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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission File Number 0-27460
PERFORMANCE TECHNOLOGIES, INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware 16-1158413
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
14620
315 Science Parkway, Rochester New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (716) 256-0200
----------------------
Securities registered pursuant to section 12(b) of the Act:
NONE
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Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark 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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of the close of business on February 25, 1998 was
approximately $99,872,000.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, was approximately 7,273,000 as of February 25, 1998.
Documents Incorporated by Reference
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held June 3, 1998, which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1997.
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-Cover Page of 37 Pages-
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Performance Technologies, Incorporated
Index to Annual Report on Form 10-K
Page
PART I
Item 1 Business 1
Item 2 Properties 11
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 11
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 11
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8 Financial Statements and Supplementary Data 18
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
PART III
Item 10 Directors and Executive Officers of the Registrant 34
Item 11 Executive Compensation 34
Item 12 Security Ownership of Certain Beneficial Owners
and Management 34
Item 13 Certain Relationships and Related Transactions 34
PART IV
Item 14 Exhibits, Financial Statement Schedules, Reports on Form 8-K 35
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PART I
ITEM 1 - Business
Performance Technologies, Incorporated designs, manufactures and markets a wide
variety of fault-tolerant, high performance communications, networking and data
storage interface products. The company's products are designed to enhance the
performance of customers' computer network systems and include local and wide
area network interface adapters, communications servers, mass storage interface
products and sophisticated software communications solutions. The company's
products are targeted toward high performance, mission critical networking
solutions for the telecommunications, financial services, defense and public
safety industries. Applications include network interfaces for cellular
telephone communications, data storage products found in bank ATMs, fiber optic
data communications products used aboard navy vessels and communications servers
used in air traffic control centers.
Since its inception in 1981, the company has consistently produced innovative
networking solutions for a wide variety of computer architectures and has a
history of being able to adapt its products to a continually changing
marketplace. The company has focused its efforts on providing high performance,
unique application solutions where hardware and software reliability are a key
concern to the end user. This strategy has enabled the company to significantly
increase both sales and income over the last five years.
All references to the "company" herein include Performance Technologies,
Incorporated, the company's wholly-owned foreign sales subsidiary, PTI Virgin
Islands Company, Ltd. and the company's wholly-owned subsidiary, UconX
Corporation (UconX).
Industry Overview
The need to collect, store, analyze and distribute information in a secure,
timely and efficient manner has become an integral part of operating a
successful organization. Developments in computer technology have resulted in
less reliance on centralized mainframes and greater reliance on distributed
computing. In its initial stages of evolution, distributed computing led to the
computer software architecture concept of "client/server" systems. Client/server
computing systems have typically included a large number of desktop computers
interconnected with one, or often more than one, server. The server provides
central resources to all remote computer users and provides common services such
as printing, communications, data backup and information gateways to other local
or distant client/server systems. The client/server model has continued to
evolve from a site based system that was typically found in a limited geographic
area (e.g. campus, manufacturing complex or office environment) to client/server
systems that are worldwide in their reach and operation. The fundamental premise
of this expanding computer and information paradigm relies heavily on computer
data networking for both LANs (Local Area Network) to provide the local
client-to-server communications and WANs (Wide Area Network) for seamless
communication between servers which may be located on different continents of
the world.
As a result of the rapidly growing installed base of client/server computing
systems, the market opportunity for client/server networking and communication
products is rapidly expanding. According to a recent industry study, there were
approximately 33 million Ethernet LAN connections installed worldwide in 1993
and the number of those connections is expected to grow to over 84 million by
1998. The WAN communication area is also expected to grow at a similar pace.
This growth, combined with other market trends, is expected to cause the
computer networking equipment industry to continue to experience substantial
increase in demand into the next millennium.
Strategy
The company's strategy is to enhance the performance of customers' network
systems by providing a wide variety of fault-tolerant, high performance and
easily managed networking solutions targeted toward mission critical
applications. Major elements of the company's operational strategy include:
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Focus on High Performance Mission Critical Solutions. The company continues to
focus its development efforts on addressing specific needs for high performance
networking. The company's products have provided unique mission critical
solutions where reliability and performance are the primary concerns of the
user. Applications include network interfaces for cellular telephone
communications, fault-tolerant Fiber Digital Data Interface (FDDI) adapter
products used aboard navy vessels and terrestrial military vehicles,
communications servers used in air traffic control and data storage products
found in bank ATMs. To a large degree, the company has avoided networking and
communication products that would be sold into the commodity desktop office or
home environment, often dominated by low price and large volumes.
Exploit Technological Competencies. Since its inception, the company has
pioneered many innovations in networking technology including the VME64 industry
standard, proprietary ASICs and the early use of the SCSIbus standard for local
area networking. These technological competencies have allowed the company to
develop products that improve network performance without rendering an end
user's network equipment obsolete. Management intends to continue to leverage
off of these competencies to position the company as a technological leader in
high performance WAN and LAN hardware and software products.
Continue to Develop Advanced Networking Products. The company recognizes the
need to continually upgrade the performance of its existing products and to
develop new products which address the changing requirements of WAN and LAN
users. Over the past 12 months, the company has introduced a variety of WAN and
LAN products designed for the PCIbus and the new industrialized PCI standard
called Compact PCI (cPCI). Several of these products have been early and unique
entrants into the growth oriented PCIbus and cPCI arena for supporting complex
communications protocols and networks. These new products have been responsible
for a variety of potentially significant OEM and partnering relationships. The
company has also developed switching products for Ethernet LANs directed at
specific applications requiring high availability for which it plans to start
deliveries in 1998.
Expand International Markets. The networking and computer markets served by the
company are international in scope. Global demand for network products, such as
those manufactured by the company, is driven by the increasing dependence of
business on the successful implementation of networking infrastructures. While
the company markets its products in Europe and the Asia Pacific countries,
currently international sales only account for approximately 10% of sales.
During 1996, the company expanded its direct sales presence into the European
Economic Community (E.E.C) with the opening of a sales office in Munich,
Germany. The company intends to continue expanding its international efforts in
the Asia Pacific countries and the European arena. In 1998, the company will
employ a variety of third party organizations to assist in establishing and
developing both OEM and distribution accounts in Europe and the Asia Pacific
regions. This expanded effort will augment the company's existing direct sales
office operations that exist in the E. E. C. arena. (See Footnote A to the
consolidated financial statements included elsewhere in this report).
Leverage Software Expertise. The company has successfully employed its software
expertise in targeted industries and applications, including financial data
information services, air traffic radar installations and defense applications
and deep space telemetry. The company plans to continue to leverage its existing
networking and mass storage interface software expertise in distributed network
management and control, integration of legacy networking protocols and virtual
LAN implementation.
Capitalize on Internal Manufacturing Expertise. Unlike many of its industry
competitors, the company does not rely upon third party manufacturing
subcontractors for assembly, test and quality control for the manufacturing of
its products. Instead, the company operates a state-of-the-art manufacturing
facility that gives the company the flexibility to meet customer requirements,
produce high quality equipment and make timely deliveries. The company's
manufacturing facility operates under an integrated MRP system that
significantly reduces lead time and inventory investments and facilitates
effective demand forecast. This in-house manufacturing capability provides the
company with the means to quickly launch new products without the delays
normally associated with the use of manufacturing subcontractors. It is expected
that additional capital expansion in surface mount component capacity will occur
over the next 12-18 months to assure continued high quality assembly with
adequate capacity to meet expected delivery requirements for the company's
expanding customer base. During 1997, the company's manufacturing process was
certified under the ISO 9002 quality program.
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Products
The company's products include a wide variety of fault-tolerant, high
performance solutions for WAN communications, LAN connectivity and mass
storage/retrieval applications. The company historically has addressed the needs
of the client/server computing environment with a family of hardware and
software products which operate on a number of open standards and allow ease of
use with a variety of popular high performance computer platforms. These
platforms include systems built on the VMEbus standard, the SBus standard, the
newer PCIbus standard now found on a broad range of computer platforms and the
emerging industrial standard, cPCI . The company's products are grouped into
five categories: WAN Interface Adapter products, LAN Interface Adapter products,
Network Systems products, Mass Storage Interface products and Inter-system
Connectivity products.
WAN Interface Adapter Products. The company's WAN interface adapter products
include modules that provide connectivity between the SBus, VMEbus, PCI and cPCI
computer platforms and the wide area communications network. The company's WAN
interface adapter products are found in a wide variety of applications which
include network interfaces for cellular telephone transmitter sites, billing and
control information for long distance telephone communications, and control of
remote police, ambulance and municipal radio transmitter locations. Selected
end-users include Lucent Technologies, Digital Equipment Corporation and
QualComm Corporation. Products include interface adapters for use in VMEbus
systems and high speed interface adapters for the Sun Microsystems' SBus market.
During 1996, the company released three WAN interface adapters for the PCIbus
architecture. In 1997 this family of PCI WAN products was expanded to include
the new cPCI format which is directed at applications that require a more rugged
and modular form factor. Management believes that the company's cPCI products
are some of the first products available to cPCI users for high speed WAN
communications. All of the company's WAN interface adapter products are designed
for applications that require high performance and high speed communications
capability. All of the company's products are "intelligent," containing their
own microprocessors and memory. This architecture allows these interface
adapters to off-load many of the lower-level communications tasks that would
typically be performed by the host platform, greatly improving overall system
performance. The family of WAN interface adapter products is supported by
extensive communications software developed by both the company, through its San
Diego based communications protocol engineering group, and a variety of third
party partners. WAN sales represented 47% of total sales for 1997, compared to
42% for 1996.
