SEC Company Response from PERFORMANCE TECHNOLOGIES INC \DE\ (CIK 0001003950) — May 20, 2005
PERFORMANCE TECHNOLOGIES INC \DE\ (CIK 0001003950)
Date: May 20, 2005 · CIK: 0001003950 · Accession: 0001003950-05-000021
AI Filing Summary & Sentiment
Referenced dates: April 18, 2005
Letter
May 20, 2005 Mr. Martin F. James Senior Assistant Chief Accountant Division of Corporation Finance United States Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549
Dear Mr. James,
Thank you for your letter dated April 18, 2005 under which the Staff conducted a review of the Form 10-K of Performance Technologies, Inc. ("the Company") for the fiscal year ended December 31, 2004. Below we have listed the Staff comments along with our responses to each comment.
Item 6 - Selected Financial Data --------------------------------
1. We note that you present a non-GAAP financial measure. However, it does not appear that your measure complies with the requirements of Item 10(e) of Regulation S-K. Please respond to the following:
a) We note your measure excludes restructuring charges, which have occurred in each of the last three years and will generally require cash settlement. We also note your measure excludes in-process research and development charges, which occurred in both 2002 and 2004. Finally, we note your measure excludes class action lawsuit settlement costs, which required cash settlement. Explain how you concluded that your presentation is appropriate in light of Item 10(e)(1)(ii)(A) and 10(e)(1)(ii)(B) of Regulation S-K.
The Company includes a non-GAAP measure of net income in its annual, quarterly, and certain periodic filings with the SEC. Net income reported on a GAAP basis is adjusted for certain items that the Company believes are non-recurring amounts that are unusual or infrequent in their nature. These adjustments to GAAP net income result in the presentation of a non-GAAP measure of net income. The Company reports this non-GAAP net income measure in order to provide investors with information that is presented on a basis which is consistent with the manner in which the board of directors and management operates the organization. The Company believes that this non-GAAP measure provides a more transparent and enhanced view of the true operations of the Company. The items that have been adjusted to arrive at this non-GAAP net income measure are discussed as follows:
Restructuring Charges ---------------------
During the past three years, the Company incurred costs related to restructuring efforts. The Company adjusted for these amounts in its non-GAAP net income measure based upon the Company's view of these expenses. Amounts paid related to restructuring are considered to be non-recurring charges that are not expected to continue in future quarters. The board of directors and management do not include restructuring charges in their assessments of the operational performance of the Company or when budgeting or forecasting future periods. Since the Company does not consider these items as recurring operational expenses, they were specifically identified in the determination of the non-GAAP net income measure in order to present financial information to an investor on a basis that is consistent with the Company's view of the operations and financial condition of the Company. Despite this position, the Company recognizes the provisions of Item 10(e)(1)(ii)(A) and also recognizes that these costs are expected to continue through the third quarter 2005. Therefore, in future filings, the Company will no longer adjust for this item in determining its non-GAAP net income measure. This change has been reflected in the Company's most recent filing on Form 10-Q for the three month period ended March 31, 2005.
In-process Research and Development -----------------------------------
Historically, acquisitions have not been a common occurrence for the Company. Within the past five years, the Company acquired two businesses. Charges resulting from an acquisition, such as in-process research and development costs, are also not common in the Company's history. When considering acquisitions, the potential charge related to in-process research and development is not a measure that management considers in its assessment of an acquisition. In addition, once it is recorded, the amount of a charge does not have an impact on future operational decisions made by the board of directors or management. Amounts recorded for in-process research are not included in budgets or forecasts. Based upon these facts, the Company felt that, despite the occurrence of a charge twice within the last two years, this item should be used in the determination of the non-GAAP net income measure. This determination was made so that investors are able to examine the Company's results on a basis which is consistent with the manner in which management views the Company's financial condition and operates the business.
