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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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 June 30, 2004
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
incorporation of organization) Identification No.)
205 Indigo Creek Drive, Rochester, New York 14626
(Address of principal executive offices) (Zip Code)
-----------------------------
Registrant's telephone number, including area code: (585) 256-0200
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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 outstanding shares of the registrant's common stock was 12,763,474
as of July 31, 2004.
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PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2004 (unaudited)
and December 31, 2003 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2004 and 2003 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2004 2003
-------------------- --------------------
(unaudited)
Current assets:
Cash and cash equivalents $21,582,000 $29,589,000
Accounts receivable, net 10,875,000 7,857,000
Inventories, net 7,746,000 5,443,000
Prepaid expenses and other assets 375,000 626,000
Deferred taxes 1,686,000 1,714,000
-------------------- ---------------------
Total current assets 42,264,000 45,229,000
Property, equipment and improvements, net 2,266,000 2,432,000
Software development costs, net 3,436,000 2,597,000
Notes receivable from unconsolidated companies 2,300,000 1,000,000
Investment in unconsolidated company 494,000 402,000
Goodwill 5,474,000
-------------------- ---------------------
Total assets $56,234,000 $51,660,000
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,419,000 $ 1,231,000
Income taxes payable 407,000 1,760,000
Accrued expenses 3,146,000 4,019,000
-------------------- ---------------------
Total current liabilities 5,972,000 7,010,000
Deferred taxes 785,000 698,000
-------------------- ---------------------
Total liabilities 6,757,000 7,708,000
-------------------- ---------------------
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 12,829,000 12,863,000
Retained earnings 41,930,000 40,532,000
Treasury stock - at cost; 496,564 and 811,049 shares
held at June 30, 2004 and December 31, 2003, respectively (5,382,000) (9,536,000)
Accumulated other comprehensive loss (33,000) (40,000)
-------------------- ---------------------
Total stockholders' equity 49,477,000 43,952,000
-------------------- ---------------------
Total liabilities and stockholders' equity $56,234,000 $51,660,000
==================== =====================
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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------------- --------------- ---------------- ----------------
Sales $13,273,000 $12,636,000 $28,839,000 $23,675,000
Cost of goods sold 6,653,000 6,510,000 14,241,000 12,546,000
---------------- --------------- ---------------- ----------------
Gross profit 6,620,000 6,126,000 14,598,000 11,129,000
---------------- --------------- ---------------- ----------------
Operating expenses:
Selling and marketing 1,572,000 1,446,000 3,200,000 2,808,000
Research and development 2,621,000 2,471,000 5,212,000 4,778,000
General and administrative 1,199,000 1,199,000 2,542,000 2,262,000
In-process research and development 218,000
---------------- --------------- ---------------- ----------------
Total operating expenses 5,392,000 5,116,000 11,172,000 9,848,000
---------------- --------------- ---------------- ----------------
Income from operations 1,228,000 1,010,000 3,426,000 1,281,000
Other income, net 151,000 127,000 289,000 254,000
---------------- --------------- ---------------- ----------------
Income before income taxes and equity
in income (loss) of unconsolidated company 1,379,000 1,137,000 3,715,000 1,535,000
Income tax provision 428,000 308,000 1,219,000 423,000
---------------- --------------- ---------------- ----------------
Income before equity in income (loss) of
unconsolidated company 951,000 829,000 2,496,000 1,112,000
Equity in income (loss) of unconsolidated
company 80,000 (125,000) 92,000 (151,000)
---------------- --------------- ---------------- ----------------
Net income $ 1,031,000 $ 704,000 $ 2,588,000 $ 961,000
================ =============== ================ ================
Basic earnings per share $ .08 $ .06 $ .20 $ .08
================ =============== ================ ================
Diluted earnings per share $ .08 $ .06 $ .19 $ .08
================ =============== ================ ================
Weighted average number of common
shares used in basic earnings per share 12,741,867 12,191,954 12,673,917 12,211,822
Potential common shares 680,294 236,897 855,534 119,868
---------------- --------------- ---------------- ----------------
Weighted average number of common
shares used in diluted earnings per share 13,422,161 12,428,851 13,529,451 12,331,690
================ =============== ================ ================
The accompanying notes are an integral part of these consolidated
financial statements.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
2004 2003
----------------- ------------------
Cash flows from operating activities:
Net income $2,588,000 $ 961,000
Non-cash adjustments:
Depreciation and amortization 1,352,000 1,129,000
In-process research and development 218,000
Reserve for inventory obsolescence 383,000 360,000
Deferred taxes 115,000 (32,000)
Equity in (income) loss of unconsolidated company (92,000) 151,000
Other 43,000 102,000
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable (2,562,000) 918,000
Inventories (1,663,000) (3,620,000)
Prepaid expenses and other assets 252,000 582,000
Accounts payable and accrued expenses (483,000) 441,000
Income taxes payable (1,353,000) 148,000
----------------- ------------------
Net cash (used) provided by operating activities (1,202,000) 1,140,000
----------------- ------------------
Cash flows from investing activities:
Purchases of property, equipment and improvements (248,000) (459,000)
Capitalized software development costs (1,124,000) (612,000)
Loan to unconsolidated company (1,300,000)
Business acquisition (7,044,000)
Maturities of marketable securities 2,006,000
Other (33,000)
----------------- ------------------
Net cash (used) provided by investing activities (9,716,000) 902,000
----------------- ------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 2,911,000 69,000
Purchase of treasury stock (194,000)
----------------- ------------------
Net cash provided (used) by financing activities 2,911,000 (125,000)
