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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 March 31, 2003
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)
14626
205 Indigo Creek Drive, Rochester, New York (Zip Code)
(Address of principal executive offices)
_____________________________
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 .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
The number of shares outstanding of the registrant's common stock was
12,189,992 as of April 30, 2003.
________________________________________________________________________________
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2003
(unaudited) and December 31, 2002 3
Consolidated Statements of Income For The Three Months
Ended March 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows For The Three
Months Ended March 31, 2003 and 2002 (unaudited) 5
Notes to Consolidated Financial Statements For The
Three Months Ended March 31, 2003 (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Certifications 18
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2003 2002
------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $20,140,000 $22,077,000
Marketable securities 2,001,000 2,006,000
Accounts receivable, net 7,722,000 6,622,000
Inventories, net 6,391,000 4,550,000
Prepaid expenses and other assets 432,000 942,000
Deferred taxes 1,583,000 1,574,000
------------- -------------
Total current assets 38,269,000 37,771,000
Property, equipment and improvements, net 2,786,000 3,012,000
Software development costs, net 2,104,000 2,068,000
Note receivable from unconsolidated company 1,000,000 1,000,000
Investment in unconsolidated company 1,327,000 1,353,000
------------- -------------
Total assets $45,486,000 $45,204,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,396,000 $ 1,926,000
Income taxes payable 564,000 502,000
Accrued expenses 2,876,000 3,213,000
------------- -------------
Total current liabilities 5,836,000 5,641,000
Deferred taxes 756,000 754,000
------------- -------------
Total liabilities 6,592,000 6,395,000
------------- -------------
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 10,961,000 10,961,000
Retained earnings 40,822,000 40,565,000
Treasury stock - at cost; 1,064,346 and
1,013,696 shares held at March 31, 2003
and December 31, 2002, respectively (12,956,000) (12,782,000)
Accumulated other comprehensive loss (66,000) (68,000)
------------- -------------
Total stockholders' equity 38,894,000 38,809,000
------------- -------------
Total liabilities and stockholders' equity $45,486,000 $45,204,000
============= =============
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
March 31,
2003 2002
------------- -------------
Sales $11,039,000 $6,407,000
Cost of goods sold 6,036,000 2,652,000
------------- -------------
Gross profit 5,003,000 3,755,000
------------- -------------
Operating expenses:
Selling and marketing 1,362,000 1,063,000
Research and development 2,307,000 1,498,000
General and administrative 1,063,000 577,000
Restructuring charge 163,000
------------- -------------
Total operating expenses 4,732,000 3,301,000
------------- -------------
Income from operations 271,000 454,000
Other income, net 127,000 116,000
------------- -------------
Income before income taxes and equity in loss of
unconsolidated company 398,000 570,000
Income tax provision 124,000 177,000
------------- -------------
Income before equity in loss of unconsolidated
company 274,000 393,000
Equity in loss of unconsolidated company, net of tax (17,000)
------------- -------------
Net income $ 257,000 $ 393,000
============= =============
Basic and diluted earnings per share $ .02 $ .03
============= =============
Weighted average number of common shares used
in basic earnings per share 12,231,691 12,238,095
Potential common shares 2,838 313,542
------------- -------------
Weighted average number of common shares used
in diluted earnings per share 12,234,529 12,551,637
============= =============
The accompanying notes are an integral part of these consolidated financial
statements
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
2003 2002
------------- -------------
Cash flows from operating activities:
Net income $ 257,000 $ 393,000
Non-cash adjustments:
Depreciation and amortization 570,000 401,000
Equity in loss of unconsolidated company, net
of tax 17,000
Other 69,000 12,000
Changes in operating assets and liabilities:
Accounts receivable (1,169,000) 79,000
Inventories (1,840,000) (107,000)
Prepaid expenses and other assets 510,000 35,000
Accounts payable and accrued expenses 168,000 (327,000)
Income taxes payable 62,000 83,000
------------- -------------
Net cash (used) provided by operating
activities (1,356,000) 569,000
------------- -------------
Cash flows from investing activities:
Purchases of property, equipment and improvements (101,000) (190,000)
Capitalized software development costs (278,000) (352,000)
Purchase of marketable securities 5,000
