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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-27460
PERFORMANCE TECHNOLOGIES, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 16-1158413
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
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 shares outstanding of the registrant's common stock was
12,219,824 as of July 31, 2003.
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PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2003
(unaudited) and December 31, 2002 3
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2003 and 2002 (unaudited) 5
Notes to Consolidated Financial Statements for the
Six Months Ended June 30, 2003 (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
Certifications 19
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2003 2002
--------------- ---------------
(unaudited)
Current assets:
Cash and cash equivalents $23,994,000 $22,077,000
Marketable securities 2,006,000
Accounts receivable, net 5,617,000 6,622,000
Inventories, net 7,810,000 4,550,000
Prepaid expenses and other assets 360,000 942,000
Deferred taxes 1,626,000 1,574,000
--------------- ---------------
Total current assets 39,407,000 37,771,000
Property, equipment and improvements, net 2,815,000 3,012,000
Software development costs, net 2,207,000 2,068,000
Note receivable from unconsolidated company 1,000,000 1,000,000
Investment in unconsolidated company 1,202,000 1,353,000
--------------- ---------------
Total assets $46,631,000 $45,204,000
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,661,000 $1,926,000
Income taxes payable 650,000 502,000
Accrued expenses 2,884,000 3,213,000
---------------- ---------------
Total current liabilities 6,195,000 5,641,000
Deferred taxes 774,000 754,000
----------------- ---------------
Total liabilities 6,969,000 6,395,000
---------------- ---------------
Stockholders' equity:
Preferred stock - $.01 par value; 1,000,000 shares
authorized; none issued
Common stock - $.01 par value; 50,000,000 shares
authorized; 13,260,038 shares issued 133,000 133,000
Additional paid-in capital 10,890,000 10,961,000
Retained earnings 41,526,000 40,565,000
Treasury stock - at cost; 1,058,796 and 1,013,696 shares
held at June 30, 2003 and December 31, 2002, respectively (12,825,000) (12,782,000)
Accumulated other comprehensive loss (62,000) (68,000)
---------------- ---------------
Total stockholders' equity 39,662,000 38,809,000
---------------- ---------------
Total liabilities and stockholders' equity $46,631,000 $45,204,000
================ ===============
The accompanying notes are an integral part of these consolidated financial
statements.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------------- --------------- ---------------- --------------
Sales $12,636,000 $6,619,000 $23,675,000 $13,026,000
Cost of goods sold 6,510,000 2,676,000 12,546,000 5,328,000
--------------- --------------- ---------------- --------------
Gross profit 6,126,000 3,943,000 11,129,000 7,698,000
--------------- --------------- ---------------- --------------
Operating expenses:
Selling and marketing 1,446,000 1,210,000 2,808,000 2,273,000
Research and development 2,471,000 1,683,000 4,778,000 3,181,000
General and administrative 1,199,000 582,000 2,262,000 1,159,000
Restructuring charge 163,000
--------------- --------------- ---------------- --------------
Total operating expenses 5,116,000 3,475,000 9,848,000 6,776,000
--------------- --------------- ---------------- --------------
Income from operations 1,010,000 468,000 1,281,000 922,000
Other income, net 127,000 121,000 254,000 237,000
--------------- --------------- ---------------- --------------
Income before income taxes and
equity in loss of unconsolidated
company 1,137,000 589,000 1,535,000 1,159,000
Income tax provision 352,000 182,000 476,000 359,000
--------------- --------------- ---------------- --------------
Income before equity in loss of
unconsolidated company 785,000 407,000 1,059,000 800,000
Equity in loss of unconsolidated
company, net of tax (81,000) (98,000)
--------------- --------------- ---------------- --------------
Net income $ 704,000 $ 407,000 $ 961,000 $ 800,000
=============== =============== ================ ==============
Basic earnings per share $ .06 $ .03 $ .08 $ .07
=============== =============== ================ ==============
Diluted earnings per share $ .06 $ .03 $ .08 $ .06
=============== =============== ================ ==============
Weighted average number of
common shares used in basic earnings
per share 12,191,954 12,260,554 12,211,822 12,249,325
Potential common shares 236,897 124,782 119,868 219,162
--------------- --------------- ---------------- --------------
Weighted average number of