----------------- ------------------
Net (decrease) increase in cash and cash equivalents (8,007,000) 1,917,000
Cash and cash equivalents at beginning of period 29,589,000 22,077,000
----------------- ------------------
Cash and cash equivalents at end of period $21,582,000 $23,994,000
================= ==================
The accompanying notes are an integral part of these consolidated
financial statements.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note A - Basis of Presentation
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. Certain reclassifications have been made to
prior periods in order to conform to the current year presentation. 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, 2003, as reported in its Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
Note B - Stock-Based Compensation and Earnings Per Share
At June 30, 2004, the Company had stock options outstanding under three stock
option plans and restricted stock awards outstanding under one plan. 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
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 and
earnings per share would have been as follows:
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
-------------- ---------------- --------------- -------------
Net income, as reported $1,031,000 $ 704,000 $2,588,000 $961,000
Add: Restricted stock compensation expense 6,000 21,000
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax
effects (764,000) (377,000) (1,223,000) (651,000)
-------------- ---------------- --------------- -------------
Pro forma net income $ 273,000 $ 327,000 $1,386,000 310,000
============== ================ =============== =============
Earnings per share:
Basic - as reported $ .08 $ .06 $ .20 $ .08
============== ================ =============== =============
Basic - pro forma $ .02 $ .03 $ .11 $ .03
============== ================ =============== =============
Diluted - as reported $ .08 $ .06 $ .19 $ .08
============== ================ =============== =============
Diluted - pro forma $ .02 $ .03 $ .10 $ .03
============== ================ =============== =============
The assumptions for annual vesting of stock options were generally 33% per year
for stock options granted in 2004 and 2003. 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 2004 and
2003, respectively: Dividend yield of 0%; expected volatility of 68% and 67%;
risk-free interest rates of 2.1% to 3.5% and 2.0%; and expected lives of three
years.
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 stock options and
unvested restricted stock awards, applying the treasury stock method. Dilutive
earnings per share calculations exclude the effect of approximately 1,075,000
and 1,609,000 options for the three months ended June 30, 2004 and 2003,
respectively, and 621,000 and 1,767,000, for the six months ended June 30, 2004,
and 2003, respectively. These options are excluded as they have exercise prices
in excess of the average market price of the Company's common stock for the
respective periods.
During the six months ended June 30, 2004, 304,000 common shares were issued
upon the exercise of stock options.
Note C - Inventories, net
Inventories consisted of the following:
June 30, December 31,
2004 2003
---------------- ----------------
Purchased parts and components $4,971,000 $3,836,000
Work in process 3,907,000 3,434,000
Finished goods 2,556,000 1,969,000
---------------- ----------------
11,434,000 9,239,000
Less: reserve for inventory obsolescence (3,688,000) (3,796,000)
---------------- ----------------
Net $7,746,000 $5,443,000
================ ================
Note D - Investment
On February 18, 2004, the Company entered into an agreement to invest up to $3.0
million in InSciTek Microsystems, Inc. (InSciTek), an unrelated company, in the
form of an interest bearing convertible note. The Company invested $1.3 million
in conjunction with execution of the agreement. In July 2004, based upon
InSciTek's sales performance in the second quarter of 2004, the Company invested
an additional $1,000,000 in InSciTek through an increase in the principal amount
of the convertible note. The balance of the investment will be made by February
2005 based upon InSciTek meeting certain sales performance criteria. If all
stages of the investment are made, the Company will have the option to acquire
ownership of InSciTek during a future specified period. The note bears interest
at 10% annually and is convertible into shares of common stock of InSciTek. All
unpaid accrued interest and all outstanding principal is payable in full on
December 31, 2008.
Note E - Accrued Expenses
Restructuring Programs
During 2002, the Company consolidated the engineering operations of its Raleigh,
North Carolina facility into its Ottawa, Canada Signaling Group. The initial
restructuring charge recorded in 2002 for lease commitments included certain
estimates for expected future sublease receipts. Due to market conditions in the
Raleigh, North Carolina area, the Company recorded an incremental restructuring
charge of $118,000 in the fourth quarter 2003, which related to a revised
estimate of the sublease receipts expected through the remaining term of this
lease, which expires in 2005. The Company did not record any restructuring
charges during the first six months 2004 or 2003.
Payments totaling $63,000 were made during the six months ended June 30, 2004,
under the existing lease obligation reducing the accrued restructuring balance
from $146,000 at December 31, 2003, to $83,000 at June 30, 2004.
Warranty Obligations
The Company has warranty obligations in connection with the sale of certain of
its products. The warranty period for its products is generally one year. The
costs incurred to provide for these warranty obligations are estimated and
recorded as an accrued liability at the time of sale. The Company estimates its
future warranty costs based on product-based historical performance rates and
related costs to repair. The changes in the Company's accrued warranty
obligations for the first six months of 2004 were as follows:
Accrued warranty obligations at December 31, 2003 $233,000
Actual warranty experience (274,000)
Warranty provisions 285,000
-----------
Accrued warranty obligations at June 30, 2004 $244,000
===========
Note F - Acquisition
On January 23, 2004, the Company acquired substantially all of the assets and
assumed certain liabilities of Mapletree Networks, Inc., a company that provides
voice, data and fax processing technology to original equipment manufacturers.
