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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-27460
PERFORMANCE TECHNOLOGIES, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 16-1158413
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
205 Indigo Creek Drive, Rochester, New York 14626
(Address of principal executive offices) (Zip Code)
-------------------
Registrant's telephone number, including area code: (585) 256-0200
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
The number of shares outstanding of the registrant's common stock was
12,277,453 as of October 31, 2002.
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PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001 3
Consolidated Statements of Income For The Three and Nine Months
Ended September 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows For The Nine
Months Ended September 30, 2002 and 2001 (unaudited) 5
Notes to Consolidated Financial Statements For The Nine
Months Ended September 30, 2002 (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Certifications 16
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2002 2001
----------------- ----------------
(unaudited)
Current assets:
Cash and cash equivalents $25,791,000 $26,913,000
Marketable securities 2,011,000
Accounts receivable, net 2,532,000 6,905,000
Inventories, net 3,892,000 3,756,000
Prepaid expenses and other 371,000 359,000
Deferred taxes 626,000 608,000
----------------- ----------------
Total current assets 35,223,000 38,541,000
Property, equipment and improvements, net 2,346,000 2,465,000
Software development costs, net 2,028,000 1,948,000
Note receivable from unconsolidated company 1,000,000
Investment in unconsolidated company 1,488,000
----------------- ----------------
Total assets $42,085,000 $42,954,000
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 557,000 $ 417,000
Income taxes payable 108,000 350,000
Accrued expenses 2,406,000 3,046,000
----------------- ----------------
Total current liabilities 3,071,000 3,813,000
Deferred taxes 826,000 799,000
----------------- ----------------
Total liabilities 3,897,000 4,612,000
----------------- ----------------
Stockholders' equity:
Preferred stock - $.01 par value; 1,000,000
shares authorized; none issued
Common stock - $.01 par value; 50,000,000
shares authorized; 13,260,038 shares issued 133,000 133,000
Additional paid-in capital 10,934,000 11,305,000
Retained earnings 39,848,000 40,239,000
Treasury stock - at cost; 979,185 and
1,024,547 shares held at September 30, 2002
and December 31, 2001, respectively (12,663,000) (13,284,000)
Accumulated other comprehensive loss (64,000) (51,000)
----------------- ----------------
Total stockholders' equity 38,188,000 38,342,000
----------------- ----------------
Total liabilities and stockholders'
equity $42,085,000 $42,954,000
================= ================
The accompanying notes are an integral part of these consolidated financial
statements.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------- ---------------- ---------------- ---------------
Sales $ 3,955,000 $ 9,871,000 $16,981,000 $29,015,000
Cost of goods sold 2,216,000 3,378,000 7,544,000 10,798,000
--------------- ---------------- ---------------- ---------------
Gross profit 1,739,000 6,493,000 9,437,000 18,217,000
--------------- ---------------- ---------------- ---------------
Operating expenses:
Selling and marketing 855,000 1,357,000 3,128,000 4,255,000
Research and development 1,576,000 1,897,000 4,757,000 6,157,000
General and administrative 558,000 783,000 1,717,000 2,347,000
Restructuring charges 410,000 573,000
Class action legal settlement 143,000 143,000
---------------- ---------------- ---------------- ---------------
Total operating expenses 3,542,000 4,037,000 10,318,000 12,759,000
---------------- ---------------- ---------------- ---------------
Income (loss) from operations (1,803,000) 2,456,000 (881,000) 5,458,000
Other income, net 95,000 187,000 332,000 783,000
--------------- ---------------- ---------------- ---------------
Income (loss) before income taxes
and minority interest (1,708,000) 2,643,000 (549,000) 6,241,000
Provision for income taxes (529,000) 873,000 (170,000) 2,060,000
--------------- ---------------- ---------------- ---------------
Income (loss) before minority
interest (1,179,000) 1,770,000 (379,000) 4,181,000
Minority interest (12,000) (12,000)
--------------- ---------------- ---------------- ---------------
Net income (loss) $(1,191,000) $ 1,770,000 $ (391,000) $ 4,181,000
================ ================ ================ ===============
Basic earnings (loss) per share $ (.10) $ .14 $ (.03) $ .34
=============== ================ ================ ===============
Diluted earnings (loss) per share $ (.10) $ .14 $ (.03) $ .33
=============== ================ ================ ===============
Weighted average number of
common shares used in basic earnings
per share 12,280,853 12,225,890 12,259,834 12,298,859
Common equivalent shares 439,121 448,528
--------------- ---------------- ---------------- ---------------
Weighted average number of
common shares used in diluted earnings
per share 12,280,853 12,665,011 12,259,834 12,747,387
================ ================ ================ ===============
The accompanying notes are an integral part of these consolidated financial
statements
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