LAN Interface Adapter Products. The company's LAN interface adapter products
consist primarily of products often referred to as Network Interface Controllers
(NICs) for a variety of LANs and computer platforms. These products currently
operate on the PCIbus, SBus and VMEbus computer platforms and include
connections for a popular range of Ethernet and FDDI standards and a unique FDDI
concentrator product that operates on the VMEbus. Applications for the company's
Ethernet and FDDI network adapter products include a convenient interface
between computer platforms and LANs used in commercial, educational or
industrial organizations and a shipboard FDDI LAN used by the United States Navy
to integrate tactical workstations on board Navy vessels. All of these NICs
permit easy integration of SBus, PCI or VMEbus computer system to an FDDI or
Ethernet LAN. The FDDI adapters support the company's alternate path FDDI
topology, ensuring the highest available levels of resiliency and data integrity
for fault-tolerant and mission critical markets. The company actively supports
software supplied with its newest PCI-based FDDI adapters to be compatible with
computer platforms utilizing both the Sun Microsystems' Solaris TM and
Microsoft's Windows NT TM operating systems. LAN sales represented 20% of total
sales for 1997, compared to 21% in 1996.
Network Systems Products. The company's network systems products consist of
systems level equipment used in the construction and deployment of computer
networks. These products represented 9% of total sales for 1997, compared to 11%
in 1996 and include:
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Communications Servers. Communications servers are multi-purpose LAN-to-WAN
bridging systems supported by software from the company's San Diego based
communication protocol engineering center. The products in this category include
a low cost, limited server solution for installations requiring from one to six
WAN connections and up to two Ethernet LAN connections. For larger installations
or special requirements, the company offers a series of communications servers
built on the VMEbus standard which offer up to 96 WAN connections and multiple
Ethernet LAN connections. Using unique software, the communications servers can
be configured to provide a variety of protocol packages and supporting protocols
including bisynchronous, asynchronous communications financial market feeds and
radar receivers. The communication server products from the company can be found
in data collection applications including NASA's deep space network and in air
traffic control centers for retrieving radar data from remote radar antenna
sites.
Front-end Communications Subsystems. The company's "front-end" communications
subsystems product supports the concurrent use of up to eight SBus "add-in" disk
storage controllers or communication interface modules. This product has been
co-developed by the company and a large OEM customer, and is used as a
communications nexus for high powered workstations, allowing them to link up
efficiently with a new line of supercomputers. The system, with its extended
SBus module capability, enables the OEM user to greatly increase the number of
workstations serviced by each front end processor, lowering costs and improving
system reliability.
Ethernet Switch. The company is executing a market and product development
effort utilizing products associated with Ethernet switching technology which
offers a variety of unique technical features directed at connectivity for
Ethernet LANs which require high availability and tolerance to network equipment
failures. This new family of company-designed second generation 100 Mbit/Gigabit
Ethernet Switching products debuted in the Fall of 1997 and is expected to begin
initial shipments in mid 1998 after field trials are completed.
Mass Storage Interface Products. The company's mass storage interface products
consist of adapters that connect various mass storage products using the SCSI
and newer UltraSCSI standard to computers based on VMEbus, SBus and PCIbus
platforms. The company's existing SCSI interface products are often used to add
external disk storage to workstations. More complex applications include
Redundant Array of Inexpensive Disks (RAID) interfaces which are found in
mission critical, high reliability and high availability applications such as
police/fire dispatch, bank automated teller applications and hospital patient
data base systems. Coupled with the Company's RAID software, the interface
product enables Sun workstation users to connect RAID products sold by major OEM
suppliers. During 1997, the company introduced a mass storage interface product
designed to operate on the PCIbus standard and provide mass storage
interconnectivity via Fibre Channel. Fibre Channel is one of the most
contemporary interconnection standards for the new array of high performance
disk drive and RAID subsystems. Future products are expected to expand the
company's strong presence in this market by providing Fibre Channel connectivity
on the cPCI standard. Mass storage products represented 14% of total sales for
1997, compared to 16% in 1996.
Inter-system Connectivity Products. The company's inter-system connectivity
products permit dissimilar computer standards to be connected. These products
are typically provided to OEMs and systems integrators that are involved with
custom applications such as connecting a Sun workstation to printing press
control electronics for a new color printing press. Selected end-users include
Indigo, an Israeli printing equipment company, Data Cube, an imaging subsystem
supplier, and Credence Corporation, a manufacturer of equipment that produces
electronic integrated circuits. By allowing a customer to connect dissimilar
computer standards, the company's products preserve that customer's investment
in existing installed equipment. These products represented 10% of total sales
in 1997, compared to 10% in 1996. The company is not investing in this group of
products and potential declines in these revenues may occur in 1998.
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Sales, Marketing and Distribution
The company currently markets its products world-wide to a broad spectrum of end
user customers through various channels including OEMs, VARs, distributors and
systems integrators. Currently, nearly 90% of the company's sales are made
domestically while the remainder represents international sales. Approximately
80% of the company's North American business is sold through the company's
direct sales force to OEMs and systems integrators. The remainder is sold to end
users through distributors and VARs.
In North America, the company operates five direct sales offices, located in San
Diego, California, Rochester, New York, Old Saybrook, Connecticut, Houston
Texas, and Minneapolis, Minnesota. The company also maintains a European
presence through a sales office in Munich, Germany. Currently, 17 technically
trained sales, marketing and support personnel conduct the company's selling
efforts out of these offices. In addition, independent sales representatives
covering selected geographic areas and distributors handling selected products
supplement the company's direct sales team on a worldwide basis. The company
believes that due to the technical nature of its products, it is essential to
employ sales people who are knowledgeable in the network and communications
fields and are able to adequately respond to inquiries that arise concerning the
capability and performance levels of the company's products.
Many of the company's products are provided to OEMs and systems integrators and
are sold through a combination of selling efforts by the company's sales force
and the efforts of a small number of independent sales representatives. These
independent sales representatives operate under the direct supervision of the
company's sales force and carry out sales of specified products primarily in
selected North American geographic areas. The independent sales representatives
are compensated by commissions paid on product orders. The OEMs or systems
integrators serviced by the company's sales organization and independent sales
representatives generally require a high level of technical support and are
usually involved with applications that require company products that are
ultimately included as a subsystem or component in an OEM's or systems
integrator's final product.
The company also sells products to distributors that are end user oriented, such
as network systems products, data storage interface products and certain LAN
interface products. Distributors purchase the company's products and resell them
to their VARs or end-users. Distributors who sell the company's products are
currently managed by the company's direct sales force. The company carries out
several marketing strategies to support these distributors including advertising
in national and international trade publications, sponsoring customer training
sessions and participating in trade shows throughout North America, Western
Europe and the Pacific Rim.
OEM customers typically provide the company with a rolling forecast for orders
placed two to three months in advance of shipment. Distributors typically
provide the company with orders placed 30 days in advance of shipment. Sales of
the company's products to OEM customers are subject to a number of factors
outside the company's control, including pricing, availability and acceptance of
these products by the OEM's customers and potential customers.
With all of its products, the company executes various ongoing marketing
strategies designed to attract new customers and to stimulate additional
purchases from existing customers. These strategies include direct mail
campaigns and catalogue distribution, direct telemarketing, special pricing
programs, active participation in technical standards groups, participation in
national and regional trade shows and selected trade press advertisements and
technical articles.
The company continues to believe that the international market represents
untapped opportunities for the company's products as sales outside the U.S.
represented only 10% of the company's net sales in 1997 as compared to 11% and
14% for 1996 and 1995, respectively. In the past, the company has sold its
products within Europe and the Asia Pacific countries through distributors
managed by sales individuals who reside at corporate offices in North America.
Management believes that it can develop expanded sales channels and marketing
alliances with respect to both new and existing international markets. The
company's products are currently sold by 25 international distributors
throughout the major industrialized countries in Europe and the Asia Pacific
area. The company also operates a sales office in Munich, Germany to better
support the Western European markets. In addition, the company has engaged two
international marketing organizations to assist in more aggressive development
of the Pacific Rim and Western Europe territories across all of its product
offerings. This is viewed as an interim step that is designed to lead to
additional direct sales offices in Europe and assuming the Asian economic
climate improves, an initial sales office in the Pacific Rim by late 1998 or
early 1999. International sales are subject to import and export controls,
transportation delays and interruptions, foreign currency exchange rates, and
foreign governmental regulations. All payments for sales outside the United
States are made in U.S. dollars.
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Customers
The company has over 300 active customers worldwide, including major OEMs,
systems integrators, and educational/research organizations, many of which are
Fortune 500 companies.
The company has two general types of customers. The first category includes
customers that are technically oriented and assemble a product or system for a
specific end use, using components and subassemblies supplied by vendors such as
the company. These products or systems are typically sold on either a repetitive
basis or on a lower volume, purpose-built basis. End use equipment or systems
sold by OEMs on a repetitive basis using the company's products include a
sophisticated workstation and server computers with high speed WAN
interconnections to the Internet or private communication facilitates, a check
scanning console provided to banks to convert canceled check information into
electronic images and mass data storage equipment provided by RAID systems
manufacturers to commercial users such as police/fire departments, hospitals and
government organizations. Examples of lower volume purpose-built end use
equipment incorporating the company's products include FDDI networks used by the
United States Navy for shipboard use, deep space network data collection for
space research and data collection/network systems for air traffic control and
radar installations. The second category includes customers that are less
technically proficient. These customers require products that are expected to be
self-installing and require limited knowledge of the products' internal
operation. These products are often referred to as "plug n' play" or "shrink
wrapped", implying a readiness to simply install the end application without the
need to have extensive technical knowledge. The company's products that fit into
this category are the SBus and PCIbus mass storage interface, the SBus and
PCIbus LAN products (Ethernet and FDDI NICs) and selected WAN interface products
operating on the SBus and PCIbus standards. In 1997, the largest single customer
represented 8% of sales and the top five customers accounted for 34% of 1997
revenues.
