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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2005
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 (I.R.S. Employer
of incorporation) 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
-----------------
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 Exchange Act). Yes [ X ] No [ ]
The number of shares outstanding of the registrant's common stock was
12,866,159 as of April 29, 2004.
- --------------------------------------------------------------------------------
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2005 (unaudited)
and December 31, 2004 3
Consolidated Statements of Income for the Three Months
Ended March 31, 2005 and 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2005 and 2004 (unaudited) 5
Notes to Consolidated Financial Statements for the Three
Months Ended March 31, 2005 (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 6. Exhibits 20
Signatures 21
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2005 2004
------------------ ------------------
(unaudited)
Current assets:
Cash and cash equivalents $13,862,000 $10,361,000
Investments 13,400,000 15,250,000
Accounts receivable, net 11,215,000 10,185,000
Inventories, net 6,219,000 6,573,000
Prepaid income taxes 514,000 771,000
Prepaid expenses and other assets 549,000 801,000
Deferred taxes 3,089,000 3,088,000
------------------ ------------------
Total current assets 48,848,000 47,029,000
Property, equipment and
improvements, net 2,034,000 2,186,000
Software development costs, net 3,903,000 3,653,000
Goodwill 4,143,000 4,143,000
------------------ ------------------
Total assets $58,928,000 $57,011,000
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,543,000 $ 1,476,000
Accrued expenses 4,278,000 3,916,000
------------------ ------------------
Total current liabilities 5,821,000 5,392,000
Deferred taxes 1,200,000 1,198,000
------------------ ------------------
Total liabilities 7,021,000 6,590,000
------------------ ------------------
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 13,625,000 13,476,000
Retained earnings 42,287,000 41,978,000
Treasury stock - at cost; 407,359
and 482,681 shares held at March
31, 2005 and December 31, 2004,
respectively (4,138,000) (5,188,000)
Accumulated other comprehensive
income 22,000
------------------ ------------------
Total stockholders' equity 51,907,000 50,421,000
------------------ ------------------
Total liabilities and
stockholders' equity $58,928,000 $57,011,000
================== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
March 31,
2005 2004
---------------- ---------------
Sales $13,157,000 $15,566,000
Cost of goods sold 6,462,000 7,588,000
---------------- ---------------
Gross profit 6,695,000 7,978,000
---------------- ---------------
Operating expenses:
Selling and marketing 1,477,000 1,628,000
Research and development 2,545,000 2,591,000
General and administrative 1,433,000 1,343,000
Restructuring charges 57,000
In-process research and development 218,000
---------------- ---------------
Total operating expenses 5,512,000 5,780,000
---------------- ---------------
Income from operations 1,183,000 2,198,000
Other income, net 295,000 138,000
---------------- ---------------
Income before income taxes and equity
in income of unconsolidated company 1,478,000 2,336,000
Income tax provision 429,000 791,000
---------------- ---------------
Income before equity in income of
unconsolidated company 1,049,000 1,545,000
Equity in income of unconsolidated
company 12,000
---------------- ---------------
Net income $ 1,049,000 $ 1,557,000
================ ===============
Basic earnings per share $ .08 $ .12
================ ===============
Diluted earnings per share $ .08 $ .11
================ ===============
Weighted average number of common
shares used in basic earnings per
share 12,809,320 12,605,967
Potential common shares 406,540 1,030,775
Weighted average number of common
shares used in diluted earnings ---------------- ---------------
per share 13,215,860 13,636,742
================ ===============
The accompanying notes are an integral part of these consolidated
financial statements.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
2005 2004
---------------- ---------------
Cash flows from operating activities:
Net income $ 1,049,000 $ 1,557,000
Non-cash adjustments:
Depreciation and amortization 572,000 759,000
Reserve for inventory obsolescence 444,000 180,000
Tax benefit from stock option exercises 143,000
In-process research and development 218,000
Equity in income of unconsolidated company (12,000)
Other 16,000 35,000
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable (1,043,000) (2,137,000)
Inventories (90,000) (75,000)
Prepaid expenses and other assets 521,000 158,000
Accounts payable and accrued expenses 422,000 95,000
Income taxes payable 74,000
---------------- ---------------
Net cash provided by operating
activities 2,034,000 852,000
---------------- ---------------
Cash flows from investing activities:
Purchases of property, equipment and
improvements (77,000) (95,000)
Capitalized software development costs (616,000) (520,000)
Purchases of investments (7,225,000) (15,850,000)
Proceeds from sales of investments 9,075,000 17,925,000
Loan to unconsolidated company (1,300,000)
Business acquisition (7,044,000)
---------------- ---------------
Net cash provided (used) by investing
activities 1,157,000 (6,884,000)
