piii_10k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
þ
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal year ended December 31, 2009
Commission
file number: 000-31283
PECO II, INC.
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(Exact name of registrant as
specified in its
charter)
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Ohio
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34-1605456
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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1376
State Route 598, Galion, Ohio 44833
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(Address
of principal executive offices) (Zip
Code)
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Registrant’s telephone number, including area
code: (419) 468-7600
Securities
registered pursuant to Section 12(b) of the Act:
Common
Shares, without par value
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Nasdaq
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(Title of each
class)
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(Name of each exchange
on
which registered)
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer as defined in
Rule 405 of the Securities Act. Yes £ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes £ No þ
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 þ No £
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large accelerated
filer
o |
Accelerated
filer o |
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Non-accelerated
filer
o
(Don’t
check if a smaller reporting company)
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Smaller reporting
company þ |
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No þ
The
aggregate market value of the registrant’s common shares, without par value,
held by non-affiliates of the registrant was approximately $5.3 million on June
30, 2009.
On March
16, 2010, the registrant had outstanding 2,859,466 of its common shares, without
par value.
DOCUMENTS
INCORPORATED BY REFERENCE
None
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1.
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Business
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1 |
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Item
1A.
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Risk
Factors
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7 |
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Item
1B.
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Unresolved
Staff Comments
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11 |
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Item
2.
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Properties
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11 |
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Item
3.
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Legal
Proceedings
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12 |
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Item
4.
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(Removed
and Reserved)
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12 |
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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12 |
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Item
6.
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Selected
Financial Data
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13 |
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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13 |
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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18 |
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Item
8.
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Financial
Statements and Supplementary Data
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18 |
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosures
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36 |
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Item
9A(T).
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Controls
and Procedures
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36 |
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Item
9B.
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Other
Information
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37 |
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PART III
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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37 |
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Item
11.
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Executive
Compensation
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39 |
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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44 |
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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48 |
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Item
14.
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Principal
Accounting Fees and Services
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49 |
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PART
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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49 |
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Signatures
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50 |
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Exhibit
Index
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E-1 |
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PART
I
ITEM 1—BUSINESS
All
references to “we,” “us,” “our,” “PECO II,” or the “Company” in this Annual
Report on Form 10-K mean PECO II, Inc.
PECO II,
Inc. was incorporated in Ohio in 1988. Our headquarters is located at
1376 State Route 598 in Galion, Ohio 44833 and our telephone number is (419)
468-7600. Our corporate web site address is
www.peco2.com.
In 1988,
we acquired the assets of ITT’s communications power product
business. In August 2000, we completed an initial public offering of
575,000 of our common shares resulting in net proceeds to us of $78.3
million. We made two strategic acquisitions in 2001 to expand our
engineering and installation, or E&I, services capabilities. In June 2001,
we acquired Thornton Communications and in August 2001, we acquired JNB
Communications. On March 28, 2006, the Company acquired the assets
related to the Telecom Power Division of Delta Products Corporation, which
consisted of certain wireline and wireless communications providers contracts
and related inventory and assumed the liabilities associated
therewith. In exchange, we issued 474,037 of our common shares
without par value (the “Primary Shares”) and a warrant to purchase up to
approximately 1.3 million of our common shares, or such other number of shares
that, when aggregated with the Primary Shares, represented 45% of our issued and
outstanding shares of common stock. The warrant expired unexercised
in September 2008.
On
February 18, 2010, we entered into an Agreement and Plan of Merger (merger
agreement) with Lineage Power Holdings, Inc. (Lineage), a Gores Group company
and a provider of intelligent power conversion solutions, and Lineage Power Ohio
Merger Sub, Inc., a wholly-owned subsidiary of Lineage. Under the
terms of the merger agreement, Lineage will acquire all of the outstanding
shares of PECO II for $5.86 per share in cash without interest and less any
applicable tax withholding. The Board of Directors of both PECO II
and Lineage have unanimously approved the proposed transaction. The
completion of the merger and other transactions contemplated by the merger
agreement is subject to a number of conditions, including adoption at the
special meeting of PECO II shareholders of the merger agreement and the
merger.
We
offer solutions to our telecommunication customers’ cost, quality, productivity
and capacity challenges by providing on-site E&I systems integration,
installation, maintenance and monitoring services and by designing, assembling
and marketing communications specific power products. The products we
offer include power systems, power distribution equipment and systems
integration products. Our power systems provide a primary supply of
power to support the infrastructure of communications service providers,
including local exchange carriers, long distance carriers, wireless service
providers, internet service providers and broadband access
providers. Our power distribution equipment directs this power to
specific customer communications equipment. Our systems integration business
provides complete built-to-order communications systems assembled and installed
pursuant to customer specifications and incorporating other manufacturers’
products. Our operations are organized within two segments: services
and products. You can find more information regarding our two business segments
in Note 2 to our consolidated financial statements located in Item 8 “Financial
Statements and Supplementary Data” below.
Market
Overview
We
participate in the global telecommunication marketplace (wireline &
wireless) with the majority of our current revenue being generated in North
America. Our customers’ network power needs are influenced by
numerous factors, including size of the organization, number and types of
technology systems deployed in the network and geographic
coverage. The North American market consists of multiple segments
that include Regional Bell Operating Companies (RBOCs), Independent Telephone
Companies (IOCs), Inter-exchange Carriers/Competitive Access Providers,
Wireless, Cable TV, Private Network/Enterprise, and Government.
Wireline
companies, including the RBOCs and IOCs, continue to upgrade their respective
networks to meet the increasing demands of their local service area. These
carriers have been increasingly offering broadband access and triple play
services. Most are currently deploying a next generation high-speed
architecture such as FTTN (fiber to the node) or FTTP (fiber to the premises) in
order to compete against the cable companies and the hybrid service offerings
from local wireless providers.
Inter-exchange
Carriers/Competitive Access Providers are experiencing tremendous pressure to
identify their fit within the global telecommunication network. The
Inter-exchange Carrier provides a connection between two parties outside an
immediate serving area. Competitive Access Providers came into play
after the Telecom Act of 1996 enabled local service competition within a given
wireline market. Over the years, many of the Competitive Access
Providers and Inter-exchange Carriers have merged or formed partnerships to
compete against the incumbent telephone company in a given area. Recent
regulatory changes have increased the competitive pressure and have created
significant infrastructure write-offs as well as mergers and acquisitions
activity in these sectors.
Wireless
providers continue to build and expand. As a result of mergers and
acquisitions within the wireless segment, there are four large North American
organizations competing for the largest growth sector among individual
subscribers. Wireless providers will likely continue to invest in
infrastructure to move closer to their subscriber base, fill coverage gaps, and
add traffic capacity, as well as upgrade facilities to provide the latest
subscriber services via high speed wireless technologies such as EVDO (Evolution
Version Data Only), HSPA (High Speed Packet Access), and UMTS (Universal Mobile
Telecommunications System). Several carriers announced plans to begin
introducing 4G solutions in 2009. The two primary 4G solutions are
LTE (Long Term Evolution) and WiMAX (Worldwide Interoperability for Microwave
Access).
Cable TV
companies have traditionally offered video services to their subscriber
base. However, in the past several years they have expanded to offer
high speed data access that competes with the incumbent telephone company’s DSL
service. New high-speed data/video infrastructure builds are
underway to offer VOIP (Voice Over Internet Protocol), and wireless services and
protect their market from the new video and data offerings currently planned by
local incumbent telephone companies.
The
Private Network/Enterprise market traditionally had been focused on providing
in-building dial tone services to commercial organizations, but has now expanded
offerings based on evolving IT technology and business
requirements. Steady growth in the Enterprise market is anticipated
to continue to occur over the next five years as new services such as
in-building wireless, video conferencing, and web page commerce are
introduced. A key enabler of these new services is improvements in
the support infrastructure to maintain these services during critical power
failures.
The
Government market is undergoing continued changes, especially as a result of the
terrorist attacks of 2001. Communication infrastructure redesign is
currently underway on a federal, state, and local basis. The current
Homeland Security communication infrastructure build is expected to continue for
the next several years. As a result of the American Recovery and
Reinvestment Act, additional spending is expected in both government and carrier
networks.
There has
been significant and material consolidation within the service provider market
segment, which is predicted to continue into 2010. This consolidation
has reduced the actual number of service provider customers while significantly
increasing their purchase power. Four of our largest customers
several years ago are now one customer. This provides both new
opportunities and risks in budget distractions driven by focused synergy efforts
to provide significant cost savings across the new organization.
Our
Business Strategy
Our
strategy is to capitalize on the growing need to afford service providers a
reliable source of power to run their networks in order to serve their customers
today. These needs are found in wireline and wireless networks both
at the service provider and enterprise level today. We provide our
customers with solutions and related services that power their voice, data, and
broadband offerings. Our long term strategy is to:
§
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profitably
grow revenues by continuing to flawlessly serve our
customers;
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improve
our ability to touch more customers through the Company’s indirect sales
channel capability;
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continually
improve the talent level of our employees through coaching, training, and
adding experienced industry talent to upgrade our overall
capability;
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continue
to organically expand our customer base while we evaluate selective
acquisitions to augment our current
capabilities;
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leverage
alliances to operationally improve our customer responsiveness and grow
our product and solution capability, enabling us to expand on technical
competencies while lowering our cost
structure;
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leverage
power system services competency to grow a national service
capability;
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penetrate
further into customer markets where we currently have a strong services
embedded base;
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evaluate
key markets for expansion based on leveraging our DC power
competency;
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leverage
industry partnerships to provide “green” solutions that meet our
customer’s expectations;
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further
develop system integration and assembly capability to ensure we maintain
the most responsive resource in the industry;
and
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refine
our product development processes to focus on systems integration skills
and practices that reduce design cycle times, positioning us to capture
market share in the fast-paced telecommunications
market.
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Business Segments
Our operations are
organized within two segments: products and services.
Products
We
continued to transform our product offering in 2009. We filled a key
product category gap by developing a new small power platform to address the
growing market for broadband outside plant and network edge power
solutions. The size of the small, or micro, power market in the U.S.
is estimated to reach $450 million by 2011, according to industry analyst
Skyline Marketing. The inclusion of another platform to the Company’s
small power portfolio will position the Company to participate in this high
growth sector during 2010 and beyond.
Our small
product platforms are the Quantum™
Power System and the MPS Micro Power System. The Quantum
platform is a 48-volt DC power system that combines high-density rectifiers,
distribution and control in a sleek, low-profile shelf. It is
optimized for telecom carriers deploying FTTN and traditional wireline
architectures. Designed for the harsh outside plant environment, the
Quantum system’s small footprint makes it ideal for cabinets where rack space is
at a premium. Both 23” and 19” Integrated Shelves were developed in
2008, along with a variety of distribution options. The Quantum
system has achieved NEBS Level 3 Certification.
The MPS
Micro Power System is a small power system designed for the network
edge. Depending on configuration, the low profile system supplies
anywhere from 18 Amps to 150 Amps of current at 48Vdc in a 1RU shelf by 19” wide
shelf. The system contains up to three rectifiers, integrated
distribution and a system controller. The controller provides
standard DC power system management along with battery management, as well as an
optional SNMP interface. Integrated distribution can include GMT
fuses and a battery disconnect fuse, minimizing the size of the overall system
and making it ideal for use in space-constrained remote cabinet
applications. A primary application for the MPS is powering triple
play solutions for multiple dwelling unit applications.
During
the fourth quarter of 2009, we introduced our next generation mid-sized power
plant products to the marketplace. These next generation 138 and 139
power plants utilize 1RU rectifiers and converters, incorporate a totally
redesigned user interface, and implement reconfigured AC input and DC output
interconnections. User friendliness, field serviceability, and cable
management have all been significantly improved while preserving all tried and
true customer practices. The 138 and 139 plants also support the
growing number of “green” initiatives by incorporating high efficiency 1RU
rectifiers and converters. Customer reaction has been very
favorable. Several plants have already shipped to new customers and
customers of existing mid-size power plants have expressed strong desire to move
to the new power plants.
Our major
product categories and building blocks are defined below:
Product Category
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Purpose
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Range of Products
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Battery Plants
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Convert
and distribute power to run network equipment while storing energy in
rechargeable batteries to be used in the event of an alternating current,
or AC, input failure.
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With
capacities ranging from 3 to 10,000 Amperes, these systems are engineered
for use in a wide number of applications, including central office,
cellular, fiber optic, microwave, and broadband
networks.
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Rectifiers
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Convert
incoming AC power to DC power.
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Our
broad collection of rectifiers includes modules designed for larger
applications as well as compact “hot swappable” modular switchmode
rectifiers designed to be added or replaced without powering down the
system.
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Power Distribution
Equipment
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Distribute
and limit power from a centralized power plant to various loads or end
uses.
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We
offer a wide range of products from large battery distribution fuse
boards, which provide intermediate distribution in applications where
large power feeds from a power plant need to be split into smaller
distributions, to smaller distribution circuits cabled directly to the
load.
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Converter
Plants
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Convert
one voltage of DC power to another voltage of DC power.
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Various
models are available utilizing modules that provide 24V-48V and 48V-24V
conversions.
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Inverter
Plants
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Convert
voltage from DC to AC power suitable for end-use applications. Provides
continuous AC power in the event of a utility
interruption.
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Numerous
systems are available based on our 1.2 kW modular “hot swappable” and
“redundant” modules.
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Services
In 2009, we continued our
efforts to address the needs of our Tier I customer base. We
strengthened our Central Office/Mobile Switching Center reputation and skill set
by expanding out to new customers and markets. We expanded our cell
site service capabilities, resulting in the award of Power turn key cell site
deployment services contracts from Tier I wireless
carriers. Additionally, we were awarded a renewal and major expansion
of an existing contract with a Tier I provider. We continue to
emphasize skill set expansion to deepen our solution set within our embedded
customer base, while assisting with the establishment of new services offerings
that will enable us to expand beyond our current power centric wireline/wireless
reputation. Our portfolio of services solutions include:
·
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Capital
Deployment Engineering & Installation (E&I)
Services
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●
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DC
Power (PECO II or other OEM
products)
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§
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Large
and Small Power Plants
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§
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Battery
Install/Testing/Removals
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§
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Converter
and/or Inverter Plants
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●
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Multi-site
Network Build Plans
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Multi-site
Maintenance and Emergency Support
Services
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Cell
Site/Remote Terminal Services
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▪ Power,
Grounding, Site Expansion Audits
▪ Preventative
Maintenance Programs
●
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Central
Office/Main Switching Office
Services
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▪ Power
& Grounding Audits
▪ Preventative
Maintenance Program
●
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Depot
& Field Repair Services of DC Power
Equipment
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▪ Advance
Exchange
▪ Product
Upgrade and Refurbishment
·
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Staffing
Services within Wireline & Wireless Telecommunication
Sector
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●
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Technical
& Field Personnel
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We will
strive to continue to develop and enhance these services to maintain our strong
quality and professional services reputation within the telecommunication
industry.
Marketing and
Sales
In
2009, our focus was on growing the business; we increased business with existing
customers, added channel partners to reach additional customers and looked to
Original Equipment Manufacturer (OEM) partners in order to provide full turnkey
solutions to the market place. Our sales force is located throughout
the United States and calls directly on our National Carrier customers, as well
as providing local sales support to our manufacture representatives and Value
Added Resellers (VARs). Our go to market model includes a National
Account focus driving new product introductions, product standardizations and
approvals as well as positioning PECO II and developing relationships throughout
the customer’s corporate group that provide us visibility and opportunity to
expand our relationships. Our regional sales efforts focus on growing
business geographically and increasing our presence in those
regions.
VARs and
manufactures representatives are utilized as both a channel to Tier II and III
customers, as well as to augment our overall account and market
strategy. Distributors are utilized to support the local needs of our
customer base as required. This channel supports local carriers and
installation groups who have established purchasing practices with the local
branch.
Marketing
and Product Line Management are located at our headquarters in Ohio and are
responsible for all pricing, promotion, and the coordination of all next
generation product and services offerings. We identify product needs
from the marketplace through feedback from our customers, our sales personnel,
in house engineering staff, and services managers, as well as our strategic
partners. We actively participate in industry trade shows as required
to communicate to our target market.
Customers
We continue our long history of being a
primary DC power solution supplier of product and services to the North American
telecommunication marketplace. Our diverse portfolio of customer solutions
and long standing reputation allow us to participate in capital deployment
projects within all the North American telecommunication market segments such as
RBOCs, Independent Telephone Operators, Inter-exchange Carriers, Competitive
Access Providers, Original Equipment Manufacturers, Wireless, Cable TV, and
Government.
In 2009,
the wireless carriers provided us with 55% of our revenue. The major
portion of this revenue came from manufactured products (power systems and
outside plant cabinets), however, we continue to see an increasing demand and
corollary growth with our services portfolio (engineering, installation,
maintenance contracts, site audits, and training). We provide
aforementioned services to companies such as: Sprint Nextel, Verizon
Wireless and AT&T. Note that Alltel was acquired by Verizon
Wireless and Centennial Wireless was acquired by AT&T in 2009.
The RBOCs
made up 35% of our 2009 revenue. Major customers that we serve in
this segment include: AT&T, Verizon and Qwest. This segment grew
dramatically in 2009 as a result of the growth in our E&I services
capability.
The
remaining revenue comes from a large number of other customers that can be
classified as Independent Telephone Companies, Competitive Access Providers,
Inter-exchange Carriers, Government, Original Equipment
Manufacturers, Cable TV, as well as international partners/service
providers. This market made up 10% of our revenues in 2009. This
segment included a healthy mix of services along with our traditional
manufactured products. Some of the customers included in this segment of
our customer base include: Level 3, Time Warner Telephone, Nokia and
BT.
Backlog
As of
December 31, 2009, the unshipped customer order backlog totaled $2.9 million,
compared to $2.5 million as of December 31, 2008. We expect to ship
the entire December 31, 2009 backlog in 2010.
Operations
and Quality Control
The goal of our operations
is to be recognized as a world class entity as measured by total customer
satisfaction. We strive to achieve complete customer satisfaction by
providing customers with zero defects in our installed equipment from product
design to test and turn up, all at the best possible value. Our
manufacturing operations are focused on factory flow, productivity improvement,
cost reduction and evaluation of operations processes to ensure our long-term
success. Our services capabilities are focused on zero defects and
flawless on-time delivery of our services to meet the requirements of our
customers. Likewise, through the development and deployment of
quality process tools throughout PECO II, we aim to dramatically improve
processes and associate involvement in our quest for excellence. By
accomplishing the above, we aim to position PECO II to ensure customer
satisfaction, which will enhance our ability to grow our business.
Our
primary focus is to deliver our products on time and defect-free, using
processes that are designed with employee involvement and focused manufacturing
cell principles. Our facility in Galion, Ohio is TL9000 and ISO9001
certified for quality assurance in design and manufacturing. TL9000
is a specific set of requirements for the telecommunications industry that is
based on ISO9001 and developed by the Quest Forum. Our quality policy
is a vital ingredient in the daily operations of all associates. Our
quality values are based on trust, respect and teamwork. We are
committed to continually improve and review our quality management system such
that our services and products exceed our customers’ needs and expectations
every time. In conjunction with the TL9000 / ISO9001 standards, our
cross-functional teams are focused to provide our customers with products that
meet or exceed industry standards such as Underwriters Laboratories (UL),
Canadian Safety Agency (CSA), European Conformity (EC), and the Network
Equipment Building Standards (NEBSÔ).
We have
valuable customer relationships, product knowledge, systems integration, and
services expertise. We believe that people, both customers and employees, are
the most important part of our business. Because we have personnel,
as well as manufacturing facilities, in Galion, Ohio with a high level of
industry knowledge, we are able to provide our customers with fast and flexible
responses to their requirements for products, systems integration, and
services.
Research,
Development and Engineering
Our engineering efforts
are focused on system design, integration and development. We utilize
our knowledge of customer applications, safety and network compliance, and
system level packaging to create products that meet both general and
customer-specific needs. The focus on systems level design and
integration allows us to design systems around different power conversion
modules to meet specific customer needs. We actively participate in
industry standards organizations, and design our products to meet those
standards.
Patents
and Trademarks
We use a combination of
patents, trade secrets, trademarks, copyrights, and nondisclosure agreements to
establish and protect our proprietary rights. We cannot assure that
any new patents will be issued and that we will continue to develop proprietary
products or technologies that are patentable. We also cannot assure
that any issued patent will provide us with competitive advantages and will not
be challenged by third parties. And finally, we cannot assure that
the patents of others will not have a material adverse effect on our business
and operating results.