Backlog
At March 2, 1998, the backlog of scheduled orders was $4.7 million, compared to
$6.1 million at March 9, 1997. Although orders are subject to cancellation in
the normal course of business, historically the company has filled most of its
firm orders. (See Management's Discussion & Analysis included elsewhere in this
report).
Seasonality
The company's business is generally not considered to have large seasonal
swings, but some of the business (primarily LAN interface products and Network
systems products) is project-related, driven by customer demand, which can cause
quarterly fluctuations in revenues.
Environmental Matters
The company does not believe that compliance with federal, state or local laws
or regulations relating to the protection of the environment has any material
effect on its capital expenditures, earnings or competitive position.
Competition
The market for computer communications, networking and mass storage interface
products is intensely competitive and characterized by rapid technological
innovations, resulting in new product introductions and frequent advances in
price/performance ratios. Competitive factors in this industry include product
performance and functionality, product quality and reliability, customer service
and support, marketing capability, corporate reputation and brand recognition
and increases in relative price/performance ratios. In the WAN interface product
market, the company's products compete with products from SBE Incorporated,
Adax, Incorporated and Digi International, Incorporated. In the emerging cPCI
arena, the company's competition is less well-defined, although early entrants
include Cyclone, Inc. and SBS Technologies, Inc. In the LAN interface product
market, the company competes with Network Peripherals Inc., Osicom Technologies,
Incorporated and Interphase Corporation. In the mass storage interface product
market, the company competes with such companies as Interphase Corporation,
MacroLink Incorporated, Sun Microsystems and Emulex Corporation.
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Many of the company's competitors have greater technical and capital resources,
more marketing experience, larger research and development staffs and better
production facilities than the company. In recent years the internetworking
product market has become increasingly concentrated as a result of increased
consolidation in the industry. Cisco Systems Inc., the industry routing leader,
has acquired companies that have historically competed with the company. These
consolidations are likely to permit Cisco and other of the company's competitors
to devote significantly greater resources to the development and marketing of
new competitive networking products and the marketing of existing products
through their larger distribution networks to their larger installed customer
bases. The company expects that competition will increase substantially as a
result of these and other industry consolidations, as well as the emergence of
new competitors and new technologies. Increased competition could result in
price reductions, reduced margins and loss of market share, all of which would
materially and adversely affect the company's business, operating results and
financial condition.
Research and Development
The company's research and development expenses, plus costs attributable to the
development of software, for 1997, 1996 and 1995 were approximately $3.7
million, $3.0 million and $2.0 million, respectively. This represents an
increase of 26% from 1996 to 1997. These expenses consist primarily of employee
costs and material consumed in developing and designing new products. To a
lesser degree, there have been limited expenses devoted to technology
acquisition, software license/tools and contract product development.
The company has, as a result of prior research and development expenditures,
developed significant core competencies applicable to high speed fiber-optic
local area networking, wide area networking, switching and mass storage
interface solutions. The company expects that research and development funding
will continue to increase significantly in 1998. This funding will be directed
at further leveraging these competencies and carrying out additional product
development in the areas of communications and network switching. These research
and development programs are expected to include expansion of both hardware and
software related to WAN and LAN network adapter products, continued enhancement
of the current LAN/FDDI offerings, next generation Ethernet switching, expansion
of mass storage interface products to encompass Fibre Channel technologies and
expanded communication server products. In addition to specific product related
expenditures, the company has increased its internal capability to design and
implement ASICs. This will be an important cornerstone for continued future
enhancements of WAN and LAN network adapters, advanced mass storage interfaces
and high performance switching architectures to support the emerging Gigabit
Ethernet LAN technology.
Proprietary Technology
The company's success depends upon the company's proprietary technology. To
date, the company has relied principally upon trademark, copyright and trade
secret laws to protect its proprietary technology. The company generally enters
into confidentiality or license agreements with its distributors, customers and
potential customers and limits access to and distribution of the source code to
its software and other proprietary information. The company's employees are
subject to the company's employment policy regarding confidentiality. The
company's software products and accessories are provided to customers under
license, generally in the form of object code, which provides a high degree of
confidentiality with respect to the intellectual property value. Much of the
company's proprietary technology is found in the company's source code which is
embedded in silicon chips, making it extremely difficult to misappropriate or
reverse engineer. Such methods may not afford complete protection, however, and
there can be no assurance that the confidentiality agreements will not be
breached, that such agreements will be enforceable, that the company will have
adequate remedies for any breach or that the company's trade secrets will not
otherwise become known to or independently developed by competitors. If patent
applications are filed by the company in the future, there can be no assurance
that any patents can be granted, or that, if granted, such patents would provide
the company with meaningful protection from competition.
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There can be no assurance that third parties will not assert intellectual
property infringement claims against the company. Although no written claims or
litigation relating to any such matter are currently pending against the
company, the company has not conducted any searches or obtained an opinion of
counsel with respect to its proprietary rights. Accordingly, there can be no
assurance that no claims will be initiated, that the company would prevail in
any such litigation seeking damages or an injunction against the sale of the
company's products, or if necessary, that the company would be able to obtain
any necessary licenses on reasonable terms or at all. Any such litigation could
be protracted and costly and could have a material adverse affect on the
company's results of operations regardless of the outcome of the litigation.
Suppliers
Certain components used in the company's products, such as specific single
source microprocessors, custom ASICs, FDDI interface components and highly
integrated PCIbus and VMEbus interface components, are only currently available
to the company from limited sources. Although to date the company has generally
been able to obtain adequate supplies of these components, the company obtains
these components on a purchase order basis and does not generally have long-term
contracts with any of these suppliers. The company's standard purchase order is
limited in nature. In addition, shortages of raw materials could negatively
affect the company's ability to meet its production obligations and result in
increased prices to the company for affected parts. The company's inability in
the future to obtain sufficient limited-source components, or to develop
alternative sources, could result in delays in product introductions or
shipments, and increased component prices could negatively affect gross margins,
either of which could have a material adverse effect on the company's results of
operations. The company would also be negatively affected if it does not
maintain adequate capital resources to fund component purchases.
Manufacturing
The company maintains a state-of-the art product assembly and manufacturing
facility at its Rochester, New York facility. This facility operates under an
integrated MRP system that significantly reduces lead time and inventory
investments and facilitates effective demand forecast. In December 1997, the
company received ISO 9002 certification of its manufacturing facilities and
quality management systems. By maintaining an in-house manufacturing capability,
management believes that the company has, to a certain extent, insulated itself
from the risks inherent in dealing with independent subcontractors. The company
does not have to compete with those who may be using subcontractors, nor is it
subject to the timing delays that often result when subcontractors are unable to
meet the manufacturing requirements of their customers. In addition, through its
in-house manufacturing capability, the company is able to oversee directly its
quality control process and the timeliness of product delivery. The company has
limited alternative capabilities through third parties, however, to perform such
manufacturing activities. In the event of an interruption of production at its
manufacturing facility, the company's ability to deliver products in a timely
fashion would be compromised, which would have a material adverse effect on the
company's results of operations.
Employees
As of February 28, 1998, the company had 140 full-time employees. Management
believes its relations with its employees are good. The company's employees are
not subject to collective bargaining agreements.
These employees work in the following areas:
Research and Development 46
Marketing and Sales 20
Manufacturing 57
General and Administrative 17
Competition for technical personnel in the company's marketplace is intense.
Management believes that the company's future success will depend on its ability
to continue to attract and retain qualified personnel.
8
<PAGE>
Risk Factors
Technological Change and New Product Introductions. The market for the company's
products is characterized by rapid technological change and frequent
introduction of products based on new technologies. As these products are
introduced, the standards of the industry change. Additionally, the overall
computer networking industry is volatile as the effects of new technologies, new
standards, new products and short life cycles contribute to changes in the
industry and the performance of industry participants. The company's future
revenues will depend upon the company's ability to anticipate technological
change and to develop and introduce enhanced products of its own on a timely
basis that meet or exceed new industry standards. New product introductions
could contribute to quarterly fluctuations in operating results as orders for
new products commence and orders for existing products decline. Moreover,
significant delays can occur between a product's introduction and commencement
of volume production. The inability to develop and manufacture new products in a
timely manner, the existence of reliability, quality or availability problems in
the products or their component parts, or the failure to achieve market
acceptance would have a material adverse effect on the company's revenues and
operating results.
Competition. The computer communications, networking and mass storage interface
business is extremely competitive and the company faces competition from a
number of established and emerging computer communications and internetworking
device companies. Many of the company's principal competitors have established
brand name recognition and market positions and have substantially greater
experience and financial resources to spend for promotion, advertising, research
and product development than the company. Several of these competitors have
recently introduced or announced their intentions to introduce new competitive
products. In addition, as the company broadens its product offerings, it may
face competition from new competitors. Companies in related markets could offer
products with functionality similar or superior to that offered by the company's
products. Increased competition could result in price reductions, reduced
margins and loss of market share, all of which would materially and adversely
affect the company's revenues and operating results. Several of the company's
competitors have recently been acquired by major networking companies. These
acquisitions are likely to permit the company's competition to devote
significantly greater resources to the development and marketing of new
competitive products and the marketing of existing competitive products to their
larger installed bases. The company expects that competition will increase
substantially as a result of these and other industry consolidations and
alliances, as well as the emergence of new competitors. There can be no
assurance that the company will be able to compete successfully with its
existing or new competitors or that competitive pressures faced by the company
will not have a material adverse effect on the company's revenues and operating
results.
Dependence on Key Customers. There can be no assurance that the company's
principal customers will continue to purchase products from the company at
current levels. Customers typically do not enter into long-term volume purchase
contracts with the company and customers have certain rights to extend or delay
the shipment of their orders. The loss of one or more of the company's major
customers, and the reduction, delay or cancellation of orders or a delay in
shipment of the company's products to such customers would have a material
adverse effect on the company's revenues and operating results. (See
Management's Discussion & Analysis included elsewhere in this report).