---------------- ---------------
Cash flows from financing activities:
Proceeds from exercise of stock options 310,000 2,603,000
---------------- ---------------
Net cash provided by financing
activities 310,000 2,603,000
---------------- ---------------
Net increase (decrease) in cash and cash
equivalents 3,501,000 (3,429,000)
Cash and cash equivalents at beginning of
period 10,361,000 12,639,000
---------------- ---------------
Cash and cash equivalents at end of period $13,862,000 $ 9,210,000
================ ===============
The accompanying notes are an integral part of these consolidated
financial statements.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(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. 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, 2004, 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 March 31, 2005, the Company had stock options outstanding under three stock
option plans. 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. On March 25, 2005, the Company accelerated the
vesting of 408,285 stock options whose exercise prices were greater than $15.11
to be fully vested on that date. As a result of the acceleration, the Company
expects to reduce its exposure to the effects of SFAS No. 123 (Revised),
"Share-Based Payment." Had compensation cost for the stock option awards under
the plans been determined based on the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's net income
(loss) and earnings (loss) per share would have been as follows:
Three Months Ended March 31,
2005 2004
---------------- ---------------
Net income, as reported $ 1,049,000 $ 1,557,000
Add: Restricted stock compensation expense,
net of tax 4,000 15,000
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of related tax effects (2,137,000) (459,000)
---------------- ---------------
Pro forma net (loss) income $(1,084,000) $ 1,113,000
================ ===============
Earnings (loss) per share:
Basic - as reported $ .08 $ .12
================ ===============
Basic - pro forma $ (.08) $ .09
================ ===============
Diluted - as reported $ .08 $ .11
================ ===============
Diluted - pro forma $ (.08) $ .08
================ ===============
There were no stock options granted during the first three months of 2005. The
assumption for vesting of stock options granted in 2004 was generally 33% per
year. 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: Dividend yield of 0%; expected volatility
of 68% to 69%, risk-free interest rate of 2.1% to 3.5%, 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, applying the treasury stock method.
Diluted earnings per share calculations exclude the effect of approximately
958,000 and 166,000 options for the three months ended March 31, 2005 and 2004,
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 three months ended March 31, 2005, 75,322 common shares were issued
upon exercise of stock options.
Note C - Acquisition
-----------
On January 23, 2004, the Company acquired substantially all of the assets and
assumed certain liabilities of Mapletree Networks, Inc., a company that provided
voice, data and fax processing technology to original equipment manufacturers.
The products acquired in this acquisition broaden the Company's product offering
to its customers. In accordance with the purchase agreement, the Company paid
$6,625,000 at closing and incurred $418,000 of other acquisition related costs.
The Company accounted for the acquisition under the provisions of SFAS No. 141,
"Business Combinations." Acquired in-process research and development (IPR&D),
which was related to certain voice processing products, amounted to $218,000 and
was charged to operations during the first quarter 2004. During the fourth
quarter of 2004, the Company resolved certain matters related to the acquisition
resulting in a payment to the Company of $1,749,000, which represented a partial
return of purchase price and was recorded as a reduction of goodwill. Operating
results of the acquired group have been included in the Consolidated Statement
of Income from the date of acquisition.
Note D - Inventories, net
----------------
Inventories consisted of the following:
March 31, December 31,
2005 2004
---------------- ---------------
Purchased parts and components $ 4,201,000 $ 3,638,000
Work in process 3,883,000 3,947,000
Finished goods 1,766,000 2,487,000
---------------- ---------------
9,850,000 10,072,000
Less: reserve for inventory obsolescence (3,631,000) (3,499,000)
---------------- ---------------
Net $ 6,219,000 $ 6,573,000
================ ===============
Note E - Investments
-----------
In connection with the preparation of the Company's Annual Report on Form 10-K
for 2004, the Company concluded that it was appropriate to classify auction rate
municipal securities as investments. Previously, such investments were
classified as cash equivalents. Accordingly, the Company revised the
classification to report these securities as investments on the Consolidated
Balance Sheets as of December 31, 2004. The Company recorded corresponding
reclassifications in the accompanying Consolidated Statements of Cash Flows for
the three months ended March 31, 2004, to reflect the gross purchases and sales
of these securities as investing activities. This change in classification did
not affect previously reported cash flows from operations or from financing
activities or previously reported net income for any period.