Suppliers
and Raw Materials
Our
suppliers of metal parts, cable assemblies, electrical components, modules and
other sub-assemblies, are vital to our success. We continue to build
on our current relationships and to cultivate new suppliers to ensure that we
achieve advantageous product costs and improved delivery times that will make us
more cost competitive in the marketplace. Cost improvements are
achieved through advanced planning with the key suppliers to ensure materials
are purchased at optimum quantities and by improving the overall supply chain
cycle time from raw materials to finished assemblies and/or
sub-assemblies. This will provide opportunities to better respond to
customer needs, to provide quality products, and meet the ever-increasing
demands for short delivery intervals.
We rely
on relationships with some of our competitors to access critical rectifier and
converter technology for our power systems. Without access to this critical
technology our ability to grow or maintain our current levels of revenue and
earnings could be impaired.
Competition
Competition
in the global marketplace is served by a number of local and global DC power
organizations. These organizations can be broken down into full
service providers, discount vendors, and new age vendors. Many
of our competitors have more engineering, manufacturing, marketing, financial,
and personnel resources than us. We will continue to see disruption
in this market space as competitors face the increasing challenges of a
shrinking customer base with significantly larger buying power. We
believe we will be successful in competing with other similar suppliers based on
our long-term customer relationships, our flexibility to scale and respond to
customer and market changes, our delivery and services capabilities, our ability
to contain costs, and our price, reliability, and quality of product and
services.
There are
three full service vendors in North America: we are one of the three and Emerson
and Lineage are the other two. Telecom carriers who utilize these
full service vendors are looking for organizations that have a complete product
portfolio, installation and services capabilities, as well as efficient and
competitive cost structures. The full service vendors maintain the
majority of the market share of the traditional telephone carrier organizations
such as the RBOCs, Inter-exchange Carriers, as well as the large incumbent
telephone organizations. In addition to the traditional carriers,
these full service organizations also dominate the large Tier I wireless
providers. Recognition and acceptance as a full service DC power
vendor generally requires a long history of top customer relationships, as well
as a large embedded base.
In
addition to the full service vendors, the North American marketplace is also
made up of OEM DC power organizations as well as local and regional niche
players. The OEM DC power organizations generally have strong
relationships with the top radio manufacturers and integration organizations
that allow them to participate in the wireless marketplace via indirect
channels. These organizations generally compete on price alone or
have a unique offering for a particular application.
Environmental
Matters
We are subject to
comprehensive and changing foreign, federal, state and local environmental
requirements, including those governing discharges to the air and water, the
handling and disposal of solid and hazardous wastes and the remediation of
contamination associated with releases of hazardous substances. We
believe we are in compliance with current environmental
requirements. Nevertheless, we use hazardous substances in our
operations and, as is the case with manufacturers in general, if releases of
hazardous substances occur on or from our properties, we may be held liable and
may be required to pay the cost of remedying the condition. The
amount of any resulting liability could be material.
Employees
We presently have
approximately 190 full-time employees. None of our employees are
represented by a labor union. We have not experienced employment
related work stoppages.
Additional
Information
We make
available on our website, www.peco2.com, links
to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and any amendments thereto, as well as proxy statements and
other filing with the Securities and Exchange Commission. In
addition, copies of our filings can be requested, free of charge, by writing to:
Investor Relations, PECO II, Inc., 1376 State Route 598, Galion, Ohio
44833.
ITEM
1A—RISK
FACTORS
Failure
to consummate the announced merger with Lineage may adversely affect the market
price of our common stock and our results of operations.
If the
merger is not completed, the price of our common stock may decline to the extent
that the current market price reflects a market assumption that the merger will
be completed. In addition, in response to the announcement of the
merger, our customers and strategic partners may delay or defer decisions which
could have a material adverse effect on our business regardless of whether the
merger is ultimately completed. Similarly, current and prospective
employees of our company may experience uncertainty about their future roles
with the combined company. These conditions may adversely affect
employee morale and our ability to attract and retain key management, sales,
marketing and technical personnel. In addition, focus on the merger
and related matters have resulted in, and may continue to result in, the
diversion of management’s attention and resources. To the extent that
there is uncertainty about the closing of the merger, or if the merger does not
close, our business may be harmed if customers, strategic partners or others
believe that they cannot effectively compete in the marketplace without the
merger or if there is customer and employee uncertainty surrounding the future
direction of the company on a stand-alone basis.
If
the merger does not occur, we will not benefit from the expenses we have
incurred in preparation for the merger.
If the
merger is not consummated, we will have incurred substantial expenses for which
no ultimate benefit will have been received by us. We currently
expect to incur significant out-of-pocket expenses for services in connection
with the merger, consisting of financial advisor, legal and accounting fees and
financial printing and other related charges, many of which may be incurred even
if the merger is not completed. Moreover, under specified
circumstances, we may be required to pay a termination fee of $1.1 million,
depending upon the reason for termination, to Lineage in connection with a
termination of the merger agreement.
Legal
proceedings in connection with the merger could delay or prevent the completion
of the merger.
A
purported class action lawsuit has been filed by third parties challenging the
proposed merger and seeking, among other things, to enjoin the consummation of
the merger. One of the conditions to the closing of the merger is
that no order shall have been issued by any court of competent jurisdiction
preventing the consummation of the merger. If a plaintiff is
successful in obtaining an injunction prohibiting consummation of the merger,
then the injunction may delay the merger or prevent the merger from being
completed.
The communications market fluctuates
and is impacted by many factors, including decisions by service providers
regarding capital expenditures and their timing of purchases as well as demand
and spending for communications services by businesses and
consumers.
After
significant deterioration earlier this decade, the global communications market
stabilized in 2004 and experienced modest growth through 2008, as reflected in
increased capital expenditures by service providers and growing demand for
telecommunications services. In 2009, the overall market was flat to
down, primarily resulting from the ongoing industry level consolidation that
continues amongst the service providers combined with the overall economic
conditions. Although we believe the overall market will continue to
grow, the rate of growth could vary and is subject to substantial fluctuations,
especially in times of overall economic uncertainty. Additionally,
the specific market segments in which we participate may not experience the
growth of other segments. If this were to continue to occur, or if
there was a reduction in capital expenditures, our business, operating results,
and financial condition may be adversely affected. If capital
investment by service providers grows at a slower pace than we anticipate, our
business, operating results and financial condition may be adversely
affected. The level of demand by service providers can change quickly
and can vary over short periods of time, including from month to
month.
A
small number of customers account for a high percentage of our net sales; there
are only a small number of potential major customers in our primary market; and
the loss of a key customer could have a negative impact on our operating results
and cause our stock price to decline.
In any
one quarter, it is typical for us to have two to three key customers that each
account for over 10% of our revenues. In 2009, sales to our ten
largest customers accounted for approximately 85.3% of net sales. We
expect that we will continue to be dependent upon a limited number of customers
for a significant portion of our revenues in future periods. In
addition, almost all of our sales are made on the basis of purchase orders, and
most of our customers are not obligated to purchase products or services from
us. As a result of this customer concentration, our revenues and
operating results may be materially adversely affected by the failure of
anticipated orders to materialize or by deferrals or cancellations of orders. In
addition, there can be no assurance that revenue from customers that accounted
for significant sales in past periods, individually, or as a group, will
continue, or if continued, will reach or exceed historical levels in any future
period. Further, such customers are concentrated in the
communications industry and our future success depends on the capital spending
patterns and the continued demand of such customers for our products and
services. Additionally, any merger or acquisitions among our
customers could impact future orders from such customers.
If
we are unable to meet our additional capital needs in the future, we may miss
expansion opportunities or find ourselves unable to respond to actions by our
competitors, which could impair our competitive position and hurt sales and
earnings.
In
the future, our competitive position could be impaired if we cannot raise
capital when required and therefore we would not be able to take advantage of
opportunities to expand our business either internally or through
acquisitions. Our sales and earnings could suffer if we do not have
the financial resources needed to respond to new product introductions or market
price erosion. If additional funds are raised through the issuance of
equity securities, the percentage ownership of our then-current shareholders may
be reduced and such equity securities may have rights, preferences, or
privileges senior to those of our common shareholders. In addition,
there can be no assurance that additional financing will be available at
favorable terms or will be available at all. If adequate funds are
not available or not available on acceptable terms we may not be able to take
advantage of unanticipated opportunities, develop new or enhanced services and
related products, or otherwise respond to unanticipated competitive
pressures. Our business, operating results, and financial condition
could be materially adversely affected without additional capital.
We may fail to meet market
expectations because of fluctuations in our quarterly operating results, which
could cause our stock price to decline.
Our
quarterly operating results have significantly varied in the past and will
continue to do so in the future depending on factors such as the timing of
significant orders and shipments; capital spending patterns of our customers;
changes in the regulatory environment; changes in our pricing or the pricing of
our competitors; increased competition; mergers and acquisitions among
customers; personnel changes; demand for our products; the number, timing, and
significance of new product and product enhancement announcements by us and our
competitors; our ability to develop, introduce, and market new and enhanced
versions of our products on a timely basis; and the mix of direct and indirect
sales and general economic factors. A significant portion of our
revenues have been, and will continue to be, derived from substantial orders
placed by large organizations, such as the Tier I wireless providers, and the
timing of such orders and their fulfillment has and will cause material
fluctuations in our operating results, particularly on a quarterly basis. Due to
the foregoing factors, quarterly sales and operating results have been and will
continue to be difficult to forecast. Based upon all of the foregoing, we
believe that quarterly sales and operating results are likely to vary
significantly in the future and period-to-period comparisons of our results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Further, it is likely that in some future
quarter, our sales or operating results will be below the expectations of public
market analysts and investors. In such event, the price of our common
stock could be materially adversely affected.
If
we engage in acquisitions, we may experience difficulty assimilating the
operations or personnel of the acquired companies, which could threaten the
benefits we seek to achieve through acquisitions and our future
growth.
If we
make additional strategic acquisitions, we could have difficulty assimilating or
retaining the acquired companies’ personnel or integrating their operations,
equipment, or services into our organization. This could disrupt our
ongoing business, distract our management and employees, and reduce or eliminate
the financial or strategic benefits that we sought to achieve through the
acquisition and threaten our future growth.
Equipment
problems may seriously harm our credibility and have a significant impact on our
revenues, earnings and growth prospects.
Communications
service providers insist on high standards of quality and reliability from
communications equipment suppliers. If we deliver defective equipment, if
our equipment fails due to improper maintenance, or if our equipment is
perceived to be defective, our reputation, credibility and equipment sales could
suffer. Any of these consequences could have a serious effect on our
sales, earnings and growth prospects.
We
will not remain competitive if we cannot keep up with a rapidly changing
market.
The
market for the equipment and services we provide is characterized by rapid
technological changes, evolving industry standards, changing customer needs and
frequent new equipment and service introductions. Failure to keep up
with these changes could impair our competitive position and hurt sales,
earnings and our prospects for future growth. If we fail to
adequately predict and respond to these market changes, our existing products or
products in development could become obsolete in a relatively short time
frame. Our future success in addressing the needs of our customers
will depend, in part, on our ability to timely and
cost-effectively:
§ respond
to emerging industry standards and other technological changes;
§ develop
our internal technical capabilities and expertise;
§ broaden
our equipment and service offerings; and
§ adapt our
products and services to new technologies as they emerge.
The
need for our products to obtain certification and the high demand for lab time
could reduce our revenue and earnings by impairing our ability to bring new
products to markets.
Typically,
our products must be compliant with and certified by certain certifying agencies
and bodies, including the Underwriters Laboratories, Canadian Safety Agency,
European Conformity and, more recently, the Network Equipment Building
Standard. Certification typically requires a company to secure lab
time to perform testing on the equipment to be certified. The time
required to obtain approvals from certifying bodies may result in delays in new
product introductions, which could delay or reduce anticipated revenue and
earnings from those products.
We
could lose revenue opportunities if we do not decrease the time it takes us to
fill our customers’ orders.
A
customer’s selection of power equipment is often based on which supplier can
supply the requested equipment within a specified time period. Unless
we increase our manufacturing capacity to meet the increasingly shortened
delivery schedules of our customers, we may lose potential sales from existing
or new customers.
The
market for supplying equipment and services to communications service providers
is highly competitive, and, if we cannot compete effectively, our ability to
grow our business or even to maintain revenues and earnings at current levels,
will be impaired.
Competition
among companies that supply equipment and services to communications service
providers is intense. A few of our competitors have significantly
greater financial, technological, manufacturing, marketing and distribution
resources than we do. There can be no assurance that our current or
potential competitors will not develop products comparable or superior to those
developed by us or adapt more quickly than us to new technologies, emerging
industry trends or changing customer requirements. Increased competition may
cause us to lose market share or compel us to reduce prices to remain
competitive, which could result in reduced gross
margins. Additionally, we rely on relationships with some of our
competitors to access critical rectifier and converter technology for our power
systems. Without access to this critical technology, our ability to
grow or to even maintain our current levels of revenues and earnings could be
impaired.
A
significant downturn in the general economy could adversely affect our revenue,
gross margin, and earnings.
Our
business could be unfavorably affected by changes in national or global economic
conditions, including inflation, interest rates, availability of capital
markets, consumer spending rates, and the effects of governmental plans to
manage economic conditions. The demand for many of our products and
services is strongly correlated with the general economic conditions and with
the level of business activity of our customers. Economic weakness
and constrained customer spending has resulted in the past, and may result in
the future, in decreased revenue, gross margin, earnings, or growth
rates. We also have experienced, and may experience in the future,
gross margin declines reflecting the effects of increased pressure for price
concessions as our customers attempt to lower their cost
structures. In this environment, we may not be able to reduce our
costs sufficiently to maintain our margins.
Our
products are dependent in part upon our proprietary technology.
Our
ability to compete is dependent in part upon our proprietary
technology. We rely on a combination of patents, trade secrets,
copyright and trademark laws, nondisclosure and other contractual agreements,
and technical measures to protect our proprietary rights. Despite our
efforts to protect these rights, unauthorized parties may attempt to copy
aspects of our products or to obtain and use the information that we regard as
proprietary. There can be no assurance that the steps we take to
protect our proprietary information will prevent misappropriation of such
technology and such protections may not preclude competitors from developing
products with functionality or features similar to our
products. While we believe that our products and trademarks do not
infringe upon the proprietary rights of third parties, there can be no assurance
that we will not receive future communications from third parties asserting our
products infringe, or may infringe, the proprietary rights of third
parties. Any such claims could be time-consuming, result in costly
litigation and diversion of technical and management personnel, cause product
shipment delays, or require us to develop non-infringing technology or enter
into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all. In the event of a successful claim of product infringement
against us, if we fail or are unable to develop non-infringing technology or
license the infringed or similar technology, our business, operating results and
financial condition could be materially adversely affected.
Failure
to attract and retain qualified personnel may result in difficulties in managing
our business effectively and meeting revenue growth objectives.
Our
success in efforts to grow our business depends on the contributions and
abilities of key personnel, executives, operating officers, and
others. If we are unable to retain and motivate our existing
employees and attract qualified personnel to fill key positions, we may not be
able to manage our business effectively, including the development of both
existing and new products and services. Success in meeting our
revenue and margin objectives also depends in large part on our ability to
attract, motivate, and retain highly qualified personnel in sales and
information management positions. Competition for such personnel is intense and
there can be no assurance that we will be successful in attracting, motivating,
and retaining such personnel. Any inability to hire and retain
salespeople or any other qualified personnel, or any loss of the services of key
personnel, could harm our business.
There
is a limited market for trading in our common shares and our stock price
has been volatile.
|
Although
we are listed on the Nasdaq Capital Market, there can be no assurance that an
active or liquid trading market in our common shares will continue. The market
price of our common shares is likely to be volatile and may be significantly
affected by factors such as actual or anticipated fluctuations in our operating
results; announcements of technological innovations, new products or new
contracts by us or our competitors; developments with respect to copyrights or
proprietary rights; general market conditions; and other factors.
Although
our common shares are currently in compliance with The Nasdaq Stock Market’s
continued listing standards, we cannot assure you that we will be able to
maintain such compliance in the future.
From
February 13, 2007, to May 22, 2008, we were not in compliance with The Nasdaq
Stock Market’s Marketplace Rule that requires the Company to maintain a $1.00
per share minimum bid price. In an effort to regain compliance, our
shareholders approved, and on May 7, 2008, we executed a 1-for-10 reverse stock
split. On May 22, 2008, we received a decision that Nasdaq would
continue the listing of our common shares on The Nasdaq Stock
Market. Although our common shares are currently in compliance with
the Nasdaq Stock Market’s continued listing standards, we cannot assure you that
we will continue to meet all continued listing standards in the
future.
Ownership
of our common shares is concentrated among a few shareholders, who may be able
to exert substantial influence over our Company.
Our
present officers and directors own outright approximately 20.7% of our common
shares as of March 12, 2010. In particular, Messrs. Matthew P. Smith
and James L. Green, and their respective affiliates, own outright approximately
16.9% of our common shares as of March 12, 2010. In addition, Delta
International Holding Ltd. owns outright 474,037 shares or approximately 16.6%
of our common shares as of March 12, 2010. As a result, these
shareholders have the potential to exercise significant influence over matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions. Such ownership may have the
effect of delaying or preventing a change in control of our
Company.
We may be subject to certain
environmental and other regulations.
Some of
our operations use substances regulated under various federal, state, local and
international environmental and pollution laws, including those relating to the
storage, use, discharge, disposal and labeling of, and human exposure to,
hazardous and toxic materials. Compliance with current or future
environmental laws and regulations could restrict our ability to expand our
facilities or require us to acquire additional expensive equipment, modify our
manufacturing processes or incur other significant expenses. In
addition, we could incur costs, fines and civil or criminal sanctions, third
party property damage or personal injury claims or could be required to incur
substantial investigation or remediation costs, if we were to violate or become
liable under any environmental laws. Liability under environmental laws can be
joint and several and without regard to comparative fault. There can be no
assurance that violations of environmental laws or regulations have not occurred
in the past and will not occur in the future as a result of our inability to
obtain permits, human error, equipment failure or other causes, and any such
violations could harm our business and financial condition.
There
are inherent limitations in all control systems, and misstatements due to error
or fraud may occur and not be detected.
While we
continue to take action to ensure compliance with the disclosure controls and
other requirements of the Sarbanes-Oxley Act of 2002 and the related Securities
and Exchange Commission and Nasdaq rules, there are inherent limitations in our
ability to control all circumstances. There is no guarantee that our
internal controls and disclosure controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. In addition, the design of a control system
must reflect the fact that there are resource constraints and the benefit of
controls must be evaluated in relation to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, in our company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Further,
controls can be circumvented by individual acts of some persons, by collusion of
two or more persons, or by management override of the controls. The design of
any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Over time, a control may be inadequate because of changes
in conditions or the degree of compliance with the policies or procedures may
deteriorate. Because of inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be
detected.
ITEM
1B—UNRESOLVED STAFF COMMENTS
None.
ITEM
2—PROPERTIES
The
following table sets forth certain information about our principal
facilities:
Location
|
|
Approximate
Square
Feet
|
|
Uses
|
|
Owned/Leased
|
|
|
|
|
|
|
|
Galion,
Ohio (A)
|
|
|
285,375 |
|
Principal
executive and corporate office, sales and services office, and
manufacturing and assembly
|
|
Owned
|
|
|
|
|
|
|
|
|
Canton,
Georgia
|
|
|
12,343 |
|
Engineering,
installation services and sales office
|
|
Leased
|
(A)
|
Includes
the Galion, Ohio corporate office shell, which is listed for sale, 42,000
square feet.
|
We have
continued to narrow our excess capacity for our current operations and continue
to attempt to sell or lease the Galion, Ohio, corporate office
shell.
Our
current capacity, with limited capital additions, is expected to be sufficient
to meet production requirements for the near future. We believe our
production facilities are suitable and can meet our future production
needs.
ITEM
3—LEGAL PROCEEDINGS
We are
party to legal proceedings and litigation arising in the ordinary course of
business. Although the outcome of such items cannot be
determined with certainty, management is of the opinion that the final outcome
of these matters should not have a material effect on our results of operations
or financial position.