common shares used in diluted earnings
per share 12,428,851 12,385,336 12,331,690 12,468,487
=============== =============== ================ ==============
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,
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 961,000 $ 800,000
Non-cash adjustments:
Depreciation and amortization 1,129,000 861,000
Equity in loss of unconsolidated company, net of tax 98,000
Other 123,000 246,000
Changes in operating assets and liabilities:
Accounts receivable 918,000 1,261,000
Inventories (3,260,000) (424,000)
Prepaid expenses and other assets 582,000 101,000
Accounts payable and accrued expenses 441,000 (486,000)
Income taxes payable 148,000 221,000
------------ ------------
Net cash provided by operating activities 1,140,000 2,580,000
------------ ------------
Cash flows from investing activities:
Purchases of property, equipment and improvements (459,000) (615,000)
Capitalized software development costs (612,000) (633,000)
Purchase of marketable securities (2,016,000)
Maturities of marketable securities 2,006,000
Other (33,000)
------------ ------------
Net cash provided (used) by investing 902,000 (3,264,000)
activities ------------ ------------
Cash flows from financing activities:
Exercise of stock options and warrants 69,000 250,000
Purchase of treasury stock (194,000)
------------ ------------
Net cash (used) provided by financing (125,000) 250,000
activities ------------ ------------
Net increase (decrease) in cash and cash 1,917,000 (434,000)
equivalents
Cash and cash equivalents at beginning of period 22,077,000 26,913,000
------------ ------------
Cash and cash equivalents at end of period $23,994,000 $26,479,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(Unaudited)
Note - A The unaudited Consolidated Financial Statements of Performance
Technologies, Incorporated and Subsidiaries (the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, the
Consolidated Financial Statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. The results for the
interim periods are not necessarily indicative of the results to be expected for
the year. The accompanying Consolidated Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements of the Company as
of December 31, 2002, as reported in its Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
Stock-Based Employee Compensation: At June 30, 2003, the Company had three stock
option plans, including the newly adopted Performance Technologies, Incorporated
2003 Omnibus Incentive Plan. The Company accounts for the plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly, no
stock-based employee compensation cost has been recognized in net income for the
stock option plans. Had compensation cost for the stock option 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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------------ ------------- ------------- -------------
Net income, as reported $704,000 $ 407,000 $961,000 $ 800,000
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (377,000) (571,000) (651,000) (1,142,000)
------------ ------------- ------------- -------------
Pro forma net income (loss) $327,000 $(164,000) $310,000 $(342,000)
============ ============= ============= =============
Earnings (loss) per share:
Basic - as reported $ .06 $ .03 $ .08 $ .07
============ ============= ============= =============
Basic - pro forma $ .03 $ (.01) $ .03 $ (.03)
============ ============= ============= =============
Diluted - as reported $ .06 $ .03 $ .08 $ .06
============ ============= ============= =============
Diluted - pro forma $ .03 $ (.01) $ .03 $ (.03)
============ ============= ============= =============
The assumptions regarding the annual vesting of stock options were 33% per year
and 25% per year for options granted in 2003 and 2002, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2003 and 2002, respectively: Dividend yield of
0%; expected volatility of 67% and 68%, risk-free interest rate of 2.0% and
3.7%, and expected life of three and four years.
Earnings Per Share: Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share calculations reflect the assumed exercise of dilutive
employee stock options, applying the treasury stock method. Dilutive earnings
per share calculations exclude the effect of approximately 1,609,000 and
1,797,000 options for the second quarter 2003 and 2002, respectively, and
1,767,000 and 1,327,000 for the first six months of 2003 and 2002 respectively,
since such options have an exercise price in excess of the average market price
of the Company's common stock for the respective periods.
Note - B During the six months ended June 30, 2003, 11,250 common shares were
issued upon the exercise of stock options.