2002 2001
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ (391,000) $ 4,181,000
Non-cash adjustments:
Depreciation and amortization 1,592,000 1,187,000
Minority interest 12,000
Other 250,000 417,000
Changes in operating assets and liabilities:
Accounts receivable 4,185,000 (102,000)
Inventories (136,000) 1,746,000
Prepaid expenses and other (13,000) 315,000
Accounts payable and accrued expenses (503,000) (1,203,000)
Income taxes payable (243,000) (219,000)
-------------- --------------
Net cash provided by operating activities 4,753,000 6,322,000
-------------- --------------
Cash flows from investing activities:
Purchases of property, equipment and improvements (665,000) (1,139,000)
Capitalized software development costs (949,000) (1,278,000)
Purchase of marketable securities (2,011,000) (5,000)
Maturities of marketable securities 10,000,000
Note receivable from unconsolidated company (1,000,000)
Investment in unconsolidated company (1,500,000)
-------------- --------------
Net cash (used) provided by investing
activities (6,125,000) 7,578,000
-------------- --------------
Cash flows from financing activities:
Exercise of stock options and warrants 250,000 511,000
Purchase of treasury stock (6,821,000)
-------------- --------------
Net cash provided (used) by financing
activities 250,000 (6,310,000)
-------------- --------------
Net (decrease) increase in cash and
cash equivalents (1,122,000) 7,590,000
Cash and cash equivalents at beginning of period 26,913,000 17,187,000
-------------- --------------
Cash and cash equivalents at end of period $25,791,000 $24,777,000
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
Note - A The unaudited Consolidated Financial Statements of Performance
Technologies, Incorporated and Subsidiaries (the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, the
Consolidated Financial Statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. The results for the
interim periods are not necessarily indicative of the results to be expected for
the year. The accompanying Consolidated Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements of the Company as
of December 31, 2001, as reported in its Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
Note - B During the nine months ended September 30, 2002, 45,362 common shares
were issued upon the exercise of stock options.
Note - C Inventories consisted of the following at September 30, 2002 and
December 31, 2001:
September 30, December 31,
2002 2001
------------ ------------
Purchased parts and components $1,494,000 $1,329,000
Work in process 2,571,000 2,778,000
Finished goods 791,000 468,000
------------ ------------
4,856,000 4,575,000
Less: reserve for inventory obsolescence (964,000) (819,000)
------------ ------------
Net $3,892,000 $3,756,000
============ ============
Note - D On September 19, 2002, the Company completed an agreement to invest
$1.5 million in Momentum Computer, Inc., a developer of specialized single
board computer solutions for the data communications, telecom, military, and
aerospace markets. Based on the terms of the agreement, the Company owns a
minority interest in Momentum Computer, Inc. and loaned Momentum Computer,
Inc. $1.0 million to be used for working capital. The Company has the option
to acquire the remaining ownership of Momentum Computer, Inc. during a future
specified period.
Note - E In September 2002, the Company improved its cost structure primarily
through reductions in the Company's staff and by consolidating the engineering
operations from its Raleigh, North Carolina facility into its Ottawa, Canada
Signaling Systems Group. This plan has been completed and resulted in a
reduction in workforce of approximately 7%. During the third quarter of 2002,
the Company recorded a restructuring charge amounting to $410,000.
Note - F In September 2002, the Company signed a Memorandum of Understanding for
settlement of the class action litigation filed against the Company and certain
of its directors and officers in May 2000. During the third quarter of 2002, the
Company recorded a charge amounting to $143,000 for the class action settlement
cost.
Note - G On October 2, 2002, subsequent to the end of the third quarter
2002, the Company acquired a portion of Intel Corporation's Embedded
Communications Platform Division. The acquisition was completed pursuant to the
Stock Purchase Agreement, dated September 12, 2002, between Intel Corporation
and the Company to acquire all the issued and outstanding shares of Ziatech
Corporation which is located in San Luis Obispo, California and which was a
wholly owned subsidiary of Intel Corporation. The stock purchase was completed
at a cash purchase price of $2,967,000. In connection with the stock purchase
agreement, the Company entered into certain arrangements respecting inventory
and the cross licensing of intellectual property with Intel. Following the
completion of the acquisition, Ziatech Corporation became a wholly owned
subsidiary of Performance Technologies and changed its name to PTI California
Corporation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Matters discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this Form 10-Q include
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Actual results of operations could
differ materially from those discussed in the forward-looking statements.