The
Company, each of the members of the Company’s board of directors, Lineage Power
Holdings, Inc. (“Lineage”), and Lineage Power Ohio Merger Sub, Inc. (“Merger
Sub”) were named defendants in a purported class action and shareholder
derivative lawsuit filed in the Court of Common Pleas of Cuyahoga, County, Ohio,
on or about March 5, 2010, and styled as follows: Harshad Sandesara
v. PECO II, Inc., et al., Case No. CV 10 720332. Plaintiff is a
shareholder of the Company and seeks both to enjoin the merger and
damages. On March 15, 2010, plaintiff filed an amended complaint and
a motion for expedited proceedings. Thereafter, on March 19, 2010,
plaintiff filed a motion for preliminary injunction asking that the court block
the merger. The lawsuit alleges, among other things, that the
directors of the Company, aided and abetted by the Company and Lineage, breached
their fiduciary duties in connection with the directors’ recommendation that the
shareholders adopt a proposed merger transaction between the Company and Merger
Sub that would result in the Company being a wholly owned subsidiary of
Lineage. On March 25, 2010, the defendants filed a motion to dismiss
the amended complaint and a brief in opposition to the motion for expedited
proceedings. On March 26, 2010, the Court denied plaintiff’s motion
to expedite discovery and ordered the Company to supplement its proxy statement
filed March 18, 2010 with specific information concerning the background of the
merger. At this stage, it is not possible to predict the outcome of
this proceeding or its impact on the Company. The Company believes
the allegations made in the amended complaint are without merit and intends to
vigorously defend against the plaintiff’s claims.
ITEM
4—(REMOVED AND RESERVED)
PART
II
ITEM 5—MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market
Information
Our
common shares began trade on the Nasdaq Capital Market under the symbol
“PIII.” The following table sets forth the high and low sales prices
(on a post-split basis) of our common shares on the Nasdaq Capital Market for
the periods set forth below:
2009
|
|
High
|
|
Low
|
First
Quarter
|
|
$
|
4.25
|
|
$
|
2.39
|
Second
Quarter
|
|
$
|
4.75
|
|
$
|
2.40
|
Third
Quarter
|
|
$
|
4.29
|
|
$
|
2.58
|
Fourth
Quarter
|
|
$
|
5.20
|
|
$
|
2.89
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
First
Quarter
|
|
$
|
7.60
|
|
$
|
5.50
|
Second
Quarter
|
|
$
|
8.50
|
|
$
|
3.12
|
Third
Quarter
|
|
$
|
4.85
|
|
$
|
3.28
|
Fourth
Quarter
|
|
$
|
4.44
|
|
$
|
2.04
|
Holders
As of
March 16, 2010, there were 496 holders of record of our common
shares.
Dividends
We have
not paid any dividends since our initial public offering in August
2000. We do not currently plan to pay dividends. Any
future determination to pay dividends will be at the discretion of the board of
directors and will depend upon our financial condition, operating results,
capital requirements and other factors the board of directors deems
relevant.
Performance
Graph
Not
required for smaller reporting companies.
Recent
Sales of Unregistered Securities
During the fourth quarter
of 2009, no unregistered securities were sold.
Purchases
of Equity Securities by the Issuer and Affiliated Purchases
During
the fourth quarter of 2009, no repurchases were made.
ITEM
6—SELECTED FINANCIAL DATA
Not
required for smaller reporting companies.
ITEM 7—MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You
should read this discussion together with the consolidated financial statements
and other financial information elsewhere in this Form 10-K.
Overview
PECO
II, Inc. was organized in 1988 for the purpose of acquiring the assets of ITT’s
communications power product business. Today, we provide solutions to
our telecommunications customers through a variety of products and services in
order to meet their cost, quality, productivity and capacity
challenges. As part of this process, we design and manufacture
communications specific power products. We also provide on-site
engineering and installation, systems integration, installation, maintenance,
and monitor services to our customers. Our power systems provide a
primary supply of power to support the infrastructure of communications service
providers, including local exchange carriers, long distance carriers, wireless
service providers, internet service providers and broadband access
providers. Our power distribution equipment directs this power to
specific customer communications equipment. Our systems integration
business provides complete built-to-order communications systems assembled and
installed pursuant to customer specifications and incorporating other
manufacturers’ products.
Market
conditions remain uncertain and difficult. In the recent past,
several of our customers have engaged in mergers, acquisitions and divestitures,
such as SBC acquiring AT&T, AT&T acquiring Bell South and Cingular,
Alltel acquiring Western Wireless, and Sprint acquiring NEXTEL. Also,
both Sprint Nextel and Alltel spun off their local wireline businesses to focus
on their core wireless businesses. Recently Verizon has concluded its
purchase of Alltel, AT&T has concluded its purchase of Centennial, and
Century Tel has merged with Embarq to form CenturyLink. Currently,
major wireline companies are focusing their capital expenditure spending on FTTC
(fiber to the curb) and FTTN (fiber to the node) for both broadband and video
services distribution, while wireless companies are focusing their capital
expenditure spending on migration of acquired systems to the standards of the
acquiring carrier, integrating networks, improving area coverage, deploying 3G
data services and have begun to announce plans to deploy WIMAX and LTE
networks.
While the
telecommunications market is extremely volatile, estimated capital expenditure
spending was flat to down in 2009 and analysts, given the economic uncertainty,
are unsure regarding capital expenditure levels for 2010. The current
economic environment is causing many companies to forecast flat to limited
growth in spending in the near future. Notwithstanding this possible
ongoing slowdown, we believe that our capabilities, combined with our market
position, will afford us the opportunity to take market share even in a slowing
economy.
In 2009,
we targeted the capital expenditures growth in the wireless market and services
spending. We successfully maintained our market position with key
customers notwithstanding a downturn in 2009 product revenues. We
believe that the downturn in product revenues was primarily driven by reduced
spending due to the industry consolidation that occurred in 2009.
Our
R&D investment extended beyond traditional cell site
applications. Our small product platforms are the QuantumTM Power
System and the MPS Micro Power System. The Quantum platform is a
48-volt DC power system that combines high-density rectifiers, distribution and
control in a sleek, low-profile shelf. It is optimized for telecom
carriers deploying FTTN and traditional wireline
architectures. Designed for the harsh outside plant environment, the
Quantum system’s small footprint makes it ideal for cabinets where rack space is
at a premium. Both 23” and 19” Integrated Shelves were developed in
2008, along with a variety of distribution options. The Quantum
system has achieved NEBS Level 3 certification.
The MPS
Micro Power System, is a small power system designed for the network
edge. Depending on configuration, the low profile system supplies
anywhere from 18 Amps to 150 Amps of current at 48Vdc in a 1RU shelf by 19” wide
shelf. The system contains up to three rectifiers, integrated
distribution and a system controller. The controller provides
standard DC power system management along with battery management, as well as an
optional SNMP interface. Integrated distribution can include GMT
fuses and a battery disconnect fuse, minimizing the size of the overall system
and making it ideal for use in space-constrained remote cabinet
applications. A primary application for the MPS is powering triple
play solutions for multiple dwelling unit applications. We began customer trials
during the fourth quarter of 2008.
During
the fourth quarter of 2009, we introduced our next generation midsized power
plant products to the marketplace. These next generation 138 and 139
power plants utilize 1RU rectifiers and converters, incorporate a totally
redesigned user interface, and implement reconfigured AC input and DC output
interconnections. User friendliness, field serviceability, and cable
management have all been significantly improved while preserving all tried and
true customer practices. The 138 and 139 plants also support the
growing number of “green” initiatives by incorporating high efficiency 1RU
rectifiers and converters. Customer reaction has been very
favorable. Several plants have already shipped to new customers and
customers of existing mid-size power plants have expressed strong desire to move
to the new power plants.
During
the first quarter 2009, we achieved TL9000 recertification. The
certification process included evaluation of our core business processes based
on TL9000 Quality Management System Requirements Release 4.0, an upgrade over
previous assessments. The TL9000 standard defines the
telecommunications quality system requirements for the design development,
production, delivery, installation and maintenance of products and
services.
Our
Services group focused on hardening our solution portfolio to meet the power
needs of our Tier I customer base. The revenue decline in 2008
was driven by reduced spending at two of our major customers. During
the fourth quarter of 2008, we were notified of a contract renewal with a major
Tier I customer. This renewal included a major expansion of work to
be performed by us. This contract award was the primary driver for
our 2009 revenue growth.
Our
Services division continues to provide multi-vendor E&I services for all
major power product brands. This capability is both respected
and valued in the marketplace. Our strong power E&I services
reputation has provided many opportunities for introducing new power products as
well as a real user feedback channel on deployed products. This
feedback continues to aid us with designing and improving products to meet the
industry evolving needs.
Looking
forward, we will continue to focus our efforts on delivering the service
solutions our customers have come to expect from working with PECO
II. This dedication has enabled us to minimize customer
turnover. We will continue to expand our Services footprint on those
opportunities that make the best utilization of our current available resources,
and/or those that position us for success as our industry matures to the next
level.
Critical Accounting Policies and
Estimates
In preparing our financial
statements and accounting for the underlying transactions and balances, we
applied the accounting policies disclosed in the Notes to the Consolidated
Financial Statements. Preparation of our financial statements
requires us to make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Although we believe our
estimates and assumptions are reasonable, they are based on information
presently available and actual results may differ significantly from those
estimates.
We
consider the estimates discussed below as critical to an understanding of our
financial statements because they place the most significant demands on
management’s judgment about the effect of matters that are inherently uncertain,
and the impact of different estimates or assumptions is material to our
financial condition or results of operations. Specific risks for these
critical accounting estimates are described in the following paragraphs.
The impact and any associated risks related to these estimates are
discussed throughout this discussion and analysis where such estimates affect
reported and expected financial results.
For a
detailed discussion of the application of these and other accounting policies,
see Note 1 to the Consolidated Financial Statements. Management has
discussed the development and selection of the critical accounting policies and
the related disclosure included herein with the Audit Committee of the Board of
Directors.
Revenue
Recognition
Product revenues are
recognized when customer orders are completed and shipped, title passes to the
customer and collection is reasonably assured. Product sales
sometimes include multiple items including services such as
installation. In such instances, product revenue is not recognized
until installation is complete and the product is made available for customer
use. Services revenues on E&I contracts and the costs for
services performed are primarily recorded as the work progresses on a percentage
of completion basis. Management believes that all relevant criteria
and conditions are considered when recognizing sales.
Impairment
of Long-Lived Assets
We assess
the impairment of long-lived assets, which include intangible assets and plant
and equipment, whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors considered important that
could trigger an impairment review include, but are not limited to, the
following:
·
|
Sustained
underperformance relative to expected historical or projected future
operating results;
|
·
|
Changes
in the manner of use of the assets, their physical condition or the
strategy for the Company’s overall
business;
|
·
|
Negative
industry or economic trends;
|
·
|
Declines
in stock price of an investment for a sustained
period;
|
·
|
The
Company’s market capitalization relative to net book
value;
|
·
|
A
more-likely-than-not expectation that a reporting unit or a significant
portion of a reporting unit, or a long-lived asset will be sold or
otherwise disposed of, significantly before the end of its previously
estimated useful life;
|
·
|
A
significant decrease in the market price of a long-lived
asset;
|
·
|
A
significant adverse change in legal factors or in the business climate
that could affect the value of a long-lived asset, including an adverse
action or assessment by a
regulator;
|
·
|
An
accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived
asset;
|
·
|
A
current period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived
asset;
|
·
|
Unanticipated
competition; and
|
·
|
A
loss of key personnel.
|
Inventory
Valuation
Inventories
are stated at the lower of cost or market with cost determined on a standard
cost basis that approximates the first-in, first-out
method. Inventory costs consist of purchased product, internal and
external manufacturing costs, and freight. Management regularly
reviews inventory for obsolescence or excessive quantities and records an
allowance accordingly. Various factors are considered in making this
determination, including recent usage history, forecasted usage and market
conditions.
We
continually review the inventory for obsolescence or excessive quantities and
accrue accordingly. At a minimum, all part numbers are reviewed
quarterly. We identify potential obsolete or excess inventory by
identifying parts with no usage for a year and excess parts greater than the
last twelve month usage or two times future six month requirements, whichever is
greater. Management reviews the inventory identified as potentially
obsolete or excess to determine the appropriate allowance.
Deferred
Taxes
We record
income taxes under the asset and liability method. Significant management
judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities, and any valuation allowance recorded against our
deferred tax assets.
Our
ability to realize deferred tax assets is primarily dependent on the future
taxable income of the taxable entity to which the deferred tax asset relates.
We evaluate all available evidence to determine whether it is more likely
than not that some portion or the entire deferred income tax asset will not be
realized.
Share-Based
Compensation
Determining
the appropriate fair value model and calculating the fair value of share-based
payment awards require the input of subjective assumptions, including the
expected life of the share-based payment awards and stock price volatility.
The assumptions used in calculating the fair value of share-based payment
awards represent management’s best estimates, but these estimates involve
inherent uncertainties and the application of management judgment. As a
result, if factors change and we use different assumptions, our stock-based
compensation expense could be different in the future.
Under the
fair value recognition provisions, we recognize stock-based compensation expense
net of an estimated forfeiture rate and only recognize compensation expense for
those shares expected to vest over the requisite service period of the award.
If our actual forfeiture rate is materially different from our estimate,
our stock-based compensation expense could be significantly different from what
we have recorded in the current period.
Results
of Operations
The following table shows,
for the periods indicated, selected items and the percentage of net sales from
our consolidated statement of operations.
|
|
Year
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$ |
24,105 |
|
|
|
57.0 |
% |
|
$ |
31,554 |
|
|
|
75.6 |
% |
Services
|
|
|
18,182 |
|
|
|
43.0 |
% |
|
|
10,189 |
|
|
|
24.4 |
% |
|
|
|
42,287 |
|
|
|
100.0 |
% |
|
|
41,743 |
|
|
|
100.0 |
% |
Cost
of sales (exclusive of depreciation and amortization):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
18,854 |
|
|
|
44.6 |
% |
|
|
25,549 |
|
|
|
61.2 |
% |
Services
|
|
|
13,579 |
|
|
|
32.1 |
% |
|
|
8,292 |
|
|
|
19.9 |
% |
Obsolete
inventory write-off
|
|
|
1,035 |
|
|
|
2.4 |
% |
|
|
2,146 |
|
|
|
5.1 |
% |
|
|
|
33,468 |
|
|
|
79.1 |
% |
|
|
35,987 |
|
|
|
86.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
8,819 |
|
|
|
20.9 |
% |
|
|
5,756 |
|
|
|
13.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,466 |
|
|
|
3.5 |
% |
|
|
1,494 |
|
|
|
3.6 |
% |
Research,
development and engineering
|
|
|
1,873 |
|
|
|
4.4 |
% |
|
|
2,306 |
|
|
|
5.5 |
% |
Selling,
general and administrative
|
|
|
7,179 |
|
|
|
17.0 |
% |
|
|
8,083 |
|
|
|
19.3 |
% |
Impairment
of goodwill
|
|
|
— |
|
|
|
— |
|
|
|
1,503 |
|
|
|
3.6 |
% |
Impairment
of idle facility
|
|
|
— |
|
|
|
— |
|
|
|
200 |
|
|
|
0.5 |
% |
|
|
|
10,518 |
|
|
|
24.9 |
% |
|
|
13,586 |
|
|
|
32.5 |
% |
Loss
from operations
|
|
|
(1,699
|
) |
|
|
(4.0 |
%
) |
|
|
(7,830
|
) |
|
|
(18.7 |
%
) |
Interest
income, net
|
|
|
26 |
|
|
|
0.1 |
% |
|
|
171 |
|
|
|
0.4 |
% |
Loss
before income taxes
|
|
|
(1,673
|
) |
|
|
(3.9 |
%
) |
|
|
(7,659
|
) |
|
|
(18.3 |
%
) |
Income
tax expense
|
|
|
(14
|
) |
|
|
(
0.1 |
%
) |
|
|
(45
|
) |
|
|
(
0.1 |
%
) |
Net
loss
|
|
$ |
(1,687
|
) |
|
|
(4.0 |
%
) |
|
$ |
(7,704
|
) |
|
|
(18.4 |
%
) |
Net Sales. Net
sales increased $0.5 million, or 1.3%, to $42.3 million for the year ended
December 31, 2009 from $41.7 million for the year ended December 31,
2008. This increase was driven primarily by our services
business. Services revenues grew by $8.0 million in
2009. Our E&I capabilities were the major driver of this
growth.
Net sales
in our product segment decreased by $7.5 million, with the result being $24.1
million for the year ended December 31, 2009 as compared to $31.6 million for
the year ended December 31, 2008. We believe this reduction was
primarily the result of the industry level consolidation that occurred in 2009
in North America. As of December 31, 2009, our product backlog, which
represents total dollar volume of firm sales orders not yet recognized as
revenue, had decreased to $1.2 million from $1.9 million at December 31, 2008.
Net sales
in our services segment increased by $8.0 million, resulting in $18.2 million
for year ended December 31, 2009 as compared with $10.2 million for the year
ended December 31, 2008. The increase in revenues was primarily
driven by new services work with a major service provider for our E&I
capabilities. As of December 31, 2009, our services backlog, which
represents total dollar volume of firm sales orders not yet recognized as
revenue, had increased to $1.7 million from $0.6 million at December 31, 2008.
Gross
Margin. Gross margin dollars increased to $8.8 million in 2009
as compared to $5.8 million in 2008. Gross margin as a percentage of net sales
increased to 20.9% in 2009 as compared to 13.8% in 2008. This
increase included a charge of $1.0 million for obsolete and slow-moving
inventory as compared to a charge of $2.1 million in 2008.
The
product gross margin increased to $4.2 million in 2009 as compared to $3.9
million in 2008. Product gross margin, as a percentage of product
sales, increased to 17.5% in 2009, compared to 12.2% in 2008. This
increase was primarily driven by product price increases instituted in 2009 with
a number of our major customers, combined with reduced obsolescence charges,
when compared to 2008.
The
services segment gross margin increased to $4.6 million in 2009 as compared with
the $1.9 million in 2008. Services gross margin as a percentage of
services sales was 25.3% in 2009 as compared to 18.6% in
2008. This increase reflected the impact of the services
contract win noted above.
Research, Development and
Engineering. Research, development and engineering expense
decreased to $1.9 million in 2009 from $2.3 million in 2008, representing a
decrease of $0.4 million. The decrease was primarily driven by the
completion of major small power work that was accomplished in
2008. As a percentage of net product sales, research, development and
engineering expense increased to 7.8% in 2009 up from 7.3% in 2008.
Selling, General and Administrative.
Selling, general and administrative expense decreased to $7.2
million in 2009 from $8.1 million in 2008, representing a decrease of $0.9
million. As a percentage of net sales, selling, general and
administrative expense decreased to 17.0% in 2009 from 19.3% in
2008. The decrease, as a percentage of revenues, reflected the
productivity increases realized as we continued our focus on process
improvements throughout the business.
Interest
Income. Interest income, net, was $26 thousand in 2009
compared to $171 thousand in 2008. Of this amount, interest expense
was $18 thousand in 2009 compared to $14 thousand in 2008, while interest income
decreased to $44 thousand in 2009 compared to $185 thousand in
2008. The decrease in interest income, net, in the current year was
due primarily to less income from investments from reduced interest-earning
balances and reductions of effective interest rates.
Income
Taxes. As a result of our significant continued
operating losses in recent years, we have not been subject to significant income
taxes and have a 100% valuation allowance for our net deferred tax
assets. As such, our effective income tax rate was a negative 0.8% in
2009 compared to an effective rate of negative 0.6% in 2008.
Liquidity and Capital
Resources
Our primary liquidity
needs for the foreseeable future will be for working capital and operations. As
of December 31, 2009, available cash and cash equivalents approximated $7.4
million. Based on available funds and current plans, we believe that
our available cash, borrowings and amounts generated from operations, will be
sufficient to meet our cash requirements for the next 12 months. The
assumptions underlying this belief include, among other things, that there will
be no material adverse developments in the business or market in general. There
can be no assurances however that those assumed events will occur. If
management’s plans are not achieved, there may be further negative effects on
the results of operations and cash flows, which could have a material adverse
effect on the Company.
Working
capital was $12.2 million at December 31, 2009, which represented a working
capital ratio of 2.6 to 1, compared to $12.4 million at December 31,
2008. Our investment in inventories and accounts receivables was
$11.3 million and $12.9 million at December 31, 2009 and 2008,
respectively. Our capital expenditures were $0.2 million and $0.07
million in 2009 and 2008, respectively. Our budgeted capital
expenditures for 2010 are $0.1 million as we remain focused on conserving
cash. Accounts receivable days sales outstanding stood at 46 days at
December 31, 2009, as compared to 46 days at December 31, 2008. At
December 31, 2009, inventory days on hand, which represents gross inventory
excluding impairments or reserves, was 152 days, as compared to 145 days on hand
at December 31, 2008.