Other (33,000)
------------- -------------
Net cash used by investing activities (407,000) (542,000)
------------- -------------
Cash flows from financing activities:
Exercise of stock options and warrants 32,000
Purchase of treasury stock (174,000)
------------- -------------
Net cash (used) provided by financing activities (174,000) 32,000
------------- -------------
Net (decrease) increase in cash and cash
equivalents (1,937,000) 59,000
Cash and cash equivalents at beginning of period 22,077,000 26,913,000
------------- -------------
Cash and cash equivalents at end of period $20,140,000 $26,972,000
============= =============
The accompanying notes are an integral part of these consolidated financial
statements
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(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, 2002, as reported in its Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
Stock-Based Employee Compensation: At March 31, 2003, the Company had one
stock-based employee compensation plan. The Company accounts for this plan under
the recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Accordingly, no
stock-based employee compensation cost has been recognized in net income for the
stock option plan. Had compensation cost for the stock option plan been
determined based on the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income (loss) and
earnings (loss) per share would have been as follows:
Three Months Ended March 31,
2003 2002
------------- -------------
Net income, as reported $257,000 $ 393,000
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (274,000) (571,000)
------------- -------------
Pro forma net loss $(17,000) $(178,000)
============= =============
Earnings (loss) per share:
Basic - as reported $ .02 $ .03
============= =============
Basic - pro forma $ .00 $ (.01)
============= =============
Diluted - as reported $ .02 $ .03
============= =============
Diluted - pro forma $ .00 $ (.01)
============= =============
There were no stock options granted in the first quarter 2003. The assumptions
regarding the annual vesting of stock options were 25% per year for options
granted in 2002. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2002: Dividend yield of 0%;
expected volatility of 68%, risk-free interest rate of 3.7%, and expected life
of four years.
Earnings Per Share: Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share calculations reflect the assumed exercise of dilutive
employee stock options, applying the treasury stock method. Dilutive earnings
per share calculations exclude the effect of approximately 1,924,000 and 858,000
options for the first quarter 2003 and 2002, respectively, since such options
have an exercise price in excess of the average market price of the Company's
common stock for the respective periods.
Note - B Inventories consisted of the following at March 31, 2003 and
December 31, 2002:
March 31, December 31,
2003 2002
---------- ----------
Purchased parts and components $5,007,000 $3,967,000
Work in process 2,602,000 2,046,000
Finished goods 2,253,000 2,088,000
---------- ----------
9,862,000 8,101,000
Less: reserve for inventory obsolescence (3,471,000) (3,551,000)
---------- ----------
Net $6,391,000 $4,550,000
========== ==========
Note - C Restructuring Programs
During 2002, the Company improved its cost structure primarily through
reductions in the Company's staff and by consolidating the engineering
operations of its Raleigh, North Carolina facility into its Ottawa, Canada
Signaling Group. The programs were essentially completed during the first and
third quarters of 2002 as the continuing decline in capital spending in the
Company's target markets resulted in lower than anticipated Company revenue.
Substantially all actions under these programs were completed in 2002, although
lease commitments will continue through 2005. A summary of the activity and the
remaining balance at March 31, 2003 in the restructuring accrual is as follows:
Severance
and related Leasehold Asset
costs commitments impairment Total
---------------- ---------------- -------------- ------------
2002 charge $341,000 $177,000 $55,000 $573,000
2002 utilization (332,000) (23,000) (55,000) (410,000)
---------------- ---------------- -------------- ------------
Balance at
December 31, 2002 9,000 154,000 163,000
2003 utilization (33,000) (33,000)
---------------- ---------------- -------------- ------------
Balance at
March 31, 2003 $ 9,000 $121,000 $ $130,000
================ ================ ============== ============
In January 2002, the uncertain economic conditions and the lack of visibility of
customer orders led the Company to improve its cost structure by reducing
annualized expenses by approximately $1.6 million.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
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. The Company's actual results could
differ materially from those discussed in the forward-looking statements.