Overview
Business Strategy: Performance Technologies, Incorporated (the "Company") is a
global supplier of innovative communications, SS7 signaling and networking
equipment. The Company's products fall into three distinct areas: network
access, SS7 signaling, and IP Ethernet switches. The Company's development
efforts are directed at future growth opportunities that utilize the evolving IP
(Internet Protocol) standard. IP based communications and systems products are
generally viewed in the industry as the foundation for data communications,
next-generation telecommunications systems and services, as well as embedded
systems for video and mass storage applications. Customer applications utilizing
the Company's products and technologies include: embedded systems platforms for
a broad range of industries, data communications and telecommunications. The
Company's products are based on open architectures and are focused on
reliability and high availability requirements.
Traditionally, the Company has focused on providing "Best-of-Breed" products
that are integrated into embedded systems. The Company's development of the
PICMG 2.16 embedded systems standard and the success of the Company's IPnexusTM
switch product family over the past two years led management to seek expansion
of its product lines to include more components typically found in embedded
systems. During the quarter, the Company initiated a number of definitive
actions toward building this expanded capability, as discussed below.
In early October 2002, the Company completed the purchase of a portion of
Intel Corporation's Communications Platform Division (formerly Ziatech
Corporation) located in San Luis Obispo, California for $3.0 million in cash.
The Ziatech line of single board computer processor modules and system platforms
are expected to be important elements in enabling Performance Technologies to
become a leading supplier of CompactPCI and PICMG 2.16 platforms. In addition,
this acquisition is expected to provide synergistic opportunities for revenue
growth for the Company's access, signaling and switching products.
In September 2002, the Company completed an investment in Momentum Computer,
Inc., a developer of specialized single board computer solutions located in
Carlsbad, California. Based on the terms of the agreement, Performance
Technologies invested $1.5 million for a minority interest in Momentum Computer
and loaned an additional $1 million to be used for working capital. In the near
term, the relationship with Momentum is expected to provide additional
opportunities for the Company's products. Within twenty-four months, the Company
will have the option to acquire 100% ownership of Momentum Computer, based on a
valuation tied to growth and profitability metrics.
Financial Information. Revenue in the third quarter 2002 was $4.0 million,
compared to $9.9 million in the corresponding quarter a year earlier. Net loss
for the third quarter 2002 amounted to $1.2 million, or $(.10) per share
including expenses associated with restructuring and class action settlement
costs. The continuing decline in capital spending in the Company's target
markets resulted in lower than anticipated Company revenue and prompted
management to take action in September 2002 to improve its cost structure by
reducing staffing and consolidating the engineering and product support
functions performed in the Raleigh, North Carolina office into the Ottawa,
Canada Signaling Systems Group. During the third quarter, the Company also
signed a Memorandum of Understanding for settlement of the class action
litigation outstanding since May 2000. A restructuring charge amounting to $.4
million (pre-tax), or $.02 per share and the class action settlement cost
amounting to $.1 million (pre-tax), or $.01 per share were recorded in the third
quarter 2002. Excluding the restructuring and class action settlement charges,
net loss for the third quarter 2002 was $.8 million, or $(.07) per share, based
on 12.3 million shares outstanding. Net income amounted to $1.8 million, or $.14
per share for the third quarter 2001, based on 12.7 million shares outstanding.
Revenue for the nine months ended September 30, 2002 was $17.0 million, compared
to $29.0 million in the corresponding period a year earlier. Net loss for the
first nine months 2002 amounted to $0.4 million, or $(.03) per share including
expenses associated with restructuring and class action settlement costs. For
the first nine months 2002, restructuring charges amounting to $.6 million
(pre-tax), or $.03 per share and the class action settlement cost amounting to
$.1 million (pre-tax), or $.01 per share were recorded. Excluding the
restructuring and class action settlement charges, net income for the first nine
months 2002 amounted to $0.1 million, or $.01 per share on 12.4 million shares
outstanding. Net income amounted to $4.2 million, or $.33 per share for the
comparable period in 2001, based on 12.7 million shares outstanding.
Cash, cash equivalents and marketable securities amounted to $27.8 million at
September 30, 2002, compared to $26.9 million at the end of 2001 and no
long-term debt existed at either date. For the first nine months of 2002, the
Company generated net cash from operating activities of $4.8 million, compared
to $6.3 million for the same period in 2001.
The continuing decline in capital spending in the communications and
telecommunications markets dramatically impacted access and signaling product
revenue in the third quarter. Notwithstanding these spending reductions, the
Company continued to experience follow-through of orders for its IPnexus switch
products that address a broader range of markets. Management continues to
believe the Company's products are well positioned when economic conditions
improve.
FAS 144 - In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets to
be held and used, to be disposed of other than by sale, and to be disposed of by
sale. On January 1, 2002, the Company adopted SFAS No. 144. Adoption of this
statement did not have an impact on the results of operations or the financial
position of the Company.
