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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, 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
12,351,370 October 31, 2003.
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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, 2003
(unaudited) and December 31, 2002 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2003 and 2002 (unaudited) 5
Notes to Consolidated Financial Statements for the Nine
Months Ended September 30, 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 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Certifications 19
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2003 2002
-------------- --------------
(unaudited)
Current assets:
Cash and cash equivalents $25,997,000 $22,077,000
Marketable securities 2,006,000
Accounts receivable, net 6,627,000 6,622,000
Inventories, net 6,341,000 4,550,000
Prepaid expenses and other assets 403,000 942,000
Deferred taxes 1,667,000 1,574,000
-------------- --------------
Total current assets 41,035,000 37,771,000
Property, equipment and improvements, net 2,617,000 3,012,000
Software development costs, net 2,468,000 2,068,000
Note receivable from unconsolidated company 1,000,000 1,000,000
Investment in unconsolidated company 1,080,000 1,353,000
-------------- --------------
Total assets $48,200,000 $45,204,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,414,000 $ 1,926,000
Income taxes payable 1,108,000 502,000
Accrued expenses 3,515,000 3,213,000
-------------- --------------
Total current liabilities 6,037,000 5,641,000
Deferred taxes 781,000 754,000
-------------- --------------
Total liabilities 6,818,000 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 10,448,000 10,961,000
Retained earnings 42,481,000 40,565,000
Treasury stock - at cost; 968,875 and 1,013,696 shares
held at September 30, 2003 and December 31, 2002, respectively (11,622,000) (12,782,000)
Accumulated other comprehensive loss (58,000) (68,000)
-------------- --------------
Total stockholders' equity 41,382,000 38,809,000
-------------- --------------
Total liabilities and stockholders' equity $48,200,000 $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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------------- --------------- ---------------- ---------------
Sales $13,060,000 $ 3,955,000 $36,735,000 $16,981,000
Cost of goods sold 6,516,000 2,216,000 19,062,000 7,544,000
--------------- --------------- ---------------- ---------------
Gross profit 6,544,000 1,739,000 17,673,000 9,437,000
--------------- --------------- ---------------- ---------------
Operating expenses:
Selling and marketing 1,514,000 855,000 4,322,000 3,128,000
Research and development 2,513,000 1,576,000 7,291,000 4,757,000
General and administrative 1,168,000 558,000 3,430,000 1,717,000
Restructuring charge 410,000 573,000
Class action legal settlement 143,000 143,000
--------------- --------------- --------------- ---------------
Total operating expenses 5,195,000 3,542,000 15,043,000 10,318,000
--------------- --------------- --------------- ---------------
Income (loss) from operations 1,349,000 (1,803,000) 2,630,000 (881,000)
Other income, net 150,000 95,000 404,000 332,000
--------------- --------------- --------------- ---------------
Income (loss) before income taxes
and equity in loss of
unconsolidated company 1,499,000 (1,708,000) 3,034,000 (549,000)
Income tax provision (benefit) 465,000 (529,000) 941,000 (170,000)
--------------- --------------- --------------- ---------------
Income (loss) before equity in loss
of unconsolidated company 1,034,000 (1,179,000) 2,093,000 (379,000)
Equity in loss of unconsolidated
company, net of tax (79,000) (12,000) (177,000) (12,000)
--------------- --------------- --------------- ---------------
Net income (loss) $ 955,000 $(1,191,000) $ 1,916,000 $ (391,000)
=============== =============== =============== ===============
Basic earnings (loss) per share $ .08 $ (.10) $ .16 $ (.03)
=============== =============== =============== ===============
Diluted earnings (loss) per share $ .07 $ (.10) $ .15 $ (.03)
=============== =============== =============== ===============
Weighted average number of
common shares used in basic earnings
per share 12,235,758 12,280,853 12,219,801 12,259,834
Potential common shares 768,380 336,038
--------------- --------------- ---------------- ---------------
Weighted average number of
common shares used in diluted earnings
per share 13,004,138 12,280,853 12,555,839 12,259,834
=============== =============== =============== ===============
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,
2003 2002
------------------ ------------------
Cash flows from operating activities:
Net income (loss) $ 1,916,000 $ (391,000)
Non-cash adjustments:
Depreciation and amortization 1,721,000 1,592,000
Equity in loss of unconsolidated company, net of tax 177,000 12,000
Other 172,000 250,000
Changes in operating assets and liabilities:
Accounts receivable (92,000) 4,185,000
Inventories (1,791,000) (136,000)
Prepaid expenses and other assets 540,000 (13,000)
Accounts payable and accrued expenses (177,000) (503,000)
Income taxes payable 606,000 (243,000)
----------------- -----------------
Net cash provided by operating activities 3,072,000 4,753,000
----------------- -----------------
Cash flows from investing activities:
Purchases of property, equipment and improvements (638,000) (665,000)
Capitalized software development costs (1,103,000) (949,000)
Purchase of marketable securities (2,011,000)