Note - C Inventories, net
Inventories consisted of the following:
June 30, December 31,
2003 2002
--------------- ---------------
Purchased parts and components $5,465,000 $3,967,000
Work in process 3,289,000 2,046,000
Finished goods 2,518,000 2,088,000
--------------- ---------------
11,272,000 8,101,000
Less: reserve for inventory obsolescence (3,462,000) (3,551,000)
--------------- ---------------
Net $7,810,000 $4,550,000
=============== ===============
Note - D Restructuring Programs
During 2002, the Company improved its cost structure primarily through
reductions in the Company's staff and by consolidating the engineering
operations of its Raleigh, North Carolina facility into its Ottawa, Canada
Signaling Group. The programs were initiated during the first and third quarters
of 2002 as the continuing decline in capital spending in the Company's target
markets resulted in lower than anticipated Company revenue. Substantially all
actions under these programs were completed in 2002, although lease commitments
will continue through 2005. A summary of the activity and the remaining balance
at June 30, 2003 in the restructuring accrual is as follows:
Severance
and related Lease Asset
costs commitments impairment Total
------------ ------------- ------------ ------------
2002 charge $341,000 $177,000 $55,000 $573,000
2002 utilization (332,000) (23,000) (55,000) (410,000)
------------ ------------- ------------ ------------
Balance at
December 31, 2002 9,000 154,000 163,000
Q1 2003 utilization (33,000) (33,000)
------------ ------------- ------------ ------------
Balance at
March 31, 2003 9,000 121,000 130,000
Q2 2003 utilization (9,000) (31,000) (40,000)
------------ ------------- ------------ ------------
Balance at
June 30, 2003 $ $ 90,000 $ $ 90,000
============ ============= ============ ============
Note - E Subsequent Event
On July 1, 2003, the litigation settlement agreement associated with the class
action lawsuits filed during the second quarter 2000 against the Company, as
well as several of its officers and directors, alleging violations of federal
securities laws was accepted and approved by the United States District Court
for the Western District of New York and all claims therein were dismissed with
prejudice. The costs associated with the settlement of this litigation were
recorded in the third quarter of 2002.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Matters discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this Form 10-Q include
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results could
differ materially from those discussed in the forward-looking statements.
Overview
Business Strategy: Performance Technologies has a proven history of successfully
adapting its products, services and organization to a constantly changing
technology-driven marketplace. This adaptation has been demonstrated through the
course of several business cycles that have occurred since its founding in 1981.
With the Computing Products Group acquisition in October 2002, a new business
strategy was defined that management believes will continue to drive the
Company's growth. This strategy is to supply "comprehensive" embedded system
platforms incorporating multiple components from the Company's product
portfolio. Please refer to the Company's Annual Report on Form 10-K, PART 1,
Item 1, under the caption "Business," for a discussion of the Company's new
corporate and product strategies for 2003.
Financial Information: Revenue in the second quarter 2003 was $12.6 million,
compared to $6.6 million in the second quarter 2002. For the second quarter
2003, the results of operations include the Computing Products Group acquired in
October 2002. Net income for the second quarter 2003 amounted to $.7 million, or
$.06 per diluted share, compared to $.4 million, or $.03 per diluted share for
the second quarter 2002, based on 12.4 million shares outstanding for each
quarter.
Revenue for the six months ended June 30, 2003 was $23.7 million, compared to
$13.0 million in the corresponding period a year earlier. Net income amounted to
$1.0 million, or $.08 per diluted share for the first six months 2003, based on
12.3 million shares outstanding. Net income for the first six months 2002
amounted to $.8 million, or $.06 per diluted share including expenses associated
with a restructuring charge recorded in the first quarter amounting to $.2
million (pre-tax), or $.01 per diluted share. Excluding the restructuring
charge, net income for the first six months 2002 amounted to $.9 million, or
$.07 per diluted share, based on 12.5 million shares outstanding.
Cash and marketable securities amounted to $24.0 million at June 30, 2003,
compared to $24.1 million at December 31, 2002, and no long-term debt existed at
either date.
The following includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 and is subject to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
With the Computing Products Group acquisition in October 2002, the Company
substantially broadened its product offering to include computing and system
platform products, and more than doubled its addressable market. More
importantly, this acquisition enabled the Company to elevate its market position
as a more complete supplier to its customers. Furthermore, a new business
strategy was defined following the acquisition that management believes will
continue to drive the Company's growth. This strategy is to supply
"comprehensive" embedded system platforms incorporating multiple components from
the Company's product portfolio.
Nine months after embarking on this expanded strategy, there are clear
indications that the Company's products are being evaluated for new programs
earlier in the customer's design cycle. This increases the opportunity for
"pull-through" of the Company's entire product line of network access, switching
and signaling products into the customer's final product design. One clear
example of the success and growth potential of this strategy is the Company's
recent announcement of the Stratus Technologies design win. This customer
transitioned from considering one of the Company's products before the Ziatech
acquisition, to designing their next-generation, high availability
communications server solution with four distinct Performance Technologies
products. It was the Company's expanded product capabilities, combined with the
Company's ability to assure system interoperability that resulted in this
significant design win.
Another measurable result of the new business strategy is the quarterly
sequential revenue growth, margin improvement and enhanced profitability that
the Company realized during the second quarter. The organization is focused on
the continuation of this new momentum. In addition, management continues to
aggressively seek opportunities to acquire elements, products and technologies
to add to its current capabilities.