FAS 146 - In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
when it is incurred and measured initially at fair value. On July 1, 2002 the
Company adopted SFAS No. 146. Adoption of this statement did not have a material
impact on the results of operations or the financial position of the Company.
Forward Looking Guidance for the Fourth Quarter 2002 (published October 24,
2002):
The following includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 and are subject to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
The Company`s communications, signaling and networking products are integrated
into current and next-generation embedded systems infrastructure. A "design win"
is when a customer or prospective customer notifies the Company that its product
has been selected to be integrated with their product. Traditionally, design
wins have been an important metric for management to judge the Company's product
acceptance in its marketplace and typically design wins reach production volumes
at varying rates, generally beginning twelve-to-eighteen months after the design
win occurs. A variety of risks such as schedule delays, cancellations, changes
in customer markets and economic conditions can adversely affect a design win
before production is reached or during deployment. While management still
believes that design wins are an important metric in evaluating the market
acceptance of the Company's products, unfortunately in the current economic
climate, fewer customers are doing new design activity and a lesser number of
these design wins are moving into production than in the past. In addition,
during difficult economic periods, customer's visibility deteriorates causing
delays in the placement of orders. These factors often result in a substantial
portion of the Company's revenue being derived from orders placed within the
quarter and shipped in the final weeks of the quarter.
The continuing decline in capital spending in the Company's target markets
resulted in lower than anticipated Company revenue and prompted management to
take action in September 2002 to improve its cost structure. Beginning in the
forth quarter, management expects the Company would be profitable with projected
annual revenue of approximately $24 million (excluding the acquisition of the
Ziatech Corporation). Furthermore, new project deployments and design activity
were sluggish during the third quarter. The Company realized six new design wins
for its IPnexus products during the third quarter, following twelve new design
wins for the first six months of 2002 and thirty-five new design wins during
2001.
In early October 2002, the Company completed the purchase of a portion of Intel
Corporation's Communications Platform Division (formerly Ziatech Corporation).
Management expects this new operation would be profitable for 2003 at $20
million in revenue.
The Company's revenue during the fourth quarter will include its new
Computing Products Group (formerly Ziatech Corporation). Based upon the current
distribution of business, the current backlog and review of sales forecasts,
management expects revenue during the forth quarter, including the newly
acquired operations, to be $9.0 million to $10.0 million. Gross margin is
expected to be approximately 50% to 52% and diluted earnings per share for the
fourth quarter is expected to be $.00 to $.04.
More in-depth discussions of the Company's strategy and financial performance
can be found in the Company's recent Annual and Quarterly Reports, on Form 10-K
and Form 10-Q, as filed with the Securities and Exchange Commission.
Quarter and Nine Months Ended September 30, 2002, Compared with
the Quarter and Nine Months Ended September 30, 2001
The following table presents the percentage of sales represented by each item in
the Company's consolidated statements of income for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------- ----------- ----------- ------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 56.0 34.2 44.4 37.2
---------- ----------- ----------- ------------
Gross profit 44.0 65.8 55.6 62.8
---------- ----------- ----------- ------------
Operating expenses:
Selling and marketing 21.6 13.8 18.5 14.7
Research and development 39.9 19.2 28.0 21.2
General and administrative 14.1 7.9 10.1 8.1
Restructuring charges 10.4 3.4
Class action legal settlement 3.6 .8
---------- ----------- ----------- ------------
Total operating expenses 89.6 40.9 60.8 44.0
---------- ----------- ----------- ------------
Income (loss) from operations (45.6) 24.9 (5.2) 18.8
Other income, net 2.4 1.9 2.0 2.7
---------- ----------- ----------- ------------
Income (loss) before income taxes
and minority interest (43.2) 26.8 (3.2) 21.5
Provision for income taxes 13.4 (8.9) 1.0 (7.1)
---------- ----------- ----------- ------------
Income (loss) before minority
interest (29.8) 17.9 (2.2) 14.4
Minority interest (0.3) (0.1)
---------- ----------- ----------- ------------
Net income (loss) (30.1) 17.9 (2.3) 14.4
========== =========== =========== ============
Sales. Total revenue for the third quarter 2002 was $4.0 million, compared to
$9.9 million for the same quarter in 2001. Revenue for the first nine months of
2002 was $17.0 million, compared to $29.0 million for the same period in 2001.
For the periods indicated, the Company's products are grouped into three
distinct categories in one market segment: Signaling and network access
products, IP Switching products and Other products. Revenue from each product
category is expressed as a percentage of sales for the three and nine months
ending September 30, 2002 and 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------- --------- ---------- -----------
Signaling and network access products 80% 90% 86% 87%
IP Switching products 17% 4% 11% 4%
Other 3% 6% 3% 9%
---------- --------- ---------- -----------
Total 100% 100% 100% 100%
========== ========= ========== ===========
Signaling and Network Access Products: During the past twelve months, the
decline in capital expenditure investments in the Company's target markets has
significantly reduced signaling and network access product revenue.