For the three months ended March 31, 2004, net cash provided by investing
activities related to these investments totaled $2,075,000, which was previously
included in cash and cash equivalents in the Company's Consolidated Statements
of Cash Flows.
At March 31, 2005, investments consisted of high grade, auction rate municipal
securities which the Company has classified as available-for-sale. The
contractual maturities of the available-for-sale securities at March 31, 2005
all exceeded five years.
These investments are recorded at cost, which approximates fair market value due
to their variable interest rates. These investments typically reset on
approximately a monthly basis, and, despite the long-term nature of their stated
contractual maturities, the Company has historically had the ability to quickly
liquidate these securities. All income generated from these investments was
recorded as interest income.
Note F - 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 quarter 2005 were as follows:
Accrued warranty obligations at December 31, 2004 $ 288,000
Actual warranty experience (25,000)
Warranty provisions 32,000
-----------
Accrued warranty obligations at March 31, 2005 $ 295,000
===========
Note G - Investment in Unconsolidated Company
------------------------------------
On February 18, 2004, the Company entered into an agreement to invest up to
$3,000,000 in InSciTek Microsystems, Inc. (InSciTek), an unrelated company, in
the form of an interest bearing convertible note. During 2004, the Company
invested $3,000,000 in conjunction with this agreement. As of December 31, 2004,
InSciTek had not raised sufficient outside capital to assure its future as a
going concern. Therefore, during the fourth quarter 2004, the Company recorded a
valuation charge related to this note receivable in the amount of $3,000,000 as
collection of this note was doubtful. The Company has 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 on the note is payable in
full to the Company on December 31, 2008.
Note H - Recently Issued Accounting Pronouncements
-----------------------------------------
In December 2004, SFAS No. 123 "Accounting for Stock-Based Compensation (Revised
2004)" was issued. This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This statement requires an entity to measure the cost of employee
services received in exchange for an award of equity instruments, based on the
fair value of the award at the grant date. That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award. The effective date of this statement was extended by the Securities
and Exchange Commission and will be effective for the Company beginning January
1, 2006. As of the required effective date, all entities that used the
fair-value-based method for either recognition or disclosure under SFAS No. 123
may apply this statement using a modified version of prospective application. An
alternative method of application is available under SFAS No. 123R. Under the
modified version of prospective application compensation cost is recognized for
the portion of outstanding stock-based awards for which the requisite service
has not yet been rendered. The Company is currently assessing the impact this
statement will have on its financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4." SFAS No. 151 states that abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) should
be recognized as current-period charges. Additionally, SFAS No. 151 requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The Company is
required to adopt SFAS No. 151 effective January 1, 2006. The Company does not
expect the adoption of SFAS No. 151 will have a material impact on its
consolidated results of operations and financial condition.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions."
SFAS No. 153 is based on the principle that nonmonetary asset exchanges should
be recorded and measured at the fair value of the assets exchanged, with certain
exceptions. This standard requires exchanges of productive assets to be
accounted for at fair value, rather than at carryover basis, unless (1) neither
the asset received nor the asset surrendered has a fair value that is
determinable within reasonable limits or (2) the transactions lack commercial
substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The Company is required to adopt SFAS
No. 153 effective for its fiscal quarter beginning after June 15, 2005, and does
not expect the adoption of SFAS No. 153 will have a material impact on its
consolidated results of operations and financial condition.
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 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 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 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 is accounted for under the provisions of Statement of Position 97-2,
Software Revenue Recognition and EITF Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables. Revenue from software requiring significant production,
modification, or customization is recognized using the percentage of completion
method of accounting. Any anticipated losses on contracts are charged to
operations as soon as such losses are determined. If all conditions of revenue
recognition are not met, the Company defers revenue recognition and will
recognize revenue when the Company has fulfilled its obligations under the
arrangement. Revenue from consulting and other services is recognized at the
time the services are rendered. Revenue from software maintenance contracts is
recognized ratably over the contractual period. The Company sells certain
products through distributors who are granted limited rights of return.
Potential returns are accounted for at the time of sale. 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, 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.