Dependence on Sun Microsystems, Inc. Products. Many of the company's products
are designed and manufactured to be compatible with workstations manufactured by
Sun Microsystems, Inc. The company's business opportunities and results of
operations are dependent, in part, on continued growth and market acceptance of
systems manufactured and marketed by Sun Microsystems, Inc. In the event these
systems are no longer commercially acceptable, or in the event Sun Microsystems,
Inc. were to curtail its manufacturing and marketing of those systems, this
would have a material adverse effect on the company's revenues and operating
results.
9
<PAGE>
Potential Fluctuations in Annual and Quarterly Results. The company's annual and
quarterly operating results may in the future vary significantly depending on
factors such as the timing and shipment of significant orders, new product
introductions by the company and its competitors, market acceptance of new and
enhanced versions of the company's products, changes in pricing policies by the
company and its competitors, the mix of distribution channels through which the
company's products are sold, inability to obtain sufficient supplies of sole or
limited source components for the company's products, seasonal and general
economic conditions. The company's expense levels are based, in part, on the
company's expectations as to future revenue. Since a substantial portion of the
company's revenue in each quarter result from orders shipped in the final month
of that quarter, revenue levels are extremely difficult to predict. If revenue
levels are below expectations, revenues and operating results will be adversely
affected. Net income would be disproportionately affected by a reduction in
revenue because only a small portion of the company's net expenses varies with
its revenue. (See Management's Discussion and Analysis included elsewhere in
this report).
Dependence on Third Party Component Suppliers. Certain components used in the
company's products are currently available to the company from one or a limited
number of sources. Although to date, the company has generally been able to
obtain adequate supplies of these components, there can be no assurance that
future supplies will be adequate for the company's needs or will be available on
prices and terms acceptable to the company. The company's inability in the
future to obtain sufficient limited-source components, or to develop alternative
sources, could result in delays in product introduction or shipments, and
increased component prices could negatively affect the company's gross margins,
either of which will have a material adverse effect on the company's revenues
and operating results.
Dependence on Internal Manufacturing. In order to avoid relying on outside
contract manufacturers, the company manufactures all of its products at its
Rochester, New York facility. The company does not have alternative
manufacturing capabilities, either internally or through third parties, to
perform those manufacturing functions. Even if the company were able to identify
alternative third-party contract manufacturers, there can be no assurance that
the company would be able to retain their services on terms and conditions
acceptable to the company. In the event of an interruption in production, the
company may not be able to deliver products on a timely basis, which will have a
material adverse effect on the company's revenues and operating results.
Although the company currently has business interruption insurance, no
assurances can be given that such insurance will adequately cover the company's
lost business as a result of such an interruption.
Dependence on Proprietary Technology. The company's success depends upon the
company's proprietary technologies. To date, the company has relied principally
upon trademark, copyright and trade secret laws to protect its proprietary
technologies. The company generally enters into confidentiality or license
agreements with its distributors, customers and potential customers and limits
access to and distribution of the source code to its software and other
proprietary information. The company's employees are subject to the company's
employment policy regarding confidentiality. There can be no assurance that the
steps taken by the company in this regard will be adequate to prevent
misappropriation of its technologies or to provide an effective remedy in the
event of a misappropriation by others. The company holds no patents and has not
filed any patent applications for its products. If patent applications are filed
by the company, there can be no assurance that any patents will be granted, or
that, if granted, such patents would provide the company with meaningful
protection from competition.
Although management believes that the company's products do not infringe on the
proprietary rights of third parties, there can be no assurance that infringement
claims will not be asserted, resulting in costly litigation in which the company
may not ultimately prevail. Adverse determinations in such litigation could
result in the loss of the company's proprietary rights, subject the company to
significant liabilities, require the company to seek licenses from third parties
or prevent the company from manufacturing or selling its products, any of which
will have a material adverse effect on the company's revenues and operating
results.
Because of the existence of a large number of patents in the computer networking
industry and the rapid rate of issuance of new patents or new standards or to
obtain important new technology, it may be necessary for the company to enter
into technology licenses from others. There can be no assurance that these third
party technology licenses will be available to the company on commercially
reasonable terms. The loss of or inability to obtain any of these technology
licenses could result in delays or reductions in product shipments. Any such
delays or reductions in product shipments will have a material adverse effect on
the company's revenues and operating results.
Dependence on Personnel. The company's success depends on the continued
contributions of its personnel, many of whom would be difficult to replace. It
will also depend on its ability to attract and retain skilled employees.
Although the company's employees are subject to the company's employment policy
regarding confidentiality and ownership of inventions, employees are not
otherwise subject to employment agreements or non-competition covenants. Changes
in personnel could adversely affect the company's operating results.
10
<PAGE>
ITEM 2 - Properties
The company's principal executive offices, manufacturing facilities and the
majority of its research and development facilities are located in Rochester,
New York in a 30,000 square foot building in a high technology business park
that was constructed specifically for the company in 1990. The lease for this
facility expires in the year 2001. The company has an option to renew the lease
for two successive five-year terms. The company also leases approximately 6,800
square feet of office space in San Diego, California pursuant to a lease which
expires in November 1999. This facility houses a portion of the company's
software engineering, sales and marketing operations. The company also leases
sales offices at five locations. There is currently no excess office capacity at
the company's Rochester, New York facility, and management believes that the
company will have to identify and obtain additional office space in 1998 to
accommodate the company's operations. Management believes that there are
adequate office facilities available in and around the Rochester area.
ITEM 3 - Legal Proceedings
From time to time, the company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The company is
not a party to any such legal proceedings, the adverse outcome of which,
individually or in the aggregate, would have a material adverse effect on the
company's results of operations, financial condition or cash flows.
ITEM 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1997.
PART II
ITEM 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
The company's Common Stock is traded on the NASDAQ National Market System under
the trading symbol "PTIX". The following table sets forth, for the periods
indicated, the high and the low closing prices for the Common Stock, as reported
on the NASDAQ National Market System since January 24, 1996, the effective date
of the company's Registration Statement on Form S-1 for the company's initial
public offering of its Common Stock. These prices represent quotations among
securities dealers without adjustments for retail markups, markdowns or
commissions and may not represent actual transactions. Where appropriate, all
prices have been adjusted for the company's three-for-two stock split effected
in September 1997.
<TABLE>
<CAPTION>
1997 High Low
---- ---- ---
<S> <C> <C>
First Quarter $ 8.67 $ 6.83
Second Quarter 10.33 7.00
Third Quarter 19.38 10.00
Fourth Quarter $ 21.75 $ 13.50
1996 High Low
---- ---- ---
First Quarter
(from January 24, 1996) $ 8.50 $ 5.33
Second Quarter 11.83 7.83
Third Quarter 9.67 8.08
Fourth Quarter $ 8.17 $ 6.44
</TABLE>
11
<PAGE>
As of February 25, 1998, there were 198 stockholders of record of the company's
Common Stock.
To date, the company has not paid cash dividends on its Common Stock and there
can be no assurances that the company will do so at any time in the future.
The following table summarizes the proceeds from the sale of securities and use
of proceeds therefrom in connection with the Registrant's Initial Public
Offering on January 24, 1996. Amounts reported represent an estimate of the
amount of these expenditures.
<TABLE>
<CAPTION>
Proceeds from the sale of securities:
<S> <C>
Gross proceeds $ 12,800,000
Less: Underwriter's commission 896,000
Finder's fees 0
Underwriter's expenses 27,000
Payments to Directors, Officers, General Partners 0
Other 461,000
------------
Net proceeds $ 11,416,000
============
Use of Proceeds:
Construction of facilities $ 0
Purchase of machinery 1,588,000
Purchase of real estate 0
Acquisition of other business(es) 0
Repayment of debt 0
General working capital purposes 0
Temporary investments 2,679,000
Inventory for new products 1,265,000
Software development 1,084,000
Product development 4,800,000
------------
Total use of proceeds $ 11,416,000
============
</TABLE>
ITEM 6 - Selected Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Years Ended December 31: ........ 1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales ................................... $ 30,336 $ 24,843 $ 17,891 $ 12,562 $ 10,805
Income from continuing operations ....... 5,131 3,734 2,393 1,618 1,218
Loss from discontinued operations ....... (19) (1,133) (455)
Basic earnings per share:
Income from continuing operations (1) $ .71 $ .53 $ .52 $ .36 $ .27
Weighted average common shares ...... 7,231 7,020 4,590 4,549 4,509
Diluted earnings per share:
Income from continuing operations (1) $ .68 $ .52 $ .52 $ .34 $ .26
Weighted average common and common
equivalent shares ............... 7,522 7,248 4,623 4,705 4,640
At December 31: ......................... 1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Working capital ......................... $ 26,584 $ 20,965 $ 6,215 $ 4,369 $ 4,689
Total assets ............................ 31,626 26,089 10,523 9,312 9,246
Long-term debt, less current portion .... $ 18 $ 30 $ 57 $ 622 $ 1,504
(1) All per share amounts have been adjusted where appropriate, for the
three-for-two stock split effected in September 1997.
</TABLE>
12
<PAGE>
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the company's financial condition and
results of operations during the periods included in the accompanying financial
statements focuses on the company's continuing operations and does not include
any discussion or analysis with respect to those operations that were
discontinued in 1995.
The company's annual operating performance is subject to various risks and
uncertainties. The following discussion should be read in conjunction with the
consolidated financial statements and related notes included elsewhere herein as
well as the section appearing in Item 1 of this Form 10 - K under the heading
"Risk Factors." The company's future operating results may be affected by
various trends and factors which are beyond the company's control. These
include, among other factors, general business and economic conditions, rapid or
unexpected changes in technologies, cancellation or delay of customer orders,
changes in the product or customer mix of sales, delays in new product
development, customer acceptance of new products and customer delays in
qualification of products.