Forward Looking Guidance for the Third Quarter 2003 (published July 23, 2003):
The Company's products are integrated into current and next-generation embedded
systems infrastructure. Traditionally, design wins have been an important metric
for management to judge the Company's product acceptance in its marketplace.
Typically, design wins reach production volumes at varying rates, generally
beginning twelve to eighteen months after the design win occurs. A variety of
risks such as schedule delays, cancellations and changes in customer markets and
economic conditions can adversely affect a design win before production is
reached or during deployment. While management still believes that design wins
are an important metric in evaluating the market acceptance of the Company's
products, as the economy slowed in 2001 and 2002 fewer customers were doing new
design activity, and a smaller number of these design wins were moving into
production than in the past. In addition, during difficult economic periods,
frequently a substantial portion of the Company's revenue is derived from orders
placed within the quarter and shipped in the final month of the quarter.
In the Company's target markets, capital spending appeared to stabilize during
the fourth quarter 2002, and beginning in 2003 certain customers appear to be
moving projects toward production. However, overall, new project development
culminating in actual design wins in the second quarter was still sluggish.
Nonetheless, during the second quarter 2003, the Company realized two new design
wins for its IPnexusTM (including rebranded ZiatechTM products) and SEGwayTM
product families. Forward-looking visibility in the market is still limited.
Based upon the current business mix, the current backlog and review of sales
forecasts, management expects revenue to be $12.5 million to $13.5 million in
the third quarter 2003. Gross margin is expected to be approximately 47.5% to
49.5% and diluted earnings per share for the third quarter are expected to be
between $.05 and $.09. The effective income tax rate for the third quarter is
assumed to be 31%.
More in-depth discussions of the Company's strategy and financial performance
can be found in the Company's recent Annual and Quarterly Reports, on Form 10-K
and Form 10-Q, as filed with the Securities and Exchange Commission.
Quarter and Six Months Ended June 30, 2003, Compared with
the Quarter and Six Months Ended June 30, 2002
The following table presents the percentage of sales represented by each item in
the Company's consolidated statements of income for the periods indicated. The
table includes the results of operations of the Computing Products Group,
acquired by the Company in October 2002.
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------------- -------------- ------------- --------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 51.5 40.4 53.0 40.9
------------- -------------- ------------- --------------
Gross profit 48.5 59.6 47.0 59.1
------------- -------------- ------------- --------------
Operating expenses:
Selling and marketing 11.4 18.3 11.9 17.4
Research and development 19.6 25.4 20.2 24.4
General and administrative 9.5 8.8 9.5 8.9
Restructuring charge 1.3
------------- -------------- ------------- --------------
Total operating expenses 40.5 52.5 41.6 52.0
------------- -------------- ------------- --------------
Income from operations 8.0 7.1 5.4 7.1
Other income, net 1.0 1.8 1.1 1.8
------------- -------------- ------------- --------------
Income before income taxes and equity in loss
of unconsolidated company 9.0 8.9 6.5 8.9
Income tax provision (2.8) (2.8) (2.0) (2.8)
------------- -------------- ------------- --------------
Income before equity in loss of unconsolidated
company 6.2 6.1 4.5 6.1
Equity in loss of unconsolidated company,
net of tax (0.6) (0.4)
------------- -------------- ------------- --------------
Net income 5.6% 6.1% 4.1% 6.1%
============= ============== ============= ==============
Sales. Total revenue for the second quarter 2003 amounted to $12.6 million,
compared to $6.6 million for the same quarter in 2002. For the second quarter
2003, the Computing Products Group contributed $5.5 million to revenue. During
the second quarter 2003, the Company had two customers that each represented
greater than 10% of sales, and the four largest customers represented 58% of
sales. Shipments to customers outside of North America represented 17% and 23%
of sales during the second quarter of 2003 and 2002, respectively.
Total revenue for the first six months of 2003 was $23.7 million, compared to
$13.0 million for the same period in 2002. For the first six months of 2003, the
Computing Products Group contributed $11.2 million to revenue.