Carrying Value of Goodwill: The Company conducts tests for impairments of
goodwill annually or more frequently if circumstances indicate that the asset
might be impaired. The Company believes that the accounting estimate related to
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
The following contains forward-looking statements within the meaning of the
Securities Act of 1933 and Securities Exchange Act of 1934 and is subject to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Performance Technologies is a leading developer of platforms, components,
software, and service solutions for the embedded systems marketplace that can be
used in a broad range of applications and end markets.
The embedded systems market is comprised of several sectors, with
telecommunications being the largest. The telecommunications market is dependent
upon carrier spending to upgrade network infrastructure to next-generation
equipment. As the Company entered 2005, there were announcements by major
domestic wireless carriers for new spending programs directed at upgrading
networks to the third generation (3G) of mobile network capabilities. During the
first quarter, the Company received indications, forecasts and orders from a
number of the largest (tier 1) telecommunications equipment providers for
equipment to meet these requirements. While the actual deployments associated
with network upgrades and expansions during the first quarter were somewhat
slower than originally thought, it appears these 3G deployments are occurring.
Current forecast and schedules on a number of these programs suggest the latter
part of 2005 will see increased deployment activities.
The Company markets its products through its direct worldwide sales force under
a variety of brand names including IPnexus(TM), SEGway(TM), NexusWare(TM) and
Advanced Managed Platforms. The Company's products, particularly its Advanced
Managed Platforms, are applicable to the broader embedded systems market, not
just telecommunications. Since the introduction of the Advanced Managed
Platforms in 2003, this product line has realized more than 25 new design wins
of varying sizes. As of March 2005, a small number of these design wins had
reached production levels. Based on discussions with customers, management
expects to see an increase in Advanced Managed Platform shipments beginning in
the second quarter resulting from design wins that had already reached
production levels, as well as, additional design wins just reaching production
levels.
During the first quarter 2005, the Company announced that current president and
chief executive officer, Donald Turrell, will leave the Company's executive
management at the end of the year. As part of the succession plan developed by
the Board of Directors, Mr. Turrell will remain as a board member and will
maintain active involvement throughout the transition of the Company's change in
leadership.
Strategy: The Company has a history of successfully adapting its products and
services 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. During the most recent economic downturn,
the Company maintained its commitment to aggressively fund new product
development, as well as to use its strong balance sheet to acquire additional
products and technologies to strengthen its market position.
The Company's IPnexus product line, based on open system architectures, consists
of a wide range of embedded building blocks, which can be mixed and matched to
construct highly integrated, packet-based platforms. In September 2003, the
Company introduced a new line of application ready platforms marketed under the
trade name Advanced Managed Platform (AMP). Today, this product line contains
the Company's latest generation of configurable, fully-managed and redundant
packet-based platforms targeted at communications applications, which leverage
all of the Company's IPnexus component-based products. This platform line is
based on an architecture referred to as PICMG 2.16, which is an embedded
technology developed by the Company and adopted as an industry standard. The
Company's Advanced Managed Platforms offer customers distinct cost advantages,
increase overall system reliability and performance, and improve time-to-market
for their products. From a market perspective, the Advanced Managed Platform
line continues to prove itself as a viable alternative to proprietary platforms
and directly addresses equipment manufacturers' requirements for using a
flexible and scalable architecture.
In the next phase of the Company's product strategy, management expects to
develop a number of products for selected high growth IP-based applications
including media gateway, media server, wireless, voice-over-cable and satellite
communications. Key for 2005 will be to successfully develop and combine certain
hardware and software elements from the Company's product portfolio to form
intelligent embedded solutions which add value for application providers in
these target markets.
Historically, the Company's growth has been generated through a combination of
internal growth and acquisition of new products or complementary technologies.
In October 2002, the Company acquired a portion of Intel Corporation's
Communications Platform Group for its chassis and computing products. In January
2004, the Company completed the acquisition of the assets of Mapletree Networks
to acquire its voice processing technology. The products from both acquisitions
have enhanced the Company's product offerings to its customers. The Company
continues to focus on acquisitions as an important part of its growth strategy.
There are identifiable risks associated with carrying out the Company's
expansive product strategies in the current uncertain economic climate. Many of
the Company's end markets are forecasted to show only modest growth in 2005. In
order to realize growth in this environment, the Company will have to gain
market share from competitors, many of whom are larger, more established
companies with greater resources than the Company. However, management believes
that based on its analysis of the marketplace and the Company's strengthened and
innovative product portfolio, the identified risks are manageable.
If successful, management believes these initiatives will continue to reposition
the organization as an important strategic partner with many of its customers,
thereby increasing their utilization of the Company's broadened product
capabilities.