IP Switching Products: The Company's IPnexus switch product family has been
designed for the embedded systems market and is based on the PICMG 2.16 systems
architecture, which was ratified in September 2001. While still a modest
percentage of the Company's revenue, IP switch product revenue increased by 59%
to $.7 million in the third quarter 2002, compared to the respective quarter in
2001. During the third quarter, the Company realized its first design win for
the CPC6400, a 24 port gigabit switch.
Other product revenue: This revenue is related to legacy products. Customer
demand for these products has declined significantly over the past twelve months
as customers move to newer technology. Many of these products are project
oriented and shipments can fluctuate on a quarterly basis.
Gross profit. Gross profit consists of sales, less cost of goods sold
including material costs, manufacturing expenses, amortization of software
development costs, expenses associated with engineering contracts and technical
support function expenses. Gross margin was 44.0% of sales for the third quarter
2002, compared to 65.8% in the third quarter of 2001. Fixed expenses such as
certain manufacturing labor and overhead costs, technical support costs, and
software amortization spread over lower sales volumes impacted gross margin as a
percentage of sales during the third quarter 2002. The decrease in gross margin
in the third quarter 2002 is also attributable to the write off of certain
software capitalization projects of $.3 million and an increase in the inventory
obsolescence reserve of $.1 million.
Selling and marketing expenses were $.9 million and $1.4 million for the
third quarter 2002 and 2001, respectively. For the nine months, selling and
marketing expenses were $3.1 million and $4.3 million in 2002 and 2001,
respectively. The decrease in expense during 2002 is primarily the result of
lower personnel and commission expenses, and reductions in advertising, travel
and trade show participation. During the second quarter 2002, the Company
increased its allowance for doubtful accounts by $.1 million to reserve a
specific customer receivable.
Research and development expenses were $1.6 million and $1.9 million for
the third quarter 2002 and 2001, respectively. For the nine months, research and
development expenses were $4.8 million and $6.2 million in 2002 and 2001,
respectively. This decrease in expense is primarily attributable to lower
engineering staff levels. Despite these reductions, management continues to
commit significant resources to the development of new products. In addition
the Company capitalizes certain software development costs, which reduce the
amount of software development charged to operating expense. During the third
quarter, amounts capitalized were $.3 million and $.4 million for 2002 and 2001,
respectively. During the nine months, amounts capitalized were $.9 million and
$1.3 million for 2002 and 2001, respectively.
General and administrative expenses were $.6 million and $.8 million for the
third quarter 2002 and 2001, respectively. For the first nine months, general
and administrative expenses were $1.7 million and $2.3 million in 2002 and 2001,
respectively. This decrease in expense is the result of tightened control over
general and administrative expenses and lower personnel related expenses.
Restructuring charges were $.4 million and zero for the third quarter 2002 and
2001, respectively. For the first nine months, restructuring charges were $.6
million and zero in 2002 and 2001, respectively. In September 2002, the Company
reduced staffing levels by approximately 7% primarily in signaling engineering
and marketing, and closed the Raleigh, North Carolina engineering facility. In
January 2002, the Company reduced staffing levels by approximately 10%
throughout the organization.
Class action legal settlement charges were $.1 million for the third quarter
2002. In September 2002, the Company signed a Memorandum of Understanding for
settlement of the class action litigation outstanding since May 2000.
Other income, net. Other income consists primarily of interest income from
marketable securities and cash equivalents. The funds are primarily invested in
high quality Municipal and U.S. Treasury securities with maturities of less than
one year. Over the past twelve months, interest rates have declined and
investment balances have increased.
Income taxes. The provision for income taxes for the third quarter and first
nine months of 2002 is based on the combined federal, state and foreign
effective tax rate of 31%, compared to 33% for the comparable periods in 2001.
Canadian tax incentives contributed to a lower effective tax rate in 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, the Company's primary source of liquidity included
cash and cash equivalents of $25.8 million, marketable securities of $2.0
million and available borrowings of $5.0 million under a revolving credit
facility with a bank. No amounts were outstanding under this credit facility as
of September 30, 2002. The Company had working capital of $32.2 million at
September 30, 2002, compared to $34.7 million at December 31, 2001.
Cash provided by operating activities for the first nine months of 2002 was $4.8
million, compared to $6.3 million for the same period in 2001.
In September 2002, the Company completed an investment in Momentum Computer,
Inc. The Company invested $1.5 million for a minority interest in Momentum
Computer, Inc. and loaned an additional $1 million to be used for working
capital.