Maturities of marketable securities 2,006,000
Note receivable from unconsolidated company (1,000,000)
Investment in unconsolidated company (1,500,000)
Other (28,000)
----------------- -----------------
Net cash provided (used) by investing activities 237,000 (6,125,000)
----------------- -----------------
Cash flows from financing activities:
Exercise of stock options and warrants 805,000 250,000
Purchase of treasury stock (194,000)
----------------- -----------------
Net cash provided by financing activities 611,000 250,000
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 3,920,000 (1,122,000)
Cash and cash equivalents at beginning of period 22,077,000 26,913,000
----------------- -----------------
Cash and cash equivalents at end of period $25,997,000 $25,791,000
================= =================
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, 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 in the United States
of America 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 September 30, 2003, the Company had one
restricted stock plan and three stock option plans. Grants under the restricted
stock plan are charged to compensation costs over the vesting period. The
Company accounts for the stock option plans under the recognition and
measurement principles of Accounting Principles Board 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 plans. Had compensation cost for the stock
option plans been determined based on the fair value recognition provisions of
Statement of Financial Accounting Standards 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------- -------------- -------------- ---------------
Net income (loss), as reported $955,000 $(1,191,000) $1,916,000 $ (391,000)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (381,000) (571,000) (1,032,000) (1,713,000)
------------- --------------- -------------- ---------------
Pro forma net income (loss) $574,000 $(1,762,000) $ 884,000 $(2,153,000)
============= =============== ============== ===============
Earnings (loss) per share:
Basic - as reported $ .08 $ (.10) $ .16 $ (.03)
============= =============== ============== ===============
Basic - pro forma $ .05 $ (.14) $ .07 $ (.18)
============= =============== ============== ===============
Diluted - as reported $ .07 $ (.10) $ .15 $ (.03)
============= =============== ============== ===============
Diluted - pro forma $ .04 $ (.14) $ .07 $ (.18)
============= =============== ============== ===============
The assumptions regarding the annual vesting of stock options were 33% per year
and 25% per year for options granted in 2003 and 2002, respectively. 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 2003 and 2002, respectively: Dividend yield of
0%; expected volatility of 67% and 68%, risk-free interest rate of 2.0% and
3.7%, and expected life of three and 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 743,000 and 2,166,000
options for the third quarter 2003 and 2002, respectively, and 1,425,000 and
1,900,000 for the first nine months of 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.
During the nine months ended September 30, 2003, 101,171 common shares were
issued upon the exercise of stock options.
Note - B Inventories, net
Inventories consisted of the following:
September 30, December 31,
2003 2002
-------------- ---------------
Purchased parts and components $5,073,000 $3,967,000
Work in process 2,550,000 2,046,000
Finished goods 2,181,000 2,088,000
-------------- ---------------
9,804,000 8,101,000
Less: reserve for inventory obsolescence (3,463,000) (3,551,000)
-------------- ---------------
Net $6,341,000 $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 initiated 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 September 30, 2003 in the restructuring accrual is as follows:
Severance
and related Lease 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
Q1 2003 utilization (33,000) (33,000)
--------------- ----------------- -------------- --------------
Balance at
March 31, 2003 9,000 121,000 130,000
Q2 2003 utilization (9,000) (31,000) (40,000)
--------------- ----------------- -------------- --------------
Balance at
June 30, 2003 90,000 90,000
Q3 2003 utilization (32,000) (32,000)
--------------- ----------------- -------------- --------------
Balance at
September 30, 2003 $ $ 58,000 $ $ 58,000
=============== ================= ============== ==============
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 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, a new business
strategy was defined that management believes will continue to drive the
Company's growth. This strategy is to supply "comprehensive" embedded system
platforms incorporating multiple components from the Company's product
portfolio. 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 third quarter 2003 was $13.1 million,
compared to $4.0 million in the corresponding quarter a year earlier. The
Computing Products Group, acquired in October 2002, contributed $4.3 million to
revenue in this period. Net income for the third quarter 2003 amounted to $1.0
million, or $.07 per diluted share, compared to a net loss amounting to $1.2
million, or $(.10) per diluted share for the third quarter 2002, based on 13.0
million and 12.3 million shares outstanding, respectively. Third quarter 2002
results included expenses associated with a restructuring charge amounting to
$.4 million (pre-tax), or $.02 per diluted share, and the class action
settlement cost amounting to $.1 million (pre-tax), or $.01 per diluted share.
