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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, 1998
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)
-------------------
Registrant's telephone number, including area code: (716) 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 .
The number of shares outstanding of the registrant's common stock was
7,302,700 as of May 5, 1998.
- -------------------------------------------------------------------------------
Cover Page of 12 Pages
1
<PAGE>
Performance Technologies, Incorporated and Subsidiaries
Index
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1998 (unaudited)
and December 31, 1997 3
Consolidated Statements of Income For The Three Months Ended
March 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows For The Three Months
Ended March 31, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements For The Three
Months Ended March 31, 1998 (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
<PAGE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,017,000 $ 8,833,000
Marketable securities 10,006,000 12,010,000
Accounts receivable, net 4,523,000 4,956,000
Inventories, net - Note C 3,559,000 3,329,000
Prepaid expenses and other 337,000 346,000
Deferred taxes 466,000 466,000
------------- -------------
Total current assets 31,908,000 29,940,000
Equipment and improvements, net 921,000 982,000
Software development, net 738,000 579,000
Other assets 115,000 125,000
------------- -------------
Total assets $ 33,682,000 $ 31,626,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 12,000 $ 12,000
Accounts payable 1,294,000 824,000
Income taxes payable 894,000 255,000
Accrued expenses 1,782,000 2,265,000
------------- -------------
Total current liabilities 3,982,000 3,356,000
Long term debt, less current portion 15,000 18,000
Deferred taxes 220,000 220,000
------------- -------------
Total liabilities 4,217,000 3,594,000
------------- -------------
Stockholders' equity
Preferred stock
Common stock - Note B 74,000 74,000
Additional paid-in capital - Note B 13,092,000 13,055,000
Retained earnings 16,480,000 15,061,000
Treasury stock (181,000) (158,000)
------------- -------------
Total stockholders' equity 29,465,000 28,032,000
------------- -------------
Total liabilities and
stockholders' equity $ 33,682,000 $ 31,626,000
============= =============
</TABLE>
3
<PAGE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1998 1997
------------- -------------
<S> <C> <C>
Sales $ 7,411,000 $ 7,434,000
Cost of goods sold 2,863,000 3,332,000
------------- -------------
Gross profit 4,548,000 4,102,000
------------- -------------
Operating expenses:
Selling and marketing 893,000 909,000
Research and development 1,063,000 942,000
General and administrative 686,000 688,000
------------- -------------
Total operating expenses 2,642,000 2,539,000
------------- -------------
Income from operations 1,906,000 1,563,000
Other income, net 311,000 230,000
------------- -------------
Income before income taxes 2,217,000 1,793,000
Provision for income taxes 798,000 681,000
------------- -------------
Net income $ 1,419,000 $ 1,112,000
============= =============
Per share of common stock - Note D
Basic earnings per share $ .20 $ .15
============= =============
Diluted earnings per share $ .18 $ .15
============= =============
</TABLE>
4
<PAGE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,419,000 $ 1,112,000
Non-cash adjustments:
Depreciation and amortization 145,000 554,000
Other 8,000 5,000
Changes in operating assets and liabilities:
Accounts receivable 428,000 (890,000)
Inventories (230,000) (692,000)
Prepaid expenses 9,000 (18,000)
Accounts payable 470,000 685,000
Accrued expenses (483,000) (507,000)
Income taxes payable 639,000 589,000
------------- -------------
Net cash provided by
operating activities 2,405,000 838,000
------------- -------------
Cash flows from investing activities
Cash purchases of equipment
and improvements, net (60,000) (168,000)
Capitalized software development (172,000) (193,000)
Purchase of marketable securities (1,000,000) (3,998,000)
Maturities of marketable securities 3,000,000
------------- -------------
Net cash provided (used) by
investing activities 1,768,000 (4,359,000)
------------- -------------
Cash flows from financing activities
Repayment of notes payable (3,000) (2,000)
Proceeds from issuance of common stock 14,000 14,000
Payments on capital lease obligations (15,000)
------------- -------------
Net cash provided (used) by
financing activities 11,000 (3,000)
------------- -------------
Net increase (decrease) in
cash and cash equivalents 4,184,000 (3,524,000)
Cash and cash equivalents at beginning of period 8,833,000 10,027,000
------------- -------------
Cash and cash equivalents at end of period $ 13,017,000 $ 6,503,000
============= =============
</TABLE>
5
<PAGE>
Performance Technologies, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
For The Three Months Ended March 31, 1998
(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, 1997, as reported in its Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
Note - B There were 7,278,700 and 7,267,450 shares issued and outstanding (net
of treasury shares held) at March 31, 1998 and December 31, 1997, respectively,
of the Company's $.01 par value Common Stock. During the three months ended
March 31, 1998, 12,450 common shares were issued upon the exercise of stock
options.