Capital equipment purchases amounted to $.7 million for the first nine months of
2002, compared to $1.1 million for the same period in 2001. Capitalization of
certain software development costs amounted to $.9 million for the first nine
months of 2002, compared to $1.3 million for the same period in 2001.
In August 2002, the Board of Directors authorized a plan to repurchase up to 1
million shares of the Company's Common Stock. The Company did not repurchase any
shares during the first nine months of 2002, compared to 541,000 shares
repurchased at a total cost of $6.8 million during the first nine months of
2001. In March 2001, the Board of Directors authorized a one-year plan to
repurchase up to an additional 500,000 shares of the Company's Common Stock
under which the Company repurchased 206,000 shares. In August 2000, the Board of
Directors authorized the repurchase of up to 1 million shares of the Company's
Common Stock and the Company completed this repurchase program in March 2001.
As a result of the net loss in the third quarter 2002 the Company was in
violation of one of the covenants under the revolving credit facility.
Subsequent to the end of the quarter the default on the covenant violation was
waived and the Company's revolving credit facility with a bank was amended and
extended through December 31, 2002.
Subsequent to the end of the third quarter 2002, the Company acquired a portion
of Intel Corporation's Embedded Communications Platform Division. The
acquisition was completed pursuant to the Stock Purchase Agreement, dated
September 12, 2002, between Intel Corporation and the Company to acquire all the
issued and outstanding shares of Ziatech Corporation. The stock purchase was
completed at a cash purchase price of $3.0 million. The Company expects to add
working capital of $3 to $4 million to this business over the next twelve
months, or so.
With the Ziatech acquisition and assuming there is no further significant
change in the Company's business, management believes that its current cash,
cash equivalents and marketable securities together with cash generated from
operations and available borrowings under the Company's loan agreement will be
sufficient to meet the Company's anticipated needs, including working capital
and capital expenditure requirements, for at least the next twelve months.
However, management is continuing its strategic acquisition program to further
accelerate new product and market penetration efforts. This program could have
an impact on the Company's working capital, liquidity or capital resources.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Quarterly Report on Form 10-Q contains forward-looking statements, which
reflect the Company's current views with respect to future events and financial
performance, within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and are subject to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "believes,"
"anticipates," "plans," "may," "intend," "estimate," "will," "should," "could,"
"feels," "is optimistic," "expects," and other expressions which indicate future
events and trends also identify forward-looking statements. However, the absence
of such words does not mean that a statement is not forward-looking.
The Company's future operating results are subject to various risks and
uncertainties and could differ materially from those discussed in the
forward-looking statements and may be affected by various trends and factors
which are beyond the Company's control. These include, among other factors,
general business and economic conditions, rapid or unexpected changes in
technologies, cancellation or delay of customer orders including those relating
to the "design wins" referenced above, unreliability of customer forecasts,
changes in the product or customer mix of sales, delays in new product
development, delays or lack of availability of electronic components, customer
acceptance of new products, and customer delays in qualification of products and
difficulties of integrating Ziatech's operations. Furthermore, if the Court does
not accept and approve the settlement agreement in the outstanding class action
litigation this could have a material adverse effect on the Company's working
capital. This report on Form 10-Q should be read in conjunction with the
Consolidated Financial Statements, the notes thereto, Management's Discussion
and Analysis of Financial Condition and Results of Operations as of December 31,
2001 and "Risk Factors" as reported in the Company's Annual Report on Form 10-K,
and other reports as filed with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks in the normal course of business,
primarily interest rate risk and changes in the market value of its investments
and believes its exposure to such risk is minimal. The Company's investments are
made in accordance with the Company's investment policy and primarily consist of
U.S. Treasury securities, municipal securities and corporate obligations. The
Company does not participate in the investment of derivative financial
instruments.
ITEM 4. CONTROLS AND PROCEDURES
Based on their most recent evaluation, which was completed within 90 days of
this filing of this Form 10-Q, the Company's Chief Executive Officer and Chief
Financial Officer believe the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) are effective. There were not
any significant changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 25, 2002 the Company announced it had signed a Memorandum of
Understanding for the settlement of the class action litigation filed against
the Company and certain of its directors and officers in May 2000 in the United
States District Court for the Western District of New York.
Following the Company's announcement on May 19, 2000 regarding its preliminary
results of operations for the second quarter, several class action lawsuits were
filed against the Company, as well as several of its officers and directors,
alleging violations of federal securities laws.
The terms of the settlement outlined in the memorandum between the Company and
the class action plaintiffs are being submitted to the Court in the form of a
settlement agreement. This proposed settlement will be subject to Court
acceptance and approval.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1 Revolving Credit Agreement dated as of
December 30, 1998 between the Registrant and
The Chase Manhattan Bank, N.A. - as amended.