These new products, incorporated into the Company's integrated platform
strategy, enable the Company to compete more effectively in the voice over IP
and wireless communications applications markets. In accordance with the
purchase agreement, the Company paid $6,625,000 at closing and incurred
approximately $400,000 of other acquisition related costs. The Company accounted
for the acquisition under the provisions of SFAS No. 141, "Business
Combinations." Accordingly, the purchase price was allocated to the respective
assets and liabilities based upon their estimated fair values at the acquisition
date. Acquired in-process research and development amounted to $218,000 and was
charged to operations during the first quarter 2004. The excess of the purchase
price over the fair value of the net assets acquired is included in goodwill on
the accompanying Consolidated Balance Sheet. Operating results of the acquired
entity have been included in the Consolidated Statement of Income from the date
of acquisition.
In connection with the acquisition, the Company agreed to pay an additional
$1,625,000 if the operations of the acquired business (on a stand-alone basis as
operated by the Company) achieve certain quarterly and annual financial
milestones. Based upon the operating results of the acquired business in the
second quarter of 2004, the Company does not believe any of the additional
$1,625,000 of purchase price will be paid related to this acquisition. The
purchase price is also subject to adjustment based upon certain factors, as
defined in the agreement.
Note G - Recently Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities," an Interpretation of Accounting Research
Bulletin (ARB) No. 51, "Consolidated Financial Statements." FIN 46 addresses the
consolidation by business enterprises of variable interest entities (VIEs)
either: (1) that do not have sufficient equity investment at risk to permit the
entity to finance its activities without additional subordinated financial
support, or (2) in which the equity investors lack an essential characteristic
of a controlling financial interest. In December 2003, the FASB completed
deliberations of proposed modifications to FIN 46 (Revised Interpretations)
resulting in multiple effective dates based on the nature and creation date of
the VIE. The Revised Interpretations must be applied to all VIEs no later than
the end of the first interim or annual reporting period ending after March 15,
2004. However, prior to the required application of the Revised Interpretations,
its provisions must be adopted by the end of the first interim or annual
reporting period that ends after December 15, 2003 (for the year ended December
31, 2003 for the Company) for VIEs considered to be special purpose entities
(SPEs). SPEs for this provision include any entity whose activities are
primarily related to securitizations or other forms of asset-backed financings
or single-lessee leasing arrangements. The adoption of FIN 46 did not have an
impact on the Company's financial position.
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.
Critical Accounting Estimates and Assumptions
In preparing the financial statements in accordance with Generally Accepted
Accounting Principles (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 generally cannot make these estimates until
preliminary results for a financial quarter are known and analyzed. 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 that 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 Inventories
o Income Taxes
o Product Warranty
o Impairment of Investments
o Carrying Value of Goodwill
Revenue Recognition: The Company recognizes revenue in accordance with the SEC
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition." 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, which represents the majority of the Company's revenue,
occurs when all factors are met, including transfer of title and risk of loss,
which 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 or capitalized as an
asset. 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.
Income Taxes: The Company accounts for income taxes using the asset and
liability approach which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of the temporary differences
between the carrying amounts and the tax basis of such assets and liabilities.
The Company would record a valuation allowance to reduce deferred tax assets to
the amount that is more likely than not to be realized. The Company believes
that the accounting estimate related to income taxes is a "critical accounting
estimate" because the Company exercises judgment in estimating future taxable
income, including prudent and feasible tax planning strategies, and in assessing
the need for any valuation allowance. If the Company should determine that it
would not be able to realize all or part of its net deferred tax assets in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made. Likewise, in the event that the Company
were to determine that it would be able to realize its deferred tax assets in
the future in excess of the net recorded amount, an adjustment to the deferred
tax asset would increase income in the period such determination was made.
Product Warranty: The Company has warranty obligations in connection with the
sale of certain of its products. The warranty period for these products is
generally one year. The costs incurred to provide for these warranty obligations
are estimated and recorded as an accrued liability at the time of sale. The
Company estimates its future warranty costs based on historical performance
rates and related costs to repair given products. The Company believes that the
accounting estimate related to product warranty is a "critical accounting
estimate" because the Company exercises judgment in determining future estimated
warranty costs. Should actual performance rates or repair costs differ from
estimates, revisions to the estimated warranty liability would be required.
Impairment of Investments: The Company holds certain debt and equity
investments. On a periodic basis, the Company reviews and evaluates its
investments for potential impairment. In determining whether impairment has
occurred, the Company considers such factors as the original expectations of the
investment, performance of the investee company since the date of the
investment, and current and future prospects for the investee company. If events
or changes in circumstances occur in which an other than temporary loss has
occurred, the Company will record an impairment of the investment by writing
down the investment to the Company's estimate of fair market value at the time
of the impairment. The Company believes that the accounting estimate related to
impairment of investments is a "critical accounting estimate" because the
Company exercises judgment in determining whether an other than temporary loss
has occurred and the Company also estimates the fair market value of the
investment at the time of the impairment.
Carrying Value of Goodwill: The Company conducts tests for impairment of
goodwill annually or more frequently if circumstances indicate that the asset
might be impaired. The Company believes that the accounting estimate related to
the carrying value of goodwill is a "critical accounting estimate" because these
impairment tests include management estimates of future cash flows that are
dependent upon subjective assumptions regarding future operating results
including growth rates, discount rates, capital requirements and other factors
that impact the estimated fair value. An impairment loss is recognized to the
extent that an asset's carrying amount exceeds its fair value.
Overview
Performance Technologies is a leading supplier of integrated platforms,
components and software solutions for the embedded systems marketplace that can
be used in a broad range of applications and end markets including
communications, military and commercial.