Overview
Business Strategy: Performance Technologies has a proven history of successfully
adapting its products, services and organization to a constantly changing
technology-driven marketplace. This adaptation has been demonstrated through the
course of several business cycles that have occurred since its founding in 1981.
With the Computing Products Group acquisition in October 2002, the Company
substantially broadened both its product offering and market coverage to include
additional computing and system products that can be effectively supplied to a
market that is twice the size of that which was available to the Company prior
to the acquisition. Following the acquisition, a new corporate strategy was
defined that integrates the Company's technological innovation and product
breadth. Please refer to the Company's Annual Report on Form 10-K, PART 1, Item
1, under the caption "Business," for a discussion of the Company's new corporate
and product strategies for 2003.
Financial Information: Revenue in the first quarter 2003 was $11.0 million,
compared to $6.4 million in the first quarter 2002. For the first quarter 2003,
the results of operations include the Computing Products Group acquired in
October 2002. Net income for the first quarter 2003 amounted to $.3 million, or
$.02 per share, compared to $.4 million, or $.03 per share for the first quarter
2002, based on 12.2 million and 12.6 million shares outstanding, respectively.
First quarter 2002 results included expenses associated with a restructuring
charge amounting to $.2 million (pre-tax), or $.01 per share. In January 2002,
the uncertain economic conditions and the lack of visibility of customer orders
led the Company to improve its cost structure by reducing annualized expenses by
approximately $1.6 million.
Cash and marketable securities amounted to $22.1 million at March 31, 2003,
compared to $24.1 million at December 31, 2002 and no long-term debt existed at
either date.
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 is subject to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
As the Company began integrating the Computing Products Group acquired from
Intel in October 2002, management sought to maximize the synergies between the
two organizations, which it believed provided considerable opportunity to
improve both future top and bottom line performance, despite current economic
conditions. To capitalize on this opportunity, a new corporate strategy was
defined that integrates the Company's technological innovation and product
breadth, and emphasizes the Company's expanded capability to offer a "unified"
solution to the customer base including software, hardware and system platforms
through a single Performance Technologies offering. This new business strategy
broadens the Company's market focus to more effectively address embedded systems
requirements for communications, military and commercial applications. While
early signs are encouraging, management expects the response to the Company's
new strategy to be evolutionary as the marketplace and our customers better
understand and embrace the Company's enhanced capabilities.
During the first quarter 2003, the Company made progress in implementing the
initial phase of this strategy including adding three new sales people,
initiating new advertising and marketing programs, and focusing on
interoperability between all elements of our expanded product line. Furthermore,
the Company received positive indications from customers validating the
Company's new approach to providing a more comprehensive range of embedded
products and system platforms, and our sales organization reports seeing
increased involvement earlier in the customer's project development cycle.
Forward Looking Guidance for the Second Quarter 2003 (published April 23, 2003):
The Company's products are integrated into current and next-generation embedded
systems infrastructure. Traditionally, "design wins" have been an important
metric for management to judge the Company's product acceptance in its
marketplace. 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, and 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 continue to be an important metric in evaluating the market
acceptance of the Company's product, in the current economic climate, fewer
customers are doing new design activity and a smaller number of these design
wins are moving into production than in the past. In addition, during difficult
economic periods, customers' 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 month of the quarter.
