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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 March 31, 2002
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)
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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 .
The number of shares outstanding of the registrant's common stock was
12,239,228 as of April 30, 2002.
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1
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2002
(unaudited) and December 31, 2001 3
Consolidated Statements of Income For The Three Months
Ended March 31, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows For The Three
Months Ended March 31, 2002 and 2001 (unaudited) 5
Notes to Consolidated Financial Statements For The Three
Months Ended March 31, 2002 (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2002 2001
------------- --------------
(unaudited)
Current assets:
Cash and cash equivalents $26,972,000 $26,913,000
Accounts receivable, net 6,814,000 6,905,000
Inventories, net 3,863,000 3,756,000
Prepaid expenses and other 324,000 359,000
Deferred taxes 608,000 608,000
------------- --------------
Total current assets 38,581,000 38,541,000
Property, equipment and improvements, net 2,419,000 2,465,000
Software development costs, net 2,131,000 1,948,000
------------- --------------
Total assets $43,131,000 $42,954,000
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 689,000 $ 417,000
Income taxes payable 433,000 350,000
Accrued expenses 2,447,000 3,046,000
------------- --------------
Total current liabilities 3,569,000 3,813,000
Deferred taxes 799,000 799,000
------------- --------------
Total liabilities 4,368,000 4,612,000
------------- --------------
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 11,286,000 11,305,000
Retained earnings 40,632,000 40,239,000
Treasury stock - at cost; 1,020,810 and
1,024,547 shares held at March 31, 2002 and
December 31, 2001, respectively (13,233,000) (13,284,000)
Accumulated other comprehensive loss (55,000) (51,000)
------------- --------------
Total stockholders' equity 38,763,000 38,342,000
------------- --------------
Total liabilities and stockholders' equity $43,131,000 $42,954,000
============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
3
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
March 31,
2002 2001
------------- --------------
Sales $6,407,000 $9,700,000
Cost of goods sold 2,652,000 3,809,000
------------- --------------
Gross profit 3,755,000 5,891,000
------------- --------------
Operating expenses:
Selling and marketing 1,063,000 1,510,000
Research and development 1,498,000 2,285,000
General and administrative 577,000 732,000
Restructuring charge 163,000
------------- --------------
Total operating expenses 3,301,000 4,527,000
------------- --------------
Income from operations 454,000 1,364,000
Other income, net 116,000 355,000
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Income before income taxes 570,000 1,719,000
Provision for income taxes 177,000 567,000
------------- --------------
Net income $ 393,000 $1,152,000
============= ==============
Basic earnings per share $ .03 $ .09
============= ==============
Diluted earnings per share $ .03 $ .09
============= ==============
Weighted average number of common shares used
in basic earnings per share 12,238,095 12,474,014
Common equivalent shares 313,542 452,832
-------------- --------------
Weighted average number of common shares used
in diluted earnings per share 12,551,637 12,926,846
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income $ 393,000 $1,152,000
Non-cash adjustments:
Depreciation and amortization 401,000 326,000
Other 12,000 6,000
Changes in operating assets and liabilities:
Accounts receivable 79,000 636,000
Inventories (107,000) 62,000
Prepaid expenses and other 35,000 373,000
Accounts payable and accrued expenses (327,000) (869,000)
Income taxes payable 83,000 477,000
------------- -------------
Net cash provided by operating activities 569,000 2,163,000
------------- -------------
Cash flows from investing activities:
Purchases of property, equipment and improvements (190,000) (587,000)
Capitalized software development costs (352,000) (368,000)
Purchase of marketable securities (5,000)
Maturities of marketable securities 10,000,000
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Net cash (used) provided by
investing activities (542,000) 9,040,000
------------- -------------
Cash flows from financing activities:
Exercise of stock options and warrants 32,000 76,000
Purchase of treasury stock (6,449,000)
------------- -------------
Net cash provided (used) by
financing activities 32,000 (6,373,000)
------------- -------------
Net increase in cash and cash equivalents 59,000 4,830,000
Cash and cash equivalents at beginning of period 26,913,000 17,187,000
------------- -------------
Cash and cash equivalents at end of period $26,972,000 $22,017,000
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
5
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(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, 2001, as reported in its Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
Note - B During the three months ended March 31, 2002, 3,737 common shares
were issued upon the exercise of stock options.