The Company markets its products through its direct worldwide sales force under
a variety of brand names including IPnexus(TM), Advanced Managed Platforms,
Intelligent Shelf Manager, NexusWare(TM), SEGway(TM), and UniPorte Software
Architecture(TM) products.
The Company's IPnexus product line is based on open systems architectures and
consists of a wide range of embedded building blocks which can be mixed and
matched to construct packet-based integrated platforms. IPnexus products include
Advanced Managed Platforms, the Intelligent Shelf Manager and NexusWare.
Customers select the appropriate platform, components and software to fit system
and application requirements with full confidence that all elements have been
designed and engineered to function together. The Company's SEGway signaling
products provide a signaling bridge between traditional telephone networks and
the growing IP packet-switched network architectures of today. When used in
conjunction with softswitches, media gateways and application servers, SEGway
signaling products can provide a variety of call control functionality or
service processing capabilities of traditional Public Switched Telephone Network
switches. The UniPorte Software Architecture products of the Company provide
voice, data and fax processing technology using digital signal processors (DSP).
Historically, the Company's growth has been generated through a combination of
internal growth and acquisition of new products or complementary technologies.
On January 23, 2004, the Company acquired substantially all of the assets of
Mapletree Networks, Inc. (Mapletree), a company that provides voice, data and
fax processing technology to original equipment manufacturers. The Company paid
$7.0 million, including cash and the assumption of certain debt at closing of
$6.6 million and other acquisition costs of $.4 million. The Company also agreed
to pay an additional $1.6 million if the operations of Mapletree (on a
stand-alone basis as operated by the Company) achieve certain milestones. Based
upon the operating results of the acquired entity in the second quarter 2004,
the Company does not believe that any of the additional $1.6 million of purchase
price will be paid related to this acquisition.
On February 18, 2004, the Company entered into an agreement to invest up to an
aggregate of $3.0 million in InSciTek Microsystems, Inc. (InSciTek), in the form
of an interest bearing convertible note. The Company invested $1.3 million in
conjunction with execution of the agreement. In July 2004, based upon InSciTek's
sales performance in the second quarter of 2004, the Company invested an
additional $1,000,000 in InSciTek through an increase in the principal amount of
the convertible note. The balance of the investment will be made by February
2005 based upon InSciTek meeting certain sales performance criteria. If the
Company makes the remaining investment, it will have the option to acquire
ownership of InSciTek during a future specified period. The note bears interest
at 10% annually and is convertible into shares of common stock of InSciTek. All
unpaid accrued interest and all outstanding principal is payable in full on
December 31, 2008.
Strategy: Since its founding in 1981, the Company has designed innovative
embedded products and solutions that focus on attributes such as reduced
time-to-market, enhanced performance, high availability and cost advantages for
its customers. Today, the Company is a leading supplier of integrated platforms,
components and software solutions for the embedded systems marketplace.
Management implemented a new product strategy during 2003 that repositioned the
Company as a supplier of fully managed, system-level platform solutions to the
embedded systems marketplace. An important milestone in this strategy was
achieved in September 2003 with the introduction of the IPnexus Advanced Managed
Platform product line. This new family of platform solutions specifically
addresses equipment manufacturers' requirements for an increased level of system
integration and services from suppliers. These new platforms also enable
equipment manufacturers' downsized engineering staffs to improve time-to-market
for their new products. The Company's strategy addresses this trend by enabling
customers to replace proprietary or legacy platforms with the latest generation
of fully managed platform functionality. This new product strategy resulted in
improved financial performance by the Company during 2003. During 2004, the
Company will integrate the Voice Technology Group's products (formerly Mapletree
Networks) into this strategy.
Financial Information
As noted above, the Company acquired substantially all of the assets of
Mapletree Networks (the Voice Technology Group) on January 23, 2004. Beginning
on that date, the Company's revenue and expenses reflect the operations of the
Voice Technology Group.
Revenue in the second quarter 2004 amounted to $13.3 million, compared to $12.6
million in the corresponding quarter a year earlier. Revenue for the six months
ended June 30, 2004, totaled $28.8 million, compared to $23.7 million for the
respective period in 2003. The Voice Technology Group contributed $.4 million to
revenue in the second quarter 2004 and $1.6 million for the six months ended
June 30, 2004.
On a GAAP earnings basis, net income for the second quarter 2004 amounted to
$1.0 million, or $.08 per diluted share based on 13.4 million shares. Net income
for the second quarter 2003 amounted to $.7 million, or $.06 per diluted share,
based on 12.4 million shares outstanding. Net income for the six months ended
June 30, 2004 totaled $2.6 million or $.19 per diluted share based on 13.5
million shares outstanding. For the six months ended June 30, 2003, net income
amounted to $1.0 million, or $.08 per diluted share based on 12.3 million
shares outstanding.
Management believes that the Company's results excluding non-recurring expense
provide better comparability of its operations because non-recurring expenses
result from facts and circumstances that vary in frequency, amounts and cause.
During the first quarter 2004, the Company completed the purchase of the
business of Mapletree Networks and recorded in-process research and development
costs associated with this acquisition in the amount of $.2 million (after-tax),
or $.02 per diluted share. On a non-GAAP basis, excluding this $.2 million
non-recurring expense, net income for the six months ended June 30, 2004
amounted to $2.8 million, or $.21 per diluted share, based on 13.5 million
shares outstanding. Net income for the six months ended June 30, 2003 amounted
to $1.0 million or $.08 per diluted share, based on 12.3 million shares
outstanding.