In the Company's target markets, capital spending appeared to stabilize during
the fourth quarter 2002 and certain customers appear to be moving projects
toward production during the first quarter 2003. However, overall, new project
deployments and design activity in the first quarter were still sluggish with
only limited forward visibility in the market. During the first quarter 2003,
the Company realized three new design wins for its IPnexusTM, SEGwayTM and
ZiatechTM product families.
Based upon the current business mix, the current backlog and review of sales
forecasts, management expects revenue to be $11.5 million to $12.5 million in
the second quarter 2003. Gross margin is expected to be approximately 45% to 47%
and diluted earnings per share for the second quarter is expected to be between
$.02 and $.06. This guidance includes an increase in expenses of approximately
$.3 million, reflecting the full quarter's impact for initiatives commenced
during the first quarter to implement the new strategy. The income tax rate for
the second quarter is assumed to be 31%.
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 Ended March 31, 2003, Compared with
the Quarter Ended March 31, 2002
The following table presents the percentage of sales represented by each item in
the Company's consolidated statements of income for the periods indicated.
Beginning in October 2002, the table includes the results of operations of the
Computing Products Group.
Three Months Ended
March 31,
2003 2002
------------- -------------
Sales 100.0% 100.0%
Cost of goods sold 54.7 41.4
------------- -------------
Gross profit 45.3 58.6
------------- -------------
Operating expenses:
Selling and marketing 12.3 16.6
Research and development 20.9 23.4
General and administrative 9.6 9.0
Restructuring charge 2.5
------------- -------------
Total operating expenses 42.8 51.5
------------- -------------
Income from operations 2.5 7.1
Other income, net 1.1 1.8
------------- -------------
Income before income taxes and equity in loss of
unconsolidated company 3.6 8.9
Income tax provision (1.1) (2.8)
------------- -------------
Income before equity in loss of unconsolidated
company 2.5 6.1
Equity in loss of unconsolidated company, net of
tax (0.2)
------------- -------------
Net income 2.3% 6.1%
============= =============
Sales. Total revenue for the first quarter 2003 was $11.0 million, compared to
$6.4 million for the same quarter in 2002. For the first quarter 2003, the
Computing Products Group contributed $5.7 million to revenue. During the first
quarter 2003, the Company had two customers that each represented greater than
10% of sales, and the four largest customers represented 54% of sales. During
the first quarter 2002, the Company had one customer that represented greater
than 10% of sales and the four largest customers represented 32% of sales.
Shipments to customers outside of North America represented 24% and 31% of sales
during the first quarter of 2003 and 2002, respectively.
For the periods indicated, the Company's products are grouped into four distinct
categories in one market segment: Signaling and network access products,
Computing products, IPnexus switching products, and other products. Revenue from
each product category expressed as a percentage of sales for the three months
ended March 31, 2003 and 2002 is as follows:
Three Months Ended
March 31,
2003 2002
------------- -------------
Signaling and network access products 34% 87%
Computing products 51% 0%
IPnexus switching products 13% 7%
Other 2% 6%
------------- -------------
Total 100% 100%
============= =============
Signaling and network access products: The continuing decline in capital
expenditure investments by customers in the Company's target markets has
significantly reduced the Company's signaling and network access product
revenue.
Computing products: The newly acquired Computing Products Group generated the
revenue in this category.
IPnexus switching products: Revenue from this category increased 195% to $1.4
million in 2003, compared to $.5 million in the respective quarter of 2002. 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, IPnexus switch product revenue is expected to grow when customers move
their new products into production.
Other product revenue: This revenue is related to legacy products. Over the past
twenty four months, customer demand for these products has declined
significantly as customers have moved to newer technologies. 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. In the first quarter, gross margin was 45.3% and 58.6% of
sales in 2003 and 2002, respectively. During the first quarter 2003, fixed
expenses such as certain manufacturing labor and overhead costs, technical
support costs, and amortization of capitalized software development spread over
lower sales volumes negatively impacted gross margin as a percentage of sales.
The decrease in gross margin in 2003 is also attributable to the lower gross
margins on the newly acquired computing products.
