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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 September 30, 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
7,265,920 as of October 13, 1998.
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Cover Page of 15 Pages
1
<PAGE>
Performance Technologies, Incorporated and Subsidiaries
Index
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Income For The Three
Months Ended September 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Income For The Nine
Months Ended September 30, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows For The Nine
Months Ended September 30, 1998 and 1997 (unaudited) 6
Notes to Consolidated Financial Statements For The Nine
Months Ended September 30, 1998 (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,108,000 $ 8,833,000
Marketable securities 6,000,000 12,010,000
Accounts receivable, net 4,806,000 4,956,000
Inventories, net - Note C 3,890,000 3,329,000
Prepaid expenses and other 365,000 346,000
Deferred taxes 466,000 466,000
------------ ------------
Total current assets 34,635,000 29,940,000
Equipment and improvements, net 898,000 982,000
Software development, net 902,000 579,000
Other assets 125,000
------------ ------------
Total assets $ 36,435,000 $ 31,626,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 12,000 $ 12,000
Accounts payable 1,672,000 824,000
Income taxes payable 675,000 255,000
Accrued expenses 2,378,000 2,265,000
------------ ------------
Total current liabilities 4,737,000 3,356,000
Long term debt, less current portion 9,000 18,000
Deferred taxes 220,000 220,000
------------ ------------
Total liabilities 4,966,000 3,594,000
------------ ------------
Stockholders' equity
Preferred stock
Common stock - Note B 75,000 74,000
Additional paid-in capital - Note B 13,148,000 13,055,000
Retained earnings 18,871,000 15,061,000
Treasury stock - Note B (625,000) (158,000)
------------ ------------
Total stockholders' equity 31,469,000 28,032,000
------------ ------------
Total liabilities and stockholders' equity $ 36,435,000 $ 31,626,000
============ ============
</TABLE>
3
<PAGE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
Sales $ 7,857,000 $ 7,606,000
Cost of goods sold 2,947,000 3,263,000
----------- -----------
Gross profit 4,910,000 4,343,000
----------- -----------
Operating expenses:
Selling and marketing 1,088,000 1,004,000
Research and development 1,240,000 791,000
General and administrative 565,000 552,000
----------- -----------
Total operating expenses 2,893,000 2,347,000
----------- -----------
Income from operations 2,017,000 1,996,000
Other income, net 337,000 266,000
----------- -----------
Income before income taxes 2,354,000 2,262,000
Provision for income taxes 824,000 860,000
----------- -----------
Net income $ 1,530,000 $ 1,402,000
=========== ===========
Per share of common stock - Note D
Basic earnings per share $ .21 $ .19
=========== ===========
Diluted earnings per share $ .20 $ .18
=========== ===========
</TABLE>
4
<PAGE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
Sales $21,319,000 $22,579,000
Cost of goods sold 8,292,000 9,620,000
----------- -----------
Gross profit 13,027,000 12,959,000
----------- -----------
Operating expenses:
Selling and marketing 3,022,000 3,015,000
Research and development 3,210,000 2,705,000
General and administrative 1,851,000 1,980,000
----------- -----------
Total operating expenses 8,083,000 7,700,000
----------- -----------
Income from operations 4,944,000 5,259,000
Other income, net 951,000 733,000
----------- -----------
Income before income taxes 5,895,000 5,992,000
Provision for income taxes 2,085,000 2,278,000
----------- -----------
Net income $ 3,810,000 $ 3,714,000
=========== ===========
Per share of common stock - Note D
Basic earnings per share $ .52 $ .51
=========== ===========
Diluted earnings per share $ .50 $ .50
=========== ===========
</TABLE>
5
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PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,810,000 $ 3,714,000
Non-cash adjustments:
Depreciation and amortization 646,000 1,119,000
Other 18,000 168,000
Changes in operating assets and liabilities:
Accounts receivable 135,000 (1,628,000)
Inventories (561,000) 409,000
Prepaid expenses and other (17,000) (251,000)
Accounts payable 848,000 220,000
Accrued expenses 113,000 19,000
Income taxes payable 420,000 304,000
------------ ------------
Net cash provided by operating activities 5,412,000 4,074,000
------------ ------------
Cash flows from investing activities
Cash purchases of equipment and improvements, net (274,000) (456,000)
Capitalized software development (491,000) (537,000)
Purchase of marketable securities (6,000,000) (6,512,000)
Maturities of marketable securities 12,010,000
------------ ------------
Net cash provided (used)
by investing activities 5,245,000 (7,505,000)
------------ ------------
Cash flows from financing activities
Repayment of notes payable (9,000) (8,000)
Proceeds from issuance of common stock 71,000 65,000
Purchase of treasury stock (444,000)
Payments on capital lease obligations (15,000)
------------ ------------
Net cash (used) provided
by financing activities (382,000) 42,000
------------ ------------
Net increase (decrease) in
cash and cash equivalents 10,275,000 (3,389,000)
Cash and cash equivalents at beginning of period 8,833,000 10,027,000
------------ ------------
Cash and cash equivalents at end of period $ 19,108,000 $ 6,638,000
============ ============
</TABLE>
6
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Performance Technologies, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
For The Nine Months Ended September 30, 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 7,265,920 and 7,267,450 shares issued and outstanding (net
of treasury shares held) at September 30, 1998 and December 31, 1997,
respectively, of the Company's $.01 par value Common Stock. During the nine
months ended September 30, 1998, 46,350 common shares were issued upon the
exercise of stock options and 47,880 were added to the number of treasury shares
held.