Cash flows provided by operating
activities were $2.7 million in 2009, compared to 2008 which had cash flows used
for operating activities of $3.0 million. This was primarily from a
reduced net loss of $6.0 million compared to 2008, decreases in inventory and
other non-cash charges offset by increases in accounts receivable and other
assets. There was $671 thousand of cash provided by investing
activities, which was primarily from reduction in restricted cash offset by
capital expenditures. Cash used for financing activities was $1.8
million, which was primarily the result of payoff of line of credit and bank
overdraft.
We have
an available line of credit agreement with National City Bank for borrowing up
to $3.5 million. The line of credit requires certain amounts be
restricted in an identified collateral account based on the outstanding balance
due. As of December 31, 2009, there is an outstanding balance of $0
on the line of credit. As such, the portion of the deposit account
collateralized is reflected as restricted cash in the accompanying balance sheet
as of December 31, 2009.
We
believe that cash and cash equivalents, anticipated cash flow from operations,
and our credit facilities will be sufficient to fund our working capital and
capital expenditure requirements for at least the next 12 months. We
do not currently plan to pay dividends.
From
February 13, 2007, to May 22, 2008, we were not in compliance with The Nasdaq
Stock Market’s Marketplace Rule that requires the Company to maintain a $1.00
per share minimum bid price. In an effort to regain compliance, our
shareholders approved, and on May 7, 2008, we executed, a 1-for-10 reverse stock
split. On May 22, 2008, we received a decision that Nasdaq would
continue the listing of our common shares on The Nasdaq Stock
Market. Although our common shares are currently in compliance with
the Nasdaq Stock Market’s continued listing standards, we cannot assure you that
we will continue to meet all continued listing standards in the
future.
We have
operating leases covering certain office facilities and equipment that expire at
various dates through 2014. Future minimum annual lease payments
required during the years ending in 2010 through 2014 under non-cancelable
operating leases having an original term of more than one year are $324
thousand, $191 thousand, $92 thousand, $93 thousand and $47 thousand
respectively.
Impact
of New Accounting Standards
Recently
adopted and recently issued accounting pronouncements and their effects on the
Company’s consolidated financial statements are described in Note 1, “Summary of
Significant Accounting Policies,” in Item 8.
Off-Balance
Sheet Arrangements
We do not
have any off balance sheet entities or arrangements. All of our
subsidiaries are reflected in our financial statements. We do not
have any interests in or relationships with any special-purpose entities that
are not reflected in our financial statements.
ITEM 7A—QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Not
required for smaller reporting companies.
ITEM
8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PECO
II, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
19 |
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
|
|
20 |
|
|
|
|
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2009 and
2008
|
|
|
21 |
|
|
|
|
|
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2009
and 2008
|
|
|
22 |
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009 and
2008
|
|
|
23 |
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
24 |
|
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
Board of
Directors and Shareholders
PECO II,
Inc.
Galion,
Ohio
We have
audited the accompanying consolidated balance sheets of PECO II, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of operations, shareholders’ equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of PECO II, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ BATTELLE
& BATTELLE LLP
Dayton,
Ohio
March 31,
2010
PECO
II, INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
7,394
|
|
|
$ |
5,814
|
|
Accounts
receivable, net
|
|
|
5,786
|
|
|
|
4,366
|
|
Inventories,
net
|
|
|
5,470
|
|
|
|
8,533
|
|
Cost
and earnings in excess of billings on uncompleted
contracts
|
|
|
1,158
|
|
|
|
622
|
|
Prepaid
expenses and other current assets
|
|
|
166
|
|
|
|
295
|
|
Restricted
cash
|
|
|
-
|
|
|
|
834
|
|
Total
current assets
|
|
|
19,974
|
|
|
|
20,464
|
|
Property
and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land
and land improvements
|
|
|
195
|
|
|
|
195
|
|
Buildings
and building improvements
|
|
|
4,628
|
|
|
|
4,628
|
|
Machinery
and equipment
|
|
|
3,031
|
|
|
|
2,895
|
|
Furniture
and fixtures
|
|
|
5,538
|
|
|
|
5,518
|
|
|
|
|
13,392
|
|
|
|
13,236
|
|
Less-accumulated
depreciation
|
|
|
(10,471
|
)
|
|
|
(10,109
|
)
|
Property
and equipment, net
|
|
|
2,921
|
|
|
|
3,127
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Idle
facility
|
|
|
800
|
|
|
|
800
|
|
Intangibles,
net
|
|
|
1,675
|
|
|
|
2,748
|
|
Total
assets
|
|
$ |
25,370
|
|
|
$ |
27,139
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Borrowings
under line of credit
|
|
$ |
-
|
|
|
$ |
834
|
|
Bank
overdrafts
|
|
|
-
|
|
|
|
994
|
|
Accounts
payable
|
|
|
3,308
|
|
|
|
3,387
|
|
Billings
in excess of cost and estimated earnings on uncompleted
contracts
|
|
|
1,135
|
|
|
|
235
|
|
Accrued
compensation expense
|
|
|
1,535
|
|
|
|
923
|
|
Accrued
income taxes
|
|
|
36
|
|
|
|
56
|
|
Other
accrued expenses
|
|
|
1,739
|
|
|
|
1,633
|
|
Total
current liabilities
|
|
|
7,753
|
|
|
|
8,062
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, no par value: 150,000,000 shares authorized; 2,851,385 and
2,816,527 shares issued at December 31, 2009 and 2008,
respectively
|
|
|
3,617
|
|
|
|
3,573
|
|
Additional
paid-in capital
|
|
|
122,085
|
|
|
|
121,901
|
|
Accumulated
deficit
|
|
|
(108,085
|
)
|
|
|
(106,397
|
)
|
Total
shareholders’ equity
|
|
|
17,617
|
|
|
|
19,077
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
25,370
|
|
|
$ |
27,139
|
|
The
accompanying notes are an integral part of these consolidated balance
sheets.
PECO
II, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
|
Years
Ended December 31, |
|
|
|
2009
|
|
|
2008
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
Product
|
|
$ |
24,105
|
|
|
$ |
31,554
|
|
Services
|
|
|
18,182
|
|
|
|
10,189
|
|
|
|
|
42,287
|
|
|
|
41,743
|
|
Cost
of sales (exclusive of depreciation and amortization):
|
|
|
|
|
|
|
|
|
Product
|
|
|
18,854
|
|
|
|
25,549
|
|
Services
|
|
|
13,579
|
|
|
|
8,292
|
|
Obsolete
inventory write-off
|
|
|
1,035
|
|
|
|
2,146
|
|
|
|
|
33,468
|
|
|
|
35,987
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
8,819
|
|
|
|
5,756
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,466
|
|
|
|
1,494
|
|
Research,
development and engineering
|
|
|
1,873
|
|
|
|
2,306
|
|
Selling,
general and administrative
|
|
|
7,179
|
|
|
|
8,083
|
|
Impairment
of goodwill
|
|
|
—
|
|
|
|
1,503
|
|
Impairment
of idle facility
|
|
|
—
|
|
|
|
200
|
|
|
|
|
10,518
|
|
|
|
13,586
|
|
Loss
from operations
|
|
|
(1,699
|
)
|
|
|
(7,830
|
)
|
Interest
income, net
|
|
|
26
|
|
|
|
171
|
|
Loss
before income taxes
|
|
|
(1,673
|
)
|
|
|
(7,659
|
)
|
Income
tax expense
|
|
|
(14
|
)
|
|
|
(45
|
)
|
Net
loss
|
|
$ |
(1,687
|
)
|
|
$ |
(7,704
|
)
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
(0.59
|
)
|
|
$ |
(2.77
|
)
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
2,844
|
|
|
|
2,775
|
|
The
accompanying notes are an integral part of these consolidated
statements.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(In
thousands)
|
|
|
|
Additional Paid-In
Capital
|
|
Accumulated
Deficit
|
|
|
|
Common
Stock
|
|
Warrants
|
|
Total
Shareholders
Equity
|
Balance,
January 1, 2008
|
$
|
$3,475
|
|
$ |
5,078
|
|
$ |
116,412
|
|
$ |
$(98,693
|
)
|
$ |
$
26,272
|
Stock
purchase plan and restricted stock activity
|
|
98
|
|
|
—
|
|
|
(96
|
)
|
|
—
|
|
|
2
|
Issuances
from acquisition (Delta)
|
|
—
|
|
|
51
|
|
|
—
|
|
|
—
|
|
|
51
|
Share-based
compensation
|
|
—
|
|
|
—
|
|
|
456
|
|
|
—
|
|
|
456
|
Expired
warrants
|
|
—
|
|
|
(5,129
|
)
|
|
5,129
|
|
|
—
|
|
|
—
|
Net
loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,704
|
)
|
|
(7,704)
|
Balance,
December 31, 2008
|
$
|
$3,573
|
|
$ |
—
|
|
$ |
121,901
|
|
$ |
(106,397
|
)
|
$ |
19,077
|
Stock
purchase plan and restricted stock activity
|
|
44
|
|
|
—
|
|
|
(41
|
)
|
|
(1)
|
|
|
2
|
Share-based
compensation
|
|
—
|
|
|
—
|
|
|
225
|
|
|
—
|
|
|
225
|
Net
loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,687
|
)
|
|
(1,687)
|
Balance,
December 31, 2009
|
$
|
$3,617
|
|
$ |
—
|
|
$ |
122,085
|
|
$ |
(108,085
|
)
|
$ |
17,617
|
The
accompanying notes are an integral part of these consolidated
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Years Ended December 31, |
|
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,687
|
)
|
|
$ |
(7,704
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used for) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,466
|
|
|
|
1,494
|
|
Provision
for bad debts
|
|
|
14
|
|
|
|
316
|
|
Provision
for obsolete and excess inventories
|
|
|
1,035
|
|
|
|
2,146
|
|
Provision
for product warranty
|
|
|
774
|
|
|
|
1,021
|
|
Goodwill
impairment
|
|
|
-
|
|
|
|
1,503
|
|
Gain
on disposals of property and equipment
|
|
|
(1
|
)
|
|
|
(5
|
)
|
Asset
impairments
|
|
|
-
|
|
|
|
200
|
|
Compensation
expense from share-based payments
|
|
|
225
|
|
|
|
456
|
|
Working
capital changes:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,434
|
)
|
|
|
(737
|
)
|
Inventories
|
|
|
2,028
|
|
|
|
754
|
|
Prepaid
expenses and other current assets
|
|
|
(431
|
)
|
|
|
(31
|
)
|
Accounts
payable and other current liabilities
|
|
|
746
|
|
|
|
(2,396
|
)
|
Net
cash provided by (used for) operating activities
|
|
|
2,735
|
|
|
|
(2,983
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(189
|
)
|
|
|
(71
|
)
|
Transfer
from (to) restricted cash
|
|
|
834
|
|
|
|
(834
|
)
|
Issuance
of note receivable
|
|
|
-
|
|
|
|
(260
|
)
|
Proceeds
from sale of property and equipment
|
|
|
26
|
|
|
|
187
|
|
Net
cash provided by (used for) investing activities
|
|
|
671
|
|
|
|
(978
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
(repayments) usage under line of credit agreement
|
|
|
(834
|
)
|
|
|
834
|
|
Net
(decrease) increase in bank overdraft
|
|
|
(994
|
)
|
|
|
994
|
|
Proceeds
from issuance of common shares- ESPP
|
|
|
2
|
|
|
|
12
|
|
Net
cash (used for) provided by financing activities
|
|
|
(1,826
|
)
|
|
|
1,840
|
|
Net
increase (decrease) in cash
|
|
|
1,580
|
|
|
|
(2,121
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
5,814
|
|
|
|
7,9355
|
|
Cash
and cash equivalents at end of period
|
|
$ |
7,394
|
|
|
$ |
5,814
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Income
taxes paid, net of refunds
|
|
$ |
43
|
|
|
$ |
72
|
|
Interest
paid
|
|
|
18
|
|
|
|
15
|
|
The
accompanying notes are an integral part of these consolidated
statements.
PECO
II, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except for share and per share data)
1. Summary
of Significant Accounting Policies
Nature
of Business
The Company provides
engineering and installation on-site services and designs; manufactures and
markets communications power systems and equipment; and offers systems
integration products and related services for the communications
industry. The Company markets its products and services primarily
throughout North America.
Principles of
Consolidation
The accompanying
consolidated financial statements include the accounts of PECO II, Inc. (the
“Company”), and its wholly owned subsidiary. The Company’s investment
in a joint venture is included in the consolidated financial statements using
the equity method of accounting. The Company does not have any
off-balance sheet arrangements or affiliated entities that require consolidation
in the Company’s consolidated financial statements. All significant
intercompany transactions have been eliminated in consolidation.
Financial
Statement Presentation and Use of Estimates
The
accompanying consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of
America. Certain amounts in the prior year financial statements have
been reclassified to conform to the current year presentation.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect reported amounts and
disclosures. Significant estimates are used for, but not limited to,
the accounting for doubtful accounts, inventory obsolescence, depreciation and
amortizations, goodwill and other asset impairments, warranty costs, valuation
allowance on tax assets, share-based compensation, taxes and
contingencies. Actual results could differ from those
estimates.
Reclassifications
In 2009,
the Company’s presentation of certain expenses within its consolidated
statements of operations was changed. Depreciation and amortization
expenses were previously recorded in the captions “Cost of sales,” “Research,
development and engineering” and “Selling, general and
administrative.” In the current year, depreciation and amortization
expenses are now being presented separately under the caption “Depreciation and
amortization.” The Company believes that this change in presentation
provides a more meaningful measure of its cost of sales and other operating
expenses. These reclassifications had no effect on reported
consolidated income (loss) from operations, net income (loss) or per share
amounts. Amounts presented for the prior periods have been
reclassified to conform to the current presentation. The following
table provides the amounts reclassified for the years ended December 31, 2009
and December 31, 2008.
Amounts
reclassified:
|
|
For
the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$ |
(1,019 |
) |
|
$ |
(1,018 |
) |
Research,
development and engineering
|
|
|
(45 |
) |
|
|
(47 |
) |
Selling,
general and administrative
|
|
|
(402 |
) |
|
|
(429 |
) |
Depreciation
and amortization
|
|
|
1,466 |
|
|
|
1,494 |
|
Total
costs and expenses
|
|
$ |
- |
|
|
$ |
- |
|
Subsequent
Events
The
Company has evaluated for disclosure all subsequent events through the date the
financial statements were issued and filed with the United States Securities and
Exchange Commission.
Impacts
of Reverse Stock Split
The Company executed a
reverse stock split of the Company’s common stock at a ratio of 1-for-10 shares
on May 7, 2008. As a result, all periods presented in the
accompanying consolidated financial statements and these notes to the
consolidated financial statements have been retroactively
restated. All share related data including shares outstanding, shares
issuable under warrants and stock-based compensation plans and loss per share
amounts reflect the reverse stock split.
Cash
and Cash Equivalents
Cash equivalents consist of money
market funds that are readily convertible into cash. At December 31,
2009 and 2008, the Company had money market funds totaling $5,754 and $6,647 (of
which $834 is presented as restricted cash), respectively. The
remaining cash and cash equivalent balances is from cash deposits maintained
with banks.
Restricted
Cash
We have a $3,500 demand line of
credit agreement with National City Bank that requires a deposit account as
collateral dependent upon the outstanding balance due on the line of
credit. As of December 31, 2009, there is no outstanding balance on
the line and no amounts are required to be reflected as restricted
cash. As of December 31, 2008, there was an outstanding balance on
the line of $834. As such, an equal amount of the Company’s
collateral account has been reflected as restricted cash in the accompanying
consolidated balance sheet.
Accounts
and Notes Receivable
Trade
receivables are uncollateralized customer obligations due under normal trade
terms requiring payment generally within 30 days from the invoice
date. The Company grants credit on open accounts to its customers,
substantially all of whom are in the telecommunication industry. Due
to the nature of its customer base, the Company’s historical credit risk has
been low. The Company generally requires payment within thirty days
from delivery and has not provided extended payment terms under any type of
vendor financing arrangements. However, the Company does establish
allowances against accounts receivable for potentially uncollectible
amounts. The Company estimates necessary allowances based on its
analysis of customers’ outstanding receivables at the individual invoice level,
the customers’ payment history and any other known factors concerning their
current financial condition and ability to pay. After the Company has
exhausted its collection efforts and determined that amounts are uncollectible
at the individual invoice level, such amounts are charged off against the
allowance. Accounts receivable are presented net of the allowance for
doubtful accounts of $100 and $120 at December 31, 2009 and 2008,
respectively.
Notes
receivable are stated at the principal amount with interest accrued where
applicable. An allowance for uncollectible notes receivable is
recorded based on our determination of probable losses based upon the specific
facts and circumstances of each note receivable. At December 31, 2009
and 2008, the Company had a note receivable for $260 but has recognized a full
valuation allowance as it was determined that it is probable that it won’t be
collected.
Bad debt
expense was $14 and $316 for 2009 and 2008, respectively.
Inventories
Inventories are stated at
the lower of cost or market with cost determined on a standard basis that
approximates the first-in, first-out method. Inventory costs consist
of purchased product, internal and external manufacturing costs, and
freight. Management regularly reviews inventory for obsolescence or
excessive quantities and records an allowance accordingly. Various
factors are considered in making this determination, including recent usage
history, forecasted usage and market conditions.
From time
to time, the Company has increased risk for obsolete and excess inventory
depending on various unforeseen future events and circumstances, primarily
related to the mix of future business and customer requirements for new
technologies that could have a material impact on the Company’s estimated
allowance for obsolete and excess inventory in the near term. If
these unforeseen events and circumstances do occur in the near term, the
resulting change in the estimate could be material to the Company’s consolidated
financial position and results of operations.
In both
2009 and 2008, due to changing market conditions in the telecommunications
industry and changes in demand for certain product lines, management conducted a
thorough review of inventory on hand. As a result, a provision for
obsolete and excess inventories of $1,035 and $2,146 was charged against
operations to write down inventory to its net realizable value for 2009 and
2008, respectively. This was based on management’s best estimate of
current forecasted usage, customer demand patterns and plans to transition
product lines to meet market demands. This provision is reflected as
obsolete inventory write-off reported as a separate component of costs of goods
sold in the accompanying consolidated statement of operations.
Property
and Equipment
Property and equipment are
stated at cost. Expenditures for improvements that extend the useful
life of property and equipment are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred.
Depreciation for the years
ended December 31, 2009 and 2008 was $393 and $421
respectively. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. The estimated useful lives
used for computing depreciation for financial statement purposes are:
|
|
Years
|
|
Land
improvements
|
|
15 |
|
Buildings
and building improvements
|
|
20 to 40
|
|
Machinery
and equipment
|
|
5
to 10
|
|
Furniture
and fixtures
|
|
4
to 7
|
|
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable by
comparing the carrying amount of an asset to fair value. If such
assets are considered to be impaired, the impairment recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets classified as held for sale are reported at the
lower of the carrying amount or fair value less costs to sell.
The
carrying value of permanently idle assets that are not a part of the Company’s
long-term operating assets are segregated and presented in the other assets
section of the accompanying balance sheet. Such assets are not
depreciated but are evaluated for impairment to determine if the carrying value
is recoverable.
Intangible
Assets
Intangible assets, which
consist of customer relationships and a supply agreement, have determinable
lives and are amortized on a straight-line basis over the estimated useful
life.
Income
Taxes
Income taxes are accounted
for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that included the
enactment date.
The
Company reviews the potential future tax benefits of all deferred tax assets on
an ongoing basis. The Company’s review includes consideration of
historical and projected future operating results, reversals of existing
deferred tax liabilities, tax planning strategies and the eligible carryback
and/or carryforward period of each deferred tax asset to determine whether a
valuation allowance is appropriate.
Management
evaluates tax positions taken or expected to be taken on income tax returns to
assess, based on each position’s technical merits, if it is more likely than not
that the position will be sustained upon examination by the relevant taxing
authority. If it is determined that a tax position does not meet this
criteria, the Company records the related tax benefit at risk as a liability or
reduction of any recorded net operating loss carryforward. The
Company recognizes interest and penalties associated with uncertain tax
positions as components of income tax expense.
Warranties
The Company records a
liability for an estimate of costs that it expects to incur under its basic
limited warranty when revenue is recognized. Factors affecting the
Company’s warranty liability include the number of units sold and historical and
anticipated rates of claims and costs per claim. The provision for
warranty claims is adjusted for specific problems that may arise. At
a minimum, the Company reviews the adequacy of its warranty liability quarterly
based on changes in these factors.
