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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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-27460
PERFORMANCE TECHNOLOGIES, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 16-1158413
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
205 Indigo Creek Drive, Rochester, New York 14626
(Address of principal executive offices) (Zip Code)
-----------------
Registrant's telephone number, including area code: (585) 256-0200
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock was
12,934,727 as of October 31, 2005.
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PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2005
and December 31, 2004 (unaudited) 3
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 2005 and 2004
(unaudited) 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2005 and 2004 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 6. Exhibits 24
Signatures 24
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
September 30, December 31,
2005 2004
---------------- ----------------
Current assets:
Cash and cash equivalents $10,599,000 $10,361,000
Investments 19,325,000 15,250,000
Accounts receivable, net 9,833,000 10,185,000
Inventories, net 6,753,000 6,573,000
Prepaid income taxes 260,000 771,000
Prepaid expenses and other assets 248,000 801,000
Deferred taxes 3,105,000 3,088,000
---------------- ----------------
Total current assets 50,123,000 47,029,000
Property, equipment and improvements, net 2,014,000 2,186,000
Software development costs, net 4,430,000 3,653,000
Investment in unconsolidated company 248,000
Goodwill 4,143,000 4,143,000
---------------- ----------------
Total assets $60,958,000 $57,011,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,949,000 $ 1,476,000
Accrued expenses 4,283,000 3,916,000
---------------- ----------------
Total current liabilities 6,232,000 5,392,000
Deferred taxes 1,582,000 1,198,000
---------------- ----------------
Total liabilities 7,814,000 6,590,000
---------------- ----------------
Stockholders' equity:
Preferred stock - $.01 par value;
1,000,000 shares authorized; none issued
Common stock - $.01 par value; 50,000,000
shares authorized; 13,260,038 shares
issued 133,000 133,000
Additional paid-in capital 13,636,000 13,476,000
Retained earnings 43,212,000 41,978,000
Treasury stock - at cost; 385,332 and
482,681 shares held at September 30,
2005 and December 31, 2004, respectively (3,837,000) (5,188,000)
Accumulated other comprehensive income 22,000
---------------- ----------------
Total stockholders' equity 53,144,000 50,421,000
---------------- ----------------
Total liabilities and stockholders'
equity $60,958,000 $57,011,000
================ ================
The accompanying notes are an integral part of these consolidated
financial statements.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Sales $12,343,000 $11,560,000 $36,302,000 $40,400,000
Cost of goods sold 6,153,000 6,608,000 18,531,000 20,849,000
----------- ----------- ----------- -----------
Gross profit 6,190,000 4,952,000 17,771,000 19,551,000
----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing 1,342,000 1,568,000 4,187,000 4,769,000
Research and development 2,677,000 2,398,000 7,550,000 7,610,000
General and administrative 1,131,000 993,000 3,658,000 3,535,000
Restructuring charges 53,000 12,000 249,000 12,000
In-process research and
development 218,000
----------- ----------- ----------- -----------
Total operating expenses 5,203,000 4,971,000 15,644,000 16,144,000
----------- ----------- ----------- -----------
Income(loss) from operations 987,000 (19,000) 2,127,000 3,407,000
Other income, net 333,000 182,000 958,000 471,000
----------- ----------- ----------- -----------
Income before income taxes,
equity in income of
unconsolidated company and
gain on sale of investment 1,320,000 163,000 3,085,000 3,878,000
Income tax provision 383,000 51,000 895,000 1,270,000
----------- ----------- ----------- -----------
Income before equity in income
of unconsolidated company
and gain on sale of
investment 937,000 112,000 2,190,000 2,608,000
Equity in income of
unconsolidated company 90,000 182,000
Gain on sale of investment in
unconsolidated company,
net of tax 1,169,000 1,169,000
----------- ----------- ----------- -----------
Net income $ 937,000 $ 1,371,000 $ 2,190,000 $ 3,959,000
=========== =========== =========== ===========
Basic earnings per share $ .07 $ .11 $ .17 $ .31
=========== =========== =========== ===========
Diluted earnings per share $ .07 $ .11 $ .17 $ .30
=========== =========== =========== ===========
Weighted average number of
common shares used in basic
earnings per share 12,872,126 12,758,106 12,848,264 12,701,980
Potential common shares 207,314 289,213 276,238 666,761
Weighted average number of
common shares used in ----------- ----------- ----------- -----------
diluted earnings per share 13,079,440 13,047,319 13,124,502 13,368,741
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
2005 2004
------------- -------------
Cash flows from operating activities:
Net income $ 2,190,000 $ 3,959,000
Non-cash adjustments:
Depreciation and amortization 1,838,000 1,962,000
Reserve for inventory obsolescence 1,254,000 561,000
Tax benefit from stock option exercises 143,000
Deferred taxes 367,000 108,000
In-process research and development 218,000
Equity in income of unconsolidated company (182,000)
Gain on sale of investment in unconsolidated
company (1,169,000)
Other 56,000 66,000
Changes in operating assets and liabilities, net
of effects of acquisition:
Accounts receivable 316,000 (812,000)
Inventories (1,434,000) (1,502,000)
Prepaid expenses and other assets 305,000 97,000
Accounts payable and accrued expenses 840,000 (1,366,000)
Income taxes payable and prepaid income taxes 511,000 (1,617,000)
------------- -------------
Net cash provided by operating activities 6,386,000 323,000
------------- -------------
Cash flows from investing activities:
Purchases of property, equipment and improvements (480,000) (363,000)
Capitalized software development costs (1,987,000) (1,722,000)
Purchases of investments (57,325,000) (31,650,000)
Proceeds from sales of investments 53,250,000 33,500,000
Loan to unconsolidated company (2,300,000)
Business acquisition (7,044,000)
------------- -------------
Net cash used by investing activities (6,542,000) (9,579,000)
------------- -------------
Cash flows from financing activities:
Proceeds from exercises of stock options 394,000 2,956,000
------------- -------------
Net cash provided by financing activities 394,000 2,956,000
------------- -------------
Net increase (decrease) in cash and cash
equivalents 238,000 (6,300,000)
Cash and cash equivalents at beginning of period 10,361,000 12,639,000
------------- -------------
Cash and cash equivalents at end of period $10,599,000 $ 6,339,000
============= =============
Noncash investing activity - On September 30, 2004, the Company sold its
investment in Momentum Computers, Inc. Total cash proceeds received in the
fourth quarter 2004 amounted to $3.1 million and included the collection of a
$1.0 million note receivable. At September 30, 2004, the Company included the
amount to be received from this transaction in prepaid expenses and other assets
in the accompanying Consolidated Balance Sheet.
During the third quarter 2005, the Company received preferred stock of InSciTek
Microsystems, Inc., in satisfaction of an interest payment of $248,000 due to
the Company from InSciTek Microsystems, Inc.
The accompanying notes are an integral part of these consolidated
financial statements.