Note - C Inventories consisted of the following at September 30, 1998 and
December 31, 1997:
<TABLE><CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Purchased parts and components $ 1,570,000 $ 954,000
Work in process 2,880,000 2,580,000
Finished goods 173,000 333,000
----------- -----------
4,623,000 3,867,000
Less: reserve for inventory obsolescence (733,000) (538,000)
----------- -----------
Net $ 3,890,000 $ 3,329,000
=========== ===========
</TABLE>
Note - D The following table illustrates the calculation of both basic and
diluted earnings per share for the three months and nine months ending September
30, 1998 and 1997:
<TABLE><CAPTION>
Three Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
Basic earnings per share
Net income available to common stockholders $ 1,530,000 $ 1,402,000
=========== ===========
Weighted average common shares 7,287,000 7,238,000
=========== ===========
Basic earnings per share $ .21 $ .19
=========== ===========
Diluted earnings per share
Net income available to common stockholders $ 1,530,000 $ 1,402,000
=========== ===========
Weighted average common and common
equivalent shares 7,499,000 7,626,000
=========== ===========
Diluted earnings per share $ .20 $ .18
=========== ===========
Nine Months Ended
September 30,
1998 1997
----------- -----------
Basic earnings per share
Net income available to common stockholders $ 3,810,000 $ 3,714,000
=========== ===========
Weighted average common shares 7,285,000 7,221,000
=========== ===========
Basic earnings per share $ .52 $ .51
=========== ===========
Diluted earnings per share
Net income available to common stockholders $ 3,810,000 $ 3,714,000
=========== ===========
Weighted average common and common
equivalent shares 7,589,000 7,468,000
=========== ===========
Diluted earnings per share $ .50 $ .50
=========== ===========
</TABLE>
7
<PAGE>
Performance Technologies, Incorporated and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company produced record quarterly revenue and net income for the third
quarter September 30, 1998. Revenue increased by 30% and net income increased by
78% from the prior quarter. Profitability improved during the third quarter 1998
despite a significant increase in research and development expenses. For the
first nine months of 1998, the Company's net income as a percentage of sales was
18%, increasing from 16% for the comparable 1997 period. For the nine months
ending September 30, 1998, the Company generated cash from operating activities
of $5.4 million, compared to $4.1 million for the same period in 1997. At
September 30, 1998, the Company had approximately $25.1 million in cash, cash
equivalents, and marketable securities and no significant debt.
Late in the third quarter the Company received the order, the delay of which
caused a severe financial impact on the Company's second quarter financial
results. This initial order, amounting to $1.8 million, was received from the
prime contractor on a new seven year contract with the Department of Defense
(DOD). Under this contract, the Company will provide products used in
retrofitting and updating the military's fault-tolerant communications systems.
During the third quarter of 1998, the Company signed an agreement with Compaq
and began shipping T1/E1 WAN communication products for integration into a
variety of embedded applications being supplied to the telecom industry. This
agreement could result in Compaq becoming one of the Company's major customers
in 1998 and beyond.
Management believes that the Company's key areas for growth will be its Data
Communications products for Wide Area Networks and its Network Switching
products for Local Area Networks.