Note - C Inventories consisted of the following at March 31, 2002 and
December 31, 2001:
March 31, December 31,
2002 2001
------------- -------------
Purchased parts and components $1,248,000 $1,329,000
Work in process 2,811,000 2,778,000
Finished goods 704,000 468,000
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4,763,000 4,575,000
Less: reserve for inventory obsolescence (900,000) (819,000)
------------- -------------
Net $3,863,000 $3,756,000
============= =============
Note - D On January 15, 2002, the Company announced plans to improve its cost
structure primarily through reductions in the Company's staff. This plan has
been completed and resulted in a reduction in workforce of approximately 10%.
During the first quarter of 2002, the Company recorded a restructuring charge,
primarily related to severance costs, of $163,000.
6
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. Actual results of operations could
differ materially from those discussed in the forward-looking statements.
Overview
Business Strategy: Performance Technologies, Incorporated (the "Company") is a
supplier of innovative hardware and software products for a broad range of
communications infrastructure including traditional data communications and
wireline/wireless telecommunication systems. The Company's products fall into
three distinct areas: SS7 signaling, IP Ethernet switch and network access. The
Company's development efforts are directed at future growth opportunities that
utilize the evolving IP (Internet Protocol) standards for communications and
networking equipment. IP based communications and systems products are the
foundation for next-generation telecommunications systems and services, as well
as embedded systems for video, data communications and mass storage
applications. Customers who use the Company's products and technologies include:
telecommunications equipment manufacturers (TEMs), communications service
providers/operators, international mobile/cellular wireless operators and
embedded systems platform suppliers/integrators. The Company's products are
based on open-architectures and are focused on high availability requirements.
Financial Information: Total revenue for the first quarter 2002 amounted to $6.4
million, compared to $9.7 million for the first quarter 2001. Net income for the
first quarter 2002 amounted to $.4 million, or $.03 per share including expenses
associated with a restructuring charge of $.2 million (pre-tax), or $.01 per
share. Excluding the restructuring charge net income was $.5 million, or $.04
per share, based on 12.6 million fully diluted shares outstanding. Net income
amounted to $1.2 million, or $.09 per share for the first quarter 2001, based on
12.9 million fully diluted shares outstanding.
At March 31, 2002, the Company had $27.0 million of cash and cash equivalents
and no long-term debt. For the quarter ended March 31, 2002, the Company
generated income from operations, excluding depreciation and amortization
(EBITDA), of $.9 million, compared to $1.7 million for the same period in 2001.
During January 2002, the Company improved its cost structure by reducing
annualized expenses by approximately $1.6 million due to the uncertainty of the
current economic conditions and lack of visibility. These reductions were
primarily personnel related and were initiated throughout the organization.
During the quarter, the Company continued to focus on "design win" efforts for
its new products and believes that revenue generated from these design wins can
be the defining criterion in providing increased stockholder value when business
conditions improve. Management believes the most important measurement of
progress in executing the Company's product and marketing strategies is when a
prospective customer notifies the Company that its product has been selected to
be integrated with their product. During the first quarter 2002, the Company
realized seven new "design wins" for its IPnexusTM and SS7 signaling products,
following thirty-five new "design wins" during 2001.
7
In addition, the Company continued its aggressive efforts to promote its
innovative SEGwayTM Network products to achieve additional deployments. The
SEGway Edge product offers wireless and wireline carriers the ability to reduce
operating costs, enhance services and expand their network by utilizing lower
cost IP networks for signaling. Introduced a year ago, shipments of the SEGway
Edge product continued to rise and more trials began during the first quarter,
particularly for European customers. Validation testing also began at a tier-one
carrier in North America. Additionally, the first beta trials for the SEGway
Link Concentrator began in early April and production release is scheduled for
mid-year in anticipation of a successful beta period.
In March 2002, the Company continued to expand the breadth and capability of its
embedded IPnexus switch products through the introduction of the industry's
first and only Gigabit Ethernet switch capable of supporting the maximum
bandwidth and slot density specified by the PCI Computer Manufacturers' Group
2.16 standard. Since the new PICMG 2.16 industry standard was ratified in
September 2001, the Company has introduced the broadest array of Ethernet switch
and network access products compliant with this standard, propelling it to a
market leadership position. Management is optimistic that this leadership
position will translate into noteworthy growth potential as economic conditions
strengthen.
In early April 2002, the Company's Rochester operations relocated to a new,
larger facility within ten miles of the previous location and new manufacturing
equipment was added to accommodate several new products that require
leading-edge manufacturing processes.