Financial Information
Beginning on January 23, 2004, the Company's revenue and expenses reflect the
operations of the Voice Technology Group (acquired from Mapletree Networks).
Revenue:
- -------
Revenue in the first quarter 2005 amounted to $13.2 million, compared to $15.6
million in the corresponding quarter a year earlier.
Earnings:
- --------
GAAP Information:
On a GAAP earnings basis, net income for the first quarter 2005 amounted to $1.0
million, or $.08 per diluted share based on 13.2 million shares outstanding.
During the first quarter 2005, the Company recorded a restructuring charge
amounting to less than $.1 million, or $.00 per diluted share related to cost
improvement efforts. Net income for the first quarter 2004 amounted to $1.6
million, or $.11 per diluted share based on 13.6 million shares outstanding.
Non-GAAP Information:
Management believes that the Company's results excluding non-recurring items
provide better comparability of its operations as non-recurring items result
from facts and circumstances that vary in frequency, amounts and cause. In
addition, amounts included as non-recurring items are not utilized by management
in its analysis of the operating performance of the Company.
There was no difference between GAAP earnings and non-GAAP earnings in the first
quarter 2005. During the first quarter 2004, the Company recorded in-process
research and development costs associated with the acquisition of the Voice
Technology Group in the amount of $.2 million, or $.02 per diluted share. On a
non-GAAP basis, excluding the $.2 million in-process research and development
costs, net income for the first quarter 2004 amounted to $1.8 million, or $.13
per diluted share based on 13.6 million shares outstanding. A reconciliation of
GAAP net income to non-GAAP net income for the first quarter 2004 is as follows:
2004
-------------
Net income, GAAP basis $1,557
Add: Non-recurring item - In-process research
and development costs 218
-------------
Net income, non-GAAP basis $1,775
=============
Liquidity:
- ---------
Cash, cash equivalents and investments amounted to $27.3 million and $25.6
million at March 31, 2005 and December 31, 2004, respectively, and the Company
had no long-term debt at either date.
Centralization of Functions:
- ---------------------------
In October 2004, management began formulating a plan to reduce annualized
expenses by approximately $2.0 million with a primary focus on centralizing its
multi-location operations and streamlining the organization. During the fourth
quarter 2004, the Company completed integration of the Voice Technology Group
(VTG) sales, marketing and administrative functions into its corporate
operations. During the first quarter 2005, the Company completed integration of
the accounting functions for VTG and the Computing Products Group into corporate
accounting in Rochester, New York and began transitioning the manufacturing
operations for these groups to its Rochester headquarters. The manufacturing
transition for VTG is expected to be completed during the second quarter 2005
and for Computing Products by the end of the third quarter 2005. During the
first quarter 2005, the Company incurred a charge of less than $.1 million
related to these restructuring efforts. Additional charges related to these
restructuring actions are expected in the range of $.05 million to $.25 million
during the remainder of 2005. When this centralization plan is completed,
operating expenses are expected to be reduced by $1.3 million annually and
manufacturing overhead (cost of goods) is expected to be reduced by $.7 million
annually. While the Company continues to pursue its centralization plan, some
part of these savings will be reinvested to stimulate future growth.
Forward Looking Guidance for the Second Quarter 2005 (published April 27, 2005):
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.
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.
During weak or uncertain 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.
Based upon the current business mix, the current backlog and review of sales
forecasts, management expects revenue to be in the range of $13.0 million to
$14.0 million in the second quarter 2005. Gross margin is expected to be
approximately 45.5% to 48.0% and diluted earnings per share in the second
quarter is expected to be $.05 to $.09, excluding any restructuring charges.
Restructuring charges are expected in the range of $.05 million to $.25 million
during the remainder of 2005. The effective income tax rate for the second
quarter is expected to be 29%.
The second quarter's guidance reflects a change in the revenue mix from the
first quarter and a temporary increase in manufacturing staffing (to accomplish
the manufacturing transition for the computing products). Shipments of computing
products and integrated platforms, with lower gross margins than switching and
communications products, are expected to increase by more than $1.5 million in
the second quarter, while shipments of switching and communications products are
expected to decline by more than $1.5 million. The forecasted increase in
integrated platforms shipments in the second quarter reflects improving traction
on the Company's focused strategy. This strategy emphasizes providing customers
with more complete solutions which is expected to result in higher sales volumes
but lower gross margin levels. The forecasted decrease in switching and
communications products reflects a decline and push-out of certain shipments
related to 3G deployments by domestic carriers.