The
changes in the Company’s accrued product warranty costs are as
follows:
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Accrued
warranty costs, beginning of year
|
|
$ |
1,012
|
|
|
$ |
908
|
|
Annual
accrual
|
|
|
774
|
|
|
|
1,021
|
|
Warranty
claims
|
|
|
(646
|
)
|
|
|
(917
|
)
|
Accrued
warranty costs, end of year
|
|
$ |
1,140
|
|
|
$ |
1,012
|
|
During 2009, actual warranty claims
decreased when compared to 2008 activity. Major issues in 2008
related to legacy supplier component workmanship and design issues that resulted
in a need for field replacements. These issues were all non customer
service impacting, however, the Company incurred significant costs to travel to
customer locations to perform the required field upgrades. A number
of customers had lightning related issues that impacted our products’
performance and in the interest of customer satisfaction the Company worked with
the customers to resolve these issues. Most of the 2008 issues were
resolved, resulting in decreased warranty claims in 2009.
Earnings
per Share
Basic
earnings (loss) per share is calculated by dividing net income (loss) by the
weighted-average number of shares outstanding during the
period. Diluted earnings (loss) per share is calculated by dividing
net income (loss) by the weighted-average number of shares outstanding and
common equivalent shares from stock options and unvested shares using the
treasury method, except when anti-dilutive.
Revenue
Recognition
Product
revenues are recognized when customer orders are completed and shipped, title
passes to the customer and collection is reasonably assured. Product
sales sometimes include multiple items including services such as
installation. In such instances, product revenue is not recognized
until installation is complete and the product is made available for customer
use. Services revenues on E&I contracts and the costs for
services performed are primarily recorded as the work progresses on a percentage
of completion basis. Management believes that all relevant criteria
and conditions are considered when recognizing sales.
Cost
of Goods Sold
The
product segment cost of goods sold includes various components. In
addition to the standard material and labor costs, there are other various
expenses such as: freight, purchasing and material control costs,
shipping and receiving costs, quality control costs, industrial engineering, and
warehousing.
The
services segment cost of goods sold include all expense items related to
specific jobs, such as labor, material and freight. In addition,
there are purchasing, material control, quality control and warehousing
expenses.
Research,
Development and Engineering Costs
Expenses associated with
the development of new products and changes to existing products are charged to
expense as incurred.
Selling,
General and Administrative
Expenses
associated with the selling, general, and administrative costs would includes
executive administrative expenses, corporate governance and public reporting,
accounting and finance, information technology and sales and marketing
expenses.
Shipping
and Handling
Shipping
and handling fees billed to customers are recorded as revenue, and shipping and
handling costs paid to vendors are recorded as cost of sales.
Sales
Taxes
Taxes
collected from customers and remitted to governmental authorities are recorded
on a net basis and are therefore excluded from revenues.
Advertising
Expense
The
Company expenses costs of advertising as incurred.
Interest
income, net
The
Company records interest income and interest expense net in the accompanying
consolidated statements of operations. Interest income, net was $26
and $171 for 2009 and 2008, respectively. Of this amount, interest
expense during 2009 and 2008 was $18 and $14, respectively.
Financial
Instruments
The Company’s financial
instruments consist primarily of cash and cash equivalents, receivables,
payables and debt. Fair values of cash and cash equivalents,
receivables and payables approximate carrying values due to their relatively
short-term nature. The carrying amount of debt approximates fair
value due to either the length of maturity or existence of interest rates that
approximate prevailing market rates.
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash deposits, money market funds and trade accounts
receivable. Cash deposits and money market funds are held at high-credit quality
financial institutions that are generally insured by the Federal Deposit
Insurance Corporation (FDIC) up to $250 (as temporarily increased by Congress
through December 31, 2013). However, the Company does have certain
money market funds held at institutions that are not FDIC insured and amounts
that exceed FDIC insured amounts. At December 31, 2009, the Company
had approximately $6,894 of money market funds and cash in excess of current
FDIC insured limits.
Trade
accounts receivable due from three customers at December 31, 2009 and 2008 was
$4,724 and $2,662 respectively, which accounted for 81.6% and 60.9% of total
accounts receivable due at these dates. These trade accounts
receivables are reputable customers and management feels there is minor risk
associated with these accounts. The Company’s credit risk with
respect to trade receivables is, limited in management’s opinion, due to
industry and geographic diversification. As disclosed, the Company maintains an
allowance for doubtful accounts to cover estimated credit losses.
Recently
Adopted Accounting
Pronouncements
Effective
for the quarterly period ended September 30, 2009, the Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) became the single
source of authoritative generally accepted accounting principles (GAAP) in the
United States. The ASC does not change current GAAP, but introduces a
new structure, organized by accounting topics, designed to simplify user access
to all authoritative literature related to a particular accounting
topic. All prior authoritative documents were superseded and all
other accounting literature not included in the ASC is considered
nonauthoritative. As a result, prior GAAP references are no longer
applicable. In an effort to make the financial statements more
useful, the Company has elected to omit specific GAAP references and to ensure
accounting concepts and policies are clearly explained. Any new
recently issued accounting pronouncements will be referenced to the FASB’s
Accounting Standards Update (ASU) referencing structure.
Fair
value
As
permitted, management elected to defer adoption of new fair value accounting
standards until 2009 for nonfinancial assets and liabilities measured at fair
value on a nonrecurring basis. Accordingly, beginning January 1,
2009, management began applying the new standards to nonfinancial assets and
liabilities for any nonrecurring fair value measurements
required. During 2009, there have been no fair value measurements on
a nonrecurring basis of the Company’s nonfinancial assets and liabilities that
require further consideration or disclosure.
Effective
for the quarterly period ended June 30, 2009, we also adopted new accounting
standards that require disclosures about the fair value of financial instruments
for interim reporting periods in addition to annual financial statements.
The adoption of this standard does not have a material effect on our
consolidated results of operations, financial position, or cash
flows.
Business
combinations and noncontrolling interests
Effective
January 1, 2009, we adopted new accounting standards for accounting and
reporting of business combinations and noncontrolling interests. We have not
entered into any business combination transactions during
2009. Therefore, the effect of implementing these standards will be
dependent upon the nature and extent of future business combination
transactions.
Earnings
per share
Effective
January 1, 2009, we adopted a new accounting standard for determining whether
instruments granted in share-based payment transactions are participating
securities. Under the new standard, unvested share-based awards that
contain non-forfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and are included in the computation
of earnings per share pursuant to the two-class method. Before adoption,
the Company already treated unvested share-based awards granted in share-based
payment transactions as participating securities. As such, the
adoption of this new standard did not have any effect on the computation of
earnings per share.
Subsequent
events
Effective
for the quarterly period ended June 30, 2009, we adopted a new accounting
standard for subsequent events. The new standard provides guidance
for the accounting and disclosure of events that occur after the balance sheet
date but before financial statements are issued or available to be issued.
It also requires us to disclose the date through which subsequent events
were evaluated and whether that date represents the date the financial
statements were issued or were available to be issued. The adoption of this
standard did not have a material effect on our consolidated results of
operations, financial position, or cash flows.
Recently
Issued Accounting Pronouncements
In
October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605) –
Multiple-Deliverable Revenue Arrangements. This ASU provides
amendments to the criteria for separating deliverables and measuring and
allocating arrangement consideration to one or more units of
accounting. The amendments establish a selling price hierarchy for
determining the selling price of a deliverable. The ASU permits the
use of the “best estimate of selling price” in addition to vendor-specific
objective evidence (VSOE) and third-party evidence (TPE) for determining the
selling price of a deliverable. In cases in which VSOE or TPE cannot
be determined, use of the best estimate of selling price is
required. In addition, the residual method of allocating arrangement
consideration is no longer permitted. This new update is effective
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is permitted. We are
currently evaluating the impact that the adoption of this ASU will have on our
consolidated financial statements.
2.
Segment Information
The
Company has identified two reportable segments: product and
services. These two segments reflect the organization used by our
management for internal reporting and decision making. The product
segment consists of manufacturing operations and the production of power plants,
rectifiers and power distribution equipment. The services segment
consists primarily of telecommunications contract, engineering, and installation
services. The accounting policies of the segments are the same as those
described in Note 1. Earnings of the segments exclude interest income
and expense and income tax (expense) benefit from the consolidated statements of
operations. The Company has no significant assets located outside of
the United States.
The
following table summarizes certain information regarding segments of the
Company’s operations for the years ended December 31, 2009 and
2008:
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Net
Sales:
|
|
|
|
|
|
|
Product
|
|
$ |
24,105 |
|
|
$ |
31,554 |
|
Services
|
|
|
18,182 |
|
|
|
10,189 |
|
|
|
$ |
42,287 |
|
|
$ |
41,743 |
|
Loss
from operations:
|
|
|
|
|
|
|
|
|
Product
(1)
|
|
$ |
(3,755 |
) |
|
$ |
(5,908 |
) |
Services
(2)
|
|
|
2,056 |
|
|
|
(1,922
|
) |
|
|
$ |
(1,699 |
) |
|
$ |
(7,830 |
) |
Identifiable
assets:
|
|
|
|
|
|
|
|
|
Product
|
|
$ |
18,794 |
|
|
$ |
22,903 |
|
Services
|
|
|
6,576 |
|
|
|
4,236 |
|
|
|
$ |
25,370 |
|
|
$ |
27,139 |
|
Depreciation
and amortization expense:
|
|
|
|
|
|
|
|
|
Product
|
|
$ |
1,444 |
|
|
$ |
1,480 |
|
Services
|
|
|
22 |
|
|
|
14 |
|
|
|
$ |
1,466 |
|
|
$ |
1,494 |
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
Product
|
|
$ |
85 |
|
|
$ |
58 |
|
Services
|
|
|
104 |
|
|
|
13 |
|
|
|
$ |
189 |
|
|
$ |
71 |
|
(1) Product
segment loss from operations for the year ending December 31, 2009 includes
$1,035 of obsolete inventory write-offs. Product segment loss from
operations for the year ending December 31, 2008 includes $200 real estate
impairment and $2,146 of obsolete inventory write-offs
(2) Services
segment loss from operations for the year ending December 31, 2008 includes a
goodwill impairment charge of $1,503.
3. Inventories
Inventories are summarized
as follows:
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Raw
materials
|
|
$ |
8,402 |
|
|
$ |
9,924 |
|
Work-in-process
|
|
|
132 |
|
|
|
303 |
|
Finished
goods
|
|
|
507 |
|
|
|
1,106 |
|
Gross
inventories
|
|
|
9,041 |
|
|
|
11,333 |
|
Allowance
for obsolete and excess inventory
|
|
|
(3,571
|
) |
|
|
(2,800 |
) |
Inventories,
net
|
|
$ |
5,470 |
|
|
$ |
8,533 |
|
4. Uncompleted
Contracts
The
Company reports costs and revenues from manufacturing and installation contracts
on the percentage-of-completion method of accounting determined on a basis
approximating the ratio of costs incurred to total estimated
costs. Contract costs are recorded in cost of revenues in the period
in which they are incurred, except in the case of manufactured material, which
is included in inventory until completion of the job site. When
estimates indicate that a loss will be incurred on a contract, the total
estimated loss is recognized currently. Changes in job performance,
job conditions, estimated profitability, and final contract settlements may
result in revisions to costs and income and are recognized in the year in which
the revisions are determined.
The
asset, “Costs and estimated earnings in excess of billings on uncompleted
contracts,” represents income recognized in advance of amounts
billed. The liability, “Billings in excess of costs and estimated
earnings on uncompleted contracts,” represents billings in advance of revenues
recognized.
Costs and
estimated earnings on uncompleted contracts consist of the
following:
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
Costs
incurred on uncompleted contracts
|
|
$ |
4,586 |
|
|
$ |
2,500 |
|
Estimated
earnings
|
|
|
1,283 |
|
|
|
500 |
|
|
|
|
5,869 |
|
|
|
3,000 |
|
Less:
Billings to date
|
|
|
5,846 |
|
|
|
2,613 |
|
|
|
$ |
23 |
|
|
$ |
387 |
|
Included
in the accompanying balance sheet under the following captions:
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
$ |
1,158 |
|
|
$ |
622 |
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
(1,135 |
) |
|
|
(235 |
) |
|
|
$ |
23 |
|
|
$ |
387 |
|
5. Asset
Impairment Charges and Assets Held For Sale
The Company has an idle
facility that has not yet been sold and does not meet the criteria to be
presented as held for sale. As such, the adjusted carrying value of
the idle facility has been segregated from property and equipment as it is not a
part of long-term operating assets and is reflected in the other assets section
of the accompanying consolidated balance sheet. In 2009 and 2008,
management performed the required impairment analysis on the idle facility to
determine if its carrying value was recoverable. For both years,
management identified recent sales data for similar facilities for sale in the
area and analyzed the expected cash flows from different sales
scenarios. For 2008, management recorded an impairment loss of $200
to adjust the idle facility to its estimated recoverable
amount. For 2009, the impairment analysis determined that the
current carrying value was recoverable.
6. Goodwill
and Other Intangibles
During 2008, it was
determined that due to the continued weakness in carrier spending for wireless
segment, services segment goodwill recognized as part of previous acquisitions
was fully impaired and an impairment charge was reflected in the statement of
operations.
Intangible
assets are summarized as follows and relate to the product reporting segment
only:
Intangible Assets with Determinable
Lives
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
Customer
Relationships
|
|
$ |
2,000 |
|
|
$ |
2,000 |
|
Supply
Agreement
|
|
|
3,700 |
|
|
|
3,700 |
|
Total
Gross Intangible Assets
|
|
|
5,700 |
|
|
|
5,700 |
|
Less:
Accumulated Amortization
|
|
|
4,025 |
|
|
|
2,952 |
|
Intangibles,
net
|
|
$ |
1,675 |
|
|
$ |
2,748 |
|
Amortization
expense for the years ending December 31, 2009 and December 31, 2008 was $1,073
and $1,074, respectively. Amortization is calculated using the
straight-line method over the estimated useful lives of the
assets. The estimated useful lives of the customer relationship and
supply agreement intangibles are 6 years and 5 years, respectively.
The
estimated amortization expense for future years is:
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
Customer
Relationships
|
|
$ |
333 |
|
|
$ |
333 |
|
|
$ |
84 |
|
Supply
Agreement
|
|
$ |
740 |
|
|
$ |
85 |
|
|
$ |
0 |
|
Total
amortization expense
|
|
$ |
1,073 |
|
|
$ |
518 |
|
|
$ |
84 |
|
7. Line
of Credit
We have a line of credit
agreement with National City Bank for borrowings up to $3,500 due on demand with
interest payable monthly at LIBOR plus 1.5%. The line of credit
requires certain amounts be restricted in an identified collateral account based
on the outstanding balance due. The portion of the collateral account
currently restricted is reflected as restricted cash in the accompanying
consolidated balance sheet. As of December 31, 2009, the outstanding
balance due under the line of credit was $0. As of December 31, 2008,
the outstanding balance due under the line of credit was $834. The
weighted average effective interest rate was 1.73% and 4.17% at December 31,
2009 and 2008, respectively.
8. Other
Accrued Expenses
Other
accrued expenses at December 31, 2009 and 2008 consist of the
following:
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Accrued
warranty costs
|
|
|
1,140 |
|
|
|
1,012 |
|
Taxes,
other than income taxes
|
|
|
196 |
|
|
|
164 |
|
Other
|
|
|
403 |
|
|
|
457 |
|
Total
|
|
$ |
1,739 |
|
|
$ |
1,633 |
|
9. Income
Taxes
The components of the
income tax expense for the years ended December 31 are as follows:
|
|
2009
|
|
|
2008
|
|
Current
tax expense:
|
|
|
|
|
|
|
Federal
|
|
$ |
(5 |
) |
|
$ |
— |
|
State
and local
|
|
|
19 |
|
|
|
45 |
|
Total
current income tax expense
|
|
|
14 |
|
|
|
45 |
|
Deferred
tax expense:
|
|
|
— |
|
|
|
— |
|
Total
income tax expense
|
|
$ |
14 |
|
|
$ |
45 |
|
A
reconciliation of income tax expense by applying the statutory federal income
tax rate for the years ended December 31 follows:
|
|
2009
|
|
|
2008
|
|
Loss
before income taxes
|
|
$ |
(1,673
|
)
|
|
$ |
(7,659
|
)
|
|
|
|
|
|
|
|
|
|
Computed
tax benefit at the statutory federal rate
|
|
|
(569
|
)
|
|
|
(2,604
|
)
|
State
and local income taxes, net of federal benefit
|
|
|
12
|
|
|
|
29
|
|
Change
in valuation allowance
|
|
|
416
|
|
|
|
1,887
|
|
Non-deductible
goodwill impairment
|
|
|
—
|
|
|
|
344
|
|
Non-deductible
share-based compensation activity
|
|
|
79
|
|
|
|
86
|
|
Changes
in effective state rates
|
|
|
17
|
|
|
|
411
|
|
Prior
year adjustments
|
|
|
(1
|
)
|
|
|
(113
|
)
|
Other
|
|
|
60
|
|
|
|
5
|
|
Income
tax expense
|
|
$ |
14
|
|
|
$ |
45
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
(0.8)
|
%
|
|
|
(0.6)
|
%
|
A
detailed summary of the deferred tax assets and liabilities at December 31
resulting from differences in the book and tax basis of assets and liabilities
follows:
|
|
2009
|
|
|
2008
|
|
Current
deferred tax assets:
|
|
|
|
|
|
|
Accrued
compensation
|
|
$ |
121 |
|
|
$ |
208 |
|
Other
accrued expenses
|
|
|
29 |
|
|
|
31 |
|
Inventories
|
|
|
1,377 |
|
|
|
996 |
|
Accrued
warranty costs
|
|
|
457 |
|
|
|
360 |
|
Accounts
receivable
|
|
|
128 |
|
|
|
135 |
|
Other
|
|
|
— |
|
|
|
6 |
|
Total
current assets
|
|
|
2,112 |
|
|
|
1,736 |
|
Less:
valuation allowance
|
|
|
(2,112
|
) |
|
|
(1,736
|
) |
Net
current assets
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Long-term
deferred tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss and credit carryforwards
|
|
|
24,028 |
|
|
|
23,977 |
|
Share-based
compensation
|
|
|
106 |
|
|
|
189 |
|
Property
and equipment
|
|
|
913 |
|
|
|
842 |
|
Goodwill
and intangibles
|
|
|
2,819 |
|
|
|
2,799 |
|
Other
|
|
|
64 |
|
|
|
63 |
|
Total
long-term assets
|
|
|
27,930 |
|
|
|
27,890 |
|
Less:
valuation allowance
|
|
|
(27,930
|
) |
|
|
(27,890
|
) |
Net
deferred tax asset
|
|
$ |
— |
|
|
$ |
— |
|
At
December 31, 2009, the Company has unused federal net operating loss
carryforwards of $66,242 generally expiring from 2022 through
2029. The Company has federal tax credit carryforwards of
approximately $822 generally expiring from 2011 through 2022. The
Company also has other unused state and local net operating loss
carryforwards.
Based on the available objective
evidence, including the Company’s recent history of operating losses, management
believes it is more likely than not that the net deferred tax assets will not be
fully realizable. Accordingly, the Company provided for a full
valuation allowance against its net deferred tax assets at December 31, 2009 and
2008.
10. Lease
Commitments
The Company also has certain
non-cancelable operating leases covering certain office facilities and equipment
that expire at various dates through 2014. The future minimum
operating lease payments for years ending December 31 are as follows:
|
|
Operating
Leases
|
|
2010
|
|
|
324 |
|
2011
|
|
|
191 |
|
2012 |
|
|
92 |
|
2013 |
|
|
93 |
|
2014
|
|
|
47 |
|
Total
future minimum lease payments
|
|
$ |
747 |
|
Aggregate
rental expense on all cancelable and non-cancelable operating leases for the
years ended in 2009 and 2008 approximated $276 and $322,
respectively.
11. Contingencies
The Company is
periodically a party, both as plaintiff and defendant, to lawsuits and claims
arising out of the normal course of business. If necessary, the
Company records reserves for losses that are deemed to be probable and that are
subject to reasonable estimates. As of December 31, 2009 and 2008,
the Company does not have any recorded legal contingencies.