Revenue for the nine months ended September 30, 2003 was $36.7 million, compared
to $17.0 million in the corresponding period a year earlier. The Computing
Products Group, acquired in October 2002, contributed $15.4 million to revenue
in this period. Net income for the first nine months of 2003 amounted to $1.9
million, or $.15 per diluted share, compared to a net loss amounting to $.4
million, or $(.03) per diluted share for the first nine months of 2002, based on
12.6 million and 12.3 million shares outstanding, respectively. Results for the
first nine months of 2002 included restructuring charges amounting to $.6
million (pre-tax), or $.03 per diluted share, and the class action settlement
cost amounting to $.1 million (pre-tax), or $.01 per share.
Cash and marketable securities amounted to $26.0 million at September 30, 2003,
compared to $24.1 million at December 31, 2002 and no long-term debt existed at
either date.
The following contains forward-looking statements within the meaning of the
Securities Act of 1933 and Securities Exchange Act of 1934 and are subject to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995.
Early in 2003, a corporate-wide effort was launched to reposition the Company to
deliver fully managed, system-level platform solutions. This effort achieved an
important milestone during the third quarter with the release of the IPnexusTM
Advanced Managed Platform product line. This new line of platform solutions
specifically addresses equipment manufacturers' requirements for an increased
level of system integration and services from suppliers. This growing
opportunity for the Company is the result of downsized engineering staffs and
increased time-to-market pressures placed on equipment manufacturers. The
Company's strategy addresses this trend by effectively enabling customers to
replace proprietary or legacy platforms with the latest generation of fully
managed system functionality.
During the third quarter, the Company continued to focus its marketing, sales
and engineering resources on growth opportunities for integrated platforms and
associated embedded products. Marketing promotional programs are targeting
regional, Company sponsored, technology seminars designed to educate customers
on the latest systems and platform strategies, while demonstrating the
capability of the IPnexus platform solutions for a variety of customer
applications. The Company's worldwide sales force continues to focus on
realizing design wins for these new integrated platform solutions. The recent
design win announcements with Sun Microsystems and Stratus Technologies, both
expected to be multi-million dollar revenue customers during 2004, are
representative of the ideal target customers for the Company's new system-level
platform solutions. At all corporate locations, engineering continues to focus
on both hardware and software development to support the Advanced Managed
Platforms configured from the Company's individual embedded products and
technologies.
During the quarter, the Company also registered growing design activity related
to the SEGwayTM line of Signaling Communication Products that are built to
utilize cost-effective contemporary IP networks. The SEGway product line is
built on the Company's integrated platforms and is increasingly being deployed
in a variety of communication applications throughout the world.
Forward Looking Guidance for the Fourth Quarter 2003 (published October 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. If
implemented, 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. In addition, during difficult economic periods, a
substantial portion of the Company's revenue is frequently 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, however, very few companies in the Company's target
markets are currently experiencing revenue growth. Starting in 2003, certain of
the Company's customers began moving projects toward production and since
mid-year, the Company's sales organization has seen a broad acceleration in
design activity. During the third quarter 2003, the Company realized six design
wins for its IPnexus and SEGway product families. Unfortunately, forward-looking
visibility on customer orders continues to be very limited.