Key Performance Indicators:
The Company's platforms, components, software and service solutions 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.
The Company modified its criteria for the measurement of "design wins" in 2004
to provide greater accuracy in predicting forward looking potential for the
Company and to assist in measuring day-to-day execution of product, sales and
marketing programs. During the first quarter 2005, the Company was notified of
five design wins for its products with each expected to generate greater than
$.5 million of annualized revenue when reaching production volumes. These new
design wins were for its integrated platform solutions (with multiple products)
(2), individual component design wins for IPnexus access (1) and SEGway (2)
products. During the first quarter 2004, the Company's metric for design wins
included customers that were expected to generate greater than $1.0 million of
annualized revenue when reaching production volumes. Based on this measurement
criterion, the Company was notified of four design wins for its products. These
2004 design wins were for its integrated platform solutions (with multiple
products) (2), individual component design wins for IPnexus access (1), and
SEGway products (1). Not all design wins are expected to result in production
orders. Regardless of the changes in the measurement metric, management believes
that the growth in the number of design wins for integrated platform solutions
over the last twelve months reflects increasing customer demand for more
complete platform solutions from a single vendor, such as the Company.
Management believes another key indicator for the Company's business is the
volume of orders received from its customers. During weak economic periods,
customers' 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 first quarter 2005 amounted to $13.2
million, compared to $15.6 million in first quarter 2004. Revenue in the first
quarter 2005 was impacted by a decline in business from the Company's two
largest customers in the first quarter 2004. Shipments to these two customers
declined by $5.0 million, to zero revenue in the first quarter 2005 due to
changes in their businesses.
More in-depth discussions of the Company's strategy and financial performance
can be found in the Company's Annual Report on Form 10-K and other filings with
the Securities and Exchange Commission.
Quarter Ended March 31, 2005, Compared with
the Quarter Ended March 31, 2004
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
March 31,
2005 2004
------------- --------------
Sales 100.0% 100.0%
Cost of goods sold 49.1 48.7
------------- --------------
Gross profit 50.9 51.3
------------- --------------
Operating expenses:
Selling and marketing 11.2 10.5
Research and development 19.4 16.6
General and administrative 10.9 8.7
Restructuring charges .4
In-process research and development 1.4
------------- --------------
Total operating expenses 41.9 37.2
------------- --------------
Income from operations 9.0 14.1
Other income, net 2.2 0.9
------------- --------------
Income before income taxes and
equity in income of unconsolidated
company 11.2 15.0
Income tax provision 3.2 5.1
------------- --------------
Income before equity in income of
unconsolidated company 8.0 9.9
Equity in income of unconsolidated
company 0.1
------------- --------------
Net income 8.0% 10.0%
============= ==============
Sales. Total revenue for the first quarter 2005 amounted to $13.2 million,
compared to $15.6 million for the same quarter in 2004, a decrease of 15%. For
the first quarter 2005 and 2004, the Voice Technology Group contributed $.3
million, or 2%, and $1.2 million, or 8%, to revenue, respectively. In the first
quarter 2005, the Company had two customers that each represented greater than
10% of sales, and the four largest customers represented 47% of sales. During
the first quarter 2004, the Company had two customers that each comprised
greater than 10% of revenue and the Company's four largest customers represented
49% of sales. Shipments to customers outside of the United States represented
33% and 28% of sales during the first quarter 2005 and 2004, 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 months ended March 31, 2005 and 2004:
Three Months Ended
March 31,
2005 2004
------------ ------------
Communications products 49% 58%
Computing products 20% 30%
IPnexus switching products 30% 11%
Other products 1% 1%
------------ ------------
Total 100% 100%
============ ============
Communications products:
Communications products are comprised of network access, SEGway signaling and
Voice Technology 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. Voice Technology products enable voice, data and
fax processing for communications applications.
Revenue from Communications products amounted to $6.4 million and $9.1 million
in the first quarter of 2005 and 2004, respectively. The significant decline in
revenue during the first quarter 2005, compared to a year earlier, was primarily
attributable to (1) one major customer, whose product requirements were $3.3
million in the first quarter 2004, that unexpectedly ceased purchasing product
in the second quarter of 2004, and (2) revenue from VTG products decreasing by
$.9 million due to lack of demand. These decreases were partially offset by
increased shipments to various customers for 3G deployments for domestic
carriers in the first quarter 2005.