The
Company, each of the members of the Company’s board of directors, Lineage Power
Holdings, Inc. (“Lineage”), and Lineage Power Ohio Merger Sub, Inc. (“Merger
Sub”) were named defendants in a purported class action and shareholder
derivative lawsuit filed in the Court of Common Pleas of Cuyahoga, County, Ohio,
on or about March 5, 2010, and styled as follows: Harshad Sandesara
v. PECO II, Inc., et al., Case No. CV 10 720332. Plaintiff is a
shareholder of the Company and seeks both to enjoin the merger and
damages. On March 15, 2010, plaintiff filed an amended complaint and
a motion for expedited proceedings. Thereafter, on March 19, 2010,
plaintiff filed a motion for preliminary injunction asking that the court block
the merger. The lawsuit alleges, among other things, that the
directors of the Company, aided and abetted by the Company and Lineage, breached
their fiduciary duties in connection with the directors’ recommendation that the
shareholders adopt a proposed merger transaction between the Company and Merger
Sub that would result in the Company being a wholly owned subsidiary of
Lineage. On March 25, 2010, the defendants filed a motion to dismiss
the amended complaint and a brief in opposition to the motion for expedited
proceedings. On March 26, 2010, the Court denied plaintiff’s motion
to expedite discovery and ordered the Company to supplement its proxy statement
filed March 18, 2010 with specific information concerning the background of the
merger. At this stage, it is not possible to predict the outcome of
this proceeding or its impact on the Company. The Company believes
the allegations made in the amended complaint are without merit and intends to
vigorously defend against the plaintiff’s claims.
12. Employee
Benefit Plans
The Company has a
401(k)/Profit Sharing Plan. Under the Plan, eligible employees, as defined, may
elect to contribute 1% up to 100% of their annual compensation subject to
certain limitations. In addition, the Company may make contributions
to the Plan at the discretion of the Compensation Committee of the Board of
Directors. No contributions were made by the Company in 2009 and
2008.
13. Warrants
During
2006, the Company issued a warrant as part of the purchase price consideration
for an acquisition. The Warrant gave the seller the right to purchase
additional shares to obtain up to 45% of the Company’s issued and outstanding
shares of capital stock measured as of five business days before the exercise of
the Warrant, at an exercise price of $2.00 per share, exercisable immediately
upon issuance and for a period of 30 months thereafter. The Warrant
expired unexercised in September 2008.
14. Loss
Per Share
The
number of shares outstanding for calculation of loss per share is as
follows:
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Weighted-average
shares outstanding - basic
|
|
|
2,844 |
|
|
|
2,775 |
|
Effect
of potentially dilutive shares
|
|
|
— |
|
|
|
— |
|
Weighted
average in outstanding shares - diluted
|
|
|
2,844 |
|
|
|
2,775 |
|
|
|
|
|
|
|
|
|
|
Due to
the Company’s net loss for the years ended December 31, 2009 and 2008, no
potentially dilutive shares were included in the calculation of diluted loss per
share because their effect would have been anti-dilutive.
15. Stock-Based
Compensation
The Company has one plan
under which stock-based awards may currently be granted to officers and
employees, including non-employee directors. The Amended 2000
Performance Plan (“2000 Plan”) provides for the granting of 500,000 common
shares (on a post-split basis). The Compensation Committee of the
Board of Directors administers the 2000 Plan. The 2000 Plan permits
the grant of stock options, restricted stock awards, and other stock and
performance-based incentives.
Stock
options are generally granted with an exercise price equal to the market price
of the Company’s common stock at the date of grant, generally vest over three to
four years, and generally have a term of 5 years. Restricted stock
awards generally vest in a one year period. Stock options and
restricted stock awards may vest based on service requirements or specific
performance criteria as determined by the Compensation Committee.
In
addition to the 2000 Plan, the Company has the 2000 Employee Stock Purchase Plan
(“ESPP”) which reserved an aggregate of 100,000 common shares (on a post-split
basis). The ESPP allows eligible employees to purchase common shares
through payroll deductions, at prices equal to 85% of fair market value on the
first or last business day of the offering period, whichever is lower. The Plan
will terminate when all or substantially all of the common shares reserved for
purposes of the plan have been purchased. The fair value of the
discount is estimated at the beginning of each semi-annual payment period and
vests at the end of that period.
All
shares issued under both the 2000 Plan and ESPP are from newly issued common
shares. The 2000 Plan and ESPP will terminate in 2010, or when all of
the common shares reserved for purposes of the plan have been
issued.
Total
stock-based compensation expense recognized by type of award is as
follows:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$ |
39 |
|
|
$ |
201 |
|
Restricted
stock awards
|
|
|
184 |
|
|
|
252 |
|
Employee
stock purchase plan
|
|
|
2 |
|
|
|
3 |
|
Total
stock-based compensation expense
|
|
|
225 |
|
|
|
456 |
|
Tax
effect on stock-based compensation expense
|
|
|
— |
|
|
|
— |
|
Net
effect on loss from operations
|
|
$ |
225 |
|
|
$ |
456 |
|
There was
no recorded tax effect on the recognition of stock-based compensation expense
due to the Company’s significant net operating loss carryforward and valuation
reserve. In addition, there was no effect on the presentation of the
statement of cash flows as excess tax benefits from the exercise of stock
options have not been recorded as the Company does not expect to be able to
realize current period deductions of taxable income.
Stock
Options
There were no stock option grants
during 2009. The
weighted-average fair value of stock options granted in 2008 was
estimated $3.27 per share, respectively, using the Black-Scholes option-pricing
model based on the following assumptions:
|
|
2008
|
|
Expected
dividend
|
|
|
0 |
% |
Expected
volatility
|
|
|
60.0 |
% |
Risk-free
interest rate
|
|
|
3.50 |
% |
Expected
term (in years)
|
|
|
2.98 |
|
Expected Term: The
Company’s expected term represents the period that the Company’s share-based
awards are expected to be outstanding and was determined based on historical
experience of similar awards, given consideration to contractual terms of the
awards and vesting schedules.
Expected
Volatility: The fair value of share-based awards was
determined using the Black-Scholes Model with a volatility factor based on
regular measurements of the Company’s historical stock prices.
Expected
Dividend: The Company has not historically paid dividends, nor
does it expect to pay dividends in the near future. Therefore,
there is no expected dividend yield.
Risk-Free Interest
Rate: The Company bases the risk-free interest rate used in
the Black-Scholes Model on the implied yield currently available on U.S.
Treasury zero-coupon issues with a remaining term equivalent to the expected
term of the share-based awards.
Estimated Pre-Vesting
Forfeitures: The Company considers historical pre-vesting
forfeiture rates in determining the estimated number of shares that will
ultimately vest.
The
following table represents stock option activity for the year-to-date period
ended December 31, 2009:
|
|
Number
of
|
|
|
Weighted
Average
|
|
Weighted
Average
Remaining
|
|
|
Shares
|
|
|
Exercise
Price
|
|
Contract
Life
|
Outstanding
options at January 1, 2009
|
|
|
192,402 |
|
|
$ |
9.98 |
|
|
Granted
|
|
|
— |
|
|
|
— |
|
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
Forfeited/Cancelled
|
|
|
(96,402 |
) |
|
$ |
10.35 |
|
|
Outstanding
options at December 31, 2009
|
|
|
96,000 |
|
|
$ |
9.62 |
|
1.68 years
|
Options
vested or expected to vest at December 31, 2009
|
|
|
93,807 |
|
|
$ |
9.66 |
|
1.65 years
|
Exercisable
at December 31, 2009
|
|
|
71,100 |
|
|
$ |
10.27 |
|
1.22
years
|
At
December 31, 2009 there was no aggregate intrinsic value of stock options
outstanding and exercisable as the exercise prices of the options were all
greater than that of the average market price at the end of the
period.
Restricted
Stock Awards
The
Company has granted restricted stock awards to certain of its employees that
vest based on the attainment of certain performance goals and service
requirements. Fair-values of the restricted stock awards are based on
the closing market price of the Company’s common stock on the grant
date. At December 31, 2009, there was $61 of unrecognized
compensation expense from non-vested awards that is expected to be recognized
over a weighted-average remaining service period of 1.5 years. The
total fair-value of restricted stock awards that vested during 2009 and 2008 was
$203 and $237, respectively.
The
following table represents restricted stock awards activity for the year-to-date
period ended December 31, 2009:
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Grant
Date Fair Value
|
|
Non-vested
at January 1, 2009
|
|
|
45,000 |
|
|
$ |
3.92 |
|
Granted
|
|
|
33,732 |
|
|
|
2.82 |
|
Vested
|
|
|
(60,568 |
) |
|
|
3.35 |
|
Non-vested
at December 31, 2009
|
|
|
18,164 |
|
|
$ |
3.79 |
|
16. Related
Party Transactions
The
Company engages in certain related party transactions throughout the course of
its business with Delta, a significant shareholder and vendor. The
Company’s related party transactions with Delta, for the year ended December 31,
2009 include $128 in sales and $5,494 in purchases. At December 31,
2009, the Company had balances of $31 and $28 included in accounts receivable
and accounts payable, respectively. The Company’s related party
transactions with Delta, for the year ended December 31, 2008 include $144 in
sales and $9,041 in purchases. At December 31, 2008, the Company had
balances of $11 and $485 included in accounts receivable and accounts payable,
respectively.
17. Significant
Customers
Sales to the top three
customers amounted to $16,728, $13,505, and $1,622 and comprised approximately
40%, 32%, and 4% respectively, of consolidated net sales for
2009. Sales to our top customer included $13,940 in product and
$2,788 in services, our second highest customer included $1,038 in product and
$12,467 in services, and our third highest customer included $1,568 in product
and $54 in services.
Sales to
the top three customers amounted to $17,801, $5,170, and $4,054 and comprised
approximately 43%, 12%, and 10%, respectively, of consolidated net sales for
2008. Sales to our top customer included $14,685 in product and
$3,116 in services, our second highest customer included $1,381 in product and
$3,788 in services, and our third highest customer included $3,986 in product
and $68 in services.
18. Subsequent
Events
Pending
Acquisition
On
February 18, 2010, we entered into an Agreement and Plan of Merger pursuant to
which Lineage Power Holdings, Inc., a Delaware corporation (“Lineage”), will
acquire all of our outstanding shares of common stock for $5.86 per share in
cash without interest and less any applicable tax
withholding. Lineage is a provider of power conversion solutions and
is a portfolio company of The Gores Group, LLC, a private equity firm focused on
acquiring controlling interests in mature and growing businesses. We
expect the transaction to close during the second quarter of 2010, subject to
approval by our shareholders.
ITEM 9—CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
ITEM 9A(T)—
CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of
December 31, 2009, the end of the period covered by this report, an evaluation
was carried out under the supervision and with the participation of our
management, including our Chief Executive Officer/Chief Financial Officer of our
disclosure controls and procedures (as such term is defined in Rule 13a-15(e) or
15d-15(f) under the Securities Exchange Act of 1934). Based upon such
evaluation, our Chief Executive Officer/Chief Financial Officer concluded such
disclosure controls and procedures were effective as of the end of the period
covered by this report.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the (i)
effectiveness and efficiency of operations, (ii) reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles, and (iii) compliance
with applicable laws and regulations. Our internal controls framework
is based on the criteria set forth in the Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting is as of the year ended December 31, 2009. We believe that internal
control over financial reporting is effective. We have not identified any,
current material weaknesses considering the nature and extent of our current
operations and any risks or errors in financial reporting under current
operations.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal controls over financial reporting during our
fourth quarter that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
ITEM 9B— OTHER
INFORMATION
None.
PART
III
ITEM
10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
authorized number of our directors presently is fixed at nine. As
required by our Amended and Restated Articles of Incorporation, the Board of
Directors is divided into three classes of directors. There are
currently three directors in each of Class I and Class III, and two directors in
Class II. There is one vacancy in Class II. Each listed
director’s respective experience and qualifications described below led to the
conclusion that each director is qualified to serve as a member of our board of
directors.
Class
I Directors
E. Richard Hottenroth, age 73
— Director since 1997.
E.
Richard Hottenroth has been a member of the firm Hottenroth, Garverick, Tilson
& Garverick, Co., L.P.A. since 1961. Hottenroth, Garverick,
Tilson & Garverick, Co., L.P.A. provides legal services to PECO
II.
Gerard B. Moersdorf, Jr., age
58 — Director since 2006.
Gerard B.
Moersdorf, Jr. is the founder and innovator behind a start-up company called
ACScout that has been highly successful from its inception in late
2006. He was also the founder of Applied Innovation Inc., which was
acquired by Kentrox, Inc. in May 2007. Mr. Moersdorf served as
Applied Innovation’s Chairman of the Board from 1986 to May 2007, President,
Chief Executive Officer, and Treasurer from 1986 to 2000 and as its President
and Chief Executive Officer from August 2002 to January 2005.
R. Louis Schneeberger, age 55
— Director since 2003.
Since
January 2010, R. Louis Schneeberger has been a Director of Qorval LLC, an
international business advisory firm providing financial restructuring,
operational turnaround, due diligence and management services to private equity
groups, lenders/creditors and stakeholders of underperforming or troubled
enterprises. In 2008 and 2009, Mr. Schneeberger was a Partner and
Managing Director of Knowledge Investment Partners, an alternative investment
firm focused on the education sector. In November of 2009, Mr.
Schneeberger became a Director of Energy Focus, Inc. (NASDAQ: EFOI) a public
company that designs, develops, manufactures, and markets lighting systems for
use in both the general commercial market and the pool market. From
November 2005 to December 2007, Mr. Schneeberger was an independent consultant
who focused on assisting in several mergers and acquisitions and performing the
chief financial officer function for a Cleveland based large private
company. From February 2004 to November 2005, Mr. Schneeberger served
as Chief Financial Officer for OM Group, Inc, a $1.3 billion international
producer of metal-based specialty chemicals. Mr. Schneeberger is an
experienced public-company executive with a background in public accounting and
as a strategist, turnaround specialist, and business advisor. He was
chief financial officer and a director of Olympic Steel, Inc. (NASDAQ: ZEUS)
from 1987 to 2000 and Chairman of the Board and audit committee of Royal
Appliance Manufacturing Company (NYSE: RAM) from July 1995 to April
2003. He began his career with Arthur Andersen (1977 to
1987).
Class
II Directors
John G. Heindel, age 55 —
Director since 2005.
John G.
Heindel became Chairman of the Board of Directors of our Company in June 2006,
President and Chief Executive Officer of the Company in July 2005, and Chief
Financial Officer and Treasurer in January 2008. Prior to his service
with the Company, Mr. Heindel provided strategic consulting services since June
2003 to various companies interested in making acquisitions in the
communications industry. Prior to his work as a consultant, Mr.
Heindel spent more than 22 years with Lucent Technologies and its predecessor
companies, most recently as the company’s President, Worldwide
Services.
Thomas R. Thomsen, age 74 —
Director since 2003.
Thomas R.
Thomsen is a veteran of more than 45 years in the telecommunications
industry. His career includes 32 years with Western
Electric/AT&T, where he held responsibilities for manufacturing, services,
marketing, sales and administration at the senior executive
level. After retiring from AT&T in 1990 he served as Chairman of
the Board and CEO of Lithium Technology Corp., a publicly held development stage
company, from August 1995 to November 1999. Mr. Thomsen currently
serves on the board of EF Johnson Technologies, Inc., a company with a class of
securities registered pursuant to the Securities Exchange Act of 1934, where he
has been a director since July 1995, and the Executive Committee for the
University of Nebraska Technology Park. Previously, he served on the
boards of Western Electric, Sandia Corp, Olivetti Inc., AT&T Credit Corp.,
Lithium Technology Corp., and Rensselaer Polytechnic
Institute.
Class
III Directors
James L. Green, age 82 —
Director since 1988.
James L.
Green was one of the founders of PECO II in 1988, served as Chairman of the
Board of Directors until July 2001, served as Chief Executive Officer from 1988
to 1990 and April 2003 to June 2006, and as the President from 1989 to 1990 and
April 2003 to June 2006. Mr. Green has over 50 years of experience in
the communications industry. From 1983 to 1988, Mr. Green also worked
as a management consultant in the international communications
industry. From 1983 to 1985, Mr. Green was President and Chief
Executive Officer of NovAtel Communications, Ltd. in Calgary,
Canada. From 1953 to 1983, Mr. Green served in various capacities
with the Power Equipment Company, North Electric Company and ITT, the
predecessor businesses of PECO II, Inc.
Richard W. Orchard, age 56 —
Director since 2006.
Mr.
Orchard is a retired telecommunications executive with over 25 years experience
in sales, operations and general management. Mr. Orchard most
recently served as Chief Transition Officer of Sprint Nextel Corporation in
connection with the merger of Sprint and Nextel Communications, Inc. from
December 2004 until late 2005. Prior to his role as Chief Transition
Officer, Mr. Orchard served as Nextel’s Senior Vice President and Chief Service
Officer and prior to that as Eastern Regional President. Prior to
joining Nextel, Mr. Orchard also served in various capacities for AirTouch and
PacTel for ten years and Motorola Communications for five years. Mr.
Orchard is also a director of Grande Communications Holdings, Inc., a company
subject to the reporting requirements of Section 15(d) of the Securities
Exchange Act of 1934.
Matthew P. Smith, age 56 —
Director since 1994.
Matthew
P. Smith is self-employed as a private investor in technology and energy
companies. Mr. Smith is a managing member of Paquin Energy and
Fuel President of Firenze Valley Farms Inc. and serves on the Board of two other
technology related forms. Mr. Smith served as the Chairman of the
Board from July 2001 until July 2005. Mr. Smith was employed by PECO
II in various capacities between 1989 and May 2004, including as Chief Executive
Officer from 1998 to June 2002, and as our President from 1998 to July
2001. From 1996 to 1998, he served as Executive Vice President, from
1991 to 1998, he served as Secretary, and from 1990 to 1998 he served as
Treasurer.
Executive
Officers
The
executive officers of the Company are elected annually by the Board of Directors
and serve at the pleasure of the Board. In addition to John G.
Heindel, President, Chief Executive Officer, Chief Financial Officer and
Treasurer, the following person is an executive officer of the
Company.
Eugene A. Peden, age 44 —
Senior Vice President/Operations and Corporate Secretary since June
2009.
Mr. Peden
previously had held the position of Vice President of Operations since joining
PECO II in January 2008. Mr. Peden spent his career in corporate
operations positions in Ireland, Thailand, the United Kingdom and the United
States. Prior to joining the Company, Mr. Peden worked for Rittal
Corporation, one of the largest enclosure manufacturers in the world. In his
most recent position as Senior Vice President, Operations, Mr. Peden led a
re-engineering of Rittal’s operations, driving significant culture change by
establishing a customer-focused organizational structure, instituting
cost-control measures and implementing lean manufacturing
practices.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our executive officers and
directors and persons who own 10% or more of a registered class of our equity
securities, to file reports of ownership and changes in ownership on Forms 3, 4
and 5 with the SEC. Executive officers, directors and 10% or greater
shareholders are required by SEC regulations to furnish us with copies of all
Forms 3, 4 and 5 they file.
Based
solely on our review of the copies of such forms we have received, we believe
that all of our executive officers and directors complied with all filing
requirements applicable to them.
Code
of Ethics
The Board
has adopted a Code of Conduct and Ethics that applies to all of PECO II’s
employees, officers and directors. These documents can be found on
our website at www.peco2.com by clicking on the link for Investor
Relations. If we make any substantive amendments to our code or grant
any waivers, including any implicit waivers, from a provision of our code to any
director or executive officer, we will disclose the nature of such amendment on
our website and any waiver in a Current Report on Form 8-K.
Audit
Committee
The Board
of Directors maintains an Audit Committee, whose members include R. Louis
Schneeberger (Chairman), Gerard B. Moersdorf, Jr., and Richard W.
Orchard. The Audit Committee hires, oversees and reviews the
activities of our independent registered public accounting firm and various
company policies and practices. The specific functions and
responsibilities of the Audit Committee are set forth in the Audit Committee
Charter adopted by the Board of Directors. Our Board has determined
that each of the members of the Audit Committee satisfies the current
independence standards of the Nasdaq Stock Market listing standards and Section
10A(m)(3) of the Securities Exchange Act of 1934, as amended. The
Audit Committee met four times in 2009.
The Board
also has determined that R. Louis Schneeberger is an “audit committee financial
expert” as that term is defined in Item 407(d)(5)(ii) of Regulation
S-K. As an “audit committee financial expert,” Mr. Schneeberger
satisfies the Nasdaq financial literacy and sophistication
requirements.
ITEM
11—EXECUTIVE COMPENSATION
Summary
Compensation Table
The
following table shows the compensation paid by PECO II, Inc. to each of the
Named Executive Officers (NEOs) of the Company for the 2009 and 2008 fiscal
years.