Class action settlement -----------------------
Since becoming a public entity, the Company has been subject to one class action lawsuit. This suit was filed in 2000 and resulted in an out of pocket settlement by the Company of $143,000 in 2002. The Company recognizes that under Item 10(e)(1)(ii)(A) this item should not be used in determining the non-GAAP net income measure due to the cash settlement. However, similar to the items described above, when assessing the operating performance of the Company and its financial condition, the potential exposure of this item did not influence key decisions made by management. Management considered this amount to be an unusual, non-recurring charge and did not include the amount in its budgets or forecasts and the amount did not impact decisions made by management. To present financial information to the investor on a basis consistent with management's view; the Company adjusted for this charge when calculating its non-GAAP net income measure for the respective period.
b) In order to assist the reader in understanding your non-GAAP financial measure, revise future filings to provide a clear reconciliation of the non-GAAP financial measure to the most directly comparable measure calculated in accordance with GAAP.
The Company has historically supplied this information through footnotes to the Selected Financial Data table under Item 6. The Company will revise its future filings and will include a clear tabular reconciliation. In its Form 10-Q for the three months ended March 31, 2005, the Company included the following reconciliation:
------ Net income, GAAP basis $1,557 Add: Non-recurring item - In-process research and development costs 218 ---------- Net income, non-GAAP basis $1,775 ==========
In its Form 10-K for 2005, the Company will include a clear tabular reconciliation. As an illustration, the reconciliation for 2004 will be presented as follows:
------ Net income, GAAP basis $2,780 Add: Non-recurring items: Gain on sale of investment in unaffiliated company (1,169) In-process research and development costs 218 Note receivable valuation charge 3,000 Restructuring charges 217 ---------- Total non-recurring items 2,266 ---------- Total net income excluding non-recurring items before tax effect of non-recurring items 5,046 Tax effect of non-recurring items (1,245) ---------- Net income, non-GAAP basis $3,801 ==========
c) Revise your disclosures in future filings to explain in greater detail the reasons why management believes the presentation of this non-GAAP financial measure provides useful information to investors regarding your financial condition and the results of your operations. You should discuss each of the following, based on the guidance in question 8 of the Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures dated June 13, 2003:
o the manner in which management uses the non-GAAP measure to conduct or evaluate its business;
In its reporting of the non-GAAP net income measure, the Company adjusts for items that it believes are not expected to recur, are unusual or infrequent in nature, do not influence decision making in operating the business or assessing operating performance and are not included in the Company's budgets or forecasts for future periods. The Company adjusts for these items in its non-GAAP net income measure in order to provide the investor with a more transparent and enhanced view of the Company's true operations. As illustrated below, the Company will revise its future filings to include disclosure related to this requirement.
o the economic substance behind management's decision to use such a measure;
As noted above, the board of directors and management operate the Company using its non-GAAP net income measure. Items that are adjusted in the non-GAAP measure are not considered in the assessment of the performance of the Company and do not influence future decision making. Management does not expect these expenses to recur and considers them to be unusual or infrequent in their nature. In some cases, the settlement of these charges includes a cash payment. However, even in the event of a future cash payment, budgets and forecasts are not adjusted for these items. For example, the expected settlement of the class action suit in 2002 did not affect the decisions made in that quarter or future quarters. The Company adjusted for this item when calculating its non-GAAP net income measure in order to assess the operating results for that period compared to other historical or future periods. As illustrated below, the Company will revise its future filings to include disclosure related to this requirement.
o the material limitations associated with the use of the non-GAAP financial measure as compared to the use of the most directly comparable GAAP financial measure;
The Company believes that a material limitation of using a non-GAAP net income measure includes the potential implications related to financial covenants under bank lending agreements.
In the past, the Company was a party to bank lending agreements whereby certain financial covenants were based upon GAAP measures. Under these types of agreements, the Company could be in violation of certain financial covenants based upon the results for a particular period. The failure of a covenant could affect liquidity. If the results for that period include non-GAAP adjustments, management's exclusion of non-recurring items from its analysis could result in management making decisions to allocate financial resources that may not be available due to the failure of covenants. During the past five years, the Company was in compliance with, or had received a waiver for, all bank covenants. The Company was not a party to any bank lending agreements at December 31, 2004 or 2003.
As illustrated below, the Company will revise future filings to include disclosure related to this requirement.
o the manner in which management compensates for these limitations when using the non-GAAP financial measure; and
Currently, the Company is not a party to any bank lending agreements. As a result, at this point in time, the material limitation described above does affect current decision making. In the future, it is expected that the Company will be able to negotiate terms of bank lending agreements under which financial covenants are calculated using the non-GAAP net income measure utilized by the
Show Raw Text
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
May 20, 2005
Mr. Martin F. James
Senior Assistant Chief Accountant
Division of Corporation Finance
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Mr. James,
Thank you for your letter dated April 18, 2005 under which the Staff conducted a
review of the Form 10-K of Performance Technologies, Inc. ("the Company") for
the fiscal year ended December 31, 2004. Below we have listed the Staff comments
along with our responses to each comment.