FAS 144 - In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets to
be held and used, to be disposed of other than by sale, and to be disposed of by
sale. On January 1, 2002 the Company adopted SFAS No. 144. Adoption of this
statement did not have an impact on the results of operations or the financial
position of the Company.
Forward Looking Guidance for the Second Quarter 2002 (published April 24, 2002):
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 are subject to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
Performance Technologies provides products to communications and network
equipment suppliers that are integrated into current and next-generation network
infrastructure products. Design wins reach production volumes at varying rates,
typically beginning twelve to eighteen months after the design win occurs. A
variety of risks such as schedule delays, cancellations, changes in customer
markets and general economic conditions can adversely affect a design win before
production is reached or during deployment. Not all design wins can be expected
to result in production orders. Furthermore, when economic conditions
deteriorate, customers' visibility also deteriorates, causing delays in the
placement of orders. This results in a substantial portion of the Company's
revenue in each quarter being derived from orders placed within the quarter and
often shipped in the final month of the quarter.
Performance Technologies continued to experience the effects of the difficult
economic conditions and slowdown of capital spending in the communications
market during the first quarter 2002. New project deployments and design
activity were sluggish. In addition, production orders from a number of design
wins were anticipated but were not received and a number of customers requested
delays in shipments.
Based upon the current distribution of business, the current backlog and review
of sales forecasts, management expects revenue in the second quarter of 2002 to
be $6.5 million to $8.0 million. Gross margin is expected to be approximately
58% to 63% and diluted earnings per share for the second quarter is expected to
be $.03 to $.07.
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.
8
Quarter Ended March 31, 2002, compared with
the Quarter Ended March 31, 2001
The following table presents the percentage of sales represented by each item in
the Company's consolidated statements of income for the periods indicated:
Three Months Ended
March 31,
2002 2001
----------- -----------
Sales 100.0% 100.0%
Cost of goods sold 41.4 39.3
----------- -----------
Gross profit 58.6 60.7
----------- -----------
Operating expenses:
Selling and marketing 16.6 15.6
Research and development 23.4 23.6
General and administrative 9.0 7.5
Restructuring charge 2.5
----------- -----------
Total operating expenses 51.5 46.7
----------- -----------
Income from operations 7.1 14.0
Other income, net 1.8 3.7
----------- -----------
Income before income taxes 8.9 17.7
Provision for income taxes (2.8) (5.8)
----------- -----------
Net income 6.1% 11.9%
=========== ===========
Sales. Total revenue for the first quarter 2002 was $6.4 million, compared to
$9.7 million for the same quarter in 2001. For the periods indicated, the
Company's products are grouped into three distinct categories in one market
segment: Signaling and network access products, IP Switching products and Other
products. Revenue from each product category is expressed as a percentage of
sales for the three months ending March 31, 2002 and 2001 as follows:
Three Months Ended
March 31,
2002 2001
----------- -----------
Signaling and network access products 87% 83%
IP Switching products 7% 4%
Other 6% 13%
----------- -----------
Total 100% 100%
=========== ===========
Signaling and Network Access Products: During the past twelve months, the
decline in capital expenditure investments by carriers has significantly reduced
the Company's signaling and network access products revenue.
9
IP Switching Products: While still a modest percentage of the Company's revenue,
switching product revenue increased by 36% to $.5 million in 2002, compared to
the respective quarter in 2001. The recently ratified PICMG 2.16 embedded
systems architecture is being adopted by a wide range of industries and revenue
from switching products is expected to increase when customers move into
production of their new platforms.
Other product revenue: This revenue is related to legacy products. Revenue from
other products has declined significantly over the past twelve months. Many of
these products are project oriented and shipments can fluctuate on a quarterly
basis. Management expects revenue from these products to continue to decline
over future periods as these technologies are replaced.
Gross profit. Gross profit consists of sales, less cost of goods sold including
material costs, manufacturing expenses, amortization of software development
costs, expenses associated with engineering contracts and technical support
function expenses. In the first quarter, gross margin was 58.6% and 60.7% of
sales in 2002 and 2001, respectively. During the first quarter 2002, the product
mix and fixed overhead for manufacturing being spread over lower sales volumes
impacted gross margin as a percentage of sales.