Note - C Inventories consisted of the following at March 31, 1998 and December
31, 1997:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
Purchased parts and components $ 1,341,000 $ 954,000
Work in process 2,578,000 2,580,000
Finished goods 286,000 333,000
------------- -------------
4,205,000 3,867,000
Less: reserve for inventory obsolescence (646,000) (538,000)
------------- -------------
Net $ 3,559,000 $ 3,329,000
============= =============
</TABLE>
Note - D The following table illustrates the calculation of both basic and
diluted earnings per share for the three months ending March 31, 1998 and 1997:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
------------- -------------
<S> <C> <C>
Basic earnings per share
Net income available to common stockholders $ 1,419,000 $ 1,112,000
------------- -------------
Weighted average common shares 7,272,508 7,205,774
------------- -------------
Basic earnings per share $ .20 $ .15
============= =============
Diluted earnings per share
Net income available to common stockholders $ 1,419,000 $ 1,112,000
------------- -------------
Weighted average common and common
equivalent shares 7,673,640 7,377,419
------------- -------------
Diluted earnings per share $ .18 $ .15
============= =============
</TABLE>
6
<PAGE>
Performance Technologies, Incorporated and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company's operating performance is subject to various risks and
uncertainties. 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,
1997 and "Risk Factors" as reported in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
Matters discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations 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 Act of 1934, as amended, and are subject to the
safe harbor provisions of those Sections. The Company's future operating results
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, as more particularly set forth
below, general business and economic conditions, rapid or unexpected changes in
technologies, cancellation or delay of customer orders, changes in the product
or customer mix of sales, delays in new product development, customer acceptance
of new products and customer delays in qualification of products.
Overview
The Company achieved its twelfth consecutive quarter of record net income for
the first quarter 1998. Net income increased 28%, to $1,419,000, from $1,112,000
for the first quarter 1997. Revenue for the first quarter was $7,411,000,
compared to $7,434,000 for the same period in 1997. During the past twelve
months, gross margin has steadily improved contributing to the increase in net
income. At March 31, 1998, the Company had approximately $23 million in cash,
cash equivalents, and marketable securities, and no significant debt. For the
three months ended March 31, 1998, the Company generated income from operations,
excluding depreciation and amortization (EBITDA), of $2.0 million. EBITDA,
however, does not represent cash from operating activities as defined by
generally accepted accounting principles (See Consolidated Statements of Cash
Flows).
The Company's revenue is generated from products designed to enhance the
performance of network systems based on varied computer architectures including
VMEbus, SBus and PCIbus. The Company's products operate on various operating
systems including UNIX, Windows NT(TM), VxWorks and QNX. The Company has a
history of adapting its products to a continually changing marketplace and
historically the increase in sales has been primarily the result of developing
new products and by increasing the unit sales volumes of existing products.
Management believes that the Company's WAN Interface adapter products and its
new Nebula (TM) family of network switch products will be key factors for
continued growth for 1998 and beyond. The recent integration of the Company's
west coast communications software subsidiary into the overall corporate
research and development function provides the Company with one of the most
comprehensive Wide Area Network product development capabilities in this market
segment. Various new WAN communication interface products are planned for
release during 1998. The anticipated Nebula fault-tolerant 100 Mbit/Gigabit
network switch family, developed by the Company, was demonstrated in early May
at Networld+Interop98 in Las Vegas. The financial community and those
commercial, industrial and government operations that must have their networks
available on a 7 days-a-week, 24 hours-a-day basis are the targeted markets for
these new PTI networking products which emphasize high availability without
significant price premiums. Production shipments for these products are
scheduled to begin in the third quarter.
In addition, during the past six months, the Company has developed several new
communications and mass storage products for the PCI and CompactPCI (cPCI)
markets. cPCI is a new standard bus architecture combining the attributes of the
VMEbus and PCIbus hardware into a ruggedized industrial system for the embedded
OEM marketplace.
7
<PAGE>
Quarter Ended March 31, 1998, compared with the Quarter Ended March 31, 1997
Sales. Sales for the quarter ended March 31, 1998 were $7,411,000, compared to
$7,434,000 for the first quarter 1997. The Company's products are grouped into
five categories: WAN Interface adapter products, LAN Interface adapter products,
Network Systems products, Mass Storage Interface products and Inter-system
Connectivity products.
WAN Interface adapter product revenue represented 63% of total sales in the
first quarter 1998, compared to 49% for the same quarter of the prior year. For
the current quarter, WAN Interface adapter product revenue increased by 28% over
the respective quarter in 1997 and 23% from the fourth quarter 1997. A
significant shipment to Dow Jones Markets, a contract announced in January,
partially contributed to this increase. The Company's WAN Interface adapter
products are found in a wide variety of applications and during the past twelve
months the Company has introduced several new WAN products.