Item 6 - Selected Financial Data
--------------------------------
1. We note that you present a non-GAAP financial measure. However, it does not
appear that your measure complies with the requirements of Item 10(e) of
Regulation S-K. Please respond to the following:
a) We note your measure excludes restructuring charges, which
have occurred in each of the last three years and will
generally require cash settlement. We also note your measure
excludes in-process research and development charges, which
occurred in both 2002 and 2004. Finally, we note your measure
excludes class action lawsuit settlement costs, which required
cash settlement. Explain how you concluded that your
presentation is appropriate in light of Item 10(e)(1)(ii)(A)
and 10(e)(1)(ii)(B) of Regulation S-K.
The Company includes a non-GAAP measure of net income in its
annual, quarterly, and certain periodic filings with the SEC.
Net income reported on a GAAP basis is adjusted for certain
items that the Company believes are non-recurring amounts
that are unusual or infrequent in their nature. These
adjustments to GAAP net income result in the presentation of a
non-GAAP measure of net income. The Company reports this
non-GAAP net income measure in order to provide investors with
information that is presented on a basis which is consistent
with the manner in which the board of directors and management
operates the organization. The Company believes that this
non-GAAP measure provides a more transparent and enhanced view
of the true operations of the Company. The items that have
been adjusted to arrive at this non-GAAP net income measure
are discussed as follows:
Restructuring Charges
---------------------
During the past three years, the Company incurred costs
related to restructuring efforts. The Company adjusted for
these amounts in its non-GAAP net income measure based upon
the Company's view of these expenses. Amounts paid related to
restructuring are considered to be non-recurring charges that
are not expected to continue in future quarters. The board of
directors and management do not include restructuring charges
in their assessments of the operational performance of the
Company or when budgeting or forecasting future periods. Since
the Company does not consider these items as recurring
operational expenses, they were specifically identified in the
determination of the non-GAAP net income measure in order to
present financial information to an investor on a basis that
is consistent with the Company's view of the operations and
financial condition of the Company. Despite this position, the
Company recognizes the provisions of Item 10(e)(1)(ii)(A) and
also recognizes that these costs are expected to continue
through the third quarter 2005. Therefore, in future filings,
the Company will no longer adjust for this item in determining
its non-GAAP net income measure. This change has been
reflected in the Company's most recent filing on Form 10-Q for
the three month period ended March 31, 2005.
In-process Research and Development
-----------------------------------
Historically, acquisitions have not been a common occurrence
for the Company. Within the past five years, the Company
acquired two businesses. Charges resulting from an
acquisition, such as in-process research and development
costs, are also not common in the Company's history. When
considering acquisitions, the potential charge related to
in-process research and development is not a measure that
management considers in its assessment of an acquisition. In
addition, once it is recorded, the amount of a charge does not
have an impact on future operational decisions made by the
board of directors or management. Amounts recorded for
in-process research are not included in budgets or
forecasts. Based upon these facts, the Company felt that,
despite the occurrence of a charge twice within the last two
years, this item should be used in the determination of the
non-GAAP net income measure. This determination was made so
that investors are able to examine the Company's results on a
basis which is consistent with the manner in which management
views the Company's financial condition and operates the
business.
Class action settlement
-----------------------
Since becoming a public entity, the Company has been subject
to one class action lawsuit. This suit was filed in 2000 and
resulted in an out of pocket settlement by the Company of
$143,000 in 2002. The Company recognizes that under Item
10(e)(1)(ii)(A) this item should not be used in determining
the non-GAAP net income measure due to the cash settlement.
However, similar to the items described above, when assessing
the operating performance of the Company and its financial
condition, the potential exposure of this item did not
influence key decisions made by management. Management
considered this amount to be an unusual, non-recurring charge
and did not include the amount in its budgets or forecasts
and the amount did not impact decisions made by management. To
present financial information to the investor on a basis
consistent with management's view; the Company adjusted for
this charge when calculating its non-GAAP net income measure
for the respective period.
b) In order to assist the reader in understanding your non-GAAP
financial measure, revise future filings to provide a clear
reconciliation of the non-GAAP financial measure to the most
directly comparable measure calculated in accordance with
GAAP.