The Company is focusing a substantial amount of resources on the Data
Communications market where computer and telephony technologies are converging
in the advanced intelligent network being built worldwide. Through a combination
of internal development, licensing and strategic partnering, the Company has
created one of the most comprehensive groups of Data Communications products for
Wide Area Networks (WAN) in its market segment. These products encompass a
comprehensive family of communications software protocols and WAN hardware
products for PCI and CompactPCI platforms. The communication protocols include:
Frame Relay, Signaling System #7 (SS7), X.25, High-Level Data Link Control
(HDLC) and a variety of protocols to facilitate high and low speed
communications. The Company's "add-in" hardware products function on all
standard PCI and CompactPCI platforms. In this arena, the Company has
established strategic partnering relationships with a number of major server,
workstation and telecommunications equipment suppliers including Sun
Microsystems, Compaq/Digital Equipment and NewNet/ADC, as well as several of the
leading CompactPCI platform manufacturers. In addition, the Company has a line
of specialized stand-alone communication server platforms for this market.
For the past twenty-one months, the Company has been developing its second
generation family of high performance 100Mbit/Gigabit Network Switch products
for the Local Area Network market. At the end of June, the Company completed
production releases of its new Nebula(TM) 4000 Workgroup Switch and its new
Nebula 6000 High Density switch. The Nebula 4000 is ideal for demanding
workgroup applications such as imaging, CAD/CAM and multimedia development. The
Nebula 6000 is the highest port density department switch on the market and has
been specifically designed for Internet/Intranet applications where installation
space is a premium and overall cost is a critical component in the buying
decision. The Company's new Fault Tolerant Switch, Nebula 8000, is the first
100/1000 Ethernet switch to offer true fault tolerance at an affordable price.
The Nebula 8000 has been engineered for maximum availability and is targeted
toward 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. The Nebula 8000 model is the centerpiece of the Company's
network switch strategy. Its release has been delayed until January 1999 in
order to strengthen and solidify a number of the fault tolerant features
stressed at certain Beta sites. This new Nebula Family of network switches
features Pulsar(TM), PTI's innovative new ASIC technology as well as
8
<PAGE>
StarGazerII(TM), PTI's platform independent Web-based network management system.
The Company has filed for a patent on certain aspects of the Nebula 8000
fault-tolerant design.
Quarter and Nine Months Ended September 30, 1998, compared with
the Quarter and Nine Months Ended September 30, 1997
Sales. Sales for the third quarter of 1998 increased to $7,857,000, (3.3%), from
$7,606,000 for the third quarter of 1997. Sales for the nine months ended
September 30, 1998 were $21,319,000, compared to $22,579,000 for the comparable
1997 period. 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.
Shipments of WAN Adapter products were 53% of sales during the third quarter of
1998, compared to 47% for the same quarter in 1997. Shipments were 58% of sales
for the first nine months of 1998, compared to 47% of sales for the same period
in 1997. Sales of WAN products increased by 11% in the third quarter, over the
previous 1998 quarter. Shipments of PCI Wan adapter products are accelerating.
Shipments of LAN Adapter products for the third quarter of 1998 amounted to 32%
of sales, compared to 15% of sales for the third quarter of 1997. Shipments were
19% of sales for the first nine months of 1998, compared to 17% for the same
period in 1997. The largest share of the Company's LAN business has historically
been generated from Commercial Off-the-Shelf (COTS) Defense applications. As
indicated herein, the Company received the initial order for a follow-on DOD
contract in September. Approximately $800,000 of communication products were
shipped on this contract in the third quarter with the remainder scheduled for
shipment in the fourth quarter.
Shipments of Network Systems products represented 3% of total sales in the third
quarter of 1998 and 11% for the same quarter in 1997. Network Systems shipments
were 5% of sales for the nine months ended September 30, 1998, compared to 11%
for the same 1997 period. Network Systems are primarily comprised of shipments
of I/O subsystems to an OEM customer and sales of specialized communication
server hardware and protocol software for specialty WAN applications. The
decrease in quarterly revenue in this product group from the previous year, is
primarily attributable to significantly lower shipments to the OEM customer.