Based upon the current business mix, the current backlog and review of sales
forecasts, management expects revenue to be $12.0 million to $13.0 million in
the fourth quarter 2003. Gross margin is expected to be approximately 50.5% to
52.5%, reflecting continuing sequential improvement, and diluted per share
earnings for the fourth quarter is expected to be between $.05 and $.08. The
effective income tax rate for the fourth quarter is assumed to be 31%. The
fourth quarter revenue guidance does not reflect orders from a customer that has
contributed greater than 10% of the Company's revenue in each of the first three
quarters of this year. This customer typically provides very little visibility
on future orders but ordinarily would have placed orders for the fourth quarter
by this time. Should this customer place orders, of the usual magnitude, for
delivery in the fourth quarter, management would expect the Company to exceed
this revenue and earnings guidance by a material amount.
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, 2003, Compared with
the Quarter and Nine Months Ended September 30, 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. The
table includes the results of operations of the Computing Products Group,
acquired by the Company in October 2002.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------- ------------ ------------- -------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 49.9 56.0 51.9 44.4
------------- ------------ ------------- -------------
Gross profit 50.1 44.0 48.1 55.6
------------- ------------ ------------- -------------
Operating expenses:
Selling and marketing 11.6 21.6 11.8 18.5
Research and development 19.2 39.9 19.8 28.0
General and administrative 8.9 14.1 9.3 10.1
Restructuring charge 10.4 3.4
Class action legal settlement 3.6 0.8
------------- ------------ ------------- -------------
Total operating expenses 39.7 89.6 40.9 60.8
------------- ------------ ------------- -------------
Income (loss) from operations 10.4 (45.6) 7.2 (5.2)
Other income, net 1.1 2.4 1.1 2.0
------------- ------------ ------------- -------------
Income (loss) before income taxes and
equity in loss of unconsolidated
company 11.5 (43.2) 8.3 (3.2)
Income tax provision (benefit) 3.6 (13.4) 2.6 (1.0)
------------- ------------ ------------- -------------
Income (loss) before equity in loss of
unconsolidated company 7.9 (29.8) 5.7 (2.2)
Equity in loss of unconsolidated company,
net of tax (0.6) (0.3) (0.5) (0.1)
------------- ------------ ------------- -------------
Net income (loss) 7.3% (30.1)% 5.2% (2.3)%
============= ============ ============= =============
Sales. Total revenue for the third quarter 2003 amounted to $13.1 million,
compared to $4.0 million for the same quarter in 2002. For the third quarter
2003, the Computing Products Group contributed $4.3 million to revenue. During
the third quarter 2003, the Company had two customers that each represented
greater than 10% of sales, and the four largest customers represented 48% of
sales. Shipments to customers outside of North America represented 21% and 35%
of sales during the third quarter of 2003 and 2002, respectively.
Total revenue for the first nine months of 2003 was $36.7 million, compared to
$17.0 million for the same period in 2002. For the first nine months of 2003,
the Computing Products Group contributed $15.4 million to revenue.
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 switch 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, 2003 and 2002:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Signaling and network access products 58% 80% 47% 86%
Computing products 33% 0% 42% 0%
IPnexus switch products 8% 17% 10% 11%
Other 1% 3% 1% 3%
-------- -------- -------- --------
Total 100% 100% 100% 100%
======== ======== ======== ========
Signaling and network access products: Network access products provide a
connection between embedded systems platforms and a variety of networks
(including the signaling network) and are used to control the network and/or
process information being transported over networks. Many of the Company's
signaling products enable the transport of signaling messages over
packet-switched (IP) networks. Revenue from this category in the third quarter
2003 amounted to $7.6 million, compared to $5.9 million in the second quarter
2003 and compared to $3.2 million in the third quarter 2002. Revenue for this
product category reversed a downward trend during the second quarter 2003 and
for the first nine months of 2003, revenue amounted to $17.4 million, compared
to $14.7 million for the same period in 2002.
Computing products: The Computing Products Group was acquired during the fourth
quarter 2002 and its products include a range of single board computers, a
variety of embedded system chassis and associated chassis management products.
These products enable Performance Technologies to provide comprehensive embedded
system platforms incorporating multiple components from the Company's portfolio.