Total Operating Expenses. Total operating expenses were $3.3 million and $4.5
million in first quarter of 2002 and 2001, respectively. Early in the second
quarter 2001, the Company tightened control over discretionary expenses. In
January 2002, the Company took further actions to improve its cost structure
primarily through reductions in the Company's staff.
Selling and marketing expenses were $1.1 million and $1.5 million in first
quarter of 2002 and 2001, respectively. In the first quarter of 2001, the
Company participated in a number of industry trade shows and conferences and
broadly advertised its products. Early in the second quarter 2001, the Company
tightened control over these expenses. In the first quarter of 2002, lower
headcount resulted in reduced personnel expenses.
Research and development expenses were $1.5 million and $2.3 million in the
first quarter of 2002 and 2001, respectively. During the first quarter of 2002,
the Company focused its engineering efforts on the development of the IPnexus
embedded switch products and the SEGway Link Concentrator. The reduction in
expenses in the first quarter 2002, compared to 2001 is primarily attributable
to lower headcount.
General and administrative expenses were $.6 million and $.7 million for the
first quarter 2002 and 2001, respectively. The reduction in expenses in the
first quarter 2002, compared to 2001 is primarily attributable to lower
headcount.
Restructuring charges were $.2 million and zero for the first quarter 2002 and
2001, respectively. In January 2002, the Company improved its cost structure
primarily through the reduction of the Company's staff resulting in a decline 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 and U.S. Treasury securities with maturities of less than
one year.
Income taxes. The provision for income taxes for the first quarter of 2002 is
based on the combined federal, state and foreign effective tax rate of 31%,
compared to 33% for the first quarter of 2001.
10
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, the Company's primary source of liquidity included cash
and cash equivalents of $27.0 million and available borrowings of $5.0 million
under a revolving credit facility with a bank. No amounts were outstanding under
this credit facility as of March 31, 2002. The Company had working capital of
$35.0 million at March 31, 2002, compared to $34.7 million at December 31, 2001.
Cash provided by operating activities for the first quarter 2002 was $.6
million, compared to $2.2 million for the same period in 2001.
Capital equipment purchases amounted to $.2 million for the three months ended
March 31, 2002, compared to $.6 million for the same period in 2001.
Capitalization of certain software development costs amounted to $.4 million and
$.4 million for the three months ended March 31, 2002 and 2001, respectively.
In August 2000, the Board of Directors authorized the repurchase of up to 1
million shares of the Company's Common Stock and the Company completed this
repurchase program in March 2001. In March 2001, the Board of Directors
authorized the repurchase of up to an additional 500,000 shares of the Company's
Common Stock. Based on deteriorating economic conditions and an effort to
preserve cash, the Company did not repurchase any shares during the first
quarter of 2002, compared to 509,900 shares repurchased at a total cost of $6.4
million during the first quarter 2001.
Assuming there is no significant change in the Company's business, management
believes that its current cash and cash equivalents together with cash generated
from operations and available borrowings under the Company's loan agreement 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, an unfavorable determination in the outstanding class action litigation
could have a material adverse effect on the Company's working capital.
Furthermore, management is continuing its strategic acquisition program to
further accelerate new product and market penetration efforts. This program
could have an impact on the Company's working capital, liquidity or capital
resources.
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 are 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.
11
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.
Furthermore, an unfavorable determination in the outstanding class action
litigation could have a material adverse effect on the Company's working
capital. This report on Form 10-Q should be read in conjunction with the
Consolidated Financial Statements, the notes thereto, Management's Discussion
and Analysis of Financial Condition and Results of Operations as of December 31,
2001 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks in the normal course of business,
primarily interest rate risk and changes in the market value of its investments
and believes its exposure to such risk is minimal. The Company's investments are
made in accordance with the Company's investment policy and primarily consist of
U.S. Treasury securities, municipal securities and corporate obligations. The
Company does not participate in the investment of derivative financial
instruments.
12
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material changes have transpired since the Company's last filing relative to
the class action lawsuits filed on May 19, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
None.
B. Reports on Form 8-K
There were no reports filed on Form 8-K during the three month period ended
March 31, 2002.
13
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 9, 2002 By: /s/ Donald L. Turrell
--------------------------------------
Donald L. Turrell
President and
Chief Executive Officer
May 9, 2002 By: /s/ Dorrance W. Lamb
--------------------------------------
Dorrance W. Lamb
Chief Financial Officer and
Vice President, Finance
14