Shipments to this customer amounted to approximately $100,000 during the first
nine months of 1998, compared to $1.6 million during the first nine months of
1997. This customer has placed an order for shipment in the fourth quarter of
approximately $500,000 and no other significant shipments are currently
scheduled. Revenue from the sales of specialized communication servers and
associated protocol software is project oriented and has declined this year as
the engineering staff for these products has been reassigned to develop software
protocols for Data Communications solutions and products within the WAN product
group.
Shipments of Mass Storage Interface products for the third quarter of 1998
amounted to 7% of sales, compared to 14% in the third quarter of 1997. For the
nine months ended September 30, 1998, Mass Storage products were 10% of total
sales compared to 16% for the same 1997 period. The decrease in sales volume
from 1997 is primarily attributable to technology changes occurring in this
market and sales of these products are forecasted to decline in 1999. The first
component of this revenue group is SCSI adapters. The decline in this revenue is
due to customers transitioning from SBus to PCIbus based computer platforms. The
PCI market has become a commodity market with greater competition and lower
pricing. The Company is experiencing difficulty in achieving value-added margins
in the PCI market. The second component of this revenue group is Fibre Channel
adapters. This has become very competitive and the standards for the fundamental
Fibre Channel technology are still being developed for wide spread
implementation.
Shipments of Inter-system Connectivity products represented 5% of sales for the
third quarter of 1998 and 8% of total sales for the nine months ended September
30, 1998, compared to 13% and 9%, respectively for the 1997 periods. The Company
is not investing in this group of products and a decline in these revenues is
expected from last year's levels.
9
<PAGE>
International sales amounted to 21% of total sales for the first nine months of
1998, compared to 10% of sales for the same period in 1997. This increase is
primarily attributable to the Company's new relationship with an offshore
operating unit of Compaq, along with a number of new European customers.
Gross Profit. Gross profit consists of sales, less cost of goods sold including
materials costs, manufacturing expenses and amortization of software development
costs. Gross margin improved to 62.5% of sales for the third quarter, from 57.1%
in the third quarter of 1997. For the first nine months of 1998, gross margin
improved to 61.1% of sales as compared to 57.4% for the same period in 1997. The
improvement in gross margin is primarily attributable to the mix of product
shipments, and achieving manufacturing and purchasing efficiencies during the
past twelve months.
Operating Expenses. Total operating expenses increased to $2,893,000, or 36.8%
of sales for the third quarter 1998, from $2,347,000, or 30.9% of sales for the
comparable 1997 quarter. Total operating expenses increased to $8,083,000, or
37.9% of sales for the first nine months of 1998, from $7,700,000, or 34.1% of
sales for the nine months ended September 30, 1997.
Selling and marketing expenses increased to $1,088,000, or 13.8% of sales for
the third quarter 1998, from $1,004,000, or 13.2% of sales for the same quarter
in 1997. Selling and marketing expenses for the nine months ended September 30,
1998 were $3,022,000, or 14.2% of sales, compared to $3,015,000, or 13.4% of
sales, for the same period in 1997. The acceleration in selling and marketing
expense expected during the third quarter of 1998 was delayed for approximately
ninety days in order to be coordinated with the availability of the new Nebula
8000 fault-tolerant switch. During the third quarter, the Company demonstrated
its Nebula Family of network switch products at VarVision which was attended by
over 200 Value Added Resellers (VARs) and numerous network vendors. VarVision is
a highly focused program primarily designed to bring together VARs and network
vendors. Unlike an industry trade show, which is predominately for vendors and
end-users, VarVision is exclusively designed for establishing sales channel
relationships. This was the first time the Company participated in this program
and it was uniquely more effective for presenting the Nebula Switch Family to
pre-qualified VARs. In addition, our Nebula 8000 fault-tolerant switch was
recognized as one of the top five new products at this prestigious event.
Research and development expenses were $1,240,000, or 15.8% of sales for the
third quarter of 1998, compared to $791,000, or 10.4% of sales for the
comparable 1997 quarter. Research and development expenses were $3,210,000, or
15.1% of sales for the nine months ended September 30, 1998, compared to
$2,705,000, or 12.0% of sales for the same period in 1997. Recruiting and hiring
engineers is one of the Company's greatest challenges. While a number of
engineers have been hired during the past year, the Company is actively
recruiting to fill several open positions and has engaged outside engineering
consultants to assist in meeting certain project deadlines. The increase of
research and development expenses for the third quarter and for the nine months
ending September 30, 1998 is attributable to the additional number of
engineering positions added and the use of outside engineering consultants.