IPnexus switch 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 by the industry standards group in September
2001. The Company is now shipping nine distinct switch models to customers, with
new models scheduled for release later this year. Revenue from this product
category increased 53% to $1.0 million in the third quarter 2003, compared to
$.7 million in the respective quarter of 2002. For the first nine months of
2003, revenue from this product category amounted to $3.5 million, compared to
$1.8 million during the same period in 2002.
Other product revenue: This revenue is related to legacy products. 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. For the third quarter, gross margin amounted to 50.1% and
44.0% of sales in 2003 and 2002, respectively. When comparing year-over-year
gross margin performance, Computing Products were acquired during the fourth
quarter 2002 and have a gross margin of approximately 35%. Overall, gross margin
has improved in each quarter this year from 45.3% in the first quarter to 50.1%
this quarter. This improvement is primarily attributable to fixed manufacturing
overhead being spread over more units produced and rising shipment volumes of
network access and signaling products which have higher margins than the
Company's other products.
Total Operating Expenses. Total operating expenses were $5.2 million and $3.5
million for the third quarter 2003 and 2002, respectively. For the nine months,
total operating expenses were $15.0 million and $10.3 million in 2003 and 2002,
respectively. In October 2002, the Computing Products Group was acquired. During
the first quarter 2003, the Company began to selectively increase expenditures
in the Computing Products Group, and in sales and marketing, to implement the
first phase of its new business strategy. During January and September 2002,
staff reductions were initiated throughout the organization to more closely
align expenses with the then current revenue levels.
Selling and marketing expenses were $1.5 million and $.9 million for the third
quarter 2003 and 2002, respectively. For the nine months, selling and marketing
expenses were $4.3 million and $3.1 million in 2003 and 2002, respectively. In
October 2002, the 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. During January and
September 2002, sales and marketing staff reductions were initiated to more
closely align expenses with the then current revenue levels.
Research and development expenses were $2.5 million and $1.6 million for the
third quarter 2003 and 2002, respectively. For the nine months, research and
development expenses were $7.3 million and $4.8 million in 2003 and 2002,
respectively. In October 2002, the Computing Products Group was acquired. During
the first quarter 2003, the Company increased research and development
expenditures in its Computing Products Group. During January and September 2002,
engineering staff reductions were initiated to more closely align expenses with
the then current revenue levels. The Company capitalizes certain software
development costs, which reduces the amount of engineering costs charged to
operating expense. Amounts capitalized were $1.1 million and $.9 million during
the first nine months of 2003 and 2002, respectively.
General and administrative expenses were $1.2 million and $.6 million for the
third quarter 2003 and 2002, respectively. For the first nine months, general
and administrative expenses were $3.4 million and $1.7 million in 2003 and 2002,
respectively. The increase in expense is primarily attributable to 2003 expenses
associated with the Computing Products Group acquired in October 2002, expenses
associated with the Chief Strategic Officer position created in January 2003 and
incentive compensation.
Restructuring charges were zero and $.6 million for the first nine months of
2003 and 2002, respectively. In January and September 2002, the Company improved
its cost structure primarily through the reduction of the Company's staff.
Class action legal settlement charges were zero and $.1 million for the third
quarter 2003 and 2002, respectively. In September 2002, the Company signed a
Memorandum of Understanding for settlement of the class action litigation
outstanding since the second quarter 2000. All claims therein were dismissed
with prejudice on July 1, 2003.
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 third quarter and first
nine months 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 federal statutory rate of 34% 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 third quarter and first nine months of 2003, losses were
recorded reflecting the allocation of Momentum's net loss to the Company, based
on the Company's ownership percentage.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, the Company's primary source of liquidity included cash
and cash equivalents of $26.0 million. The Company had working capital of $35.0
million and $32.1 million at September 30, 2003 and December 31, 2002,
respectively. The Company allowed its revolving credit facility in the amount of
$5 million to expire in April 2003.
Cash provided by operating activities amounted to $3.1 million and $4.8 million
for the first nine months of 2003 and 2002, respectively. Inventory levels have
increased due to higher volumes of shipments but continued lack of visibility of
customer orders.