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note A - Basis of Presentation
---------------------
The unaudited Consolidated Financial Statements of Performance Technologies,
Incorporated and Subsidiaries (the "Company") have been prepared in accordance
with generally accepted accounting principles in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, the Consolidated Financial Statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair statement have been included. The results for
the interim periods are not necessarily indicative of the results to be expected
for the year. The accompanying Consolidated Financial Statements should be read
in conjunction with the audited Consolidated Financial Statements of the Company
as of December 31, 2004, as reported in its Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
Note B - Stock-Based Compensation and Earnings Per Share
-----------------------------------------------
At September 30, 2005, the Company had stock options outstanding under three
stock option plans. The Company accounts for the stock option plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no stock-based compensation cost has been recognized in net income
for the stock option plans. On March 25, 2005, the Company accelerated the
vesting of 408,285 stock options whose exercise prices were greater than $15.11
to be fully vested on that date. As a result of the acceleration, the Company
expects to reduce its exposure to the effects of Statement of Financial
Accounting Standards (SFAS) No. 123 (Revised), "Share-Based Payment." Had
compensation cost for the stock option awards under the plans been determined
based on the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income (loss) and earnings (loss)
per share would have been as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income, as reported $ 937,000 $1,371,000 $2,190,000 $3,959,000
Add: Restricted stock
compensation expense, net of
tax 4,000 6,000 11,000 26,000
Deduct: Total stock-based
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (150,000) (760,000) (2,440,000) (1,982,000)
---------- ---------- ---------- ----------
Pro forma net income (loss) $ 791,000 $ 617,000 $ (239,000) $2,003,000
========== ========== ========== ==========
Earnings (loss) per share:
Basic - as reported $ .07 $ .11 $ .17 $ .31
========== ========== ========== ==========
Basic - pro forma $ .06 $ .05 $ (.02) $ .16
========== ========== ========== ==========
Diluted - as reported $ .07 $ .11 $ .17 $ .30
========== ========== ========== ==========
Diluted - pro forma $ .06 $ .05 $ (.02) $ .15
========== ========== ========== ==========
During the nine months ended September 30, 2005, the Company granted 204,000
stock options. The assumption for vesting of stock options granted in 2005 and
2004 was generally 33% per year. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 2005 and 2004:
Dividend yields of 0% for both years; expected volatility ranges of 65% to 70%
in 2005 and 68% to 69% in 2004, risk-free interest rate ranges of 3.3% to 3.7%
in 2005 and 2.1% to 3.5% in 2004, and expected life ranges of one to three years
for both years.
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share calculations reflect the assumed exercise of dilutive stock options and
the vesting of unvested restricted stock, applying the treasury stock method.
Diluted earnings per share calculations exclude the effect of approximately
1,263,000 and 1,575,000 options for the three months ended September 30, 2005
and 2004, respectively, and 1,184,000 and 939,000, for the nine months ended
September 30, 2005 and 2004, respectively, since such options have an exercise
price in excess of the average market price of the Company's common stock for
the respective periods.
During the nine months ended September 30, 2005, 97,349 common shares were
issued upon exercise of stock options.
Note C - Acquisition
-----------
On January 23, 2004, the Company acquired substantially all of the assets and
assumed certain liabilities of Mapletree Networks, Inc., a company that provided
voice, data and fax processing technology to original equipment manufacturers.
The products acquired in this acquisition broaden the Company's product offering
to its customers. In accordance with the purchase agreement, the Company paid
$6,625,000 at closing and incurred $418,000 of other acquisition related costs.
The Company accounted for the acquisition under the provisions of SFAS No. 141,
"Business Combinations." Acquired in-process research and development (IPR&D),
which was related to certain voice processing products, amounted to $218,000 and
was charged to operations during the first quarter 2004. As a component of the
acquisition, the Company acquired certain software development costs which
amounted to $577,000 at the date of acquisition. The Company also acquired
certain net assets which amounted to $574,000 and were comprised principally of
accounts receivable, inventory, accounts payable and accrued expenses. During
the fourth quarter 2004, the Company resolved certain matters related to the
acquisition resulting in a payment to the Company of $1,749,000, which
represented a partial return of purchase price and was recorded as a reduction
of goodwill. The excess of purchase price over the fair value of the net assets
acquired totaled $4,143,000 and is included in goodwill on the accompanying
Consolidated Balance Sheets. Operating results of the acquired group have been
included in the Consolidated Statements of Income from the date of acquisition.
Note D - Inventories, net
----------------
Inventories consisted of the following:
September 30, December 31,
2005 2004
--------------- ---------------
Purchased parts and components $ 3,987,000 $ 3,638,000
Work in process 4,065,000 3,947,000
Finished goods 2,425,000 2,487,000
--------------- ---------------
10,477,000 10,072,000
Less: reserve for inventory obsolescence (3,724,000) (3,499,000)
--------------- ---------------
Net $ 6,753,000 $ 6,573,000
=============== ===============
Note E - Investments
-----------
In connection with the preparation of the Company's Annual Report on Form 10-K
for 2004, the Company concluded that it was appropriate to classify auction rate
municipal securities as investments. Previously, such investments were
classified as cash equivalents. Accordingly, the Company revised the
classification to report these securities as investments on the Consolidated
Balance Sheets as of December 31, 2004. The Company recorded corresponding
reclassifications in the accompanying Consolidated Statement of Cash Flows for
the nine months ended September 30, 2004, to reflect the gross purchases and
sales of these securities as investing activities. This change in classification
did not affect previously reported cash flows from operations or from financing
activities or previously reported net income for any period. For the nine months
ended September 30, 2004, net cash provided by investing activities related to
these investments totaled $1,850,000, which was previously included in cash and
cash equivalents in the Company's Consolidated Statements of Cash Flows.
At September 30, 2005, investments consisted of high grade, auction rate
municipal securities which the Company has classified as available-for-sale. The
contractual maturities of the available-for-sale securities at September 30,
2005 all exceeded five years.
These investments are recorded at cost, which approximates fair market value due
to their variable interest rates. These investments typically reset on
approximately a monthly basis, and, despite the long-term nature of their stated
contractual maturities, the Company has historically had the ability to quickly
liquidate these securities. All income generated from these investments was
recorded as interest income.
Note F - Warranty Obligations
--------------------
The Company has warranty obligations in connection with the sale of certain of
its products. The warranty period for its products is generally one year. The
costs incurred to provide for these warranty obligations are estimated and
recorded as an accrued liability at the time of sale. The Company estimates its
future warranty costs based on product-based historical performance rates and
related costs to repair. The changes in the Company's accrued warranty
obligations for the nine months ended September 30, 2005 and 2004 were as
follows:
2005 2004
--------------- ---------------
Accrued warranty obligations, January 1, $288,000 $233,000
Actual warranty experience (95,000) (290,000)
Warranty provisions 117,000 311,000
--------------- ---------------
Accrued warranty obligations, September 30, $310,000 $254,000
=============== ===============
Note G - Investment in Unconsolidated Company
------------------------------------
On February 18, 2004, the Company entered into an agreement to invest up to
$3,000,000 in InSciTek Microsystems, Inc. (InSciTek), an unrelated company, in
the form of an interest bearing convertible note. During 2004, the Company
invested $3,000,000 in conjunction with this agreement. As of December 31, 2004,
InSciTek had not raised sufficient outside capital to assure its future as a
going concern. Therefore, during the fourth quarter 2004, the Company recorded a
valuation charge related to this note receivable in the amount of $3,000,000 as
collection of this note was doubtful. Under the original terms of the note, the
Company had the option to acquire ownership of InSciTek during a future
specified period. The note bore interest at 10% annually and was convertible
into shares of common stock of InSciTek. All unpaid accrued interest and all
outstanding principal on the note was payable in full to the Company on December
31, 2008.
During the third quarter 2005, InSciTek received an investment from an outside
party through the sale of series A preferred stock. In connection with that
investment, the Company and InSciTek renegotiated the terms of the note. Under
the amended terms, the Company forfeited the option to acquire ownership of
InSciTek during a future specified period. In addition, all unpaid interest due
to the Company at the date of closing, amounting to $248,000, was paid in the
form of series A preferred stock of InSciTek. The note is now convertible into
series 2 preferred stock of InSciTek. The Company may call the note in the
future upon the occurrence of certain events.
Note H - Stock Repurchase Program
------------------------
On July 11, 2005, the Company announced that its Board of Directors authorized
the Company to repurchase shares of its common stock for an aggregate amount not
to exceed $10,000,000. Under this program, shares of the Company's common stock
may be repurchased through open market or private transactions, including block
purchases, over the next twelve months. Repurchased shares will be used for the
Company's stock option plan, potential acquisition initiatives and general
corporate purposes. To date, there have been no repurchases of shares under this
program.