For the periods indicated, the Company's products are grouped into four distinct
categories in one market segment: Signaling and network access products,
Computing products, IPnexus switch products, and other products. Revenue from
each product category is expressed as a percentage of sales for the three and
six months ending June 30, 2003 and 2002:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------------ ------------ ----------- ------------
Signaling and network access products 47% 89% 41% 88%
Computing products 43% 0% 47% 0%
IPnexus switch products 9% 10% 11% 9%
Other 1% 1% 1% 3%
------------ ------------ ----------- ------------
Total 100% 100% 100% 100%
============ ============ =========== ============
Signaling and network access products: Network access products provide a
connection between embedded systems platforms and a variety of networks
(including the signaling network) and are used to control the network and/or
process information being transported over networks. Many of the Company's
signaling products enable the transport of signaling messages over
packet-switched (IP) networks. Revenue from this category in the second quarter
2003 amounted to $5.9 million, compared to $3.8 million in the first quarter
2003 and compared to $5.9 million in the second quarter 2002. For the first six
months of 2003, revenue from this category was down 16%, compared to the same
period in 2002. During the past two years, the decline in capital expenditure
investments by customers in the Company's target markets significantly reduced
signaling and network access product revenue. Revenue for this category during
the second quarter 2003 reflects a potential reversal of this trend.
Computing products: The Computing Products Group was acquired during the third
quarter 2002 and its products include a range of single board computers, a
variety of embedded system chassis and associated chassis management products.
These products enable Performance Technologies to provide comprehensive embedded
system platforms incorporating multiple components from the Company's portfolio.
IPnexus switch products: The Company's IPnexus switch product family has been
designed for the embedded systems market and is based on the PICMG 2.16 systems
architecture, which was ratified by the industry standards group in September
2001. The Company is now shipping nine distinct switch models to customers, with
new models scheduled for release later this year. Revenue from this category
increased 78% to $1.1 million in the second quarter 2003, compared to $.6
million in the respective quarter of 2002. For the first six months of 2003,
revenue from this category exceeded switch shipments for all of 2002 and were up
128%, compared to the same period in 2002.
Other product revenue: This revenue is related to legacy products. Over the past
twenty-four months, customer demand for these products has declined
significantly as customers have moved to newer technologies. Many of these
products are project oriented and shipments can fluctuate on a quarterly basis.
Gross profit. Gross profit consists of sales, less cost of goods sold including
material costs, manufacturing expenses, amortization of software development
costs, expenses associated with engineering contracts and technical support
function expenses. For the second quarter, gross margin amounted to 48.5% and
59.6% of sales in 2003 and 2002, respectively. Gross margin during the second
quarter 2003 improved from 45.3% in the first quarter 2003 primarily because
fixed manufacturing overhead was spread over more units produced and shipped
during the second quarter. Overall, the decrease in gross margin during the
second quarter 2003, compared to the second quarter 2002 is primarily
attributable to the lower gross margin for computing products, acquired in the
fourth quarter 2002.
Total Operating Expenses. Total operating expenses were $5.1 million and $3.5
million for the second quarter 2003 and 2002, respectively. For the six months,
total operating expenses were $9.8 million and $6.8 million in 2003 and 2002,
respectively. In October 2002, the Computing Products Group was acquired. During
the first quarter 2003, the Company began to selectively increase expenditures
in the Computing Products Group and in sales and marketing, to implement the
first phase of its new business strategy. During January and September 2002,
staff reductions were initiated throughout the organization to more closely
align expenses with the then current revenue levels.
Selling and marketing expenses were $1.4 million and $1.2 million for the second
quarter 2003 and 2002, respectively. For the six months, selling and marketing
expenses were $2.8 million and $2.3 million in 2003 and 2002, respectively. In
October 2002, the Computing Products Group was acquired. During the first
quarter 2003, the Company began to increase expenditures in sales and marketing
to implement the first phase of its new business strategy. During January and
September 2002, sales and marketing staff reductions were initiated to more
closely align expenses with the then current revenue levels.
Research and development expenses were $2.5 million and $1.7 million for the
second quarter 2003 and 2002, respectively. For the six months, research and
development expenses were $4.8 million and $3.2 million in 2003 and 2002,
respectively. In October 2002, the Computing Products Group was acquired. During
the first quarter 2003, the Company increased research and development
expenditures in its Computing Products Group. During January and September 2002,
engineering staff reductions were initiated to more closely align expenses with
the then current revenue levels. The Company capitalizes certain software
development costs, which reduces the amount of engineering costs charged to
operating expense. Amounts capitalized were $.6 million in each of the first six
months of 2003 and 2002, respectively.
General and administrative expenses were $1.2 million and $.6 million for the
second quarter 2003 and 2002, respectively. For the first six months, general
and administrative expenses were $2.3 million and $1.2 million in 2003 and 2002,
respectively. The increase in expense is primarily attributable to 2003 expenses
associated with the Computing Products Group acquired in October 2002 and
expenses associated with the Chief Strategic Officer position created in January
2003.