Total Operating Expenses. Total operating expenses were $4.7 million and $3.3
million in first quarter of 2003 and 2002, respectively. During January and
September 2002, staff reductions were initiated throughout the organization to
more closely align expenses with current revenue levels. In October 2002, the
new Computing Products Group was acquired. During the first quarter 2003, the
Company began to selectively increase expenditures in the new Computing Products
Group and in sales and marketing, to implement the first phase of its new
business strategy.
Selling and marketing expenses were $1.4 million and $1.1 million in first
quarter of 2003 and 2002, respectively. During January and September 2002, sales
and marketing staff reductions were initiated to more closely align expenses
with current revenue levels. In October 2002, the new Computing Products Group
was acquired. During the first quarter 2003, the Company began to increase
expenditures in sales and marketing to implement the first phase of its new
business strategy.
Research and development expenses were $2.3 million and $1.5 million in the
first quarter of 2003 and 2002, respectively. During January and September 2002,
engineering staff reductions were initiated to more closely align expenses with
current revenue levels. In October 2002, the new Computing Products Group was
acquired. During the first quarter 2003, the Company increased research and
development expenditures in its Computing Products Group. In addition, the
Company capitalizes certain software development costs, which reduce the amount
of software development costs charged to operating expense. Amounts capitalized
were $.3 million and $.4 million in the first quarter of 2003 and 2002,
respectively.
General and administrative expenses were $1.1 million and $.6 million for the
first quarter 2003 and 2002, respectively. This increase in expense is primarily
attributable to expenses associated with the new Computing Products Group
acquired in October 2002 and expenses associated with the newly created position
of Chief Strategic Officer.
Restructuring charges were zero and $.2 million for the first quarter 2003 and
2002, respectively. In January 2002, the Company improved its cost structure
primarily through the reduction of the Company's staff resulting in a decrease
in its workforce of approximately 10%.
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, U.S. Treasury and corporate obligations with maturities
of less than one year.
Income taxes. The provision for income taxes for the first quarter of 2003 and
2002 is based on an assumed combined federal, state and foreign effective tax
rate of 31%. The difference between the effective tax rate and the statutory
rate is attributable to certain permanent items.
Equity in Loss of Unconsolidated Company, net of tax. In September 2002, the
Company completed a 47% minority interest investment in Momentum Computer Inc.,
a developer of specialized single board computer solutions located in Carlsbad,
California. During the first quarter of 2003, a loss was recorded reflecting the
allocation of Momentum's net loss to the Company, based on the Company's
ownership percentage.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company's primary source of liquidity included cash, cash
equivalents and marketable securities of $22.1 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 March 31, 2003 and this facility
expired on April 15, 2003. The Company had working capital of $32.4 million at
March 31, 2003, compared to $32.1 million at December 31, 2002.
Cash used by operating activities for the first quarter 2003 was $1.4 million,
compared to cash provided by operating activities of $.6 million for the same
period in 2002. The net change in cash from operating activities is primarily
attributable to increases in inventory due to higher backlog and an increase in
accounts receivable as a result of higher sales.
Capital equipment purchases amounted to $.1 million for the three months ended
March 31, 2003, compared to $.2 million for the same period in 2002.
Capitalization of certain software development costs amounted to $.3 million and
$.4 million for the three months ended March 31, 2003 and 2002, respectively.
In August 2002, the Board of Directors authorized a plan to repurchase up to one
million shares of the Company's common stock. During the first quarter 2003, the
Company repurchased a total of 51,000 shares at a total cost of $.2 million
under this program.
Assuming there is no significant change in the Company's business, management
believes that its current cash, cash equivalents and marketable securities 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 its new product and market penetration efforts. This program could
have an impact on the Company's working capital, liquidity or capital resources.