Note I - Credit Facility
---------------
On November 8, 2005, the Company executed a non-binding commitment letter with a
bank which would provide the Company with a $5 million senior revolving credit
facility. The facility would be used to finance working capital needs of the
Company. Under the terms detailed in the commitment letter, the credit facility
will allow for borrowings by the Company on a revolving basis with interest on
borrowings at the bank's published prime rate. The facility will also include
certain operating and financial covenants. It is expected that the Company will
enter into the credit facility agreement during the fourth quarter 2005.
Note J - Recently Issued Accounting Pronouncements
-----------------------------------------
In December 2004, SFAS No. 123 "Accounting for Stock-Based Compensation (Revised
2004)" was issued. This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This statement requires an entity to measure the cost of employee
services received in exchange for an award of equity instruments, based on the
fair value of the award at the grant date. That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award. The effective date of this statement was extended by the Securities
and Exchange Commission and will be effective for the Company beginning January
1, 2006. As of the required effective date, all entities that used the
fair-value-based method for either recognition or disclosure under SFAS No. 123
may apply this statement using a modified version of prospective application. An
alternative method of application is available under SFAS No. 123R. Under the
modified version of prospective application, compensation cost is recognized for
the portion of outstanding stock-based awards for which the requisite service
has not yet been rendered. The Company is currently assessing the impact this
statement will have on its financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4." SFAS No. 151 states that abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) should
be recognized as current-period charges. Additionally, SFAS No. 151 requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The Company is
required to adopt SFAS No. 151 effective January 1, 2006. The Company does not
expect the adoption of SFAS No. 151 will have a material impact on its
consolidated results of operations and financial condition.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions."
SFAS No. 153 is based on the principle that nonmonetary asset exchanges should
be recorded and measured at the fair value of the assets exchanged, with certain
exceptions. This standard requires exchanges of productive assets to be
accounted for at fair value, rather than at carryover basis, unless (1) neither
the asset received nor the asset surrendered has a fair value that is
determinable within reasonable limits or (2) the transactions lack commercial
substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The Company adopted SFAS No. 153
effective for the third quarter 2005. The adoption of SFAS No. 153 did not have
a material impact on the Company's consolidated results of operations and
financial condition.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", which replaces APB Opinion No. 20, "Accounting Changes," and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS No.
154 changes the requirements for the accounting for and reporting of a change in
accounting principle. Upon the adoption of SFAS No. 154 beginning January 1,
2006, the Company will apply the standard's guidance to changes in accounting
methods as required. At this time, the Company does not expect the adoption of
SFAS No. 154 will have a material impact on its consolidated results of
operations and financial condition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Matters discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this Form 10-Q include
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results could
differ materially from those discussed in the forward-looking statements.
Critical Accounting Estimates and Assumptions
In preparing the financial statements in accordance with GAAP, management is
required to make estimates and assumptions that have an impact on the assets,
liabilities, revenue and expense amounts reported. These estimates can also
affect supplemental information disclosures by the Company, including
information about contingencies, risk and financial condition. The Company
generally cannot make estimates until preliminary results for a financial
quarter are known and analyzed. The Company believes, given current facts and
circumstances, that its estimates and assumptions are reasonable, adhere to
GAAP, and are consistently applied. Inherent in the nature of an estimate or
assumption is the fact that actual results may differ from estimates and
estimates may vary as new facts and circumstances arise. The critical accounting
policies, judgments and estimates that management believes have the most
significant effect on the financial statements are set forth below:
o Revenue Recognition
o Software Development Costs
o Valuation of Inventories
o Income Taxes
o Product Warranty
o Carrying Value of Goodwill
Revenue Recognition: The Company recognizes revenue from product sales in
accordance with the SEC Staff Accounting Bulletin (SAB) No. 104, "Revenue
Recognition." Product sales represent the majority of the Company's revenue and
include hardware products and hardware products with embedded software. The
Company recognizes revenue from these product sales when persuasive evidence of
an arrangement exists, delivery has occurred or services have been provided, the
sale price is fixed or determinable, and collectability is reasonably assured.
Additionally, the Company sells its products on terms which transfer title and
risk of loss at a specified location, typically shipping point. Accordingly,
revenue recognition from product sales occurs when all factors are met,
including transfer of title and risk of loss, which typically occurs upon
shipment by the Company. If these conditions are not met, the Company will defer
revenue recognition until such time these conditions have been satisfied.
Revenue earned from arrangements for software is accounted for under the
provisions of Statement of Position 97-2, "Software Revenue Recognition" and
EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables". Revenue
from software requiring significant production, modification, or customization
is recognized using the percentage of completion method of accounting. Any
anticipated losses on contracts are charged to operations as soon as such losses
are determined. If all conditions of revenue recognition are not met, the
Company defers revenue recognition and will recognize revenue when the Company
has fulfilled its obligations under the arrangement. Revenue from software
maintenance contracts is recognized ratably over the contractual period.
Revenue from consulting and other services is recognized at the time the
services are rendered. The Company also sells certain products through
distributors who are granted limited rights of return. Potential returns are
accounted for at the time of sale.
The Company believes that the accounting estimate related to revenue recognition
is a "critical accounting estimate" because the Company's terms of sale can
vary, and management exercises judgment in determining whether to defer revenue
recognition. Such judgments may materially affect net sales for any period.
Management exercises judgment within the parameters of GAAP in determining when
contractual obligations are met, title and risk of loss are transferred, sales
price is fixed or determinable and collectability is reasonably assured.
Software Development Costs: All software development costs incurred in
establishing the technological feasibility of computer software products to be
sold are research and development costs. Software development costs incurred
subsequent to the establishment of technological feasibility of a computer
software product to be sold and prior to general release of that product are
capitalized. Amounts capitalized are amortized commencing after general release
of that product over the estimated remaining economic life of that product,
generally three years, or using the ratio of current revenues to current and
anticipated revenues from such product, whichever provides greater amortization.
If in the judgment of management, technological feasibility for a particular
project has not been met or recoverability of amounts capitalized is in doubt,
project costs are expensed as research and development or charged to costs of
goods sold, as applicable. The Company believes that the accounting estimate
related to software development costs is a "critical accounting estimate"
because the Company's management exercises judgment in determining whether
project costs are expensed as research and development or capitalized as an
asset. Such judgments may materially affect expense amounts for any period.
Management exercises judgment within the parameters of GAAP in determining when
technological feasibility has been met and recoverability of software
development costs is reasonably assured.
Valuation of Inventories: Inventories are stated at the lower of cost or market,
using the first-in, first-out method. The Company's inventory includes purchased
parts and components, work in process and finished goods. The Company provides
inventory reserves for excess, obsolete or slow moving inventory after periodic
evaluation of historical sales, current economic trends, forecasted sales,
estimated product lifecycles and estimated inventory levels. The factors that
contribute to inventory valuation risks are the Company's purchasing practices,
electronic component obsolescence, accuracy of sales and production forecasts,
introduction of new products, product lifecycles, product support and foreign
regulations governing hazardous materials (see LIQUIDITY AND CAPITAL RESOURCES
for further information on foreign regulations). The Company manages its
exposure to inventory valuation risks by maintaining safety stocks, minimum
purchase lots, managing product end-of-life issues brought on by aging
components or new product introductions, and by utilizing certain inventory
minimization strategies such as vendor-managed inventories. The Company believes
that the accounting estimate related to valuation of inventories is a "critical
accounting estimate" because it is susceptible to changes from period-to-period
due to the requirement for management to make estimates relative to each of the
underlying factors ranging from purchasing, to sales, to production, to
after-sale support. If actual demand, market conditions or product lifecycles
are adversely different from those estimated by management, inventory
adjustments to lower market values would result in a reduction to the carrying
value of inventory, an increase in inventory write-offs and a decrease to gross
margins.
Income Taxes: The Company accounts for income taxes using the asset and
liability approach which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of the temporary differences
between the carrying amounts and the tax basis of such assets and liabilities.