Restructuring charges were zero and $.2 million for the first six months of 2003
and 2002, respectively. In January 2002, the Company improved its cost structure
primarily through the reduction of the Company's staff resulting in a decrease
in its workforce of approximately 10%.
Other income, net. Other income consists primarily of interest income from
marketable securities and cash equivalents. The funds are primarily invested in
high quality Municipal, U.S. Treasury and corporate obligations with maturities
of less than one year.
Income taxes. The provision for income taxes for the second quarter and first
six months of 2003 and 2002 is based on an assumed combined federal, state and
foreign effective tax rate of 31%. The difference between the effective tax rate
and the federal statutory rate of 34% is attributable to certain permanent
items.
Equity in Loss of Unconsolidated Company, net of tax. In September 2002, the
Company completed a 47% minority interest investment in Momentum Computer, Inc.,
a developer of specialized single board computer solutions located in Carlsbad,
California. During the second quarter and first six months 2003, losses were
recorded reflecting the allocation of Momentum's net loss to the Company, based
on the Company's ownership percentage.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company's primary source of liquidity included cash and
cash equivalents of $24.0 million. The Company had working capital of $33.2
million and $32.1 million at June 30, 2003 and December 31, 2002, respectively.
The Company allowed its revolving credit facility in the amount of $5 million to
expire in April 2003.
Cash provided by operating activities amounted to $1.1 million and $2.6 million
for the first six months of 2003 and 2002, respectively.
Capital equipment purchases amounted to $.5 million and $.6 million for the
first six months 2003 and 2002, respectively. Capitalization of certain software
development costs amounted to $.6 million in each of the first six months of
2003 and 2002, respectively.
In August 2002, the Board of Directors authorized a plan to repurchase up to one
million shares of the Company's common stock. During the first six months of
2003, the Company repurchased a total of 56,000 shares at a total cost of $.2
million under this program.
Assuming there is no significant change in the Company's business, management
believes that its current cash and cash equivalents will be sufficient to meet
the Company's anticipated needs, including working capital and capital
expenditure requirements, for at least the next twelve months. However,
management is continuing its strategic acquisition program to further accelerate
its new product and market penetration efforts. This program could have an
impact on the Company's working capital, liquidity or capital resources.
Recently Issued Accounting Pronouncements
FIN 45 - In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 required that at
the time a company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it assumes
under that guarantee. This interpretation is applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. The Company does not
currently provide significant guarantees on a routine basis. The Company adopted
this interpretation and it did not have a material impact on the results of
operations or the financial position of the Company.
FIN 46 - In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." Interpretation No. 46 requires companies with a
variable interest entity to apply this guidance to that entity as of the
beginning of the first interim period beginning after June 15, 2003 for existing
interests and immediately for new interests. The application of the guidance
could result in the consolidation of a variable interest entity. The only
variable interest entity of the Company is its investment in Momentum Computer,
Inc. The Company adopted this interpretation and it did not have a material
impact on the financial results.
Critical Accounting Estimates and Assumptions
In preparing the financial statements in accordance with GAAP, management is
required to make estimates and assumptions that have an impact on the assets,
liabilities, revenue and expense amounts reported. These estimates can also
affect supplemental information disclosures by the Company, including
information about contingencies, risk and financial condition. The Company
believes, given current facts and circumstances, its estimates and assumptions
are reasonable, adhere to GAAP, and are consistently applied. Inherent in the
nature of an estimate or assumption is the fact that actual results may differ
from estimates, and estimates may vary as new facts and circumstances arise. The
critical accounting policies, judgments and estimates, which management believes
have the most significant effect on the financial statements are set forth
below:
o Revenue Recognition
o Software Development Costs
o Valuation of Inventory
Revenue Recognition: The Company recognizes revenue in accordance with the SEC
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred or services have been provided, the
sale price is fixed or determinable, and collectability is reasonably assured.
Additionally, the Company sells its products on terms, which transfer title and
risk of loss at a specified location, typically shipping point. Accordingly,
revenue recognition from product sales occurs when all factors are met,
including transfer of title and risk of loss, which generally occurs upon
shipment by the Company. Revenue earned from arrangements for software systems
requiring significant production, modification, or customization of software is
recognized over the contract period as performance milestones are fulfilled. If
all conditions of revenue recognition are not met, the Company defers revenue
recognition. Revenue from consulting and other services is recognized at the
time the services are rendered. Any anticipated losses on contracts are charged
to operations as soon as such losses are determined. Revenue from software
maintenance contracts is recognized ratably over the contractual period. The
Company believes that the accounting estimate related to revenue recognition is
a "critical accounting estimate" because the Company's terms of sale can vary,
and management exercises judgment in determining whether to defer revenue
recognition. Such judgments may materially affect net sales for any period.