Matters discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this Form 10 - K include forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Act of 1934, as amended, and
are subject to the safe harbor provisions of those sections. The company's
actual results could differ materially from those discussed in the forward
looking statements.
Overview
In 1997, the company achieved record revenues and income from continuing
operations for the fifth consecutive year and the second record year as a
publicly traded company. Net income in 1997 increased by 37% and revenues
increased by 22%. At the end of 1997, the company had approximately $21 million
in cash, cash equivalents and marketable securities and no significant debt. For
1997, the company generated income from operations, excluding depreciation and
amortization (EBITDA), of $8.7 million as compared to $5.9 million in 1996.
EBITDA, however, does not represent cash from operating activities as defined by
generally accepted accounting principles (see consolidated statements of cash
flows). Return on equity for 1997 was 20.2% and return on assets was 17.8%.
While the company's customer related activities continue at very high levels,
management is monitoring the 1998 first quarter order rate and shipment
activities closely. A softening in orders was noted in the latter months of 1997
as a number of customers adjusted inventories and took a cautious position with
respect to the market disruptions in certain areas of the world. As a result,
the company entered 1998 with a lower than traditional backlog.
On September 15, 1997, the company effected a three-for-two stock split in the
form of a 50% stock dividend which increased the number of shares outstanding to
7.2 million shares.
The company's revenues are generated from products designed to enhance the
performance of network systems based on varied computer architectures including
VMEbus, SBus and PCIbus. The company's products operate on various operating
systems including UNIX, Windows NT TM, VxWorks and Linux. The company has a
history of adapting its products to a continually changing marketplace and the
historical increase of sales is primarily the result of developing new products
and of increasing the unit sales volumes of existing products. During 1997, the
company introduced and began shipping several new communications and mass
storage interface products for the PCIbus market and announced new products for
the cPCI market. cPCI is a new standard bus architecture that combines the
attributes of the VMEbus and PCIbus hardware into a ruggedized industrial system
for the embedded OEM marketplace. Initially the company will migrate its Wide
Area Network adapter products to this new standard but later in 1998, mass
storage adapters based on SCSI and Fibre Channel technologies will be available.
These new products will initially be directed toward telecommunications and
industrial applications. Cooperative marketing relationships with Ziatech
Corporation and VI Computer Inc., both selling processors for the cPCI market,
were announced in January 1998. Even in this early stage of this emerging
market, the company is seeing significant new business opportunities based on
this technology. Production units of the WAN cPCI products will be available
during the second half of 1998. The company also introduced three new fast
Ethernet switch products which expands the Nebula TM product line with the next
generation of fast Ethernet products and incorporates features for high
reliability and fault tolerance. Production units of these new switching
products are expected to be available in second quarter of 1998.
13
<PAGE>
Historically, approximately 65% to 85% of the company's revenues have been
generated by sales of products to OEMs. During 1997, the company entered into
three distribution relationships to broaden its worldwide distribution network
of VARs, distributors and systems integrators for the company's SBus and PCI
products. In addition, a relationship was established with International
Business Development Specialist (IBDS) to enhance the company's distribution
efforts in the Asia-Pacific region and other international regions.
International sales were $3.0 million in 1997, compared to $2.6 million in 1996
and $2.5 million in 1995.
At the end of 1997, the company integrated the operations and assets of its San
Diego based subsidiary, UconX Corporation, into its corporate operations. The
company believes that a combined corporate structure can better capitalize on
the unique capabilities and resources of the individual organizations. The
engineering staff for this location has been assigned to accelerate certain of
the company's WAN development projects. The company believes that redirecting
these valuable engineering resources onto corporate projects will result in
delivering WAN products to market more rapidly. The products and services of
UconX will continue to be supported and sold, but consolidated revenues may be
impacted in the short term.
In December 1997, the company was awarded ISO 9002 Certification achieving
compliance with quality standards developed by the International Organization of
Standardization of Geneva, Switzerland. The company believes that securing the
ISO 9002 Certification validates and reinforces the company's commitment to
manufacturing products to the highest quality standards.
Results of Operations
The following table sets forth for the years indicated certain consolidated
financial data expressed as a percentage of sales and is included as an aid to
understanding the company's results and should be read in conjunction with the
selected financial data and Consolidated Financial Statements (including the
notes thereto) appearing elsewhere in this report:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales ................................... 100.0% 100.0% 100.0%
Cost of goods sold ........................... 41.8 43.7 44.4
----- ----- -----
Gross profit ................................. 58.2 56.3 55.6
----- ----- -----
Operating expenses:
Selling and marketing ..................... 13.1 12.9 11.8
Research and development ................... 12.3 11.9 10.9
General and administrative ................. 8.9 11.0 14.6
----- ----- -----
Total operating expenses ............. 34.3 35.8 37.3
----- ----- -----
Income from operations ....................... 23.9 20.5 18.3
Other income, net ............................ 3.4 3.0 1.1
----- ----- -----
Income before taxes and minority interest .... 27.3 23.5 19.4
Provision for income taxes ................... 10.4 8.4 5.8
Minority interest ............................ 0.0 (0.1) (0.2)
----- ----- -----
Income from continuing operations ........ 16.9% 15.0% 13.4%
===== ===== =====
</TABLE>
14
<PAGE>
Year Ended December 31, 1997, Compared with the Year Ended December 31, 1996
Sales. Sales for 1997 increased by $5,493,000 (22%) to $30,336,000, from
$24,843,000 for 1996. The Company's products are grouped into five categories:
WAN Interface Adapter products, LAN Interface Adapter products, Network Systems
products, Mass Storage Interface products and Inter-system Connectivity
products.
Shipments of WAN Interface Adapter products amounted to 47% of sales during
1997, compared to 42% for 1996. This increase is attributable to introductions
over the last twelve to eighteen months of several new WAN products and several
new OEM customers integrating these products into their product applications.
Shipments of LAN Interface Adapter products for 1997 amounted to 20% of sales,
compared to 21% for 1996. The largest share of the Company's LAN business is
generated from Commercial Off-the-Shelf (COTS) Defense applications which is
project-oriented and is difficult to predict on a quarterly basis. Combined WAN
and LAN sales grew by 30% in 1997 and represented 77% of the company's business
in the fourth quarter of 1997.
Shipments of Network Systems products represented 9% of total sales in 1997 and
11% for 1996. Network Systems are primarily comprised of shipments of I/O
subsystems to a major OEM customer and specialty protocol software business sold
by the company's subsidiary, UconX Corporation. During the first nine months of
1997, shipments of the I/O subsystem to this customer represented $1.6 million
of revenue. Due to what appears to be a slowdown in orders for the customer's
product that incorporates the company's I/O subsystem product, this customer
requested delays of its fourth quarter deliveries and has not placed any orders
for product deliveries for the first half of 1998. The specialty software
protocol business is typically project-oriented which can result in
fluctuations. The volume of this business in 1997 was less than originally
forecasted and at the end of 1997, the company integrated the UconX organization
into its corporate structure. The products and services of UconX will continue
to be sold but future engineering efforts will be more focused on PTI's WAN
projects.
Shipments of Mass Storage Interface products for 1997 amounted to 14% of sales,
compared to 16% in 1996. The decrease in sales volume is believed to be
attributable to a slow down in the RAID/disk drive market primarily associated
with the Pacific Rim economic issues in the fourth quarter and technology
changes occurring in this market. These changes include customers transitioning
from SBus to PCIbus applications and from the slower SCSI adapters to faster
Fibre Channel adapters. The company has been transitioning its products and
customers into these new technologies; however, the decline in the SBus business
has been greater than the increase in the PCI business. The company continues to
believe that there are significant opportunities for the company's Fibre Channel
adapter and is working on establishing new agreements with certain OEM's within
the next few months.
Shipments of Inter-system Connectivity products represented 10% of sales 1997
and 10% of total sales 1996. The Company is not investing in this group of
products and a declining trend in these revenues is expected.
Gross Profit. Gross profit consists of sales, less cost of goods sold including
materials costs, manufacturing expenses and amortization of software development
costs. Gross profit for 1997 increased by $3,647,000 to $17,641,000, from
$13,994,000 for 1996 due to increased sales volumes. Gross margin percentage
improved to 58.2% of sales for 1997, from 56.3% in 1996. The improved margin is
attributable to favorable product mix along with manufacturing efficiencies
associated with higher sales volumes.
Total Operating Expenses. Total operating expenses increased to $10,419,000 for
1997, from $8,907,000 for 1996, but declined as a percentage of sales from 35.8%
in 1996 to 34.3% in 1997. The Company made significant investments in sales,
marketing, research and development during 1997 while reducing its general and
administrative expenses as a percentage of sales.
Selling and marketing expenses increased by 24.2% to $3,988,000, or 13.1% of
sales for 1997, from $3,210,000, or 12.9% of sales for 1996. The company added
staff to the sales and marketing departments resulting in an increase of
compensation-related expenses in an effort to promote the company's products
more extensively and increase market penetration. Spending for marketing and
promotion increased in 1997 as compared to 1996, primarily due to the costs
incurred to introduce the new switching products and to improve the company's
presence in the marketplace. Management expects to increase marketing
expenditures for advertising, trade shows and promotion in an effort to expand
sales of controller and switching products.
15
<PAGE>
Research and development expenses increased by 25.7% to $3,720,000, or 12.3% of
sales for 1997, compared to $2,960,000, or 11.9% of sales for 1996. Research and
development expenses consist primarily of employee salaries and benefits costs,
cost of materials consumed in developing and designing new products and, to a
lesser extent, contract development. Certain engineering expenses associated
with the development of software are capitalized and amortized to cost of goods
sold. The increase in research and development expenses in 1997 was primarily
attributable to the hiring of eight additional engineers and the development of
the new ASIC for the new switching products. The company needs to continually
invest in new product development to stay abreast of technological changes in
its markets. The company expects to commit greater resources to research and
development in the future, including hiring engineers for new product
development and greater product development resources associated with the new
switching products.