The Company provides guidance related to earnings per share expected in future
quarters. Any additional information provided, such as revenue forecasts, is
provided as supplementary information to the earnings per share guidance. The
Company met its earnings per share guidance for the second quarter. Revenue in
the second quarter was less than forecasted for two reasons: First, the
Company's largest customer over the past fifteen months unexpectedly reduced its
second quarter requirement for product to $.6 million, from $3.3 million in the
first quarter. Second, revenue from the Voice Technology Group, acquired in
January 2004, was also less than expected, amounting to $.4 million in the
second quarter 2004, compared to $1.2 million in the first quarter. Excluding
these two sources, revenue increased 11% sequentially, from $11.1 million in the
first quarter, to $12.3 million in the second quarter 2004.
During the quarter, the Company was engaged with customers and prospective
customers in a growing number of field trials for Performance Technologies'
platforms and products. Furthermore, during the second quarter, there were six
new product introductions, including extensions to the Company's popular IPnexus
Advanced Managed Platform line, its portfolio of Voice Technology products and
its new Mini-STP as part of its Signaling Systems product family. To complement
these introductions, there were announcements of seven customer relationships
which covered the entire range of the Company's products. This customer
activity demonstrates continued acceptance of the Company's product technology
and validation of its overall integrated platform strategy.
Cash amounted to $21.6 million at June 30, 2004, compared to $29.6 million at
December 31, 2003, and no long-term debt existed at either date. The decrease in
cash is primarily related to the acquisition of the business of Mapletree
Networks which took place in January 2004.
Forward Looking Guidance for the Third Quarter 2004 (published July 28, 2004):
The Company provides guidance related to earnings per share expected in future
quarters. Any additional information provided, such as revenue forecasts, is
provided as supplementary information to the earnings per share guidance.
The Company develops integrated platforms, components and software solutions
which are incorporated 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. Design
wins, if implemented, 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 weak economic periods, the
visibility for customers' orders is limited which frequently causes 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 a quarter and
shipped in the final month of the same quarter. Unfortunately, forward-looking
visibility on customer orders continues to be very limited. During the second
quarter 2004, the Company realized four design wins for its IPnexus, SEGway and
UniPorte Architecture product families.
At the current time, it appears that the Company's largest customer (noted
above) will not be ordering meaningful volumes of product until the pending
merger of one of its customers is resolved. Therefore, the Company is not
forecasting additional product shipments to this customer in the third quarter.
The newly acquired Voice Technology Group (VTG) generated second quarter revenue
of $.4 million, was not profitable on an operating basis, and is now not
forecasted to be profitable for 2004. During the third quarter, the Company will
begin to integrate VTG into the Company's operations.
Diluted earnings per share in the third quarter is expected to be $.06 to $.09.
In addition, based upon the current business mix, the current backlog and review
of sales forecasts, management expects revenue to be in the range of $13.5
million to $14.5 million in the third quarter 2004. Gross margin is expected to
be approximately 49.5% to 51.0% and the effective income tax rate for the third
quarter is expected to be 31%.
Key Performance Indicators:
The Company's integrated platform and component products are incorporated 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. Design wins, if implemented,
reach production volumes at varying rates, generally beginning 12 to 18 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.
As noted earlier, the Company was notified of four design wins by its customers
during the second quarter 2004. All four of these new design wins were for
integrated platforms incorporating multiple products. During the second quarter
of 2003, the Company was notified of two design wins. These design wins were for
individual components: (1) IPnexus Network Access and (1) SEGway Signaling
product. Not all design wins are expected to result in production orders. The
Company believes that the increase in design wins in the second quarter 2004,
compared to the second quarter 2003, was due to increased customer design
activity which began in the second half of 2003.
Management believes another key indicator for the Company's business is the
volume of orders received from its customers. During weak economic periods,
customer's visibility deteriorates causing delays in the placement of orders.
While forward-looking visibility on customer orders continues to be very
limited, shipments to customers in the second quarter of 2004 amounted to $13.3
million (including the new VTG products) and $12.9 million (excluding the new
VTG products), compared to $12.6 million in the second quarter 2003. As
previously indicated, revenue for the third quarter 2004 is expected to be in
the range of $13.5 million to $14.5 million, compared to $13.1 million in the
third quarter 2003.
More in-depth discussions of the Company's strategy and financial performance
can be found in the Company's recent Annual Report on Form 10-K and other
filings with the Securities and Exchange Commission.
Three and Six Months Ended June 30, 2004, Compared with
Three and Six Months Ended June 30, 2003
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 Voice Technology Group, acquired
by the Company in January 2004.
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
--------- --------- --------- --------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 50.1 51.5 49.4 53.0
--------- --------- --------- --------
Gross profit 49.9 48.5 50.6 47.0
--------- --------- --------- --------
Operating expenses:
Selling and marketing 11.8 11.4 11.1 11.9
Research and development 19.7 19.6 18.1 20.2
General and administrative 9.1 9.5 8.8 9.5
In-process research and development 0.7
--------- --------- --------- --------
Total operating expenses 40.6 40.5 38.7 41.6
--------- --------- --------- --------
Income from operations 9.3 8.0 11.9 5.4
Other income, net 1.1 1.0 1.0 1.1
--------- --------- --------- --------
Income before income taxes and
equity in income (loss) of
unconsolidated company 10.4 9.0 12.9 6.5
Income tax provision 3.2 2.4 4.2 1.8
--------- --------- --------- --------
Income before equity in income (loss)
of unconsolidated company 7.2 6.6 8.7 4.7
Equity in income (loss) of
unconsolidated company 0.6 (1.0) 0.3 (0.6)
--------- --------- --------- --------
Net income 7.8% 5.6% 9.0% 4.1%
========= ========= ========= ========
Sales. Total revenue for the second quarter 2004 amounted to $13.3 million,
compared to $12.6 million for the same quarter in 2003, an increase of 6%.