The Company would record a valuation allowance to reduce deferred tax assets to
the amount that is more likely than not to be realized. The Company believes
that the accounting estimate related to income taxes is a "critical accounting
estimate" because the Company exercises judgment in estimating future taxable
income, including prudent and feasible tax planning strategies, in assessing the
need for any valuation allowance. If the Company should determine that it would
not be able to realize all or part of its net deferred tax assets in the future,
an adjustment to the deferred tax asset would be charged to income in the period
such determination was made. Likewise, in the event that the Company were to
determine that it would be able to realize its deferred tax assets in the future
in excess of the net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made.
Product Warranty: The Company has warranty obligations in connection with the
sale of certain of its products. The warranty period for these products is
generally one year. The costs incurred to provide for these warranty obligations
are estimated and recorded as an accrued liability at the time of sale. The
Company estimates its future warranty costs based on historical performance
rates and related costs to repair given products. The Company believes that the
accounting estimate related to product warranty is a "critical accounting
estimate" because the Company exercises judgment in determining future estimated
warranty costs. Should actual performance rates or repair costs differ from
estimates, revisions to the estimated warranty liability would be required.
Carrying Value of Goodwill: The Company conducts tests for impairments of
goodwill annually, at year end, or more frequently if circumstances indicate
that the asset might be impaired. The Company believes that the accounting
estimate related to goodwill is a "critical accounting estimate" because these
impairment tests include management estimates of future cash flows that are
dependent upon subjective assumptions regarding future operating results
including growth rates, discount rates, capital requirements and other factors
that impact the estimated fair value. An impairment loss is recognized to the
extent that the goodwill's carrying amount exceeds its fair value.
Overview
The following contains forward-looking statements within the meaning of the
Securities Act of 1933 and Securities Exchange Act of 1934 and is subject to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The Company is a leading developer of platforms, components, software and
services for the embedded systems market. This marketplace is comprised of
several sectors, with telecommunications being the largest. A breakdown of
applications that utilize the Company's products and platforms include:
Voice-over-IP (VoIP) representing approximately 40%, wireless infrastructure
representing 40%, with the balance spread across various other communications,
military and commercial applications.
The Company markets its products through its direct worldwide sales force under
a variety of brand names including IPnexus(TM), SEGway(TM), NexusWare(TM) and
Advanced Managed Platforms. The Company's products are sold as individual
components or can be provided as fully integrated, purpose built, packet-based
platforms for the embedded communications marketplace. When sold as integrated
platforms (Advanced Managed Platforms) these products offer customers cost
advantages, increase overall system reliability and performance, and improve
time-to-market for their products. Since its introduction in 2003, the Advanced
Managed Platform product line has realized more than 30 new design wins, with
each expected to generate greater than $.5 million of annualized revenue when
reaching production volumes. While only a small number of these design wins had
reached production levels at the beginning of 2005, an increasing number of
these design wins are moving to production this year.
The Company's wireless infrastructure business is reliant upon carrier spending
to upgrade networks to next-generation equipment. During the third quarter 2005,
shipments by the Company to the telecommunications equipment providers for
domestic wireless network infrastructure were comparable to the previous
quarter. Despite forward-looking visibility of customers' orders being very
limited, management expects accelerated spending for wireless network
infrastructure to begin in the fourth quarter 2005.
Several new products recently introduced by the Company include an AdvancedTCA
(ATCA) Advanced Managed Platform offering, a variety of media and
packet-processing slot components and a new cost-effective IP-STP signaling
system, which began shipping to telecommunications operators this quarter.
Management believes these products provide both innovative solutions to
customers and high-growth prospects for future Company revenue.
In October 2004, management announced commencement of a plan to centralize its
multi-location operations and to streamline the organization. By the end of the
first quarter 2005, the Company had completed centralization of all sales,
marketing and accounting functions into corporate operations resulting in
anticipated savings of $1.3 million per year. During the third quarter 2005, the
transition of the remaining manufacturing functions into the Rochester
manufacturing operation was completed, resulting in anticipated savings of $.7
million per year. Management expects a portion of the savings realized under
this plan will be reinvested to stimulate future growth.
During the first quarter 2005, the Company announced that its president and
chief executive officer, Donald Turrell, would leave the Company's executive
management team by the end of 2005. On November 3, 2005, the Company announced
that Michael P. Skarzynski was selected by the Company's Board of Directors to
serve as president and chief executive officer. Mr. Skarzynski also joined the
Board of Directors at that time. Mr. Turrell will maintain active involvement
throughout the transition of the Company's change in leadership and expects to
remain as a board member thereafter.
On July 11, 2005, the Company announced that its Board of Directors authorized
the Company to repurchase shares of its common stock for an aggregate amount not
to exceed $10.0 million. To date, there have been no repurchases of shares under
this program.
Strategy: The Company has a history of successfully adapting its products and
services to a constantly changing technology-driven marketplace. This adaptation
has been demonstrated through the course of several business cycles that have
occurred since its founding in 1981. During the most recent economic downturn,
the Company maintained its commitment to aggressively fund new product
development, as well as to use its strong balance sheet to acquire additional
products and technologies to strengthen its market position.
The Company's IPnexus product line, based on open system architectures, consists
of a wide range of individual components which can also be provided as fully
integrated, purpose built, packet-based platforms for the embedded
communications marketplace.
In September 2003, the Company introduced a new line of application ready
platforms marketed under the trade name Advanced Managed Platform (AMP).
Initially, this platform line was based on an architecture referred to as PICMG
2.16, which is an embedded technology developed by the Company and adopted as an
industry standard. In June 2005, the Company introduced its new AdvancedTCA
(ATCA) Advanced Managed Platform offering which incorporates a new architecture
specifically targeted at telecommunications applications. Today, the Advanced
Managed Platform product line contains the Company's latest generation of
configurable, fully-managed and redundant packet-based platforms targeted at
communications applications, which leverage all of the Company's IPnexus
component-based products. From a market perspective, the Advanced Managed
Platform line continues to prove itself as a viable alternative to proprietary
platforms and directly addresses equipment manufacturers' requirements for using
a flexible and scalable architecture.
In the next phase of its product strategy, the Company is developing and
introducing a number of products for selected high growth IP-based applications
including media gateway, media server, wireless, voice-over-cable and satellite
communications. The thrust of this effort is to combine certain hardware and
software elements from the Company's product portfolio to form intelligent
embedded solutions which add value for application providers in these target
markets.
Historically, the Company's growth has been generated through a combination of
internal growth and acquisition of new products or complementary technologies.
In October 2002, the Company acquired a portion of Intel Corporation's
Communications Platform Group for its chassis and computing products. In January
2004, the Company completed the acquisition of the assets of Mapletree Networks
to acquire its voice processing technology. The products from both acquisitions
have enhanced the Company's product offerings to its customers.
There are identifiable risks associated with carrying out the Company's
expansive product strategy in the current uncertain economic climate. Many of
the Company's end markets are forecasted to show only modest growth in the near
term. In order to realize growth in this environment, the Company will have to
gain market share from competitors, many of whom are larger, more established
companies with greater resources than the Company. Management believes that the
Company's strategy of continuing to invest in new product development will
enable the Company to compete in this economic environment.
Financial Information
Beginning on January 23, 2004, the Company's revenue and expenses reflect the
operations of the Voice Technology Group (acquired from Mapletree Networks).
Revenue:
-------
Revenue in the third quarter 2005 amounted to $12.3 million, compared to $11.6
million in the corresponding quarter a year earlier. Revenue for the nine months
ended September 30, 2005 amounted to $36.3 million, compared to $40.4 million
for the first nine months of 2004.
Earnings:
--------
GAAP Information:
On a GAAP earnings basis, net income for the third quarter 2005 amounted to $.9
million, or $.07 per diluted share including restructuring charges related to
cost improvement efforts amounting to $.1 million, or $.00 per diluted share,
based on 13.1 million shares outstanding. Net income for the third quarter 2004
amounted to $1.4 million, or $.11 per diluted share based on 13.0 million shares
outstanding.