The Company has historically supplied this information through
footnotes to the Selected Financial Data table under Item 6.
The Company will revise its future filings and will include a
clear tabular reconciliation. In its Form 10-Q for the three
months ended March 31, 2005, the Company included the
following reconciliation:
2004
------
Net income, GAAP basis $1,557
Add: Non-recurring item - In-process research
and development costs 218
----------
Net income, non-GAAP basis $1,775
==========
In its Form 10-K for 2005, the Company will include a clear
tabular reconciliation. As an illustration, the reconciliation
for 2004 will be presented as follows:
2004
------
Net income, GAAP basis $2,780
Add: Non-recurring items:
Gain on sale of investment in unaffiliated company (1,169)
In-process research and development costs 218
Note receivable valuation charge 3,000
Restructuring charges 217
----------
Total non-recurring items 2,266
----------
Total net income excluding non-recurring items
before tax effect of non-recurring items 5,046
Tax effect of non-recurring items (1,245)
----------
Net income, non-GAAP basis $3,801
==========
c) Revise your disclosures in future filings to explain in
greater detail the reasons why management believes the
presentation of this non-GAAP financial measure provides
useful information to investors regarding your financial
condition and the results of your operations. You should
discuss each of the following, based on the guidance in
question 8 of the Frequently Asked Questions Regarding the Use
of Non-GAAP Financial Measures dated June 13, 2003:
o the manner in which management uses the non-GAAP measure
to conduct or evaluate its business;
In its reporting of the non-GAAP net income measure, the
Company adjusts for items that it believes are not
expected to recur, are unusual or infrequent in nature, do
not influence decision making in operating the business or
assessing operating performance and are not included in
the Company's budgets or forecasts for future periods. The
Company adjusts for these items in its non-GAAP net income
measure in order to provide the investor with a more
transparent and enhanced view of the Company's true
operations. As illustrated below, the Company will revise
its future filings to include disclosure related to this
requirement.
o the economic substance behind management's decision to use
such a measure;
As noted above, the board of directors and management
operate the Company using its non-GAAP net income measure.
Items that are adjusted in the non-GAAP measure are not
considered in the assessment of the performance of the
Company and do not influence future decision making.
Management does not expect these expenses to recur and
considers them to be unusual or infrequent in their
nature. In some cases, the settlement of these charges
includes a cash payment. However, even in the event of a
future cash payment, budgets and forecasts are not
adjusted for these items. For example, the expected
settlement of the class action suit in 2002 did not affect
the decisions made in that quarter or future quarters.
The Company adjusted for this item when calculating its
non-GAAP net income measure in order to assess the
operating results for that period compared to other
historical or future periods. As illustrated below,
the Company will revise its future filings to include
disclosure related to this requirement.
o the material limitations associated with the use of the
non-GAAP financial measure as compared to the use of the
most directly comparable GAAP financial measure;
The Company believes that a material limitation of using a
non-GAAP net income measure includes the potential
implications related to financial covenants under bank
lending agreements.
In the past, the Company was a party to bank lending
agreements whereby certain financial covenants were based
upon GAAP measures. Under these types of agreements,
the Company could be in violation of certain financial
covenants based upon the results for a particular period.
The failure of a covenant could affect liquidity.
If the results for that period include non-GAAP
adjustments, management's exclusion of non-recurring
items from its analysis could result in management making
decisions to allocate financial resources that may not be
available due to the failure of covenants. During the past
five years, the Company was in compliance with, or had
received a waiver for, all bank covenants. The Company was
not a party to any bank lending agreements at
December 31, 2004 or 2003.
As illustrated below, the Company will revise future
filings to include disclosure related to this requirement.
o the manner in which management compensates for these
limitations when using the non-GAAP financial measure; and
Currently, the Company is not a party to any bank lending
agreements. As a result, at this point in time, the
material limitation described above does affect current
decision making. In the future, it is expected that the
Company will be able to negotiate terms of bank lending
agreements under which financial covenants are calculated
using the non-GAAP net income measure utilized by the