Computing products:
Computing products includes integrated platform solutions, a range of single
board computers, a variety of embedded system chassis and associated chassis
management products.
Computing products revenue amounted to $2.7 million in the first quarter 2005,
compared to $4.6 million in the first quarter 2004. The significant decline in
revenue for the first quarter 2005, compared to a year earlier, was primarily
attributable to one major customer in the amount of $1.7 million whose product
requirements began declining during the second half of 2004 and had ceased
purchasing altogether by the end of 2004.
IPnexus switching products:
The Company's IPnexus switching product family has been designed for the
rigorous requirements of the embedded systems that use the industry standard
PICMG 2.16 architecture.
Revenue from switching products amounted to $3.9 million in the first quarter
2005, compared to $1.7 million in the first quarter 2004. This increase of $2.2
million is primarily related to increased revenue from one customer in the
amount of $1.7 million.
Other products:
This revenue is primarily related to legacy products. Many of these products are
project oriented and shipments can fluctuate on a quarterly and annual basis.
Revenue from these products amounted to $.1 million and $.2 million in the first
quarter 2005 and 2004, respectively.
Gross profit. Gross profit consists of sales, less cost of goods sold including
material costs, manufacturing expenses, depreciation, amortization of software
development costs, and expenses associated with engineering contracts and the
technical support function. Gross margin was 50.9% and 51.3% of sales in the
first quarter 2005 and 2004, respectively. The change in the product mix from
quarter-to-quarter resulted in an improvement in gross margin, which was more
than offset by a decline in the volume of shipments, which caused the fixed
manufacturing overhead to be spread over fewer units, thereby reducing the
overall gross margin.
Total Operating Expenses. Total operating expenses in the first quarter 2005
amounted to $5.5 million, compared to $5.8 million in 2004. For 2004, the
operating expenses of the Voice Technology Group (VTG) are included from the
date of acquisition on January 23, 2004. During the third quarter 2004,
management began formulating plans to reduce annualized expenses by
approximately $2.0 million with a primary focus on centralizing its
multi-location operations and streamlining the organization. When this
centralization plan is completed in 2005, operating expenses are expected to be
reduced by $1.3 million annually and manufacturing overhead (cost of goods) is
expected to be reduced by $.7 million.
Selling and marketing expenses were $1.5 million and $1.6 million for the first
quarter 2005 and 2004, respectively. Selling and marketing expense in the first
quarter 2005 reflects expenses for VTG for an entire quarter and a decrease in
selling and marketing expense attributable to staff reductions resulting from
the Company's effort to centralize operations.
Research and development expenses were $2.5 million and $2.6 million in the
first quarter 2005 and 2004, respectively. Research and development expense in
the first quarter 2005 reflects expenses for VTG for an entire quarter being
offset by increased capitalized software development costs. The Company
capitalizes certain software development costs, which reduces the amount of
software development charged to operating expenses. Amounts capitalized were $.6
million and $.5 million during the first quarter 2005 and 2004, respectively.
General and administrative expenses were $1.4 million in the first quarter 2005,
compared to $1.3 million in the first quarter 2004. General and administrative
expense in the first quarter 2005 reflects expenses for VTG for an entire
quarter as well as higher corporate governance costs in 2005.
Restructuring charges amounted to $.1 million in the first quarter 2005,
compared to no restructuring charges during the first quarter 2004.
Restructuring charges in the first quarter 2005 relate primarily to severance
payments associated with the Company's efforts to centralize its operations.
In-process research and development expense amounted to zero and $.2 million for
the first quarter 2005 and 2004, respectively. This amount represented 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 consists primarily of interest income. The
Company's funds are primarily invested in high quality auction rate municipal
securities. Interest rates were significantly higher in the first quarter 2005,
compared to the first quarter 2004, resulting in increased interest income. Also
contributing to higher interest income was an increase in interest from a note
receivable from an unconsolidated company based upon an increase in the
principal amount.
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
first quarter 2005 and 2004, the Company's effective tax rate was 29% and 34%,
respectively. The decrease in the effective tax rate from the first quarter 2004
to the first quarter 2005 was a result of changes in certain permanent items. On
October 22, 2004, President Bush signed into law the American Jobs Creation Act
of 2004 (H.R. 4520). The Act contains numerous corporate tax provisions which
could affect the Company's current and future tax provisions. The Company is
currently assessing any potential impact of these provisions.