General and administrative expenses decreased to 8.9% of sales for 1997, or
$2,711,000, compared to $2,737,000, or 11.0% of sales for 1996. The decrease as
a percentage of sales is primarily attributable to maintaining control of
administrative expenses.
Other income, net. Other income consists primarily of interest income from cash
equivalents and marketable securities. The funds are primarily invested in money
market funds, high quality short term commercial paper and U.S. Treasury
securities maturing in less than 12 months.
Income Taxes. The provision for income taxes for 1997 is based upon the combined
federal and state effective tax rate of 38%, compared to 35.6% in 1996. The
primary reasons for the increase in the combined tax rate are the higher
research and development tax credits generated in 1996 and a lower benefit of
State income taxes in 1997.
Year Ended December 31, 1996, Compared with the Year Ended December 31, 1995
Sales. Sales for 1996 increased by $6,952,000 (39%) to $24,843,000, from
$17,891,000 for 1995. The company's products are grouped into five categories:
WAN Interface Adapter products, LAN Interface Adapter products, Network Systems
products, Mass Storage Interface products and Inter-system Connectivity
products. The increase in sales is primarily attributable to the growing demand
for the company's WAN and LAN Adapter products. The company began shipping new
PCI based WAN and LAN adapter products in 1996 and revenues nearly reached $1
million for these products. WAN and LAN adapter product sales each grew by 62%
in 1996 and represented 42% and 21%, respectively of total sales for the year.
Network Systems products grew 57% in 1996 and were 11% of total sales for 1996.
Revenues from Mass Storage interface products increased to $3,869,000 in 1996
and grew by 20% for the year. Inter-system Connectivity product revenues
decreased from 18% of sales in 1995, to 10% in 1996.
Gross Profit. Gross profit consists of sales, less cost of goods sold including
materials costs, manufacturing expenses and amortization of software development
costs. Gross profit for 1996 increased by $4,051,000 to $13,994,000, from
$9,943,000 for 1995 due to increased sales volumes. Gross margin percentage
improved to 56.3% of sales for 1996, from 55.6% in 1995. The improved margin is
attributable to favorable product mix along with manufacturing efficiencies
associated with higher sales volumes.
Total Operating Expenses. Total operating expenses increased to $8,907,000, or
35.8% of sales for 1996, from $6,670,000, or 37.3% of sales for 1995. The
company made significant investments in sales, marketing, research and
development during 1996 while reducing its general and administrative expenses
as a percentage of sales.
Selling and marketing expenses increased by 52% to $3,210,000, or 12.9% of sales
for 1996, from $2,106,000, or 11.8% of sales for 1995. The company added sales
people in North America and in Europe and commissions increased due to higher
sales levels. The company also added staff to the marketing department in an
effort to promote the company's products more extensively. The company spent an
additional $600,000 in advertising and trade show expenses in 1996 to introduce
several new products and to improve its presence in the marketplace.
16
<PAGE>
Research and development expenses increased by 51% to $2,960,000, or 11.9% of
sales for 1996, compared to $1,955,000, or 10.9% of sales for 1995. Research and
development expenses consist primarily of employee salaries and benefits costs,
cost of materials consumed in developing and designing new products and, to a
lesser extent, contract development. Certain engineering expenses associated
with the development of software are capitalized and amortized to cost of goods
sold. The increase in research and development expenses in 1996 was primarily
attributable to hiring additional hardware and software engineers and
compensation related expenses.
General and administrative expenses increased by 5% to $2,737,000, or 11.0% of
sales for 1996, compared to $2,609,000, or 14.6% of sales for 1995. The decrease
as a percentage of sales, is primarily attributable to maintaining control of
administrative expenses while sales increased by nearly 40%.
Other income, net. Other income consists primarily of interest income. During
1996, the company earned interest income on the net proceeds of its initial
public offering of Common Stock. The funds are primarily invested in money
market funds, high quality short term commercial paper and US Treasury
securities maturing in 8 to 12 months.
Income Taxes. The provision for income taxes for 1996 is based upon the combined
federal and state effective tax rate of 35.6%, compared to 29.8% in 1995. The
primary reasons for the increase in the combined tax rate are the higher
utilization of carryforward research and development tax credits in 1995 and the
foreign sales exemption.
Liquidity and Capital Resources
At December 31, 1997, the company's primary source of liquidity included cash
and cash equivalents of $8,833,000, marketable securities with a maturity less
than one year of $12,010,000 and available borrowings of $3,000,000 under a
revolving credit facility with a bank. No amounts were outstanding under this
credit facility as of December 31, 1997. The company had working capital of
$26,584,000 at December 31, 1997, compared to $20,965,000 at December 31, 1996.
Cash generated by operating activities was $5,821,000, $3,642,000 and $3,297,000
in 1997, 1996 and 1995, respectively. The increase in cash generated from
operating activities in 1997 is attributable to greater net income and a net
increase in operating assets and liabilities.
Cash used in investing activities was $7,093,000, $7,469,000 and $619,000 in
1997, 1996 and 1995, respectively. During 1997, investing activities included
the purchase of marketable securities of $13,008,000, the maturity of marketable
securities of $7,100,000, and net capital equipment purchases of $481,000.
Capital equipment purchases consist primarily of manufacturing equipment, office
equipment and computer and related equipment used in engineering. In addition,
the company capitalizes certain software development costs. Amounts capitalized
and included within investing activities were $704,000, $380,000 and $193,000 in
1997, 1996 and 1995, respectively.
Cash provided by financing activities of $78,000 for 1997 was principally the
result of the exercise of stock options. During 1996, cash provided by financing
activities was principally the result of the company's initial public offering
of its Common Stock in January 1996. During 1995, cash used by financing
activities consisted primarily of borrowings and repayment of borrowings on the
company's line of credit.
Many companies are facing a potential issue regarding the ability of information
systems to accommodate the coming year 2000. The company has evaluated its
information systems and believes that an appropriate plan is in place to ensure
that all critical systems can, or will be able to, accommodate the coming
century without material adverse effect on the company's financial condition,
results of operations, capital spending or competitive position. Such plan
consists of obtaining upgrades of its information systems from the company's
software vendor to be year 2000 compatible. The current products sold by the
company do not require any programming date changes to function as intended;
however, the new switching products do require date sensitive programming and
are being developed to be year 2000 compatible.
17
<PAGE>
Assuming there is no significant change in the company's business, management
believes that its current cash and marketable securities together with cash
generated from operations and available borrowings under the company's loan
agreement will be sufficient to meet the company's anticipated needs, including
working capital and capital expenditure requirements, for at least the next
twelve months. However, management has also initiated a strategic acquisition
program to further accelerate new product and market penetration efforts. This
program could have an impact on the company's working capital requirements,
liquidity or capital resources.
ITEM 8 - Financial Statements and Supplementary Data
Index to Financial Statements: ..................................... Page
Report of Independent Accountants ................................ 19
Consolidated Balance Sheets at December 31, 1997 and 1996 ........ 20
Consolidated Statements of Income for the Three Years
Ended December 31, 1997 ....................................... 21
Consolidated Statements of Changes in Stockholders' Equity
for the Three Years Ended December 31, 1997 ................... 22
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1997 ....................................... 23
Notes to Consolidated Financial Statements ....................... 25
Index to Financial Statement Schedules:
All schedules have been omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
18
<PAGE>
Report of Independent Accountants
February 16, 1998
To the Board of Directors and Stockholders of
Performance Technologies, Incorporated
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Performance Technologies, Incorporated and its subsidiaries at December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/Price Waterhouse LLP
- -----------------------
Price Waterhouse LLP
Rochester, New York
19
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1997 1996
------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................... $ 8,833,000 $ 10,027,000
Marketable securities ........................ 12,010,000 6,102,000
Accounts receivable, net (Note B) ............ 4,956,000 3,234,000
Inventories, net (Note C) .................... 3,329,000 4,032,000
Prepaid expenses and other ................... 346,000 284,000
Deferred taxes (Note J) ...................... 466,000 419,000
------------ ------------
Total current assets ................... 29,940,000 24,098,000
Equipment and improvements, net (Note D) ........ 982,000 1,267,000
Software development, net (Note K) .............. 579,000 549,000
Other assets (Note E) ........................... 125,000 175,000
------------- ------------
Total assets ........................... $ 31,626,000 $ 26,089,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt (Note G) ... $ 12,000 $ 26,000
Accounts payable .............................. 824,000 953,000
Income taxes payable .......................... 255,000 23,000
Accrued expenses (Note F) ..................... 2,265,000 2,131,000
------------ ------------
Total current liabilities .............. 3,356,000 3,133,000
Long term debt, less current portion (Note G) ... 18,000 30,000
Deferred taxes (Note J) ......................... 220,000 219,000
------------ ------------
Total liabilities ....................... 3,594,000 3,382,000
------------ ------------
Commitments (Note H)
Stockholders' equity (Notes I, O)
Preferred stock - $.01 par value: 1,000,000
shares authorized; none issued at
December 31, 1997 and 1996
Common stock - $.01 par value; 15,000,000 shares
authorized; 7,414,732 and 4,899,418 shares issued
at December 31, 1997 and 1996, respectively .... 74,000 49,000
Additional paid-in capital .................... 13,055,000 12,885,000
Retained earnings ............................. 15,061,000 9,930,000
Treasury stock-at cost, 147,282 and 98,117
shares held at December 31, 1997 and 1996 ... (158,000) (157,000)
------------ ------------
Total stockholders' equity .............. 28,032,000 22,707,000
------------ ------------
Total liabilities and
stockholders' equity ................. $ 31,626,000 $ 26,089,000
============ ============
<FN>
The accompanying notes are an integral part of these
financial statements.
