2,030,578) (1,689,590)
-------------------------------------------------------------------------------------------------------
Closing balance (36,171,431) (30,548,261)
Total shareholders' equity (deficiency) $(4,217,431) $1,355,721
=======================================================================================================
PERLE SYSTEMS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
(US dollars)
-------------------------------------------------------------------------------------------------------------
For the six months ended November 30, 2002 2001
-------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities
Net loss for the year $(2,030,578) $(1,689,590)
Add (deduct) items not affecting cash:
Amortization of intangible assets 860,972 1,297,817
Write down of goodwill 750,000 -
Depreciation of capital assets 87,244 144,659
Deferred income taxes (223,238) (224,496)
-------------------------------------------------------------------------------------------------------------
(555,600) (471,610)
Net change in non-cash working capital balances related
to operations 1,101,484 1,418,282
--------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 545,884 946,672
--------------------------------------------------------------------------------------------------------------
Investing activities
Additions to capital assets (11,633) (77,521)
Purchase of technology and other intangible assets - (341,092)
--------------------------------------------------------------------------------------------------------------
Cash used in investing activities (11,633) (418,613)
--------------------------------------------------------------------------------------------------------------
Financing activities
Increase (decrease) in bank indebtedness (3,560,502) 93,839
Deferred financial cost (216,753) (25,830)
Repayment of notes payable (206,211) (126,350)
Repayment of obligation under capital lease (24,186) (15,978)
Increase (repayment) of long-term loan 3,415,314 (434,503)
Issuance of common shares (net) - (4,366)
--------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (592,338) (513,188)
--------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (16,032) (30,766)
--------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents during the year (74,119) (15,895)
Cash and cash equivalents, beginning of the year 470,441 962,046
--------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year $396,322 $946,151
--------------------------------------------------------------------------------------------------------------
Components of net change in non-cash working capital balances related to
operations:
Accounts receivable $1,843,944 $2,030,679
Inventories 80,853 980,065
Prepaid expenses 18,838 174,334
Income taxes 144,519 23,684
Accounts payable and accrued liabilities (886,159) (1,645,370)
Deferred revenue (100,511) (145,110)
--------------------------------------------------------------------------------------------------------------
$1,101,484 $1,418,282
==============================================================================================================
PERLE SYSTEMS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(US dollars)
-----------------------------------------------------------------------------------------------------------
For the six month period ended November 30, 2002 2001
-----------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $779,952 $1,026,700
Income taxes paid $ 41,224 $83,411
===========================================================================================================
Non-cash investing and financing activities:
Vender take back debt $ - $34,462
===========================================================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: January 31, 2003
PERLE SYSTEMS LIMITED
By: /s/ Derrick Barnett
---------------------------
Derrick M. Barnett
Vice-President, Finance and
Chief Financial Officer