Recently Issued Accounting Pronouncements
FIN 45 - In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 required that at
the time a company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it assumes
under that guarantee. This interpretation is applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. The Company does not
currently provide significant guarantees on a routine basis. The Company adopted
this interpretation and it did not have a material impact on the results of
operations or the financial position of the Company.
FIN 46 - In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." Interpretation No. 46 requires companies with a
variable interest entity to apply this guidance to that entity as of the
beginning of the first interim period beginning after June 15, 2003 for existing
interests and immediately for new interests. The application of the Guidance
could result in the consolidation of a variable interest entity. The only
variable interest entity of the Company is its investment in Momentum Computer,
Inc. The Company adopted this interpretation and it did not have a material
impact on the financial results.
Critical Accounting Estimates and Assumptions
In preparing the financial statements in accordance with GAAP, management is
required to make estimates and assumptions that have an impact on the assets,
liabilities, revenue and expense amounts reported. These estimates can also
affect supplemental information disclosures by the Company, including
information about contingencies, risk and financial condition. The Company
believes, given current facts and circumstances, its estimates and assumptions
are reasonable, adhere to GAAP, and are consistently applied. Inherent in the
nature of an estimate or assumption is the fact that actual results may differ
from estimates, and estimates may vary as new facts and circumstances arise. The
critical accounting policies, judgments and estimates, which management believes
have the most significant effect on the financial statements are set forth
below:
o Revenue Recognition
o Software Development Costs
o Valuation of Inventory
Revenue Recognition: The Company recognizes revenue in accordance with the SEC
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred or services have been provided, the
sale price is fixed or determinable, and collectability is reasonably assured.
Additionally, the Company sells its products on terms, which transfer title and
risk of loss at a specified location, typically shipping point. Accordingly,
revenue recognition from product sales occurs when all factors are met,
including transfer of title and risk of loss, which generally occurs upon
shipment by the Company. Revenue earned from arrangements for software systems
requiring significant production, modification, or customization of software is
recognized over the contract period as performance milestones are fulfilled. If
all conditions of revenue recognition are not met, the Company defers revenue
recognition. Revenue from consulting and other services is recognized at the
time the services are rendered. Any anticipated losses on contracts are charged
to operations as soon as such losses are determined. Revenue from software
maintenance contracts is recognized ratably over the contractual period. The
Company believes that the accounting estimate related to revenue recognition is
a "critical accounting estimate" because the Company's terms of sale can vary,
and management exercises judgment in determining whether to defer revenue
recognition. Such judgments may materially affect net sales for any period.
Management exercises judgment within the parameters of GAAP in determining when
contractual obligations are met, title and risk of loss are transferred, sales
price is fixed or determinable and collectability is reasonably assured.
Software Development Costs: All software development costs incurred in
establishing the technological feasibility of computer software products to be
sold are research and development costs. Software development costs incurred
subsequent to the establishment of technological feasibility of a computer
software product to be sold and prior to general release of that product are
capitalized. Amounts capitalized are amortized commencing after general release
of that product over the estimated remaining economic life of that product,
generally three years, or using the ratio of current revenues to current and
anticipated revenues from such product, whichever provides greater amortization.
If in the judgment of management, technological feasibility for a particular
project has not been met or recoverability of amounts capitalized is in doubt,
project costs are expensed as research and development or charged to costs of
goods sold, as applicable. The Company believes that the accounting estimate
related to software development costs is a "critical accounting estimate"
because the Company's management exercises judgment in determining whether
project costs are expensed as research and development. Such judgments may
materially affect expense amounts for any period. Management exercises judgment
within the parameters of GAAP in determining when technological feasibility has
been met and recoverability of software development costs is reasonably assured.