Equity in Income of Unconsolidated Company. In the third quarter 2004, the
Company sold its ownership interest in Momentum Computer, Inc., a developer of
specialized single board computer products. During the first quarter 2004, the
Company's allocation of Momentum's income amounted to $.01 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity included cash, cash equivalents and
investments which totaled $27.3 million at March 31, 2005. The Company had
working capital of $43.0 million and $41.6 million at March 31, 2005 and
December 31, 2004, respectively.
Cash provided by operating activities amounted to $2.0 million for the first
quarter 2005. This amount included net income of $1.0 million, non-cash charges
related to depreciation and amortization of $.6 million, and the reserve for
inventory obsolescence of $.4 million. Cash used in operations due to changes in
operating assets and liabilities included an increase in accounts receivable of
$1.0 million. A decrease in prepaid expenses of $.5 million, and an increase in
accounts payable and accrued expenses of $.4 million both generated operating
cash during the first quarter 2005.
Cash generated by investing activities during the first quarter 2005 totaled
$1.2 million. This cash was generated by the net proceeds from the purchases
and sales of auction rate municipal securities of $1.9 million, offset by the
capitalization of software development costs amounting to $.6 million.
Cash provided by financing activities amounted to $.3 million in the first
quarter 2005 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 quarter 2005.
Contractual Obligations:
The Company did not enter into any other significant contractual obligations
during the first quarter 2005.
Current Position:
Assuming there is no significant change in the Company's business, management
believes that its current cash, cash equivalents and investments 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
In December 2004, SFAS No. 123 "Accounting for Stock-Based Compensation (Revised
2004)" was issued. This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This statement requires an entity to measure the cost of employee
services received in exchange for an award of equity instruments, based on the
fair value of the award at the grant date. That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award. The effective date of this statement was extended by the Securities
and Exchange Commission and will be effective for the Company beginning January
1, 2006. As of the required effective date, all entities that used the
fair-value-based method for either recognition or disclosure under SFAS No. 123
may apply this statement using a modified version of prospective application. An
alternative method of application is available under SFAS No. 123R. Under the
modified version of prospective application compensation cost is recognized for
the portion of outstanding stock-based awards for which the requisite service
has not yet been rendered. The Company is currently assessing the impact this
statement will have on its financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4." SFAS No. 151 states that abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) should
be recognized as current-period charges. Additionally, SFAS No. 151 requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The Company is
required to adopt SFAS No. 151 effective January 1, 2006. The Company does not
expect the adoption of SFAS No. 151 will have a material impact on its
consolidated results of operations and financial condition.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions."
SFAS No. 153 is based on the principle that nonmonetary asset exchanges should
be recorded and measured at the fair value of the assets exchanged, with certain
exceptions. This standard requires exchanges of productive assets to be
accounted for at fair value, rather than at carryover basis, unless (1) neither
the asset received nor the asset surrendered has a fair value that is
determinable within reasonable limits or (2) the transactions lack commercial
substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The Company is required to adopt SFAS
No. 153 effective for its fiscal quarter beginning after June 15, 2005, and does
not expect the adoption of SFAS No. 153 will have a material impact on its
consolidated results of operations and financial condition.
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 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 advanced planning
and scheduling system, and potential impairments of investments. 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,
2004, 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
auction rate municipal securities. 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 Over Financial Reporting
During the first quarter 2005, the Company completed the integration of
the ERP systems and accounting functions of the Company's Voice
Technology Group and Computing Products Group into the corporate ERP
system and accounting function in Rochester, New York. The Company's
Chief Executive Officer and Chief Financial Officer evaluated these
changes and concluded that the changes have not materially affected, or
are not reasonably likely to materially affect, the Company's internal
controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
A. Exhibits
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Section 1350 Certification
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERFORMANCE TECHNOLOGIES, INCORPORATED
May 10, 2005 By: /s/ Donald L. Turrell
-------------------------------
Donald L. Turrell
President and
Chief Executive Officer
May 10, 2005 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 internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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;
b. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles;
c. 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
d. 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 first
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: May 10, 2005 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 internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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;
b. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles;
c. 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
d. 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 first
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: May 10, 2005 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 March 31, 2005 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: May 10, 2005 By:/s/ Donald L. Turrell
--------------------------------
Donald L. Turrell
President and Chief
Executive Officer
Date: May 10, 2005 By:/s/ Dorrance W. Lamb
--------------------------------
Dorrance W. Lamb
Chief Financial Officer and
Vice President of Finance