Revenue for the six months ended June 30, 2004, increased 22% to $28.8 million,
from $23.7 million in the same period in 2003. The Voice Technology Group
contributed $.4 million, or 3%, to revenue and $1.6 million, or 6%, to revenue
for the second quarter and the first six months of 2004, respectively.
In the second quarter 2004, the Company had two customers that each represented
greater than 10% of sales and its four largest customers represented 43% of
sales. During the second quarter 2003, the Company had two customers that each
comprised greater than 10% of revenue and the Company's four largest customers
represented 58% of sales. For the six months ended June 30, 2004, the Company
had three customers who each comprised greater than 10% of revenues and its four
largest customers constituted 43% of revenue. For the six months ended June 30,
2003, there were two customers who each contributed more than 10% of revenue and
the Company's four largest customers represented 54% of revenue. Shipments to
customers outside of North America represented 28% and 17% of sales during the
second quarter 2004 and 2003, respectively, and 25% and 20% of revenue for the
six months ended June 30, 2004 and 2003, respectively.
For the periods indicated, the Company's products are grouped into four distinct
categories in one market segment: Communications (network access, signaling and
voice) products, Computing products, IPnexus switching products and Other
products. Revenue from each product category is expressed as a percentage of
sales for the three and six month periods:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Communications products 41% 47% 50% 41%
Computing products 40% 43% 34% 47%
IPnexus switching products 18% 9% 14% 11%
Other products 1% 1% 2% 1%
---------- ---------- ---------- ----------
Total 100% 100% 100% 100%
========== ========== ========== ==========
Communications products:
Network access products provide a connection between embedded systems platforms
and a variety of networks 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. The Voice Technology products enable voice, data and fax processing
for communications applications.
Revenue from Communications products in the second quarter 2004 amounted to $5.5
million, compared to $5.9 million in the second quarter 2003. This decrease
reflects a significant decline in revenue from the customer noted earlier whose
product requirements unexpectedly decreased in the second quarter 2004. This
decrease was partially offset by the $.4 million of revenue from Voice
Technology products and an increase in shipments to other customers reflecting
greater market penetration for the Company's Communications products and general
improvement in the business environment.
For the six months ended June 30, 2004, revenue from Communications products
increased to $14.5 million, from $9.8 million during the same period in 2003.
This increase of $4.7 million, or 48%, includes the Voice Technology product
revenue of $1.6 million, an increase of $1.0 million related to the major
customer noted in the Overview section and an increase of $2.1 million in
shipments to other customers reflecting greater market penetration for the
Company's Communications products and general improvement in the business
environment.
Computing products:
Computing products include a range of single board computers, a variety of
embedded system chassis and associated chassis management products. These
products enable the Company to provide integrated platform solutions
incorporating multiple components from the Company's portfolio.
Revenue from Computing products decreased by $.2 million to $5.3 million in the
second quarter 2004, from $5.5 million in second quarter 2003.
For the six months ended June 30, 2004, revenue from Computing products totaled
$9.9 million, compared to $11.2 million for the same period in 2003. This
decrease of $1.3 million was primarily attributable to one large customer during
the first quarter of 2004.
IPnexus switching products:
The Company's IPnexus switch product family has been designed for the embedded
systems market and is based on the PICMG 2.16 systems architecture. The Company
currently ships ten distinct switch models to customers.
Revenue from this product category increased to $2.4 million in the second
quarter 2004, from $1.1 million in the second quarter 2003. Revenue for the six
months ended June 30, 2004 amounted to $4.0 million compared to $2.5 million in
the same period last year. Revenue growth in this category in 2004 is the result
of the rising adaptation of the PICMG 2.16 systems architecture which utilizes
Ethernet switches. As more customers migrate their new products into production
using this architecture, the Company expects revenue from this product category
to continue to grow.
Other products:
This revenue is primarily 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.
Fluctuations in gross margin are primarily attributable to product mix. In
addition, during the first half of 2004, the Company began manufacturing a
greater number of its single board computer products at the Company's Rochester
manufacturing facility. As a result, the higher volume of products produced in
the Rochester manufacturing facility resulted in fixed manufacturing overhead
being spread over more units produced.
Gross margins were 49.9% and 48.5% in the second quarter 2004 and 2003,
respectively. The improvement in gross margin was primarily attributable to the
increased production at the Company's Rochester manufacturing facility.
Offsetting this increase, Computing products, whose margins are lower than
Communications products, constituted a higher percentage of sales for the second
quarter 2004, compared to 2003, which negatively impacted margins for the
comparative periods. Gross margins were 50.6% and 47.0% for the first six months
of 2004 and 2003, respectively. For the six months ended June 30, 2004,
Communications products, whose margins are greater than Computing products, were
a higher percentage of revenue than in 2003, resulting in higher overall gross
margin. The increased manufacturing volume in Rochester in 2004 also had a
positive impact on gross margin. Offsetting this improvement, the margins of the
Voice Technology products negatively impacted gross margin for the six months
ended June 30, 2004 due to acquisition accounting for inventory related to the
Mapletree Networks purchase.