SUMMARY
COMPENSATION TABLE
Name
and
Principal
Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)(1)
|
|
|
Option
Awards
($)(1)
|
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
|
All
Other Compensation
($)(2)
|
|
|
Total
($)
|
|
John
G. Heindel
Chairman of the Board, President,
Chief Executive Officer, Chief Financial Officer and
Treasurer
|
|
|
2009
2008
|
|
|
|
217,669
160,000
|
|
|
|
– |
|
|
|
74,999
137,478 |
|
|
|
–
64,192
|
|
|
|
139,283
–
|
|
|
|
11,322
10,242
|
|
|
|
443,273
371,912
|
|
Jacquie
L. Boyer(3)
Former Vice President of Sales and
Sales Operation
|
|
|
2009
2008
|
|
|
|
71,639
125,008
|
|
|
25,000
_
|
|
|
–
_
|
|
|
|
–
48,150
|
|
|
|
35,772
40,043
|
|
|
|
66,915
240
|
|
|
|
199,326
213,441
|
|
Eugene
A. Peden
Senior
Vice President of
Operations
& Packaged Power
|
|
|
2009
2008
|
|
|
|
158,355
146,548
|
|
|
|
25,000
25,000
|
|
|
|
10,001
10,000
|
|
|
|
–
68,480
|
|
|
|
74,191
–
|
|
|
|
240
240
|
|
|
|
267,787
250,268
|
|
(1)
|
Represents
the aggregate grant date fair value computed in accordance with FASB ASC
Topic 718. Assumptions made in the valuation of the awards are
disclosed in Note 15 of the Notes to the Consolidated Financial Statements
in this Form 10-K.
|
(2)
|
Amounts
include the following:
|
·
|
$240
of group term insurance premiums paid on behalf of Mr. Peden and $120 of
group term insurance premiums paid on behalf of Ms. Boyer in 2009; and
$240 and $168 of group term insurance premiums paid on behalf of Mr. Peden
and Ms. Boyer in 2008;
|
·
|
$2,322
of executive life insurance premiums paid on behalf of Mr. Heindel in 2009
and $1,242 of executive life insurance premiums paid on behalf
of Mr. Heindel in 2008;
|
·
|
a
$750 monthly car allowance paid on behalf of Mr. Heindel in 2009 and
2008;
|
·
|
Ms.
Boyer received a severance payment of $66,795 per her individual
separation agreement.
|
(3) Ms. Boyer resigned as the Company’s
Vice President of Sales and Sales Operations, effective as of June 30,
2009.
Non-Equity-Based
Compensation
We have
an annual non-equity incentive compensation plan, which in 2009 was called the
2009 Incentive Compensation Plan (the “2009 IC Plan”). The goal of
the 2009 IC Plan is to tie incentive compensation directly to the growth and
profitability of our Company. The 2009 IC Plan pays cash awards to
our employees based upon the achievement of both key company-wide performance
goals and personal performance goals unique to the individual IC Plan
participant.
For NEOs,
80% of the potential payout was tied to the achievement of company-wide
performance goals, which were the achievement of revenue and EBITDA (earnings
before interest, taxes, depreciation and amortization) targets. The
revenue and EBITDA threshold targets must both be met before there are any
payouts under the 2009 IC Plan, and each of these targets accounted for 50% of
the company-wide performance goal portion of the 2009 IC Plan. The
remaining 20% of the potential payout under the 2009 IC Plan was tied to the
achievement of individual performance goals for each NEO.
Upon the
achievement of the threshold revenue and EBITDA targets, our NEOs had the
opportunity to receive threshold, target and maximum incentive compensation as
follows:
Incentive
Compensation Payout Opportunities for 2009
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
John
G. Heindel
|
|
$ |
75,000 |
|
|
$ |
150,000 |
|
|
$ |
300,000 |
|
Jacquie
Boyer |
|
$
|
42,500 |
|
|
$ |
85,00 |
|
|
$ |
170,000 |
|
Eugene
A. Peden
|
|
$ |
29,000 |
|
|
$ |
58,000 |
|
|
$ |
117,000 |
|
In 2009,
the EBITDA target was met and, as a result, the following payouts were made
under the 2009 IC Plan. Mr. Heindel received $139,283 and Mr. Peden
received $74,191. In 2009, Ms. Boyer earned $35,772 from
commissions. Ms. Boyer and Mr. Peden also each earned a $25,000 bonus
in 2009.
Equity-Based
Compensation
We
believe that emphasis on equity-based compensation opportunities encourages a
high level of long-term performance that enhances shareholder value, thereby
further linking leadership and shareholder objectives. Equity compensation also
serves to attract and retain the best available individuals to serve as our
NEOs. Equity compensation is intended to motivate our NEOs to contribute to our
future growth and profitability and to reward their performance in a manner
that:
·
|
provides
them with a means to increase their holdings of the common stock of our
Company;
|
·
|
encourages
our NEOs to be long-term shareholders;
and
|
·
|
aligns
their interests with the interests of the shareholders of the
Company.
|
Equity
compensation is granted to our NEOs under our Amended 2000 Performance Plan (the
“Plan”), which was approved (as amended) by our shareholders on April 24, 2004.
The Compensation/Nominating Committee of our Board of Directors determines the
award opportunity level for each NEO based on the individual’s responsibility
level and potential within our Company, competitive practices, the number of
shares available for grant, business needs, individual and Company performance,
shareholder returns and the market price of our common stock. The
Committee considers these factors subjectively in the aggregate. Because the
Committee believes that each of these factors is significant, and the relevance
of each factor may vary depending on the duties and responsibilities of each
executive officer, the Committee does not assign a formula weight to any single
factor in determining the amount of a grant. Instead, the Committee examines
each factor in the context of individual and Company performance and business
needs, internal pay equity where applicable, and incumbent pay
history.
We have
granted both stock options and restricted stock to our NEOs under the
Plan. Under the Plan, stock options are granted at market price and
typically vest 40% after the first year and 30% for second and third years;
however, no stock options were granted in 2009. In 2009, we
granted restricted stock covering 3,165 shares to Mr. Peden, of which 1,583
shares vested on December 31, 2009 and 1,582 shares are scheduled to vest on
June 30, 2010.
In 2009,
we also granted Mr. Heindel $40,000 of restricted stock based on fair market
value on the date of grant, in lieu of any increase in his base
compensation. In addition, Mr. Heindel agreed to take $35,000 of his
annual salary for 2009 in the form of restricted stock during the last seven
months of 2009.
All Other
Compensation
The all
other compensation category in our Summary Compensation Table consists of the
following:
·
|
employer-paid
premiums for life insurance;
|
·
|
employer-paid
car allowance; and
|
·
|
payments
under employment/severance
agreements.
|
We
provide each of our associates, including NEOs, with the option to purchase
basic group term life insurance with a death benefit equal to two times their
annual salary at a discounted premium. This element of compensation, though
relatively inexpensive, provides one additional item to the overall compensation
package which strengthens our ability to recruit and retain talented
associates.
We also
provide Mr. Heindel with an individual term life insurance policy in the amount
of $1,000,000, which policy shall be payable in the amount of $500,000, together
with a gross-up of premiums to the designated beneficiaries of Mr. Heindel and
any balance to the Company, if Mr. Heindel shall become deceased at any time
during the term of this agreement or extensions or renewals thereof as defined
in said policy. As part of our employment agreement with Mr. Heindel,
we provide Mr. Heindel with a monthly car allowance.
In
addition, we offer our employees, including our NEOs, a comprehensive benefits
program. This program is designed to provide the employees and their families
with competitive coverage at competitive rates. We strive to provide the
employees with appropriate health benefits (medical, pharmacy, dental, and
vision) to help protect the physical, mental and financial health of our
employees and their immediate families.
Agreements with
NEOs
In an
effort to attract and retain the services of our NEOs, we have entered into an
employment agreement with Mr. Heindel, our Chairman, President, Chief Executive
Officer, Chief Financial Officer and Treasurer and Mr. Peden, our Senior Vice
President of Operations.
Agreement
with Mr. Heindel
On
January 4, 2010, the Company and Mr. Heindel entered into an employment
agreement (the “Employment Agreement”). The Employment Agreement has
an initial term ending on December 31, 2011. At the end of the term,
including any renewal extensions thereof, the Employment Agreement will
automatically renew for an additional one-year period, unless either party gives
90 days’ prior written notice to the other party of its intent not to renew the
Employment Agreement. Mr. Heindel is entitled to an annual base
salary of $300,000, which will be reviewed and may be increased subject to the
approval of the Compensation/Nominating Committee. In addition,
pursuant to the terms of the Employment Agreement, the Company has granted Mr.
Heindel such number of shares of restricted stock under the Company’s Amended
2000 Performance Plan equal to (i) $40,000 divided by (ii) the closing
price of our common stock on the date of grant, on January 4, 2010 and is
obligated to make a similar grant on January 3, 2011. The grants
of restricted stock will vest on December 31, 2010 and December 31,
2011, respectively.
Under the
Employment Agreement, Mr. Heindel is eligible to participate in any cash
bonus plan which is established from time to time in an amount determined by the
Committee, and Mr. Heindel is eligible for awards granted under the
Company’s Amended 2000 Performance Plan, at the discretion of the
Committee. Mr. Heindel is entitled to a car allowance of $750
per month during the term of the Employment Agreement. The Company has agreed to
obtain a life insurance policy for a duration of not less than the term of the
Employment Agreement upon the life of Mr. Heindel in the amount of
$1,000,000, which policy shall be payable $500,000 together with gross-up of
premiums to the beneficiaries of Mr. Heindel and any balance to the
Company.
In the
event of a termination due to the death or Disability (as defined in the
Employment Agreement) of Mr. Heindel, Mr. Heindel’s employment will be
deemed terminated as of the end of the month in which such death occurs or
Disability is determined, and the Company will pay to Mr. Heindel, or his
beneficiary, base salary and benefits for a period of 90 days from the deemed
termination date. In addition, Mr. Heindel’s stock options will
immediately vest 100% upon his death or Disability and may be exercised for 90
days from the deemed termination date but no later than their expiration
date.
In the
event of a termination of Mr. Heindel for Cause (as defined in the
Employment Agreement), all obligations of the Company to Mr. Heindel shall
cease.
On
February 18, 2010, the Company, and Mr. Heindel, entered into an Amendment No. 1
(the “Amendment”) to the Employment Agreement. The Amendment
clarified certain payments that would be due Mr. Heindel if a change of control
(as defined in the Employment Agreement) occurs at any time during the term of
the Employment Agreement, and within six months following the date of the change
of control either (1) Mr. Heindel terminates his employment for any reason or
(2) the Company terminates Mr. Heindel’s employment for any reason other than
for Cause (as defined in the Employment Agreement).
If a
change of control (as defined in the employment agreement), such as the proposed
merger, occurs at any time during the term of the employment agreement, and
within six months of the date following the change in control either
(i) Mr. Heindel terminates his employment for any reason or
(ii) the Company terminates Mr. Heindel’s employment for any reason
other than for Cause, then Mr. Heindel is entitled to the following: two
times the sum of (1) Mr. Heindel’s annual salary in effect on the date
of termination , and (2) the cash value of the annual restricted
stock grant to Mr. Heindel, measured as of the grant date, and
(3) the annual or incentive bonus earned by Mr. Heindel in the most
recently completed fiscal year. In addition, upon any such
termination, Mr. Heindel is entitled to the continued payment of his family
COBRA health insurance coverage for a maximum of 18 months from the date of
termination and stock options will immediately vest 100% and may be exercised
for a period of 12 months from the termination date.
The
Amendment also contains provisions to ensure compliance with certain Internal
Revenue Code sections, and to ensure any amount of payments determined to be
nondeductible to the Company under Section 280G of the Internal Revenue Code
will be reduced to the maximum amount which would cause all of the payments to
be deductible by the Company.
In the
event of a termination without Cause upon not less than 90 days’ advance written
notice under the Employment Agreement, the Company will pay to Mr. Heindel:
(i) base salary for an additional 12 months in accordance with normal
payroll practices and (ii) an amount equal to any accrued cash bonuses
(that are accrued at the time of termination) in a lump sum within three months
after such termination. The Company may accelerate the effective date of the
termination without Cause, if the Company increases the amount payable to
Mr. Heindel to an amount equal to the amount Mr. Heindel would receive
following termination within six months of a change of control, as described
above. In addition, Mr. Heindel’s stock options and restricted stock will
immediately vest 100% upon termination and his stock options may be exercised
for 90 days from the termination date but no later than their expiration
date.
In the
event of a termination by Mr. Heindel without Good Reason (as defined in
the Employment Agreement) upon not less than 90 days’ advance written notice to
the Company, the Company shall pay to Mr. Heindel base salary and benefits
for a period of 90 days from the date of such notice. In addition,
Mr. Heindel’s stock options may be exercised for 90 days from the
termination date but not later than their expiration date.
In the
event of a termination by Mr. Heindel with Good Reason, the Company shall
pay to Mr. Heindel an amount equal to the amount Mr. Heindel would
receive following termination within six months of a change of control, as
described above. In addition, Mr. Heindel’s stock options and restricted
stock will immediately vest 100% and his stock options may be exercised for 90
days from the termination date but not later than their expiration
date.
Under the
Employment Agreement, Mr. Heindel has also agreed not to compete against
the Company for a period of one year following any termination of
Mr. Heindel’s employment with the Company. The Amendment further
provides that during this one-year period and for an additional six-month period
thereafter, Mr. Heindel may not be employed or engaged by, perform any services
for, invest in or become associated in any capacity with certain competitors of
the Company.
Agreement
with Mr. Peden
On
November 29, 2007, as amended January 27, 2010, the Company and Mr. Peden
entered into an employment agreement, which provides for an initial base salary
on $150,000, which has been increased since the date of his
hiring. The employment agreement also provides that Mr. Peden is
entitled to an annual cash bonus of $50,000, subject to the achievement of
annual business goals. Upon entering into his employment agreement,
Mr. Peden received a signing bonus of $25,000 and an option to purchase 20,000
PECO II common shares, of which 40% vested one year after his third year of
employment. Upon entering his employment agreement, Mr. Peden was
entitled to Company-provided local housing, the opportunity to earn 5,000 shares
of restricted stock awarded to him based on the achievement of 2008 performance
goals, participation in the Company benefits package after approximately one
month of employment, 15 vacation days, and additional financial support for
certain expenses not to exceed $14,000.
If a
change of control (as defined in his employment agreement) occurs, and Mr. Peden
is terminated within 12 months following the change of control, Mr. Peden is
entitled to receive cash compensation equivalent to one year’s base pay, and his
stock options and restricted stock will immediately vest 100% and may be
exercised for a period of 90 days from the termination date.
If,
within six months following a change of control, Mr. Peden terminates his
employment for good reason, Mr. Peden is entitled to receive cash compensation
equivalent to one year’s base pay, and his stock options and restricted stock
will immediately vest 100% and may be exercised for a period of 90 days from the
termination date. Good reason is generally defined in Mr. Peden’s
employment agreement to mean the occurrence of (1) any material change with
respect to the diminution or reassignment of title, appointment, authority, or
reporting relationship of Mr. Peden; (2) the assignment or relocation of Mr.
Peden to a location outside of a 50 mile radius from PECO II’s headquarters or
Mr. Peden’s residence; or (3) the failure of PECO II to pay Mr. Peden’s salary
or any amounts otherwise vested or due under any plan or policy of PECO
II.
Outstanding
Equity Awards at Fiscal Year-End Table
The
following table provides information concerning unexercised options, stock that
has not vested, and equity incentive plan awards outstanding as of the end of
the last completed fiscal year:
OUTSTANDING
EQUITY AWARDS AT FISCAL 2009 YEAR-END
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
|
|
Option
Exercise Price
($)
|
|
|
Option
Expiration
Date
|
|
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
|
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)
|
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
That Have Not Vested
(#)
|
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights That Have Not Vested
($)
|
|
John
G.Heindel
|
|
|
50,000
8,000
|
|
|
|
–
12,000
|
(1) |
|
|
–
–
|
|
|
|
10.70
7.50
|
|
|
07/28/2010
01/03/2013
|
|
|
|
–
–
|
|
|
|
–
–
|
|
|
|
–
–
|
|
|
|
–
–
|
|
Jacquie
L. Boyer(3)
|
|
|
–
|
|
|
|
– |
|
|
|
–
|
|
|
|
–
|
|
|
–
|
|
|
|
–
|
|
|
|
– |
|
|
|
–
|
|
|
|
–
|
|
Eugene
A. Peden
|
|
|
8,000
–
|
|
|
|
12,000
–
|
(2)
|
|
|
–
–
|
|
|
|
8.00
–
|
|
|
01/01/2013
–
|
|
|
|
–
1,582
|
(4) |
|
|
–
7,704
|
|
|
|
–
–
|
|
|
|
–
–
|
|
(1)
|
6,000
shares vested on January 3, 2010 and 6,000 shares vest on January 3,
2011.
|
(2)
|
6,000
shares vested on January 1, 2010 and 6,000 shares vest on January 1,
2011.
|
(3)
|
Ms
Boyer resigned effective June 30, 2009. Per her
separation agreement, Ms Boyer had until December 31, 2009 to exercise any
vested options.
|
(4)
|
Shares
are scheduled to vest on June 30,
2010.
|
Compensation
of Directors
In July 2009, each non-employee
director was granted an annual cash retainer of $10,000, payable on a quarterly
basis, for service from July 1, 2009 to June 30, 2010. In addition to
the annual cash retainer, each non-employee member of the Company’s Board of
Directors receives the following fees per meeting attended:
Meeting
Type
|
|
Fee
Per Meeting
|
|
Board
Meeting
|
|
$ |
1,000 |
|
Committee
Meeting
|
|
$ |
1,000 |
|
Committee
Meeting, Chairperson
|
|
$ |
1,500 |
|
Each
board member is also entitled to reimbursement for all reasonable out-of-pocket
expenses incurred in connection with his or her attendance at a board or
committee meeting.
Employees
and officers who are directors receive no additional compensation for services
as directors. The Board of Directors, upon the recommendation of the
Compensation/Nominating Committee, sets the compensation for non-employee
directors. The table below shows the compensation earned by the Company’s
non-employee directors during 2009:
DIRECTOR
COMPENSATION FOR 2009
Name
|
|
Fees
earned
or
paid in cash
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
James
L. Green
|
|
|
16,000 |
|
|
|
16,000 |
|
E.
Richard Hottenroth
|
|
|
24,250 |
|
|
|
24,250 |
|
Gerard
B. Moersdorf, Jr.
|
|
|
19,900 |
|
|
|
19,900 |
|
Richard
W. Orchard
|
|
|
24,700 |
|
|
|
24,700 |
|
R.
Louis Schneeberger
|
|
|
29,000 |
|
|
|
29,000 |
|
Matthew
P. Smith
|
|
|
16,000 |
|
|
|
16,000 |
|
Thomas
R. Thomsen
|
|
|
22,800 |
|
|
|
22,800 |
|
ITEM 12—SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Equity
Compensation Plan Information
|
The
following table sets forth information concerning common shares authorized or
available for issuance under our equity compensation plans as of December 31,
2009:
Plan
Category
|
|
Number
of Securities
to
be Issued
Upon
Exercise of
Outstanding
Options,
Warrants
and Rights
|
|
|
Weighted-Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights
|
|
Number of Securities
Remaining Available for
Future
Issuance Under
Equity
Compensation
Plans
(Excluding
Securities
Reflected in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
(c)
|
|
Equity
compensation plans approved by shareholders(1)
|
|
|
114,164 |
|
|
$ |
9.62 |
|
|
|
202,803 |
|
Equity
compensation plans not approved by shareholders
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Total
|
|
|
114,164 |
|
|
$ |
9.62 |
|
|
|
202,803 |
|
___________________
(1)
|
Equity
compensation plans approved by shareholders include the Amended 2000
Performance Plan and the 2000 Employee Stock Purchase
Plan.
|
Security
Ownership of Certain Beneficial Owners and Management
The
number of shares beneficially owned by each shareholder is determined under
rules issued by the Securities and Exchange Commission. This
information is not necessarily indicative of beneficial ownership for any other
purpose. Under these rules, beneficial ownership includes any shares
as to which the individual or entity has sole or shared voting power or
investment power as of the measurement date and any shares as to which the
individual or entity has the right to acquire beneficial ownership within 60
days after such measurement date, through the exercise of any stock option or
other right. Unless otherwise indicated, each person or entity named
below has sole voting power and investment power with respect to the number of
shares set forth opposite his, her or its respective name.
Ownership of Common Shares by Certain
Beneficial Owners
The following table shows information
regarding beneficial ownership of our common shares as of March 12, 2010, unless
otherwise indicated, by each person, entity or group which is known by us to own
beneficially more than 5% of our common shares.