Capital equipment purchases amounted to $.6 million and $.7 million for the
first nine months of 2003 and 2002, respectively. Capitalization of certain
software development costs amounted to $1.1 million and $.9 million in the first
nine months of 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 nine months of
2003, the Company repurchased a total of 56,000 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 and cash equivalents 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 (FIN 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 (FIN 46),
"Consolidation of Variable Interest Entities." Interpretation No. 46 will
require companies to identify their participation in variable interest entities,
which are defined as entities with a level of invested equity that is not
sufficient to fund future activities to permit them to operate on a stand-alone
basis, or whose equity holders lack certain characteristics of a controlling
financial interest. FIN 46 is effective for all variable interest entities
created or acquired after January 31, 2003. Originally, for variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
were to be applied for the first interim or annual period beginning after June
15, 2003. However, on October 8, 2003, the FASB deferred the latest date by
which all public entities must apply FIN 46 to the first reporting period ending
after December 15, 2003. 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. and in this
investment, the Company is not the primary beneficiary as discussed in FIN 46.
The Company does not expect the adoption of this interpretation to 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
o Investments
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 collectibility 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.
Investments: The Company's equity investment in Momentum Computer, Inc., which
is not "majority-owned" and controlled, is accounted for using the equity
method. Poor operating results of the investee or adverse changes in market
conditions in the future may cause losses or an inability of the Company to
recover its carrying value in the underlying investment. The Company's
management performs on-going business reviews of this investment based on
quantitative and qualitative measures and assesses the need to record impairment
losses when impairment indicators are identified and are considered to be other
than temporary. The Company believes that the accounting estimate related to
impairment of investments is a "critical accounting estimate" because the
Company's management exercises judgment in determining whether to record an
impairment charge on an investment. Such judgments may materially affect the
value carried on its balance sheet for any period.
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 and customer delays in qualification of products.
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. We are not
under any obligation, and we expressly disclaim any obligation, 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. Our Chief Executive
Officer (principal executive officer) and Chief Financial Officer
(principal financial officer) evaluated our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of the end of the period covered by this quarterly report. Based on
this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were
effective as of such date.
(b) Changes In Internal Controls Over Financial Reporting. There has been
no change in our internal control over financial reporting that
occurred during the fiscal quarter covered by this quarterly report
that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
31.1 Rule 13a-14a(a)/15d-14(a) Certification
31.2 Rule 13a-14a(a)/15d-14(a) Certification
32.1 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
(1) On July 24, 2003, the Company filed a Current
Report on Form 8-K, Item 12 - Results of Operations
and Financial Condition to inform stockholders that
on July 23, 2003, the Company announced its results of
operations for the quarter ended June 30, 2003. A copy
of the related press release was furnished as an
exhibit under Item 7 with this Form 8-K.
(2) On August 11, 2003, the Company filed a Current
Report on Form 8-K, Item 5 - Other to inform
stockholders that on August 11, 2003, the Company
announced it had appointed Mark Rajkowski, chief
operating officer, digital and applied imaging and vice
president of Eastman Kodak Company, to its Board of
Directors. A copy of the related press release was
furnished as an exhibit under Item 7 with this Form
8-K. No financial statements were filed with this 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 10, 2003 By: /s/ Donald L. Turrell
---------------------------------
Donald L. Turrell
President and
Chief Executive Officer
November 10, 2003 By: /s/ Dorrance W. Lamb
---------------------------------
Dorrance W. Lamb
Chief Financial Officer and
Vice President, Finance
Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certification of Principal 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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared; and
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluations; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors:
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 10, 2003 /s/ Donald L. Turrell
---------------------------
Donald L. Turrell,
Chief Executive Officer
Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certification of Principal 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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared; and
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluations; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors:
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 10, 2003 /s/ Dorrance W. Lamb
---------------------------
Dorrance W. Lamb,
Chief Financial Officer
Exhibit 32.1
Section 1350 Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 ("Section 906"), Donald L. Turrell and Dorrance
W. Lamb, Chief Executive Officer and Chief Financial Officer, respectively, of
Performance Technologies, Incorporated, certify that (i) the Quarterly Report on
Form 10-Q for the quarter ended September 30, 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 such report 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 or its staff upon request.
/s/ Donald L. Turrell
--------------------------------
Donald L. Turrell
Chief Executive Officer
(Principal Executive Officer)
Date: November 10, 2003
/s/ Dorrance W. Lamb
--------------------------------
Dorrance W. Lamb
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date: November 10, 2003