Valuation of Inventories: Inventories are stated at the lower of cost or market,
using the first-in, first-out method. The Company's inventory includes purchased
parts and components, work in process and finished goods. The Company provides
inventory reserves for excess, obsolete or slow moving inventory after periodic
evaluation of historical sales, current economic trends, forecasted sales,
estimated product lifecycles and estimated inventory levels. The factors that
contribute to inventory valuation risks are the Company's purchasing practices,
electronic component obsolescence, accuracy of sales and production forecasts,
introduction of new products, product lifecycles and the associated product
support. The Company manages its exposure to inventory valuation risks by
maintaining safety stocks, minimum purchase lots, managing product end-of-life
issues brought on by aging components or new product introductions, and by
utilizing certain inventory minimization strategies such as vendor-managed
inventories. The Company believes that the accounting estimate related to
valuation of inventories is a "critical accounting estimate" because it is
susceptible to changes from period-to-period due to the requirement for
management to make estimates relative to each of the underlying factors ranging
from purchasing, to sales, to production, to after-sale support. If actual
demand, market conditions or product lifecycles are adversely different from
those estimated by management, inventory adjustments to lower market values
would result in a reduction to the carrying value of inventory, an increase in
inventory write-offs and a decrease to gross margins.
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 is 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, customer delays in qualification of products and
difficulties of integrating the Computing Products Group's operations.
Furthermore, if the Court does not 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, 2002 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.
Stockholders are cautioned not to place undue reliance on the forward-
looking statements which speak as of the date of this Quarterly Report or the
date of the documents incorporated by reference in this Quarterly Report.
The Company is not under any obligation, and it expressly disclaims any
objection, to update or alter any such statements.
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, Canadian currency fluctuation 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
a. Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of
1934 (the "Exchange Act"), within 90 days prior to the filing date of
this Quarterly Report on Form 10-Q, an evaluation was carried out under
the supervision and with the participation of the Company's management,
including the certifying officers of the effectiveness of the design
and operation of the Company's disclosure controls and procedures
(as defined in Rule 13a-14(c) under the Exchange Act). Based upon
their evaluation of these disclosure controls and procedures, the
certifying officers concluded that the disclosure controls and
procedures were effective as of the date of such evaluation to ensure
that material information relating to the Company, including its
consolidated subsidiaries, was made known to them by others within
those entities, particularly during the period in which this Quarterly
Report on Form 10-Q was being prepared.
b. Changes in Internal Controls
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material changes have transpired since the Company's filing of its Annual
Report on Form 10-K relative to Court acceptance and approval of the class
action litigation settlement agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
B. Reports on Form 8-K
On January 31, 2003, the Company filed a Current Report on Form
8-K, Item 5 - Other. On January 20, 2003, the Board of Directors
of the Company created the position of Chief Strategic Officer.
John M. Slusser agreed to fill this position and will carry out
the duties and responsibilities of this position in addition
to his ongoing responsibilities as Chairman of the Board. 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
May 8, 2003 By: /s/ Donald L. Turrell
------------------------------------
Donald L. Turrell
President and
Chief Executive Officer
May 8, 2003 By: /s/ Dorrance W. Lamb
------------------------------------
Dorrance W. Lamb
Chief Financial Officer and
Vice President, Finance
CERTIFICATION 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.
May 8, 2003
/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.
May 8, 2003
/s/ Dorrance W. Lamb
-------------------------
Dorrance W. Lamb
Chief Financial Officer
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
March 31, 2003 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.
A signed original of this written statement required by Section 906 has
been provided to Performance Technologies, Incorporated and will be retained by
Performance Technologies, Incorporated and furnished to the Securities and
Exchange Commission on request.
By:/s/ Donald L. Turrell
--------------------------
Donald L. Turrell
Chief Executive Officer
May 8, 2003
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
March 31, 2003 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.
A signed original of this written statement required by Section 906 has
been provided to Performance Technologies, Incorporated and will be retained by
Performance Technologies, Incorporated and furnished to the Securities and
Exchange Commission on request.
By:/s/ Dorrance W. Lamb
--------------------------
Dorrance W. Lamb
Chief Financial Officer
May 8, 2003