Name and
Address of Beneficial Owner(1)
|
|
Common
Shares Beneficially Owned
|
|
|
Percent
Owned
|
|
Delta
International Holding
Ltd.(2)
|
|
|
474,037 |
|
|
|
16.6 |
% |
Water
Island Capital, LLC(3)
|
|
|
350,874 |
|
|
|
12.3 |
% |
Austin
W. Marxe and David M. Greenhouse(4)
|
|
|
336,082 |
|
|
|
11.8 |
% |
Skiritai
Capital LLC(5)
|
|
|
306,670 |
|
|
|
10.7 |
% |
Matthew
P. Smith(6)
|
|
|
282,495 |
|
|
|
9.9 |
% |
Linda
H. Smith(7)
|
|
|
282,495 |
|
|
|
9.9 |
% |
James
L. Green(8)
|
|
|
199,431 |
|
|
|
7.0 |
% |
Mary
Janet Green(9)
|
|
|
199,431 |
|
|
|
7.0 |
% |
ROI
Capital Management, Inc.(10)
|
|
|
199,362 |
|
|
|
7.0 |
% |
John
G. Heindel(11)
|
|
|
148,683 |
|
|
|
5.1 |
% |
(1)
|
The
address of Delta International Holding Ltd. is Scotia Center, 4th
Floor, P.O. Box 2804, George Town, Grand Cayman, Cayman
Islands. The address for Water Island Capital, LLC is 41
Madison Ave., Suite 2802, New York, NY 10010. The address for
Austin W. Marxe and David M. Greenhouse is 527 Madison Ave., Suite 2600,
New York, NY 10022. The address of Skiritai Capital LLC is 388
Market Street, Suite 700, San Francisco, CA 94111. The
addresses for Mr. Heindel, Mr. and Mrs. Smith and Mr. and Mrs. Green are
c/o PECO II, Inc., 1376 State Route 598, Galion, OH 44833. The
address of ROI Capital Management, Inc. is 300 Drakes Landing Road, Suite
175, GreenBrae,
CA 94904.
|
(2)
|
Based
on information provided in a Schedule 13D filed on April 7, 2006 by Delta
International Holding Ltd., Delta Electronics, Inc. and Delta Products
Corporation.
|
(3)
|
Based
on information provided in a Schedule 13G filed March 10, 2010 by Water
Island Capital, LLC.
|
(4)
|
Based
on information provided in a Schedule 13G/A filed on February 12, 2010, by
Austin W. Marxe and David M Greenhouse, controlling principals of AWM
Investment Company, Inc. (“AWM”), the general partner of and investment
adviser to Special Situations Cayman Fund, L.P. AWM also serves
as the general partner of MGP Advisers Limited Partnership, the general
partner of and investment adviser to Special Situations Fund III, L.P.,
and the general partner of and investment advisor to Special Situations
Fund QP, L.P. Marxe and Greenhouse share voting and investment
power over 104,452 common shares owned by Special Situations Cayman Fund,
L.P., 231,630 common shares owned by Special Situations Fund III QP, L.P.
and zero common shares owned by Special Situations Fund III,
L.P.
|
(5)
|
Based
on information provided in a Schedule 13G filed on April 23, 2008 by
Skiritai Capital LLC (“Skiritai”), Leonidas Opportunity Fund L.P.
(“Leonidas Fund”), Leonidas Opportunity Offshore Fund Ltd. (“Leonidas
Offshore Fund”), Russell R. Silvestri (“Silvestri”), and Lyron L. Bentovim
(“Bentovim”). Skiritai serves as the general partner of the Leonidas Fund
and investment manager of the Leonidas Offshore Fund. Silvestri
and Bentovim are Managing Directors of
Skiritai.
|
(6)
|
Mr.
Smith is a director of PECO II. Mr. Smith’s ownership includes
132,495 shares held by Mr. Smith and his spouse, Linda H. Smith, as joint
tenants, 100,000 common shares held by Ashwood I, LLC and 50,000 common
shares held by Ashwood II, LLC. Mr. Smith has shared voting and
dispositive power over the securities held by these limited liability
companies.
|
(7)
|
Ms.
Smith’s ownership includes 132,495 common shares held by Ms. Smith and her
spouse, Matthew P. Smith, as joint tenants, 100,000 common shares held by
Ashwood I, LLC, and 50,000 common shares held by Ashwood II,
LLC. Ms. Smith has shared voting and dispositive power over the
securities held by these limited liability
companies.
|
(8)
|
Mr.
Green is a director of PECO II. Mr. Green’s ownership includes
189,070 common shares held by The Green Family Trust and 10,361 held by
The Green Charitable Trust, both over which he shares voting and
dispositive power with his spouse, Mary Janet
Green.
|
(9)
|
Ms.
Green’s ownership includes 189,070 common shares held by the Green Family
Trust and 10,361 held by the Green Charitable Trust, both over which she
shares voting and dispositive power with her spouse, James L.
Green.
|
(10)
|
Based
on information provided in a Schedule 13G/A filed February 16, 2010 by ROI
Capital Management, Inc., Mark T. Boyer, and Mitchell J.
Soboleski. Messrs. Boyer and Soboleski beneficially own these
securities pursuant to their ownership interest in ROI Capital Management,
Inc., which beneficially owns these securities as an investment advisor
for certain persons who have the right to receive, or the power to direct
the receipt of, dividends from, or proceeds from the sale of, these
securities.
|
(11)
|
Mr.
Heindel is our Chairman of the Board, President, Chief Executive Officer,
Chief Financial Officer and Treasurer. Mr. Heindel’s ownership includes
64,000 common shares issuable within 60 days after March 12, 2010 upon the
exercise of stock options.
|
Ownership
of Common Shares by Management
The
following table shows information regarding beneficial ownership of our common
shares as of March 12, 2010, by each director, each of our named executive
officers, and all of our directors and executive officers as a
group.
Name and
Address of Beneficial Owner(1)
|
|
Common
Shares Beneficially Owned
|
|
|
Percent
Owned
|
|
Jacquie
L.
Boyer(2)
|
|
|
0 |
|
|
|
* |
|
James
L.
Green(3)
|
|
|
199,431 |
|
|
|
7.0 |
% |
John
G.
Heindel(4)
|
|
|
148,683 |
|
|
|
5.1 |
% |
E.
Richard
Hottenroth(5)
|
|
|
12,275 |
|
|
|
* |
|
Gerard
B. Moersdorf,
Jr.(6)
|
|
|
2,000 |
|
|
|
* |
|
Richard
W.
Orchard(7)
|
|
|
1,500 |
|
|
|
* |
|
Eugene
A.
Peden(8)
|
|
|
20,583 |
|
|
|
* |
|
R.
Louis
Schneeberger(9)
|
|
|
1,750 |
|
|
|
* |
|
Matthew
P.
Smith(10)
|
|
|
282,495 |
|
|
|
9.9 |
% |
Thomas
R.
Thomsen(11)
|
|
|
2,000 |
|
|
|
* |
|
All
directors and executive officers as a group
(9
persons)(12)
|
|
|
670,717 |
|
|
|
22.8 |
% |
(1)
|
The
address of the directors and executive officers listed is c/o PECO II,
Inc., 1376 State Route 598, Galion, Ohio
44833.
|
(2)
|
Ms.
Boyer resigned as the Company’s Vice President of Sales and Sales
Operations, effective as of June 30, 2009. The table reflects
no shares directly held by Ms. Boyer as of June 30,
2009.
|
(3)
|
Mr.
Green is a director of PECO II. Mr. Green’s ownership includes
189,070 common shares held by The Green Family Trust and 10,361 shares
held by The Green Charitable Trust over which he shares voting and
dispositive power.
|
(4)
|
Mr.
Heindel is our Chairman of the Board, President, Chief Executive Officer,
Chief Financial Officer and Treasurer. Mr. Heindel’s ownership
includes 64,000 common shares issuable within 60 days after March 12, 2010
upon the exercise of stock options.
|
(5)
|
Mr.
Hottenroth is a director of PECO II. Mr. Hottenroth’s ownership
does not include 6,500 common shares held by his
spouse.
|
(6)
|
Mr.
Moersdorf, Jr. is a director of PECO
II.
|
(7)
|
Mr.
Orchard is a director of PECO II.
|
(8)
|
Mr.
Peden is our Senior Vice President of Operations. Mr. Peden’s ownership
includes 14,000 common shares issuable within 60 days after March 12, 2010
upon the exercise of stock options.
|
(9)
|
Mr.
Schneeberger is a director of PECO
II.
|
(10)
|
Mr.
Smith is a director of PECO II. Mr. Smith’s ownership includes
132,495 shares held by Mr. Smith and his spouse as joint tenants, 100,000
common shares held by Ashwood I, LLC and 50,000 common shares held by
Ashwood II, LLC. Mr. Smith has shared voting and dispositive
power over the securities held by these limited liability
companies.
|
(11)
|
Mr.
Thomsen is a director of PECO II.
|
(12)
|
Ownership
of all directors and executive officers as a group includes an aggregate
of 78,000 common shares issuable within 60 days after March 12, 2010 upon
the exercise of stock options.
|
ITEM 13—CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director
Independence
The Board
of Directors has determined that the following of its members are “independent”
under the listing standards of the Nasdaq Stock Market: Messrs.
Hottenroth, Orchard, Moersdorf, Jr., Schneeberger, and Thomsen.
Mr.
Hottenroth is a partner in the law firm Hottenroth, Garverick, Tilson &
Garverick, Co., L.P.A. Although Mr. Hottenroth’s law firm provided
legal services to PECO II in 2009 (and will continue to provide such services in
2010), the amount of legal fees paid to that firm in 2009 did not exceed the
non-independence thresholds as set forth by the Nasdaq listing
standards. The Board is aware of this relationship and determined
that the payments made to Mr. Hottenroth’s firm did not interfere with the
exercise of his independent judgment as a director.
The
independent directors intend to meet at least twice a year in executive
sessions. Any independent director can request that an additional
session be scheduled. The Company encourages each member of the Board
of Directors to attend each annual meeting of shareholders. All of
the Company’s directors who were members of the Board at last year’s annual
meeting of shareholders held on May 19, 2009, were in attendance.
Transactions with Related Person
It is the
written policy of the Company that the Audit Committee will review the material
facts of all related party transactions that require approval and either approve
or disapprove of the entry into the related party transaction. A
related party transaction is any transaction between the Company and any related
party, other than (i) transactions available to all employees generally; (ii)
transactions involving less than $5,000 when aggregated with all similar
transactions; (iii) compensation of executive officers or directors if required
to be reported in the Company’s proxy statement; or (iv) transactions where the
related party’s interest arises solely from the ownership of the Company’s
common stock, and all holders of the Company’s common stock receive the same
benefit on a pro rata basis.
A related
party includes: (i) a senior officer of director of the Company; (ii) a
shareholder owning in excess of five percent of the Company (or its controlled
affiliates); (iii) an immediate family member of a senior officer or director;
or (iv) an entity owned or controlled by the foregoing or an entity in which one
of the foregoing has a substantial ownership interest or control of such
entity.
The
Company is party to a Supply Agreement, dated September 29, 2008, between the
Company and Delta Electronics, Inc. (“Delta”) which is a successor agreement to
a previous supply agreement between the Company and Delta, and allows the
Company to access Delta’s substantial engineering capabilities and high-quality,
cost-effective component manufacturing for its power systems. Delta
is a “related person” as defined in the instructions to Item 404(a) of
Regulation S-K because it is an affiliate of Delta International Holding Ltd.,
which beneficially owns more that 5% of our common stock. For the
year ended December 31, 2009, the Company’s transactions with Delta under the
Supply Agreement and its predecessor included $128 thousand in sales and $5.494
million in purchases.
ITEM
14— PRINCIPAL ACCOUNTING FEES AND SERVICES
Independent
Registered Public Accounting Firm
Our Audit
Committee engaged Battelle & Battelle LLP (“Battelle”) as the Company’s
independent registered public accounting firm for 2009. Battelle has
served as the Company’s independent registered public accounting firm since
2005.
The fees
billed by Battelle in 2009 and 2008 for the indicated services performed during
2009 and 2008 were as follows:
|
|
Fiscal
Year 2009
|
|
|
Fiscal
Year 2008
|
|
Audit
Fees
|
|
$ |
160,800 |
|
|
$ |
173,400 |
|
Audit-Related
Fees
|
|
|
9,500 |
|
|
|
10,500 |
|
Tax
Fees
|
|
|
– |
|
|
|
– |
|
All
Other
Fees
|
|
|
– |
|
|
|
– |
|
Total
|
|
$ |
170,300 |
|
|
$ |
183,900 |
|
Audit Fees for 2009 and 2008
were for professional services rendered for the audit of our annual consolidated
financial statements and the review of our consolidated financial statements
included in our Quarterly Reports on Form 10-Q.
Audit-Related Fees for 2009
were for time and costs incurred related to the proposed sale of the
Company. For 2008, fees were for professional services rendered for
accounting and SEC consultation related to the audit of our annual consolidated
financial statements and the review of our consolidated financial statements
included in our Quarterly Reports on Form 10-Q.
Pre-Approval
of Policies and Procedures
The Audit
Committee has adopted a policy that requires advance approval of all audit and
non-audit services provided by our independent registered public accounting firm
to the engagement of the independent registered public accounting firm with
respect to such services. The Chairman of the Audit Committee has
been delegated the authority by the Audit Committee to evaluate and pre-approve
the engagement of the independent registered public accounting firm when the
entire Audit Committee is unable to do so. The Chairman must report
all such pre-approvals to the entire Audit Committee at the next committee
meeting.
None of
the services described above were approved by the Audit Committee under the
de minimus exception to
pre-approval provided in Securities and Exchange Commission rules.
PART
IV
ITEM 15—EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
The
following documents are filed as part of this report:
(a)
(1) Financial Statements—See Index to Financial Statements at Item 8
of this report.
(a)
(2) Financial Statement
Schedules. None.
(a) (3)
Exhibits.
See the
“Exhibit Index” at page E-1 of this Form 10-K.
Pursuant
to the requirements of Section 13 or 15 (d) 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.
|
|
|
|
PECO II, INC.
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ John G.
Heindel
|
|
|
|
|
|
John
G. Heindel
|
|
|
|
|
|
Chairman,
President, Chief Executive Officer, Chief Financial Officer, and
Treasurer
|
March
31, 2010
|
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
Chairman,
President, Chief Executive Officer, Chief Financial Officer, and Treasurer
(Principal Executive Officer and Principal Financial
Officer)
|
|
March
31, 2010
|
John
G. Heindel
|
|
|
|
|
|
|
Corporate
Controller (Principal Accounting Officer)
|
|
March
31, 2010
|
Scott A.
Wallace
|
|
|
|
|
|
|
Director
|
|
March
31, 2010
|
James
L. Green
|
|
|
|
|
/s/ E.
RICHARD HOTTENROTH
|
|
Director
|
|
March
31, 2010
|
Richard
Hottenroth
|
|
|
|
|
/s/ Gerard B. Moersdorf,
JR.
|
|
Director
|
|
March
31, 2010
|
Gerard
B. Moersdorf, Jr.
|
|
|
|
|
|
|
Director
|
|
March
31, 2010
|
Richard
W. Orchard
|
|
|
|
|
|
|
Director
|
|
March
31, 2010
|
Matthew
P. Smith
|
|
|
|
|
/s/ R.
Louis
Schneeberger
|
|
Director
|
|
March
31, 2010
|
R.
Louis Schneeberger
|
|
|
|
|
|
|
Director
|
|
March
31, 2010
|
Thomas
R. Thomsen
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
2.1
|
|
Asset
Purchase Agreement, dated October 13, 2005, between PECO II, Inc. and
Delta Products Corporation (E)
|
|
|
|
2.2
|
|
Agreement
and Plan of Merger, dated February 18, 2010, by and among the Company,
Lineage Power Holdings, Inc., and Lineage Power Ohio Merger Sub, Inc.
(T)
|
|
|
|
3.1 (i)
|
|
Amended
and Restated Articles of Incorporation of the Company
(I)
|
|
|
|
3.1 (ii)
|
|
Second
Amended and Restated Code of Regulations of the Company
(J)
|
|
|
|
3.1
(iii)
|
|
Amendment
No. 1 to Amended and Restated Articles of Incorporation of the Company
(N)
|
|
|
|
4.1
|
|
Specimen
certificate for the common shares, without par value, of the Company
(A)
|
|
|
|
|
|
Security
Agreement, dated September 23, 2009, between PECO II, Inc. and National
City Bank
|
|
|
|
|
|
Promissory
Note, dated September 23, 2009, between PECO II, Inc. and National City
Bank as lender
|
|
|
|
*10.3
|
|
2000
Performance Plan of the Company (A)
|
|
|
|
*10.4
|
|
Amendment
1 to 2000 Performance Plan of the Company (C)
|
|
|
|
*10.5
|
|
Form
of Stock Option Agreement for 2000 Performance Plan of the Company
(A)
|
|
|
|
*10.6
|
|
Form
of Restricted Stock Award Agreement for 2000 Performance Plan of the
Company (D)
|
|
|
|
*10.7
|
|
Form
of Indemnification Agreement (A)
|
|
|
|
*10.8
|
|
Employment
Agreement, dated January 4, 2010, between PECO II, Inc. and John G.
Heindel (S)
|
|
|
|
10.9
|
|
Support
Agreement and Irrevocable Proxy, dated October 13, 2005, between the
Company, Delta Products Corporation and certain Significant Holders of the
Company (F)
|
|
|
|
10.10
|
|
Supply
Agreement, dated May 18, 2009, between the Company and DEI
(P)
|
|
|
|
10.11
|
|
Schedule
of Director Fees (H)
|
|
|
|
10.12
|
|
Description
of the Material Terms of PECO II, Inc.’s Non-equity Incentive Compensation
Plan for Fiscal 2009 (P)
|
|
|
|
10.13
|
|
Release
and Waiver Agreement Between the Company and Jacquie L. Boyer
(R)
|
|
|
|
10.14
|
|
Voting
Agreement, dated February 18, 2010, by and among the Green Family Trust
U/A/O 03/16/1995, the Green Charitable Trust U/A/O 05/09/2001,
Matthew P. Smith, Linda H. Smith, Ashwood I, LLC, Ashwood II, LLC, the
Company, Merger Sub, and Parent (T)
|
|
|
|
21.1
|
|
Subsidiaries
of the Company (G)
|
|
|
|
|
|
Consent
of Battelle and Battelle LLP
|
|
|
|
|
|
Rule
13a-14(a) Certification of Chief Executive Officer and Chief Financial
Officer as adopted pursuant to Section 302 of Sarbanes-Oxley
Act
|
|
|
|
|
|
Section
1350 Certification of Chief Executive Officer and Chief Financial Officer
as adopted pursuant to Section 906 of Sarbanes-Oxley
Act
|
|
|
|
________________________
*
|
|
Management
contract or compensation plan or arrangement identified pursuant to Item
14 (c) of this Form 10-K.
|
**
|
|
Furnished
with this Annual Report on Form
10-K.
|
(A)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Registration
Statement on Form S-1 (File No. 333-37566) and the amendments
thereto.
|
(C)
|
|
Incorporated
by reference to the Company’s Definitive Proxy Statement for the Annual
Shareholders Meeting on April 29, 2004 and filed on March 31,
2004.
|
(D)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Current Report on
Form 8-K dated July 28, 2005 and filed on August 1,
2005.
|
(E)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Current Report on
Form 8-K dated October 13, 2005 and filed on October 13,
2005.
|
|
|
|
(F)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Current Report on
Form 8-K/A dated October 13, 2005 and filed on January 20,
2006.
|
|
|
|
(G)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2005 and filed on March 24,
2006.
|
(H)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Current Report on
Form 8-K dated June 1, 2006 and filed on June 7, 2006.
|
|
|
|
(I)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 2006 and filed on
August 14, 2006.
|
|
|
|
(J)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2006 and filed on
May 15, 2006.
|
|
|
|
(K)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Current Report on
Form 8-K dated January 29, 2008 and filed on February 1,
2008.
|
(L)
|
|
Reserved.
|
|
|
|
(M)
|
|
Reserved.
|
|
|
|
(N)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 2008 and filed on
August 14, 2008.
|
|
|
|
(O)
|
|
Reserved.
|
|
|
|
(P)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Current Report on
Form 8-K, dated May 18, 2009, and filed on May 22,
2009.
|
|
|
|
(Q)
|
|
Reserved.
|
(R)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Current Report on
Form 8-K, dated June 30, 2009, and filed on July 7,
2009.
|
|
|
|
(S)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Current Report on
Form 8-K, dated January 4, 2010, and filed on January 8,
2010.
|
|
|
|
(T)
|
|
Incorporated
by reference to the appropriate exhibit to the Company’s Current Report on
Form 8-K, dated February 18, 2010, and filed on February 19,
2010.
|