99.1 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 1906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 1906 of
the Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K
The following reports were filed during the quarter
for which this Quarterly Report on Form 10-Q is
filed:
On September 20, 2002 the Company filed a Current
Report on Form 8-K, Item 5 - Other; announcing an
agreement with Intel Corporation to acquire a portion
of its Embedded Communications Platform Division
located in San Luis Obispo, California, in a
sale-of-stock transaction. No financial statements
were filed with the Form 8-K.
On September 25, 2002 the Company filed a Current
Report on Form 8-K, Item 5 - Other; announcing the
completion of an agreement to invest, as a minority
interest, $1.5 million in Momentum Computer, Inc. The
Company also agreed to lend $1.0 million to Momentum
Computer, Inc. to be used for working capital. No
financial statements were filed with the Form 8-K.
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.
PERFORMANCE TECHNOLOGIES, INCORPORATED
November 4, 2002 By: /s/ Donald L. Turrell
----------------------------------------
Donald L. Turrell
President and
Chief Executive Officer
November 4, 2002 By: /s/ Dorrance W. Lamb
----------------------------------------
Dorrance W. Lamb
Chief Financial Officer and
Vice President, Finance
CERTIFICATI0N OF CHIEF EXECUTIVE OFFICER
I, Donald L. Turrell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Performance
Technologies, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 4, 2002
/s/ Donald L. Turrell
------------------------------
Donald L. Turrell
President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Dorrance W. Lamb, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Performance
Technologies, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 4, 2002
/s/ Dorrance W. Lamb
------------------------------
Dorrance W. Lamb
Chief Financial Officer
EXHIBIT 10.1 - AS AMENDED
AMENDMENT TWO TO
CREDIT AGREEMENT
dated as of October 30th, 2002
between
JPMORGAN CHASE BANK, formerly
known as The Chase Manhattan Bank
and
PERFORMANCE TECHNOLOGIES, INCORPORATED
AMENDMENT NUMBER TWO TO CREDIT AGREEMENT
This Amendment is dated as of October 30, 2002, is made by and between
PERFORMANCE TECHNOLOGIES, INCORPORATED, a Delaware corporation with its
principal office located at 205 Indigo Creek Drive, Rochester, New York 14626
("Borrower") and JPMORGAN CHASE BANK, formerly known as The Chase Manhattan
Bank, with an office at One Chase Square, Rochester, New York 14643 ("Bank").
Statement of the Premises
Borrower and Bank have previously entered into, among other agreements, a
Credit Agreement, dated as of December 30, 1998 which was amended by Amendment
Number One, dated November 1, 2000 (the "Credit Agreement"). The Borrower and
the Bank desire to amend the Credit Agreement as referenced herein.
Statement of Consideration
Accordingly, in consideration of the premises and under the authority of
Section 5-1103 of the New York General Obligations Law, Borrower and Bank agree
as follows:
Agreement
1. Defined Terms. The terms "this Agreement," "hereunder" and similar
references in the Credit Agreement shall be deemed to refer to the Credit
Agreement as amended by this Amendment Number Two. Capitalized terms used and
not otherwise defined herein shall have the meanings ascribed to such terms in
the Credit Agreement.
2. Amendment. Effective upon the satisfaction of all conditions specified
in Section 4 hereof, the Credit Agreement is hereby amended as follows:
A. The definition of "Revolving Credit Termination Date" is
superseded and replaced in its entirety and amended to read:
"Revolving Credit Termination Date" means December 31, 2002;
provided that if such date is not a Banking Day, the Revolving
Credit Termination Date shall be the next succeeding Banking
Day.
3. Waiver of Existing Covenant Violation. The Borrower has advised the Bank
that it is not in compliance with its financial covenant obligations under the
Credit Agreement, Section 10.03, as a result of negative Consolidated Income for
the fiscal quarter ending September 30, 2002, (the "Existing Event of Default").
The Bank, hereby waives the Existing Event of Default, together with the right
of the Bank as a consequence thereof to assert an Event of Default under Article
11 of the Credit Agreement. Nothing herein shall be construed as a waiver of any
other condition, event or act which, with the giving of notice or the lapse of
time or both, would constitute an Event of Default.