GAAP net income for the nine months ended September 30, 2005 amounted to $2.2
million, or $.17 per diluted share including restructuring charges related to
cost improvement efforts amounting to $.2 million, or $.01 per diluted share,
based on 13.1 million shares outstanding. Net income for the first nine months
of 2004 amounted to $4.0 million, or $.30 per diluted share based upon 13.4
million shares outstanding.
Non-GAAP Information:
Upon the occurrence of certain non-recurring items, the Company will calculate
and report its results excluding these items from its GAAP net income to arrive
at a non-GAAP measure of net income. Management believes that the presentation
and disclosure of this non-GAAP net income measure provides another view of the
operations and financial condition of the Company on the basis in which
management operates the Company and the Board of Directors reviews its results.
This non-GAAP net income measure is calculated by adjusting net income reported
on a GAAP basis for items that the Company deems to be non-recurring and unusual
or infrequent in their nature. The Company adjusts for these non-recurring items
as these items are excluded from the Company's operational analysis, budgeting
and forecasting functions. The use of this non-GAAP measure by the Company could
result in potential limitations related to possible bank lending covenant
violations, where certain covenants may be measured on GAAP results. The Company
compensates for this potential limitation by attempting to enter into lending
agreements under which covenants are calculated utilizing the Company's non-GAAP
net income measure. At September 30, 2005, the Company was not a party to any
lending arrangements. On November 8, 2005, the Company executed a non-binding
commitment letter with a bank which would provide the Company with a $5 million
senior revolving credit facility. Under the terms stated in the commitment
letter, the Company will be subject to certain financial covenants under the
credit facility that will be calculated utilizing the Company's non-GAAP
measure described above. In the future, there can be no assurance that the
Company will be successful in its efforts to obtain other lending arrangements
under which certain covenants are calculated utilizing the non-GAAP net income
measure described above.
There was no difference between GAAP net income and non-GAAP net income in the
third quarter 2005 or for the nine months ended September 30, 2005.
During the third quarter 2004, the Company sold its minority interest in
Momentum Computer, Inc., and realized a gain of $1.2 million, or $.09 per
diluted share. On a non-GAAP basis, excluding this gain, net income for the
three months ended September 30, 2004 amounted to $.2 million, or $.02 per
diluted share based on 13.0 million shares outstanding.
During the first quarter 2004, the Company recorded in-process research and
development costs associated with the acquisition of Mapletree Networks in the
amount of $.2 million, or $.02 per diluted share. On a non-GAAP basis, excluding
the in-process research and development costs and the gain realized on the sale
of the minority interest, net income for the first nine months of 2004 amounted
to $3.0 million, or $.22 per diluted share based on 13.4 million shares
outstanding.
A reconciliation of GAAP net income to non-GAAP net income for the three and
nine months ended September 30, 2004 is as follows:
Three Months Nine Months
Ended Ended
September September
30, 2004 30, 2004
-------------- --------------
Net income, GAAP basis $1,371,000 $3,959,000
Add (deduct) non-recurring items:
Gain on sale of investment (1,504,000) (1,504,000)
In-process research and development 218,000
-------------- --------------
Total non-recurring items (1,504,000) (1,286,000)
-------------- --------------
Total net income excluding non-recurring
items before tax effect of non-
recurring items (133,000) 2,673,000
Tax effect of non-recurring items 335,000 335,000
-------------- --------------
Net income, non-GAAP basis $ 202,000 $3,008,000
============== ==============
Liquidity:
---------
Cash, cash equivalents and investments totaled $29.9 million and $25.6 million
at September 30, 2005 and December 31, 2004, respectively, and the Company had
no long-term debt at either date.
Centralization of Functions:
---------------------------
In October 2004, management announced commencement of a plan to centralize its
multi-location operations and to streamline the organization. By the end of the
first quarter 2005, the Company had completed the centralization of all sales,
marketing and accounting functions into corporate operations resulting in
anticipated savings of $1.3 million per year. During the third quarter 2005, the
transition of the remaining manufacturing functions into the Rochester
manufacturing operation was completed, resulting in anticipated savings of $.7
million per year. During the third quarter 2005, and for the nine months ended
September 30, 2005, the Company incurred charges of $.1 million and $.2 million,
respectively, related to these restructuring efforts. Management expects a
portion of the savings realized under this plan will be reinvested to stimulate
future growth.
Forward Looking Guidance for the Fourth Quarter 2005 (published October 27,
2005):
The following contains forward-looking statements within the meaning of the
Securities Act of 1933 and Securities Exchange Act of 1934 and is subject to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The Company provides guidance related to earnings per share expected in future
quarters. Any additional information provided, such as revenue forecasts, is
provided as supplementary information to the earnings per share guidance.
During weak or uncertain economic periods, the visibility for customers' orders
is limited which frequently causes delays in the placement of orders. These
factors often result in a substantial portion of the Company's revenue being
derived from orders placed within a quarter and shipped in the final month of
the same quarter. Unfortunately, forward-looking visibility on customer orders
continues to be very limited.
Management expects diluted earnings per share in the fourth quarter 2005 to be
in the range of $.10 to $.13. Based upon the current business mix, the current
backlog and review of sales forecasts, revenue is forecasted to be in the range
of $13.0 million to $14.0 million in the fourth quarter 2005. Gross margin is
expected to be approximately 50.0% to 51.5% and the effective income tax rate
for the fourth quarter 2005 is expected to be 26%.
Key Performance Indicators:
The Company's platforms, components, software and service solutions are
incorporated into current and next-generation embedded systems infrastructure.
Traditionally, design wins have been an important metric for management to judge
the Company's product acceptance in its marketplace. Design wins, if
implemented, reach production volumes at varying rates, generally beginning
twelve to eighteen months after the design win occurs. A variety of risks such
as schedule delays, cancellations, changes in customer markets and economic
conditions can adversely affect a design win before production is reached, or
during deployment.
The Company modified its criteria for the measurement of "design wins" in the
third quarter 2004 to provide greater accuracy in predicting forward looking
potential for the Company and to assist in measuring day-to-day execution of
product, sales and marketing programs. Prior the third quarter 2004, the Company
reported design wins that were expected to generate greater than $1.0 million of
annualized revenue. Upon the change in the measurement criteria, the Company
began reporting design wins that were expected to generate greater than $.5
million of annualized revenue. During the third quarter 2005, the Company was
notified of six design wins comprised of integrated platform solutions (with
multiple products) (1), individual component design wins for IPnexus network
access (2) and the SEGway(TM) product family (3). During the third quarter 2004,
the Company was notified of six design wins comprised of integrated platform
solutions (with multiple products) (4), individual component design
wins for IPnexus network access (1) and IP switching products (1).
Management believes another key indicator for the Company's business is the
volume of orders received from its customers. During weak economic periods,
customers' visibility deteriorates causing delays in the placement of orders.
While forward-looking visibility for customer orders continues to be very
limited, shipments to customers in the third quarter 2005 amounted to $12.3
million, compared to $11.6 million in the third quarter 2004. The increase in
revenue in the third quarter 2005 relates to a higher demand for the Company's
products.
More in-depth discussions of the Company's strategy and financial performance
can be found in the Company's Annual Report on Form 10-K and other filings with
the Securities and Exchange Commission.
Three and Nine Months Ended September 30, 2005, Compared with
Three and Nine Months Ended September 30, 2004
The following table presents the percentage of sales represented by each item in
the Company's consolidated statements of income for the periods indicated. The
table includes the results of operations of the Voice Technology Group, acquired
by the Company in January 2004.