Shipments of LAN adapter products for the first quarter 1998 amounted to 10% of
sales, compared to 14% for the first quarter 1997. The largest component of the
Company's LAN business is generated from Commercial Off the Shelf (COTS) Defense
applications which is project oriented and is difficult to predict on a
quarterly basis. During the first quarter 1998, LAN adapter revenue was less
than expected due to the delay in the award of a significant follow-on Defense
contract which was scheduled for February. This contract is now expected to be
awarded in June. Management believes that the Company will be awarded this
follow-on business but this delay impacted LAN revenue in the first quarter and
may also affect the second quarter revenue depending upon the award date.
Shipments of Network Systems products represented 7% of total sales for the
first quarter 1998, compared to 15% for the same period a year earlier. Network
Systems are primarily comprised of shipments of I/O subsystems to a major OEM
customer and sales of protocol software for specialty WAN applications. The
decrease in revenue during the first quarter, from a year earlier, is primarily
attributable to significantly lower shipments to the OEM customer. This customer
appears to be experiencing a slowdown in orders for the product that
incorporates the Company's I/O subsystem. During the first three quarters of
1997, the Company shipped approximately $500,000 a quarter to this customer. No
shipments to this customer were made during the fourth quarter 1997 and
approximately $100,000 was shipped during this first quarter 1998. Management is
discussing a volume shipment to this customer in the fourth quarter 1998, but no
meaningful shipments are expected prior to that time.
Mass Storage products represented 11% of total sales for the first quarter 1998
and 16% of sales in the first quarter 1997. The decrease in sales volume is
believed to be attributable to a slow down in the RAID/disk drive market
primarily associated with the Pacific Rim economic issues and technology changes
occurring in this market. These changes include customers transitioning from
SBus to PCIbus applications and from the slower SCSI adapters to faster Fibre
Channel adapters. The Company has been transitioning its products and customers
into these new technologies, however, the decline in the SBus business has been
greater than the increase in the PCI business. Management believes that there
are significant opportunities for the Company's new PCI-to-Fibre Channel
adapter. In April, the Company announced a new relationship with Ciprico to
provide this PCI-to-Fibre Channel adapter for integration into their 7000 Series
of Fibre Channel Disk Arrays.
Inter-system Connectivity products represented 9% of sales in the first quarter
1998, compared to 6% of sales for the first quarter of 1997. The Company is not
investing in this group of products and a decline in this revenue for the year
is expected.
International sales amounted to 11% of total sales for the first quarter 1998,
compared to 8% for the same period in 1997.
Gross Profit. Gross profit for the first quarter of 1998 increased to
$4,548,000, from $4,102,000 for the first quarter 1997. Gross margin was 61.4%
of sales, six percentage points higher, for the first quarter, compared to the
first quarter 1997. During the past year, management has improved gross margin
by focusing on reducing its material costs and on improving its manufacturing
efficiencies.
8
<PAGE>
Total Operating Expenses. Total operating expenses increased to $2,642,000, or
35.6% of sales for the first quarter 1998, from $2,539,000, or 34.2% of sales
for the same period in 1997. The Company expects to continue to make investments
in sales, marketing, research and development while maintaining tight control on
general and administrative expenses as a percentage of sales.
Selling and marketing expenses were $893,000, or 12.0% of sales for the first
quarter 1998, compared to $909,000, or 12.2% of sales for the same quarter in
1997. During 1998, management expects sales and marketing expenses will
accelerate as a percentage of sales in an effort to promote the new products
being introduced this year. Within the past 120 days, the Company has presented
its products at various trade shows across the country including: the Comnet
trade show in Washington, D.C., the Gigabit Exhibit Expo in San Jose,
California, the Navy League Expo in Washington, D.C., Networld+Interop98 in Las
Vegas and several Real Time Shows around the world.
Research and development expenses were $1,063,000, or 14.3% of sales for the
first quarter of 1998, compared to $942,000, or 12.7% of sales for the
comparable 1997 quarter. Certain engineering expenses associated with the
development of software are capitalized and amortized to cost of goods sold. The
increase in research and development expenses in the current quarter is
primarily due to additional costs associated with the ASIC chip set for the new
Nebula product line. During the second half of 1998, management expects
quarterly research and development expenses will decrease to more traditional
levels as a percentage of sales from the first quarter level.
General and administrative expenses were $686,000, or 9.3% of sales for the
first quarter of 1998 compared to $688,000, or 9.3% of sales for the first
quarter of 1997. The Company continues to maintain tight control over its
general and administrative expenses.