4. Representations. The Borrower hereby represents and warrants to the Bank
that: (i) the covenants, representations and warranties set forth in the Credit
Agreement are true and correct on and as of the date of execution hereof as if
made on and as of said date and as if each reference therein to the Credit
Agreement were a reference to the Credit Agreement as amended by this Amendment;
(ii) no Event of Default specified in the Credit Agreement and no event, which,
with the giving of notice or lapse of time or both, would become such an Event
of Default has occurred and is continuing, except as has been disclosed to the
Bank and is being waived pursuant to Section 3 hereinabove; (iii) since the date
of the Credit Agreement, there has been no material adverse change in the
financial condition or business operations of the Borrower which has not been
disclosed to Bank; (iv) the making and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action; and (v)
the security interest granted by the Borrower to the Bank pursuant to the
Security Agreement constitutes a valid, binding and enforceable, first in
priority lien on all Collateral subject to such Security Agreement.
5. Conditions of Effectiveness. This Amendment (including Section 4 hereof)
shall become effective when and only when Bank shall have received counterparts
of this Amendment executed by Borrower and Bank, and Bank shall have
additionally received the following:
A. A secretarial certificate of the Borrower in a form
reasonably acceptable to Bank, certifying that the December
30, 1998 secretary's certificate of Borrower is true and
correct as of October 31, 2000 and as of the date of execution
hereof, and the authorizing resolutions and the incumbency of
officers of the Borrower remain in full force and effect.
B. Payment of all legal and audit expenses incurred by
Borrower relating to the Agreement as amended hereby.
6. Reference to and Effect on Loan Documents.
A. Upon the effectiveness hereof, each reference in the Credit
Agreement to "this Agreement," "hereunder," "hereof,"
"herein," or words of like import, and each reference in the
other Loan Documents to the Credit Agreement shall mean and be
a reference to the Credit Agreement as amended hereby.
B. Except as specifically amended above, the Credit
Agreement, and all other Loan Documents shall remain in full
force and effect and are hereby ratified and confirmed.
C. The execution, delivery and effectiveness of this Amendment
shall not operate as a waiver of any right, power or remedy of
Bank under any of the Loan Documents, nor constitute a waiver
of any provision of any of the Loan Documents.
7. Costs and Expenses. Borrower agrees to pay on demand all costs and
expenses of Bank in connection with the preparation, execution and delivery of
this Amendment and the other documents related hereto, including the fees and
out-of-pocket expenses of counsel for Bank.
8. Governing Law. This Amendment shall be governed and construed in
accordance with the laws of the State of New York without regard to any
conflicts-of-laws rules which would require the application of the laws of any
other jurisdiction.
9. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
10. Execution in Counterparts. This Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed to be an original and
all or which taken together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective representatives thereunto duly authorized as of the
date first above written.
PERFORMANCE TECHNOLOGIES, INCORPORATED
By: /s/ Dorrance W. Lamb
------------------------------
Dorrance W. Lamb
Its: Chief Financial Officer and
Vice President of Finance
JPMORGAN CHASE BANK
By: /s/ Hollie Calderon
------------------------------
Hollie Calderon
Its: Vice President
CERTIFICATE OF SECRETARY
OF
PERFORMANCE TECHNOLOGIES, INCORPORATED
I, Reginald T. Cable, Secretary of Performance Technologies, Incorporated,
a Delaware corporation ("Company"), do CERTIFY in connection with the Amendment
Number Two to the Credit Agreement ("Amendment") between the Company and
JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank, as follows:
1. The resolutions attached to the Secretary Certificate dated December 30,
1998 have not been rescinded or modified and remain in full force and effect.
The Resolution authorize the Amendment and authorize the execution of the
Amendment, the transactions contemplated therein, and the execution and delivery
of all documents thereunder.
2. The officers identified in the Secretary's certificate dated December
30, 1998 remain duly and validly elected and qualified to the offices of the
Corporation set forth in the certificate.
IN WITNESS WHEREOF, I have executed this Certificate this 30th day of
October, 2002.
/s/Reginald T. Cable
--------------------------
Reginald T. Cable
Secretary
Exhibit 99.1
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
I, Donald L. Turrell, the Chief Executive Officer of Performance
Technologies, Incorporated, certify that (i) the Form 10-Q for the quarter ended
September 2002 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and (ii) the information contained in the
Form 10-Q fairly presents, in all material respects, the financial condition and
results of operations of Performance Technologies, Incorporated.
By:/s/ Donald L. Turrell
-----------------------
Donald L. Turrell
Chief Executive Officer
November 4, 2002
Exhibit 99.2
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
I, Dorrance W. Lamb, the Chief Financial Officer of Performance
Technologies, Incorporated, certify that (i) the Form 10-Q for the quarter ended
September 2002 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and (ii) the information contained in the
Form 10-Q fairly presents, in all material respects, the financial condition and
results of operations of Performance Technologies, Incorporated.
By:/s/ Dorrance W. Lamb
----------------------
Dorrance W. Lamb
Chief Financial Officer
November 4, 2002