</FN>
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Sales ............................ $ 30,336,000 $ 24,843,000 $ 17,891,000
Cost of goods sold ............... 12,695,000 10,849,000 7,948,000
------------ ------------ ------------
Gross profit ..................... 17,641,000 13,994,000 9,943,000
------------ ------------ ------------
Operating expenses:
Selling and marketing ........... 3,988,000 3,210,000 2,106,000
Research and development ........ 3,720,000 2,960,000 1,955,000
General and administrative ...... 2,711,000 2,737,000 2,609,000
------------ ------------ ------------
Total operating expenses 10,419,000 8,907,000 6,670,000
------------ ------------ ------------
Income from operations ........... 7,222,000 5,087,000 3,273,000
Other income, net ................ 1,051,000 750,000 203,000
------------ ------------ ------------
Income before taxes and
minority interest ............... 8,273,000 5,837,000 3,476,000
Provision for income taxes (Note J) 3,142,000 2,079,000 1,037,000
------------ ------------ ------------
Income before minority interest .. 5,131,000 3,758,000 2,439,000
Minority interest ................ (24,000) (46,000)
------------ ------------ ------------
Income from continuing operations 5,131,000 3,734,000 2,393,000
Loss from discontinued operations,
net of tax benefits (Note O) .... (19,000)
------------ ------------ ------------
Net income........................ $ 5,131,000 $ 3,734,000 $ 2,374,000
============ ============ ============
Basic earnings per share (Note L):
Income from continuing operations $ .71 $ .53 $ .52
============ ============ ============
Net income ...................... $ .71 $ .53 $ .52
============ ============ ============
Diluted earnings per share (Note L):
Income from continuing operations $ .68 $ .52 $ .52
============ ============ ============
Net income ...................... $ .68 $ .52 $ .51
============ ============ ============
<FN>
The accompanying notes are an integral part of these
financial statements.
</FN>
</TABLE>
21
<PAGE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Treasury Retained
Shares Amount Capital Stock Earnings Total
------ ------ ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance -
January 1,1995 3,156,688 $32,000 $ 1,123,000 $(138,000)$ 4,392,000 $ 5,409,000
1995 Net income 2,374,000 2,374,000
Exercise of
options/warrants 106,910 1,000 165,000 166,000
Issuance of
warrants 62,000 62,000
Tax benefit -
warrant and
option plans 64,000 64,000
Purchase of
treasury stock -
6,084 shares (18,000) (18,000)
Distribution to
stockholders -
spin off(Note O) (570,000) (570,000)
--------- ------ ---------- -------- ---------- ---------
Balance -
December 31,
1995 3,263,598 33,000 1,414,000 (156,000) 6,196,000 7,487,000
1996 Net income 3,734,000 3,734,000
Exercise of
options/warrants 35,820 74,000 74,000
Tax benefit -
warrant and
option plans 25,000 25,000
Purchase of
treasury stock -
37 shares (1,000) (1,000)
Initial Public
Offering stock
proceeds
(Note I) 1,600,000 16,000 11,372,000 11,388,000
--------- ------ ---------- ------- ---------- ----------
Balance -
December 31,
1996 4,899,418 49,000 12,885,000 (157,000) 9,930,000 22,707,000
1997 Net income 5,131,000 5,131,000
Exercise of
options 51,325 1,000 104,000 105,000
Tax benefit -
option plan 90,000 90,000
Three-for-two
stock split 2,463,989 24,000 (24,000)
Purchase of
treasury stock -
71 shares (1,000) (1,000)
--------- ------ ---------- ------- ---------- ----------
Balance -
December 31,
1997 7,414,732 $74,000 $13,055,000 $(158,000)$15,061,000 $28,032,000
========= ====== ========== ======== ========== ==========
<FN>
The accompanying notes are an integral part of these
financial statements.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,131,000 $ 3,734,000 $2,374,000
Non-cash adjustments:
Depreciation and amortization 1,490,000 831,000 675,000
Reserve for inventory obsolescence 262,000 609,000 293,000
Deferred income taxes (46,000) (119,000) (73,000)
Other 21,000 (113,000) 236,000
Changes in operating assets
and liabilities:
Accounts receivable (1,743,000) (895,000) (803,000)
Inventories 441,000 (1,229,000) (783,000)
Prepaid expenses and other (62,000) 25,000 (239,000)
Accounts payable (129,000) (474,000) 385,000
Accrued expenses 134,000 892,000 834,000
Income taxes payable 322,000 381,000 (97,000)
Discontinued operations - non-cash
charges and working capital charges 495,000
---------- ---------- ---------
Net cash provided by
operating activities 5,821,000 3,642,000 3,297,000
---------- ---------- ---------
Cash flows from investing activities
Cash purchases of equipment
and improvements, net (481,000) (719,000) (297,000)
Capitalized software development (704,000) (380,000) (193,000)
Purchase of marketable securities (13,008,000) (6,102,000)
Maturities of marketable securities 7,100,000
Purchase of remaining shares
in subsidiary (268,000)
Investing activities of
discontinued operations (129,000)
---------- ---------- ---------
Net cash used by investing activities (7,093,000) (7,469,000) ( 619,000)
---------- ---------- ---------
Cash flows from financing activities
Payments on capital lease obligations (15,000) (62,000) (63,000)
Repayment of line of credit
and notes payable (11,000) (12,000) (1,446,000)
Exercise of stock options and warrants 104,000 74,000 142,000
Net proceeds from issuance of common stock 11,388,000
Borrowings from line of credit 535,000
---------- ---------- ---------
Net cash provided (used)
by financing activities 78,000 11,388,000 (832,000)
---------- ---------- ---------
Net (decrease) increase in
cash and cash equivalents (1,194,000) 7,561,000 1,846,000
Cash and cash equivalents
at beginning of year 10,027,000 2,466,000 620,000
---------- ---------- ---------
Cash and cash equivalents
at end of year $ 8,833,000 $10,027,000 $2,466,000
========== ========== =========
<FN>
The accompanying notes are an integral part of these
financial statements.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year Ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Interest paid $ 4,000 $ 13,000 $ 24,000
Income taxes paid $ 2,865,000 $ 1,853,000 $ 1,371,000
SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS
Spin off to stockholders
Accounts receivable $ 13,000
Inventory 642,000
Prepaid expenses 29,000
Deferred tax assets 47,000
Equipment and improvements,
net of accumulated depreciation 331,000
Software capitalization, net of amortization 472,000
Accounts payable (139,000)
Accrued expenses (117,000)
Income taxes payable (5,000)
Capital lease obligations, short term (1,000)
Deferred tax liabilities (202,000)
Loan payable (500,000)
----------
Net distribution $ 570,000
==========
<FN>
The accompanying notes are an integral part of these
financial statements.
</FN>
</TABLE>
24
<PAGE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Nature of Business and Summary of Significant Accounting Policies
The Company: Performance Technologies, Incorporated was formed in 1981 under the
laws of the State of Delaware and maintains its corporate offices at 315 Science
Parkway, Rochester, New York. The company and its subsidiaries design, develop,
manufacture and market high performance communications, networking and data
storage interface products. The company's products are designed to enhance the
performance of customers' computer network systems and include local and wide
area network interface adapters, communication servers and mass storage
interface products. The company also provides sophisticated software
communications solutions. Applications for the company's products are targeted
toward high performance, mission critical networking solutions and include:
network interfaces for cellular telephone communications, FDDI adapter products
used aboard navy vessels, communications servers used in air traffic control
centers and data storage products found in bank automated teller machines.
Segment Data, Geographic Information and Significant Customers: The company
operates in one industry segment. Export sales to customers outside the United
States represent 9.9%, 10.8%, and 14.2% of the company's sales for the years
ended December 31, 1997, 1996 and 1995, respectively. For 1997, 1996 and 1995,
four customers accounted for approximately 28%, 30% and 21%, respectively, of
the company's sales, with no single customer representing greater than 8%, 12%
and 6%, respectively, of the company's sales.
Principles of Consolidation: The consolidated financial statements include the
accounts of the company and its wholly-owned subsidiaries, PTI Virgin Islands
Company, Ltd., and UconX Corporation (Note E). Manutech Corporation of
Rochester, Videk Corporation, the Performance Telecom business unit and the
InformationView business unit have been shown in the Consolidated Statements of
Income and Consolidated Statements of Cash Flows for the year ended December 31,
1995 as discontinued operations (Note O). All significant intercompany
transactions have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Concentration of Credit Risk: Financial instruments which potentially expose the
company to significant concentrations of credit risk consist principally of bank
deposits, marketable securities and accounts receivable. Marketable securities
consist of high quality short-term interest bearing financial instruments. The
company performs ongoing credit evaluations of its customers' financial
condition and the company maintains an allowance for uncollectible accounts
receivable based upon the expected collectibility of all accounts receivable.
Inventories: Inventories are valued at the lower of cost or market using the
first-in, first-out method.
Fair Value of Financial Instruments: The carrying amount of the company's
financial instruments, including cash and cash equivalents, marketable
securities, accounts receivable, accounts payable, accrued expenses and loans
approximates their fair value at December 31, 1997, as the maturity of these
instruments are generally short term. Due to differences in the interest rates
on the long term debt compared to prevailing rates, the fair value of these
instruments does vary from their carrying amounts, however, such differences are
immaterial.
Cash Equivalents: The company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
25
<PAGE>
Revenue Recognition: Revenue from hardware sales is recognized upon product
shipment. Revenue from consulting and other professional service contracts is
recognized when earned on the basis of hours incurred at contract rates for time
and material agreements.