General and administrative expenses were $565,000, or 7.2% of sales for the
third quarter 1998, compared to $552,000, or 7.3% of sales for the third quarter
1997. General and administrative expenses were $1,851,000, or 8.7% of sales for
the nine months ended September 30, 1998, compared to $1,980,000, or 8.8% of
sales for the first nine months of 1997. The Company continues to maintain tight
control over its general and administrative expenses.
Income taxes. The provision for income taxes was $824,000 in the third quarter
of 1998, compared to $860,000 for the same quarter in 1997. The effective
corporate income tax rate for the third quarter of 1998 was 35.0%, compared to
38.0% for the third quarter of 1997. For the nine months ended September 30,
1998, the provision for income taxes amounted to $2,085,000, compared to
$2,278,000 for the first nine months of 1998. The effective corporate income tax
rate during 1998 has been 35.4%, compared to 38.0% for the first nine months of
1997.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's primary source of liquidity included cash
and cash equivalents of $19,108,000, marketable securities with a maturity of
less than one year of $6,000,000 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 September 30, 1998. The Company had working capital of
$29,898,000 at September 30, 1998, compared to $26,584,000 at December 31, 1997.
Cash provided by operating activities for the nine months ended September 30,
1998 was $5,412,000, compared to $4,074,000 for the same period in 1997. The
increase in cash provided by operating activities for the nine months ended
September 30, 1998 is primarily attributable to changes in the components of
working capital.
Capitalization of certain software development costs amounted to $491,000 for
the nine months ended September 30, 1998, compared to $537,000 for the same
period in 1997.
In March 1998, the Board of Directors authorized the repurchase of up to $5.0
million of the Company's Common Stock. As of September 30, 1998, the Company has
repurchased a total of 46,680 shares at a total cost of $444,000 since the
program began.
Assuming there is no significant change in the Company's business, management
believes that its current cash, cash equivalents, 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 introductions throughout 1998 and beyond 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.
Impact of the Year 2000 Issue
Many companies are facing a potential issue regarding the ability of information
systems to accommodate the coming year 2000. The Year 2000 issue is the result
of computer programs using only the last two digits to indicate the year. If
uncorrected, such computer programs will be unable to interpret dates beyond the
year 1999, which could cause computer system failure or other computer errors
disrupting operations. The Company recognizes the importance of the Year 2000
issue and has been giving it high priority. The Company created a corporate-wide
Year 2000 project team and the team's objective is to ensure an uninterrupted
transition into the Year 2000. The scope of the Year 2000 readiness effort
includes (i) information technology ("IT") such as software and hardware; (ii)
non-IT systems or embedded technology; and (iii) readiness of key third parties,
including suppliers and customers, and the electronic data interchange (EDI)
with those key third parties. If needed modifications and conversions are not
made on a timely basis, the Year 2000 issue could have a material adverse effect
on the Company operations.
The Company is in the process of completing phase 1 of its readiness plan for
its IT systems and non-IT systems. This phase consists of evaluating its systems
and equipment based on the current status and normal scheduled upgrade and
replacement of such system components. Phase II, planned during fourth quarter
1998 and the first half of 1999, will consist of testing IT system and non-IT
system components whose Year 2000 status cannot be determined by research. Phase
III, planned during the third quarter 1999, will consist of upgrade and/or
replacement of IT system and non-IT system components specifically required for
Year 2000 readiness. Phase IV, planned during the fourth quarter of 1999, will
consist of developing contingency plans for temporary operation should
unexpected difficulties with IT systems and non-IT system occur.
In addition to internal Year 2000 IT and non-IT remediation activities, the
Company is in the process of contacting key suppliers and electronic commerce
customers to assure no interruption in the relationship between the Company and
these important third parties from the year 2000 issue. If third parties do not
convert their systems in a timely manner and in a way that is compatible with
11
<PAGE>
the Company's systems, the Year 2000 issue could have a material adverse effect
on Company operations. The Company believes that its diligent actions with key
suppliers and customers will minimize these risks.
The vast majority of the Company's products are not date-sensitive. The Company
is in the process of summarizing information on its products and this
information will be available to customers by the end of November 1998.