Other income, net. Other income consists primarily of interest income. Available
cash is invested in money market funds, high-quality short-term commercial paper
and United States Treasury securities maturing within twelve months.
Income Taxes. The provision for income taxes for the first quarter 1998 is based
upon the combined federal and state effective tax rate of 36%, compared to 38%
for the first quarter 1997. The net effective income tax rate is expected to
decline slightly during the remainder of the year.
Liquidity and Capital Resources
At March 31, 1998, the Company's primary source of liquidity included cash and
cash equivalents of $13,017,000, marketable securities with a maturity of less
than one year of $10,006,000 and available borrowings of $3,000,000 under a
revolving credit facility with a bank. No amounts were outstanding under this
credit facility as of March 31, 1998. The Company had working capital of
$27,926,000 at March 31, 1998, compared to $26,584,000 at December 31, 1997 and
$22,281,000 at March 31, 1997.
Cash provided by operating activities was $2,405,000 for the quarter ended March
31, 1998, compared to $838,000 for the first quarter 1997. The increase in cash
provided by operating activities for the three months ended March 31, 1998 is
attributable to greater net income and improved management of working capital.
Capitalization of certain software development costs amounted to $172,000 for
the quarter ended March 31, 1998, compared to $193,000 for the same period in
1997.
Many companies are facing a potential issue regarding the ability of information
systems to accommodate the coming year 2000. The Company has evaluated its
information systems and believes that an appropriate plan is in place to ensure
that all critical systems can, or will be able to, accommodate the coming
century without material adverse effect on the Company's financial condition,
results of operations, capital spending or competitive position. Such plan
consists of obtaining upgrades of its information systems from the Company's
software vendor to be year 2000 compatible. The current products sold by the
Company do not require any programming date changes to function as intended,
however, the new switching products do require date sensitive programming and
are being developed to be year 2000 compatible.
9
<PAGE>
Assuming there is no significant change in the Company's business, management
believes that its current cash and marketable securities 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, it is the Company's intention to continue aggressive new
product introduction throughout 1998 for a variety of markets served by the
Company. Management has also initiated a strategic acquisition program to
further accelerate new product and market penetration efforts. This program
could have an impact on the Company's working capital requirements, liquidity or
capital resources.
Note: WindowsNT is a registered trademark of Microsoft Corporation.
10
<PAGE>
Performance Technologies, Incorporated and Subsidiaries
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
The following table summarizes the proceeds from the sale of securities and use
of proceeds therefrom in connection with the Registrant's Initial Public
Offering on January 24, 1996. Amounts reported represent an estimate of the
amount of these expenditures. <TABLE> <CAPTION>
Proceeds from the sale of securities:
<S> <C>
Gross proceeds $ 12,800,000
Less: Underwriter's commission 896,000
Finder's fees 0
Underwriter's expenses 27,000
Payments to Directors, Officers, General Partners 0
Other 461,000
------------
Net proceeds $ 11,416,000
============
Use of Proceeds:
Construction of facilities $ 0
Purchase of machinery 1,648,000
Purchase of real estate 0
Acquisition of other business(es) 0
Repayment of debt 0
General working capital purposes 0
Temporary investments 1,847,000
Inventory for new products 1,265,000
Software development 1,256,000
Product development 5,400,000
-----------
Total use of proceeds $ 11,416,000
============
</TABLE>
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, 1998.
11
<PAGE>
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 12, 1998 By: s/ Donald L. Turrell
------------------------
Donald L. Turrell
President and
Chief Executive Officer
May 12, 1998 By: s/ Dorrance W. Lamb
-----------------------
Dorrance W. Lamb
Chief Financial Officer and
Vice President, Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE MARCH 31, 1998 FINANCIAL STATEMENTS OF PERFORMANCE
TECHNOLOGIES, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001003950
<NAME> PERFORMANCE TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<EXCHANGE-RATE> 1
<CASH> 13,017
<SECURITIES> 10,006
<RECEIVABLES> 4,523
<ALLOWANCES> 0
<INVENTORY> 3,559
<CURRENT-ASSETS> 31,908
<PP&E> 3,802
<DEPRECIATION> 2,881
<TOTAL-ASSETS> 33,682
<CURRENT-LIABILITIES> 3,982
<BONDS> 15
0
0
<COMMON> 74
<OTHER-SE> 29,391
<TOTAL-LIABILITY-AND-EQUITY> 33,682
<SALES> 7,411
<TOTAL-REVENUES> 7,411
<CGS> 2,863
<TOTAL-COSTS> 2,642
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,217
<INCOME-TAX> 798
<INCOME-CONTINUING> 1,419
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,419
<EPS-PRIMARY> 0.2
<EPS-DILUTED> 0.18
</TABLE>