Management exercises judgment within the parameters of GAAP in determining when
contractual obligations are met, title and risk of loss are transferred, sales
price is fixed or determinable and collectability is reasonably assured.
Software Development Costs: All software development costs incurred in
establishing the technological feasibility of computer software products to be
sold are research and development costs. Software development costs incurred
subsequent to the establishment of technological feasibility of a computer
software product to be sold and prior to general release of that product are
capitalized. Amounts capitalized are amortized commencing after general release
of that product over the estimated remaining economic life of that product,
generally three years, or using the ratio of current revenues to current and
anticipated revenues from such product, whichever provides greater amortization.
If in the judgment of management, technological feasibility for a particular
project has not been met or recoverability of amounts capitalized is in doubt,
project costs are expensed as research and development or charged to costs of
goods sold, as applicable. The Company believes that the accounting estimate
related to software development costs is a "critical accounting estimate"
because the Company's management exercises judgment in determining whether
project costs are expensed as research and development. Such judgments may
materially affect expense amounts for any period. Management exercises judgment
within the parameters of GAAP in determining when technological feasibility has
been met and recoverability of software development costs is reasonably assured.
Valuation of Inventories: Inventories are stated at the lower of cost or market,
using the first-in, first-out method. The Company's inventory includes purchased
parts and components, work in process and finished goods. The Company provides
inventory reserves for excess, obsolete or slow moving inventory after periodic
evaluation of historical sales, current economic trends, forecasted sales,
estimated product lifecycles and estimated inventory levels. The factors that
contribute to inventory valuation risks are the Company's purchasing practices,
electronic component obsolescence, accuracy of sales and production forecasts,
introduction of new products, product lifecycles and the associated product
support. The Company manages its exposure to inventory valuation risks by
maintaining safety stocks, minimum purchase lots, managing product end-of-life
issues brought on by aging components or new product introductions, and by
utilizing certain inventory minimization strategies such as vendor-managed
inventories. The Company believes that the accounting estimate related to
valuation of inventories is a "critical accounting estimate" because it is
susceptible to changes from period-to-period due to the requirement for
management to make estimates relative to each of the underlying factors ranging
from purchasing, to sales, to production, to after-sale support. If actual
demand, market conditions or product lifecycles are adversely different from
those estimated by management, inventory adjustments to lower market values
would result in a reduction to the carrying value of inventory, an increase in
inventory write-offs and a decrease to gross margins.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Quarterly Report on Form 10-Q contains forward-looking statements, which
reflect the Company's current views with respect to future events and financial
performance, within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and is subject to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "believes,"
"anticipates," "plans," "may," "intend," "estimate," "will," "should," "could,"
"feels," "is optimistic," "expects," and other expressions which indicate future
events and trends also identify forward-looking statements. However, the absence
of such words does not mean that a statement is not forward-looking.
The Company's future operating results are subject to various risks and
uncertainties and could differ materially from those discussed in the
forward-looking statements and may be affected by various trends and factors
which are beyond the Company's control. These include, among other factors,
general business and economic conditions, rapid or unexpected changes in
technologies, cancellation or delay of customer orders including those relating
to the "design wins" referenced above, unreliability of customer forecasts,
changes in the product or customer mix of sales, delays in new product
development, delays or lack of availability of electronic components, customer
acceptance of new products and customer delays in qualification of products.
This report on Form 10-Q should be read in conjunction with the Consolidated
Financial Statements, the notes thereto, Management's Discussion and Analysis of
Financial Condition and Results of Operations as of December 31, 2002 and "Risk
Factors" as reported in the Company's Annual Report on Form 10-K, and other
reports as filed with the Securities and Exchange Commission.
Stockholders are cautioned not to place undue reliance on the forward-looking
statements which speak as of the date of this Quarterly Report or the date of
the documents incorporated by reference in this Quarterly Report. We are not
under any obligation, and we expressly disclaim any obligation, to update or
alter any such statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks in the normal course of business,
primarily interest rate risk, Canadian currency fluctuation risk and changes in
the market value of its investments, and believes its exposure to such risk is
minimal. The Company's investments are made in accordance with the Company's
investment policy and primarily consist of U.S. Treasury securities, municipal
securities and corporate obligations. The Company does not participate in the
investment of derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation Of Disclosure Controls And Procedures. Our Chief Executive
Officer (principal executive officer) and Chief Financial Officer
(principal financial officer) evaluated our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of the end of the period covered by this quarterly report. Based on
this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were
effective as of such date.