While the Company expects its internal IT and non-IT systems to be Year 2000
compliant by the dates specified within its internal plan, the Company is
working on a contingency plan specifying what the Company will do if it or
important third parties are not Year 2000 compliant by the required dates. The
Company expects to have such a contingency plan finalized by second half of
1999.
Through September 1998, the Company has not incurred significant incremental
costs related to the Year 2000 issue. The total projected incremental cost is
estimated to be $150,000. The Company is expensing as incurred all costs related
to the assessment and remediation of the Year 2000 issue unless the nature of
the item is an upgrade or replacement of a system with a useful life that meets
the capitalization policy of the Company. These costs are being funded through
operating cash flows. The Company's total cost for the Year 2000 issue includes
estimated costs and time associated with interfacing with third parties' Year
2000 issues. These estimates are based on currently available information.
The Company's current estimates of the amount of time and costs necessary to
remediate and test its computer systems are based on the facts and circumstances
existing at this time. The estimates were made using assumptions of future
events including the continued availability of certain resources, Year 2000
modification plans, implementation success by key third-parties, and other
factors. New developments may occur that could affect the Company's estimates of
the amount of time and costs necessary to modify and test its IT and non-IT
systems for Year 2000 compliance. These developments include, but are not
limited to: (i) the availability and cost of personnel trained in this area;
(ii) the ability to locate and correct all relevant computer codes and
equipment, and (iii) the planning and Year 2000 compliance success that key
customers and suppliers attain.
Year 2000 compliance is an issue for virtually all businesses, whose computer
systems and applications may require significant hardware and software upgrades
or modifications. Companies owning and operating such systems may plan to devote
a substantial portion of their information systems' spending to fund such
upgrades and modifications. It is the Company's intention to fulfill its plan
and become Year 2000 compliant; however, uncertainties exist about the
thoroughness of how other companies, vendors, customers and other service
providers, that the Company does business with will be successful at also
becoming Year 2000 compliant. These other companies, regardless of the dollar
volume transacted with the Company, may significantly affect either directly or
indirectly the operations of the Company. Where practicable, the Company will
attempt to mitigate its risks with respect to the failure of suppliers to be
Year 2000 compliant. In the event that suppliers are not Year 2000 compliant,
the Company will seek alternative sources of supplies. However, such failures
remain a possibility and could have an adverse impact on the Company's results
of operations or financial condition.
12
<PAGE>
Forward-Looking Statements AND RISK FACTORS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. 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, as amended, and Section 21E of the
Securities Act of 1934, as amended, and is subject to the safe harbor provisions
of those Sections.
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,"
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, 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. 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, and as of March 31 and June 30, 1998
as reported in its Form 10-Q, as filed with the Securities and Exchange
Commission.
13
<PAGE>
Performance Technologies, Incorporated and Subsidiaries
Part II. Other Information
<TABLE><CAPTION>
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.
<S> <C>
Proceeds from the sale of securities:
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 1,862,000
Purchase of real estate 0
Acquisition of other business(es) 0
Repayment of debt 0
General working capital purposes 0
Temporary investments 114,000
Inventory for new products 1,265,000
Software development 1,575,000
Product development 6,600,000
------------
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 on Form 8-K filed during the
three month period ended September 30, 1998.
14
<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
November 2, 1998 By: s/ Donald L. Turrell
-------------------------
Donald L. Turrell
President and
Chief Executive Officer
November 2, 1998 By: s/ Dorrance W. Lamb
-------------------------
Dorrance W. Lamb
Chief Financial Officer and
Vice President, Finance
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 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> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 19108
<SECURITIES> 6000
<RECEIVABLES> 4806
<ALLOWANCES> 0
<INVENTORY> 3890
<CURRENT-ASSETS> 34635
<PP&E> 3971
<DEPRECIATION> 3073
<TOTAL-ASSETS> 36435
<CURRENT-LIABILITIES> 4737
<BONDS> 9
0
0
<COMMON> 75
<OTHER-SE> 31394
<TOTAL-LIABILITY-AND-EQUITY> 36435
<SALES> 21319
<TOTAL-REVENUES> 21319
<CGS> 8292
<TOTAL-COSTS> 8083
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5895
<INCOME-TAX> 2085
<INCOME-CONTINUING> 3810
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3810
<EPS-PRIMARY> .52
<EPS-DILUTED> .50
</TABLE>