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
-------- -------- -------- --------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 49.9 57.2 51.0 51.6
-------- -------- -------- --------
Gross profit 50.1 42.8 49.0 48.4
-------- -------- -------- --------
Operating expenses:
Selling and marketing 10.9 13.6 11.5 11.8
Research and development 21.6 20.7 20.8 18.9
General and administrative 9.2 8.6 10.1 8.8
Restructuring charges 0.4 0.1 0.7
In-process research and
development 0.5
-------- -------- -------- --------
Total operating expenses 42.1 43.0 43.1 40.0
-------- -------- -------- --------
Income (loss) from operations 8.0 (0.2) 5.9 8.4
Other income, net 2.7 1.6 2.6 1.2
-------- -------- -------- --------
Income before income taxes,
equity in income of
unconsolidated company and
gain on sale of investment 10.7 1.4 8.5 9.6
Income tax provision 3.1 .4 2.5 3.1
-------- -------- -------- --------
Income before equity in income
of unconsolidated company and
gain on sale of investment 7.6 1.0 6.0 6.5
Equity in income of
unconsolidated company 0.8 0.4
Gain on sale of investment in
unconsolidated company, net of
tax 10.1 2.9
-------- -------- -------- --------
Net income 7.6% 11.9% 6.0% 9.8%
======== ======== ======== ========
Sales. Total revenue for the third quarter 2005 amounted to $12.3 million,
compared to $11.6 million for the corresponding quarter in 2004. Revenue for the
nine months ended September 30, 2005 amounted to $36.3 million, compared to
$40.4 million in the corresponding period in 2004. In the third quarter 2005,
the Voice Technology Group contributed $.7 million to revenue, compared to $.4
million in the third quarter of 2004. For the nine months ended September 30,
2005, the Voice Technology Group contributed $1.4 million of revenue, compared
to a contribution of $1.9 million of revenue in the same period of 2004.
In the third quarter 2005, two customers each represented greater than 10% of
the Company's sales. One customer represented 25% of sales and the other
represented 14% of sales. The Company's four largest customers represented 48%
of sales. During the third quarter 2004, two customers each comprised greater
than 10% of sales and the Company's four largest customers represented 37% of
sales.
For the nine months ended September 30, 2005, two customers each represented
greater than 10% of revenue. One customer represented 21% of sales and the other
represented 12% of sales. The Company's four largest customers contributed 44%
to revenue. For the nine months ended September 30, 2004, three customers each
represented greater than 10% of revenue and the Company's four largest customers
contributed 40% to revenue.
Shipments to customers outside of the United States represented 46% and 43% of
sales during the third quarter 2005 and 2004, respectively, and 42% and 34% of
revenue for the nine months ended September 30, 2005 and 2004, respectively. In
the third quarter 2005, and for the nine months ended September 30, 2005,
shipments to the United Kingdom represented 15% and 13% of revenue,
respectively. During the third quarter 2004, shipments to the United Kingdom
represented 10% of revenue. Total shipments to a single foreign country did not
exceed 10% of revenue during the nine months ended September 30, 2004.
For the periods indicated, the Company's products are grouped into four distinct
categories in one market segment: Communications (network access, signaling and
voice) products, Computing products, IPnexus switching products and Other
products. Revenue from each product category is expressed as a percentage of
sales for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Communications products 43% 42% 47% 48%
Computing products 25% 35% 25% 35%
IPnexus switching products 31% 21% 27% 16%
Other products 1% 2% 1% 1%
---------- ---------- ---------- ----------
Total 100% 100% 100% 100%
========== ========== ========== ==========
Communications products:
Communications products are comprised of network access, SEGway signaling and
Voice Technology products. Network access products provide a connection between
embedded systems platforms and a variety of networks and are used to control the
network and/or process information being transported over networks. Many of the
Company's signaling products enable the transport of signaling messages over
packet-switched (IP) networks. Voice Technology products enable voice, data and
fax processing for communications applications.
Revenue from Communications products totaled $5.3 million and $4.9 million in
the third quarter of 2005 and 2004, respectively. This revenue increase in 2005
of $.4 million, or 8%, reflects a general increase in business.
Communications product revenue for the nine months ended September 30, 2005
totaled $17.0 million, which represented a decrease of $2.4 million, or 12%,
from $19.4 million in the corresponding period in 2004. The decrease in revenue
in 2005 reflects one major customer in 2004 that, due to industry consolidation
activity, unexpectedly ceased product requirements in the second quarter 2004.
During the first nine months 2005, one new customer partially offset the lack of
shipments to the major 2004 customer.
Computing products:
Computing products include integrated platform solutions, a range of single
board computers, a variety of embedded system chassis and associated chassis
management products.
Computing products revenue amounted to $3.1 million in the third quarter 2005,
compared to $4.0 million in the third quarter 2004. The decrease in revenue in
2005 of $.9 million, or 23% reflects two major customers in 2004 whose product
requirements, due to market conditions, ceased altogether by the end of 2004.
One major customer in 2005 partially offset the lack of shipments to the two
2004 customers.
Computing products revenue for the nine months ended September 30, 2005 totaled
$9.2 million, compared to $13.9 million for the corresponding period in 2004.
The decrease in revenue in 2005 of $4.7 million, or 34%, reflects two major
customers in 2004, who, due to market conditions, ceased purchasing product by
the end of 2004. One major customer in 2005 partially offset the lack of
shipments to the two 2004 customers.
IPnexus switching products:
The Company's IPnexus switching product family has been designed for the
rigorous requirements of the embedded systems that use the industry standard
PICMG 2.16 architecture.
Revenue from switching products amounted to $3.8 million in the third quarter
2005, compared to $2.5 million the third quarter 2004. This increase in revenue
in 2005 of $1.3 million, or 52%, reflects increased orders from a major customer
during the third quarter 2005.
For the nine months ended September 30, 2005, revenue from switching products
amounted to $9.6 million, compared to $6.5 million for the corresponding period
in 2004. The increase in revenue in 2005 of $3.1 million, or 48%, was primarily
attributable to increased sales to a wide variety of switch customers and one
major customer.
Other products:
This revenue is primarily related to legacy products. Many of these products are
project oriented and shipments can fluctuate on a quarterly and annual basis.
Gross profit. Gross profit consists of sales, less cost of goods sold including
material costs, manufacturing expenses, depreciation, amortization of software
development costs, and expenses associated with engineering contracts and the
technical support function. Gross margin was 50.1% and 42.8% of sales in the
third quarter 2005 and 2004, respectively. The increase in gross margin was a
result of a change in product mix from lower margin products (Computing
products) to higher margin products (IPnexus switching products), cost
reductions related to the Company's effort to consolidate manufacturing
locations and an increase in total shipments which spread fixed manufacturing
overhead costs over more units. For the nine months ended September 30, 2005 and
2004, gross margin was 49.0% and 48.4%, respectively. Gross margin in the first
nine months of 2005 reflects a positive change in product mix, from lower margin
products (Computing products) to higher margin products (IPnexus switching
products) and the cost savings related to the Company's centralization efforts.
However, due to the lower volumes in 2005, fixed manufacturing costs were spread
over fewer units, thereby negatively impacting the overall gross margin.
Total Operating Expenses. Total operating expenses for the third quarter 2005
amounted to $5.2 million, compared to $5.0 million in the third quarter 2004.
For the nine months ended September 30, 2005 and 2004, total operating expenses
amounted to $15.6 million and $16.1 million, respectively. For 2004, the
operating expenses of the Voice Technology Group (VTG) are included from the
date of acquisition of January 23, 2004. In October 2004, management announced
commencement of a plan to centralize its multi-location operations and to
streamline the organization. By the end of the first quarter 2005, the Company
had completed centralization of all sales, marketing and accounting functions
into corporate operations resulting in anticipated savings of $1.3 million per
year. Management expects a portion of the savings under this plan will be
reinvested to stimulate future growth.
Selling and marketing expenses were $1.3 million and $1.6 million for the third
quarter 2005 and 2004, respectively, and $4.2 million and $4.8 million for the
nine months ended September 30, 2005, and 2004, respectively. The decreases in
selling and marketing expense for the 2005 periods, compared to the respective
periods in 2004 are primarily the result of staff reductions in the sales
organization.