Included in cost of good sold is the amortization of software development
expenses which totaled $.4 million and $.2 million, for the second quarter 2004
and 2003, respectively, and $.9 million and $.5 million for the six months ended
June 30, 2004 and 2003, respectively.
Total Operating Expenses. Total operating expenses were $5.4 million and $5.1
million for the second quarter 2004 and 2003, respectively, and $11.2 million
and $9.8 million for the first six months of 2004 and 2003, respectively. The
operating expenses associated with the Voice Technology Group are included in
the 2004 results from the date of acquisition (January 2004) and are the primary
factor in the overall increase in operating expenses from 2003 to 2004.
Selling and marketing expenses amounted to $1.6 million and $1.4 million for the
second quarter 2004 and 2003, respectively. The increase in selling and
marketing expense is primarily attributable to the addition of the Voice
Technology Group, partially offset by decreases in marketing costs. Selling and
marketing expenses amounted to $3.2 million and $2.8 million for the first six
months of 2004 and 2003, respectively. This increase of $.4 million is primarily
related to addition of the Voice Technology Group.
Research and development expenses amounted to $2.6 million and $2.5 million for
the second quarter 2004 and 2003, respectively. Research and development
expenses reflect the addition of the Voice Technology Group expenses and an
increase in capitalized software development. The Company capitalizes certain
software development costs which reduced the amount of software development
charged to operating expense. Capitalized software development costs, including
the new VTG operations, were $.6 million and $.3 million during the second
quarter 2004 and 2003, respectively. Research and development expenses totaled
$5.2 million and $4.8 million for the first six months of 2004 and 2003,
respectively. The $.4 million increase reflects the addition of the Voice
Technology Group expenses and an increase in capitalized software development
costs. Capitalized software development costs, including the new VTG operations,
were $1.1 million and $.6 million during the first six months of 2004 and 2003,
respectively.
General and administrative expenses amounted to $1.2 million for both the second
quarter 2004 and 2003. Expenses modestly increased during the second quarter
2004 as a result of the addition of the Voice Technology Group, which were
offset by slightly lower expenses due to continued cost control efforts. General
and administrative expenses amounted to $2.5 million and $2.3 million for the
first six months of 2004 and 2003, respectively. The increase for this period
was primarily attributable to expenses associated with the Voice Technology
Group, offset by slightly lower expenses due to continued cost control efforts.
In-process research and development expense amounted to $.2 million and zero for
the first six months ended June 30, 2004 and 2003, respectively. This amount
represents a charge for in-process research and development costs associated
with the Mapletree Networks acquisition that were expensed in accordance with
Financial Accounting Standards Board Interpretation No. 4 "Applicability of SFAS
No. 2 to Business Combinations Accounted for by the Purchase Method." This
charge relates to research and development projects that had not reached
technological feasibility at the time of the acquisition.
Other income, net. Other income primarily consists 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. Other income also includes interest income earned from
notes receivable from unconsolidated companies.
Income taxes. The Company's effective income tax rate is a combination of
federal, state and foreign tax rates and is generally lower than statutory rates
because it includes benefits derived from the Company's international
operations, research activities, tax exempt interest and foreign sales. For the
second quarter 2004 and 2003, the Company's effective tax rate was 31% and 27%,
respectively. For the six months ended June 30, 2004 and 2003, the Company's
effective tax rate was 33% and 28%, respectively. The increase in the income tax
rate for the second quarter and the first six months of 2004, compared to the
second quarter and the first six months of 2003 was a result of changes in
certain permanent items and the favorable resolution of prior year tax
uncertainties in 2003.
Equity in Income (Loss) of Unconsolidated Company. The Company maintains an
ownership interest in Momentum Computer, Inc., a developer of specialized single
board computer products. During the fourth quarter 2003, the Company reduced its
ownership in Momentum from 47% to 30%. The amounts presented reflect the
Company's allocation of Momentum's income or loss for the periods presented
based on the Company's ownership percentage.
Liquidity and Capital Resources
At June 30, 2004, the Company's primary source of liquidity was cash and cash
equivalents which totaled $21.6 million. The Company had working capital of
$36.3 million and $38.2 million at June 30, 2004 and December 31, 2003,
respectively.
Cash used by operating activities was $1.2 million for the first six months of
2004. This amount included net income of $2.6 million, non-cash charges related
to depreciation and amortization of $1.4 million and an increase of the
inventory obsolescence reserve of $.4 million. Cash used in operations due to
changes in operating assets and liabilities included an increase in accounts
receivable of $2.6 million which reflects increased sales activity experienced
in the first six months of 2004. Inventory increased by $1.7 million during the
first six months of 2004 as a result of increased production activity and the
product built to forecast for the customer noted in the Overview section.
Decreases in cash from operations for the first six months of 2004 included the
decrease of accounts payable and accrued expenses primarily related to the
timing of payments and a decrease in income taxes payable which is a result of
the 2004 estimated payments made by the Company during the first six months of
2004.
Cash used by investing activities during the first six months of 2004 totaled
$9.7 million. This use of cash is primarily attributable to the acquisition of
Mapletree Networks of $7.0 million, a loan of $1.3 million to InSciTek
Microsystems, Inc., in the form of a convertible note, and the capitalization of
software development costs amounting to $1.1 million.
Cash provided by financing activities amounted to $2.9 million in the first six
months of 2004, resulting from the exercise of stock options.
Off-Balance Sheet Arrangements:
The Company did not enter into any off-balance sheet arrangements during the
first six months of 2004.