(b) Changes In Internal Controls Over Financial Reporting. There has been
no change in our internal control over financial reporting that
occurred during the fiscal quarter covered by this quarterly report
that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 1, 2003, the litigation settlement agreement associated with the class
action lawsuits filed during the second quarter 2000 against the Company, as
well as several of its officers and directors, alleging violations of federal
securities laws was accepted and approved by the United States District Court
for the Western District of New York and all claims therein were dismissed with
prejudice. The costs associated with the settlement of this litigation were
recorded in the third quarter of 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2003 Annual Meeting of Stockholders was held June 3, 2003. The Directors
elected at the meeting were as follows:
Votes Cast
Nominees For Withheld
Robert L. Tillman 11,168,695 486,162
Donald L. Turrell 11,168,095 486,762
John M. Slusser, Bernard Kozel, Charles E. Maginness, Stuart B. Meisenzahl and
John E. Mooney continue as Directors until the next Annual Meeting, or such
times as their respective terms expire.
The stockholders voted to adopt the Performance Technologies, Incorporated 2003
Omnibus Incentive Plan. 7,575,675 shares of common stock were voted in favor of
the proposal, 1,109,633 shares of common stock were voted against the proposal
and 78,832 shares of common stock abstained.
The stockholders also voted to ratify the appointment of PricewaterhouseCoopers
LLP as independent accountants for 2003. 11,087,884 shares of common stock were
voted in favor of the proposal, 561,430 shares of common stock were voted
against the proposal, and 5,543 shares of common stock abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
31.1 Rule 13a-14a(a)/15d-14(a) Certification
31.2 Rule 13a-14a(a)/15d-14(a) Certification
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
B. Reports on Form 8-K
(1) On April 10, 2003, the Company filed a Current Report on Form
8-K, ITEM 5 - Other to inform stockholders: (A) On March 17,
2003, Performance Technologies announced it had appointed Robert
Tillman, former president of Ziatech Corporation, to its Board of
Directors, and (B) In a letter dated April 2, 2003 to the
Chairman of our Board of Directors, Paul L. Smith indicated that
he had decided not to stand for re-election to another term as a
Director of Performance Technologies, Incorporated. Mr. Smith had
served as a Director since 1993 and his current term expired on
June 3, 2003. A copy of the related press release was furnished
as an exhibit under Item 7 to this Form 8-K. No financial
statements were filed with the Form 8-K.
(2) On April 24, 2003, the Company filed a Current Report on Form
8-K, Item 12 - Results of Operations and Financial Condition to
inform stockholders that on April 23, 2003, the Company announced
its results of operations for the quarter ended March 31, 2003. A
copy of the related press release was furnished as an exhibit
under Item 7 to this Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERFORMANCE TECHNOLOGIES, INCORPORATED
August 7, 2003 By: /s/ Donald L. Turrell
----------------------------------------
Donald L. Turrell
President and
Chief Executive Officer
August 7, 2003 By: /s/ Dorrance W. Lamb
----------------------------------------
Dorrance W. Lamb
Chief Financial Officer and
Vice President, Finance
Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
I, Donald L. Turrell, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Performance
Technologies, Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared; and
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluations; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors:
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 7, 2003 /s/ Donald L. Turrell
--------------------------
Donald L. Turrell,
Chief Executive Officer
Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
I, Dorrance W. Lamb, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Performance
Technologies, Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared; and
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluations; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors:
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 7, 2003 /s/ Dorrance W. Lamb
--------------------------
Dorrance W. Lamb,
Chief Financial Officer
Exhibit 32.1
Section 1350 Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 ("Section 906"), Donald L. Turrell and Dorrance
W. Lamb, Chief Executive Officer and Chief Financial Officer, respectively, of
Performance Technologies, Incorporated, certify that (i) the Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003, fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and (ii) the information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of
Performance Technologies, Incorporated.
A signed original of this written statement required by Section 906 has
been provided to Performance Technologies, Incorporated and will be retained by
Performance Technologies, Incorporated and furnished to the Securities and
Exchange Commission or its staff upon request.
/s/ Donald L. Turrell
--------------------------------
Donald L. Turrell
Chief Executive Officer
(Principal Executive Officer)
Date: August 7, 2003
/s/ Dorrance W. Lamb
--------------------------------
Dorrance W. Lamb
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date: August 7, 2003