Research and development expenses were $2.7 million and $2.4 million in the
third quarter 2005 and 2004, respectively. The increase in expense in 2005
primarily reflects an increase in product certification costs and prototype
costs for new product development. The Company capitalizes certain software
development costs, which reduces the amount of software development charged to
operating expenses. Amounts capitalized were $.7 million and $.6 million during
the third quarter 2005 and 2004, respectively. Research and development expenses
amounted to $7.6 million for both the nine months ended September 30, 2005 and
2004. For the comparative periods, an increase in capitalized software
development costs was offset by an increase in product certification and
prototype costs. Amounts capitalized related to software development were $2.0
million and $1.7 million during the nine months ended September 30, 2005 and
2004, respectively.
General and administrative expenses were $1.1 million in the third quarter 2005,
compared to $1.0 million in the third quarter 2004. The increase in expense in
2005 of $.1 million is primarily the result of increased corporate governance
costs including Sarbanes-Oxley compliance, which were partially offset by
savings realized under the Company's centralization plan. For the nine months
ended September 30, 2005, general and administrative expenses totaled $3.7
million, compared to $3.5 million for the same period in 2004. The increase in
expense in 2005 was also the result of increased corporate governance costs
including Sarbanes-Oxley compliance, which were partially offset by costs
savings realized under the Company's centralization plan.
Restructuring charges amounted to $.1 million in the third quarter 2005 and $.2
million in the nine months ended September 30, 2005, compared to no
restructuring charges incurred during 2004. Restructuring charges in 2005 relate
primarily to severance payments associated with the Company's efforts to
centralize its operations.
In the first quarter 2004, the Company recorded in-process research and
development expense of $.2 million. This amount represented a charge for
in-process research and development costs associated with the Mapletree Networks
acquisition that were expensed in accordance with Financial Accounting Standards
Board Interpretation No. 4 "Applicability of SFAS No. 2 to Business Combinations
Accounted for by the Purchase Method." This charge relates to research and
development projects that had not reached technological feasibility at the time
of the acquisition.
Other Income, net. Other income consists primarily of interest income. The
Company's funds are primarily invested in high quality auction rate municipal
securities. An increase in the funds available for investment as well as higher
interest rates in 2005 resulted in increased interest income for both the third
quarter 2005 and for the nine months ended September 30, 2005, compared to the
corresponding periods in 2004. In 2005, an increase in the principal amount of a
note receivable from an unconsolidated company also contributed to higher
interest income for the first nine months of 2005, compared to 2004. During the
third quarter 2005, the unpaid interest due to the Company under this note
receivable was converted into an investment in preferred stock of the
unconsolidated company.
Income taxes. The Company's effective income tax rate is a combination of
federal, state and foreign tax rates and is generally lower than statutory rates
because it includes benefits derived from the Company's international
operations, research activities, tax exempt interest and foreign sales. For the
third quarter 2005 and 2004, the Company's effective tax rate was 29% and 31%,
respectively. For the nine months ended September 30, 2005 and 2004, the
Company's effective tax rate was 29% and 33%, respectively. During the third
quarter 2005, the Company revised its estimated annual income tax rate and also
recorded tax expense for certain discrete events that took place during the
third quarter 2005. These discrete events included a tax benefit related to
foreign exchange losses of the Company's Canadian subsidiary and tax expense for
the establishment of a valuation allowance against the net deferred tax assets
of the Company's Canadian subsidiary. This valuation allowance was recorded due
to changes in judgment as to the realizability of the deferred tax assets in
future periods.
On October 22, 2004 "The American Jobs Creation Act of 2004" was signed into
law. The Act includes a temporary incentive for U.S. companies to repatriate
accumulated income earned abroad by providing an 85% dividends-received
deduction for certain dividends from controlled foreign corporations. Management
has not yet decided on whether, and to what extent, the Company might repatriate
foreign earnings as a result of the Jobs Creation Act. Accordingly, the impact
of the repatriation provision has not been considered in the Company's
calculation of its income tax provision.
Equity in Income of Unconsolidated Company. In the third quarter 2004, the
Company sold its ownership interest in Momentum Computer, Inc., a developer of
specialized single board computer products. During the third quarter 2004 and
for the nine months ended September 30, 2004, the Company's allocation of
Momentum's income amounted to $.1 million and $.2 million, respectively.
Gain on Sale of Investment in Unconsolidated Company, net of tax. In the third
quarter 2004, the Company sold its minority interest in Momentum Computer, Inc.
and realized an after tax gain of $1.2 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is its cash, cash equivalents and
investments which totaled $29.9 million at September 30, 2005. The Company had
working capital of $43.9 million and $41.6 million at September 30, 2005 and
December 31, 2004, respectively.
Cash provided by operating activities amounted to $6.4 million for the nine
months ended September 30, 2005. This amount included net income of $2.2
million, non-cash charges related to depreciation and amortization of $1.8
million, and a reserve for inventory obsolescence of $1.3 million. Cash provided
by operations due to changes in operating assets and liabilities included a
decrease in cash associated with an increase in inventory of $1.4 million. The
increase in inventory is a result of increased purchases by the Company made in
order to meet future demand expectations. Payments related to the timing of
income tax payments, accounts payable and accrued expenses resulted in an
increase in operating cash of $1.4 million.
On July 1, 2006, the Restriction of Certain Hazardous Substances Directive
("RoHS") issued by the European Union will become effective. This directive
restricts the distribution of products within the EU containing certain
substances, including lead. While the enabling legislation of a number of EU
member countries has not yet been adopted, it is expected that the Company will
not be able to sell non-RoHS compliant product to certain customers who intend
to sell their finished goods in the EU after the effective date. At the present
time, the majority of the Company's inventory contains substances prohibited by
the RoHS directive. Upon effectiveness of the RoHS legislation, a portion of the
Company's inventory may become obsolete and unsaleable and, as a result, may
have to be written off. In addition, prior to the effectiveness, the Company
expects that its overall inventory balances will increase as it builds RoHS
compliant product prior to the effective date. The Company is working closely
with its customers and suppliers to minimize this impact. During the third
quarter 2005, the Company began limited test production of RoHS compliant
products. In connection with this production and expected future needs under the
compliance program, the Company purchased additional inventory amounting to $.5
million. Management is closely monitoring inventory purchases, inventory needs
and sales efforts related to this compliance program. However, there can be no
assurance that the Company will be successful in reducing its non-compliant
products prior to the effective date and, in the future, the Company may incur
inventory obsolescence charges related to unsaleable non-compliant products.
Cash used by investing activities during the first nine months of 2005 totaled
$6.5 million. This utilization was primarily the result of net purchases of
auction rate municipal securities of $4.1 million and the capitalization of
software development costs amounting to $2.0 million.
Cash provided by financing activities for the first nine months of 2005 amounted
to $.4 million, resulting from the exercise of stock options. On July 11, 2005,
the Company announced that its Board of Directors authorized the Company to
repurchase shares of its common stock for an aggregate amount not to exceed
$10.0 million. Under this program, shares of the Company's common stock may be
repurchased through open market or private transactions, including block
purchases, over the next twelve months. Repurchased shares will be used for the
Company's stock option plan, potential acquisition initiatives and general
corporate purposes. To date, there have been no repurchases of shares under this
program.
On November 8, 2005, the Company executed a non-binding commitment letter with a
bank which would provide the Company with a $5 million senior revolving credit
facility. The facility would be used to finance working capital needs of the
Company. Under the terms detailed in the commitment letter, the credit facility
will allow for borrowings by the Company on a revolving basis with interest on
borrowings at the bank's published prime rate. The facility will also include
certain operating and financial covenants. It is expected that the Company will
enter into the credit facility agreement during the fourth quarter 2005.