Contractual Obligations:
As described in the Company's Annual Report on Form 10-K, during the first
quarter 2004, the Company renewed the lease for its operations in Ottawa, Canada
through May 2006. The Company did not enter into any other significant
contractual obligations during the first six months of 2004.
Current Position:
Assuming there is no significant change in the Company's business, management
believes that its current cash and cash equivalents together with cash generated
from operations should be sufficient to meet the Company's anticipated operating
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 growth and market penetration
efforts. These efforts could have an impact on the Company's working capital,
liquidity or capital resources, and the Company may need to raise additional
capital to facilitate these efforts.
Recently Issued Accounting Pronouncements
FIN 46 - In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," an Interpretation of Accounting
Research Bulletin (ARB) No. 51, "Consolidated Financial Statements." FIN 46
addresses the consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46 (Revised
Interpretations) resulting in multiple effective dates based on the nature and
creation date of the VIE. The Revised Interpretations must be applied to all
VIEs no later than the end of the first interim or annual reporting period
ending after March 15, 2004. However, prior to the required application of the
Revised Interpretations, its provisions must be adopted by the end of the first
interim or annual reporting period that ends after December 15, 2003 (for the
year ended December 31, 2003 for the Company) for VIEs considered to be special
purpose entities (SPEs). SPEs for this provision include any entity whose
activities are primarily related to securitizations or other forms of
asset-backed financings or single-lessee leasing arrangements. The adoption of
FIN 46 did not have an impact on the Company's financial position.
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 provides guidance related to earnings per share expected in future
quarters. Any additional information provided, such as revenue forecasts, is
provided as supplementary information to the earnings per share guidance.
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 risks and uncertainties include,
among other factors, general business and economic conditions, rapid
technological changes accompanied by frequent new product introductions,
competitive pressures, dependence on key customers, the attainment of design
wins, fluctuations in quarterly and annual results, the reliance on a limited
number of third party suppliers, limitations of the Company's manufacturing
arrangements, the protection of the Company's proprietary technology, the
dependence on key personnel, changes in critical accounting estimates, potential
delays associated with the purchase and implementation of an enterprise-wide
software system, potential impairments of investments, and the carrying value of
goodwill. These statements should be read in conjunction with the audited
Consolidated Financial Statements, the Notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company as of December 31, 2003, as reported in its Annual Report on Form 10-K,
and other documents 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks in the normal course of business,
primarily interest rate risk and changes in the market value of its investments
and believes its exposure to such risk is minimal. The Company's investments are
made in accordance with the Company's investment policy and primarily consist of
U.S. Treasury securities, municipal securities and corporate obligations. The
Company is also subject to foreign exchange risk related to its operations in
Ottawa, Canada. The Company believes that its exposure to foreign currency risk
is minimal. The Company does not participate in the investment of derivative
financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
A. Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and its Chief Financial Officer
have evaluated the Company's 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,
the Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective as of
such date.
B. Changes in Internal Controls
There has been no change in the Company's internal controls over
financial reporting that occurred during the fiscal quarter covered by
this report that has materially affected, or is reasonably likely to
materially affect, the Company's internal controls over financial
reporting.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2004 Annual Meeting of Stockholders was held June 3, 2004. The Directors
elected at the meeting were as follows:
Votes Cast
Nominees For Withheld
- -------- --- --------
Stuart B. Meisenzahl 10,808,774 1,139,620
John M. Slusser 10,804,274 1,144,120
Bernard Kozel, Charles E. Maginness, E. Mark Rajkowski, Robert L. Tillman and
Donald L. Turrell continue as Directors until the next Annual Meeting, or such
times as their respective terms expire. John E. Mooney did not stand for
re-election.
The stockholders also voted to ratify the appointment of PricewaterhouseCoopers
LLP as its registered public accounting firm for 2004. 11,800,956 shares of
common stock were voted in favor of this proposal, 142,595 shares of common
stock were voted against this proposal, and 4,813 shares of common stock
abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Section 1350 Certification
B. Reports on Form 8-K
(1) On April 28, 2004, the Company filed a Current Report on Form
8-K, Item 12, to inform stockholders that on April 27, 2004, the
Company announced its results of operations for the quarter ended
March 31, 2004.
(2) On May 17, 2004, the Company filed a Current Report on Form
8-K, Item 5, announcing the transition of John M. Slusser's role
within the Company.
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
August 13, 2004 By: /s/ Donald L. Turrell
---------------------------------------
Donald L. Turrell
President and
Chief Executive Officer
August 13, 2004 By: /s/ Dorrance W. Lamb
---------------------------------------
Dorrance W. Lamb
Chief Financial Officer and
Vice President of Finance
Exhibit 31.1
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 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)) 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;
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 evaluation; 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 (the registrant's
second 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 (or persons performing the equivalent functions):
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: August 13, 2004 By:/s/ Donald L. Turrell
-----------------------------------
Donald L. Turrell
Chief Executive Officer
Exhibit 31.2
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 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)) 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;
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 evaluation; 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 (the registrant's
second 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 (or persons performing the equivalent functions):
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: August 13, 2004 By:/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, the 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 June 30, 2004 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.
Date: August 13, 2004 By:/s/ Donald L. Turrell
--------------------------
Donald L. Turrell
President and
Chief Executive Officer
Date: August 13, 2004 By:/s/ Dorrance W. Lamb
--------------------------
Dorrance W. Lamb
Chief Financial Officer and
Vice President of Finance