Off-Balance Sheet Arrangements:
The Company did not enter into any off-balance sheet arrangements during the
first nine months of 2005.
Contractual Obligations:
The Company did not enter into any other significant contractual obligations
during the first nine months of 2005.
Current Position:
Assuming there is no significant change in the Company's business, management
believes that its current cash, cash equivalents and investments together with
cash generated from operations should be sufficient to meet the Company's
anticipated operating needs, including working capital and capital expenditure
requirements, for at least the next twelve months. However, management is
continuing its strategic acquisition program to further accelerate its growth
and market penetration efforts. A future acquisition could have an impact on the
Company's working capital, liquidity or capital resources, and the Company may
need to raise additional capital to facilitate these efforts.
Recently Issued Accounting Pronouncements
In December 2004, SFAS No. 123 "Accounting for Stock-Based Compensation (Revised
2004)" was issued. This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This statement requires an entity to measure the cost of employee
services received in exchange for an award of equity instruments, based on the
fair value of the award at the grant date. That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award. The effective date of this statement was extended by the Securities
and Exchange Commission and will be effective for the Company beginning January
1, 2006. As of the required effective date, all entities that used the
fair-value-based method for either recognition or disclosure under SFAS No. 123
may apply this statement using a modified version of prospective application. An
alternative method of application is available under SFAS No. 123R. Under the
modified version of prospective application, compensation cost is recognized for
the portion of outstanding stock-based awards for which the requisite service
has not yet been rendered. The Company is currently assessing the impact this
statement will have on its financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4." SFAS No. 151 states that abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) should
be recognized as current-period charges. Additionally, SFAS No. 151 requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The Company is
required to adopt SFAS No. 151 effective January 1, 2006. The Company does not
expect the adoption of SFAS No. 151 will have a material impact on its
consolidated results of operations and financial condition.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions."
SFAS No. 153 is based on the principle that nonmonetary asset exchanges should
be recorded and measured at the fair value of the assets exchanged, with certain
exceptions. This standard requires exchanges of productive assets to be
accounted for at fair value, rather than at carryover basis, unless (1) neither
the asset received nor the asset surrendered has a fair value that is
determinable within reasonable limits or (2) the transactions lack commercial
substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The Company adopted SFAS No. 153
effective for third quarter 2005. The adoption of SFAS No. 153 did not have a
material impact on the Company's consolidated results of operations and
financial condition.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", which replaces APB Opinion No. 20, "Accounting Changes," and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS No.
154 changes the requirements for the accounting for and reporting of a change in
accounting principle. Upon the adoption of SFAS No. 154 beginning January 1,
2006, the Company will apply the standard's guidance to changes in accounting
methods as required. At this time, the Company does not expect the adoption of
SFAS No. 154 will have a material impact on its consolidated results of
operations and financial condition.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Quarterly Report on Form 10-Q contains forward-looking statements, which
reflect the Company's current views with respect to future events and financial
performance, within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and is subject to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "believes,"
"anticipates," "plans," "may," "intend," "estimate," "will," "should," "could,"
"feels," "is optimistic," "expects," and other expressions which indicate future
events and trends also identify forward-looking statements. However, the absence
of such words does not mean that a statement is not forward-looking.
The Company's future operating results are subject to various risks and
uncertainties and could differ materially from those discussed in the
forward-looking statements and may be affected by various trends and factors
which are beyond the Company's control. These risks and uncertainties include,
among other factors, general business and economic conditions, rapid
technological changes accompanied by frequent new product introductions,
competitive pressures, dependence on key customers, the attainment of design
wins, fluctuations in quarterly and annual results, the reliance on a limited
number of third party suppliers, limitations of the Company's manufacturing
arrangements, the protection of the Company's proprietary technology, the
dependence on key personnel, changes in critical accounting estimates, potential
delays associated with the purchase and implementation of an advanced planning
and scheduling system, potential impairments of investments, and foreign
regulations. These statements should be read in conjunction with the audited
Consolidated Financial Statements, the Notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company as of December 31, 2004, as reported in its Annual Report on Form 10-K,
and other documents as filed with the Securities and Exchange Commission.
Stockholders are cautioned not to place undue reliance on the forward-looking
statements which speak as of the date of this Quarterly Report or the date of
the documents incorporated by reference in this Quarterly Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks in the normal course of business,
primarily interest rate risk and changes in the market value of its investments
and believes its exposure to such risk is minimal. The Company's investments are
made in accordance with the Company's investment policy and primarily consist of
auction rate municipal securities. The Company is also subject to foreign
exchange risk related to its operations in Ottawa, Canada. The Company believes
that its exposure to foreign currency risk is minimal. The Company does not
participate in the investment of derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
A. Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and its Chief Financial Officer
have evaluated the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of
the period covered by this quarterly report. Based on this evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective as of
such date.
B. Changes in Internal Controls Over Financial Reporting
During the first quarter 2005, the Company completed the integration of
the ERP systems and accounting functions of the Company's Voice
Technology Group and Computing Products Group into the corporate ERP
system and accounting function in Rochester, New York. During the
second quarter 2005, transition of manufacturing operations for VTG
products was completed and substantial progress was realized in
transitioning the manufacturing of the Computing products to Rochester.
During the third quarter 2005, the Company completed the transition of
the manufacturing of the Computing products to Rochester. The Company's
Chief Executive Officer and Chief Financial Officer evaluated these
changes and concluded that the changes have not materially affected, or
are not reasonably likely to materially affect, the Company's internal
controls over financial reporting. There were no other changes in the
Company's internal controls over financial reporting that occurred
during the fiscal quarter covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Section 1350 Certification
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERFORMANCE TECHNOLOGIES, INCORPORATED
November 8, 2005 By: /s/ Michael P. Skarzynski
-----------------------------
Michael P. Skarzynski
President and
Chief Executive Officer
November 8, 2005 By: /s/ Dorrance W. Lamb
-----------------------------
Dorrance W. Lamb
Chief Financial Officer
and Vice President of
Finance
Exhibit 31.1
Certification of Chief Executive Officer
I, Michael P. Skarzynski certify that:
1. I have reviewed this quarterly report on Form 10-Q of Performance
Technologies, Incorporated;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting,
or caused such internal control over financial reporting
to be designed under our supervision, to provide
reasonable assurance regarding the reliability of
financial reporting and the preparation of financial
statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's third fiscal quarter) that has materially
affected, or is reasonably likely to materially affect,
the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
the registrant's Board of Directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.
Date: November 8, 2005 By:/s/ Michael P. Skarzynski
-------------------------
Michael P. Skarzynski
Chief Executive Officer
Exhibit 31.2
Certification of Chief Financial Officer
I, Dorrance W. Lamb certify that:
1. I have reviewed this quarterly report on Form 10-Q of Performance
Technologies, Incorporated;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
third fiscal quarter) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's Board of Directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 8, 2005 By:/s/ Dorrance W. Lamb
----------------------------
Dorrance W. Lamb
Chief Financial Officer
Exhibit 32.1
Section 1350 Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 ("Section 906"), Michael P. Skarzynski and Dorrance
W. Lamb, the Chief Executive Officer and Chief Financial Officer, respectively,
of Performance Technologies, Incorporated, certify that (i) the quarterly report
on Form 10-Q for the quarter ended September 30, 2005 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and (ii) the information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of
Performance Technologies, Incorporated.
A signed original of this written statement required by Section 906 has been
provided to Performance Technologies, Incorporated and will be retained by
Performance Technologies, Incorporated and furnished to the Securities and
Exchange Commission or its staff upon request.
Date: November 8, 2005 By:/s/ Michael P. Skarzynski
--------------------------
Michael P. Skarzynski
President and Chief
Executive Officer
Date: November 8, 2005 By:/s/ Dorrance W. Lamb
--------------------------
Dorrance W. Lamb
Chief Financial
Officer and Vice
President of Finance