Marketable Securities: The company has classified all of its marketable debt
securities as held to maturity and has accounted for these investments at
amortized cost. Accordingly, no adjustment for unrealized holding gains or
losses has been reflected in the company's financial statements. Marketable
securities classified as held to maturity are high credit quality securities in
accordance with the company's investment policy. At December 31, 1997, cost
approximates fair market value.
Equipment and Improvements: Equipment and improvements are recorded at cost.
Depreciation is provided for using the straight-line method over the following
useful lives:
Machinery and equipment 3-10 years
Office furniture and equipment 3-5 years
Leasehold improvements The lesser of 10 years or the lease term
Upon retirement or disposal of an asset, the asset and the related accumulated
depreciation are eliminated from the accounts with gains or losses recorded in
the Consolidated Statements of Income.
Research and Development: Research and development costs are expensed as
incurred.
Software Development Costs: Software development costs incurred subsequent to
the establishment of technological feasibility and prior to general release of
the product are capitalized and amortized on a product-by-product basis over
their estimated remaining economic life, generally three years, or using the
ratio of current revenues to current and anticipated revenues from such
software, whichever provides greater amortization.
Income Taxes: The company accounts for income taxes using the asset and
liability approach which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax basis of such assets and liabilities. This
method utilizes enacted statutory tax rates in effect for the year in which the
temporary differences are expected to reverse and gives immediate effect to
changes in income tax rates upon enactment. Deferred tax assets are recognized,
net of any valuation allowance, for deductible temporary differences and tax
credit carryforwards. Deferred income tax expense (benefit) represents the
change in net deferred tax asset and liability balances.
Note B - Accounts Receivable
Accounts receivable consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
1997 1996
------ ------
<S> <C> <C>
Accounts receivable $ 5,148,000 $ 3,405,000
Less: allowance for doubtful accounts (192,000) (171,000)
------------ -------------
Net $ 4,956,000 $ 3,234,000
============ =============
</TABLE>
26
<PAGE>
Note C - Inventories
Inventories consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
1997 1996
------ ------
<S> <C> <C>
Purchased parts and components $ 954,000 $ 1,601,000
Work in process 2,580,000 2,641,000
Finished goods 333,000 292,000
------------ -------------
3,867,000 4,534,000
Less: reserve for inventory obsolescence (538,000) (502,000)
------------ -------------
Net $ 3,329,000 $ 4,032,000
============ =============
</TABLE>
Note D - Equipment and Improvements
Equipment and improvements consisted of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
December 31,
1997 1996
------ ------
<S> <C> <C>
Engineering equipment and software $ 1,294,000 $ 1,247,000
Manufacturing equipment 1,140,000 1,295,000
Furniture and equipment 785,000 702,000
Leasehold improvements 130,000 123,000
------------ -------------
3,349,000 3,367,000
Less: accumulated depreciation and amortization (2,367,000) (2,100,000)
------------ -------------
Net $ 982,000 $ 1,267,000
============ =============
</TABLE>
Total depreciation and amortization expense for equipment and improvements from
continuing operations for 1997, 1996 and 1995 was $426,000, $417,000 and
$318,000, respectively.
At December 31, 1996 fixed assets held under capital lease agreements were
$271,000 and related accumulated amortization was $238,000. Related amortization
expense from continuing operations was $29,000, $29,000 and $60,000 for 1997,
1996 and 1995, respectively.
Note E - Other Assets
During 1996, the Company paid $268,000 to acquire the remaining shares of UconX
Corporation resulting in UconX becoming a wholly-owned subsidiary. In connection
with this transaction, additional goodwill of $188,000 was recorded.
Amortization expense from continuing operations for goodwill was $50,000,
$45,000 and $34,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Note F - Accrued Expenses
Accrued expenses consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
1997 1996
------ ------
<S> <C> <C>
Accrued compensation $ 1,500,000 $ 1,431,000
Accrued payroll and other taxes 126,000 266,000
Other accrued expenses 639,000 434,000
------------ -------------
Total $ 2,265,000 $ 2,131,000
============ =============
</TABLE>
27
<PAGE>
Note G - Long Term Debt and Credit Agreement
At December 31, 1997, the company has a revolving credit loan agreement with a
bank under which it can borrow up to $3 million. Borrowings bear interest
ranging between 150 basis points above the Libor rate to the bank's prime rate
and are collateralized by trade accounts receivable, inventory, equipment,
contract rights and intangibles. The agreement requires the company to meet
certain financial and non-financial covenants. The company was in compliance
with such covenants at December 31, 1997. There were no balances outstanding
under this agreement at December 31, 1997 and 1996.
In June 1993, the company borrowed $80,000 from the City of Rochester to
purchase equipment. The seven year loan bears interest at 2%. The loan is fully
collateralized by an irrevocable letter of credit. This agreement contains a
covenant requiring the company to maintain substantially all of its operations
located within the boundaries of the municipality.
A summary of the long term debt outstanding at December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
------ ------
<S> <C> <C>
Loan payable $ 30,000 $ 41,000
Capital lease obligations 15,000
--------- ----------
30,000 56,000
Less: current portion (12,000) (26,000)
--------- ----------
Long term portion $ 18,000 $ 30,000
========= ==========
</TABLE>
As of December 31, 1997, the aggregate maturities of the loan payable for the
years ending December 31, 1998, 1999, and 2000 were $12,000, $12,000 and $6,000,
respectively.
Note H - Commitments
The company leases facilities and equipment under operating leases. Under the
terms of the facility lease which expires in the year 2001, the company agrees
to pay an annual rental of $270,000 with an adjustment each year based upon the
Consumer Price Index. The company is also required to pay their pro rata share
of the real property taxes and assessments, expenses and other charges
associated with this facility. The company has the option to renew the lease for
two successive periods of five years each at an annual rental in accordance with
the provisions of the lease agreement. The company has co-guaranteed
approximately $1,250,000 of the mortgage obtained to finance the building. In
recognition of this guarantee, the company has the right of first refusal to
purchase the facility at a discounted price, should the owners elect to sell.
Future minimum lease payments for all operating leases having a remaining term
in excess of one year at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Operating
Leases
1998 $ 450,000
1999 452,000
2000 371,000
2001 164,000
2002 7,000
-----------
Total minimum lease payments $ 1,444,000
===========
</TABLE>
Rental expense from continuing operations amounted to $557,000, $500,000 and
$563,000 for 1997, 1996 and 1995, respectively. Rental income from continuing
operations amounted to $9,000 and $134,000 for 1996 and 1995, respectively.
28
<PAGE>
Note I - Stockholders' Equity
On July 31, 1997, the Board of Directors declared a three-for-two stock split of
the company's common stock effected in the form of a stock dividend paid on
September 15, 1997. All agreements concerning stock options and other
commitments payable in shares of the company's common stock provided for the
issuance of additional shares due to the declaration of the stock split. An
amount equal to the par value of the common shares issued was transferred from
capital in excess of par value to the common stock account. All references to
number of shares and to per share information in the consolidated financial
statements, except shares authorized and 1996 common shares, have been adjusted
to reflect the stock split on a retroactive basis.
On January 24, 1996, the company completed the issuance of an additional 1.6
million shares of its common stock through an initial public offering, resulting
in net proceeds of $11.4 million.
In 1986, the company established an Incentive Stock Option Plan pursuant to
which 1,800,000 shares of common stock were reserved for grant by the Board of
Directors. Options may be granted to any officer, director or employee at not
less than the fair market value at the date of grant (not less than 110% of the
fair market value in the case of holders of more than 10% of the company's
common stock). Options granted under the plan generally expire five years from
the date of grant and generally vest 20% after one year, 50% after two years and
100% after three years.
With respect to non-qualified options, the company recognizes a tax benefit upon
exercise in an amount equal to the tax effect of the difference between the
option price and the fair market value of the common stock. Tax benefits related
to such non-qualified stock options are credited to additional paid-in capital.
The following table summarizes stock option activity under this plan:
<TABLE>
<CAPTION>
Number of Shares Price Ranges
---------------- ------------
<S> <C> <C>
Outstanding at January 1, 1995 273,201
Granted 24,000 $1.83-$ 2.01
Exercised (87,615) $1.22-$ 2.00
Expired (9,600) $1.52-$ 1.67
-------- ------------
Outstanding at December 31, 1995 199,986 $1.22-$ 2.01
Granted 348,000 $6.67-$ 9.83
Exercised (48,510) $1.22-$ 1.83
Expired (1,282) $1.52-$ 1.83
-------- ------------
Outstanding at December 31, 1996 498,194
Granted 143,250 $7.25-$ 13.00
Exercised (65,618) $1.21-$ 7.83
Expired (2,325) $1.21-$ 7.83
-------- ------------
Outstanding at December 31, 1997 573,501 $1.33-$ 13.00
========
</TABLE>
At December 31, 1997, 435,335 options were vested and 855,937 options were
available for future grant under the stock option plan.
During 1995, 75,000 warrants were issued to two of the company's officers, 3,000
warrants were issued to an outside director and 750 warrants were issued to a
consultant. The warrants are exercisable for five years from the date of grant
and have an exercise price of $1.83 per share. In 1995, the warrants were valued
at $62,000 and the related charge was recorded to continuing operations. During
1996, 3,000 of such warrants were exercised.
29
<PAGE>
Note I - Stockholders' Equity (continued)
The company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option plan.
The effect of this pronouncement on 1995, prior to the public offering of the
company's common stock, is not significant. Had compensation cost for the
company's stock option plan been determined based on the fair value at the grant
date for awards in 1997 and 1996 consistent with the provisions of SFAS No. 123,
the company's net income would have been reduced to the pro forma amounts of
$4,371,000 and $3,198,000, respectively. Basic earnings per share would have
been reduced to the pro forma amounts of $.60 and $.46, respectively. Diluted
earnings per share would have been reduced to the pro forma amounts of $.58 and
$.44, respectively.
The assumption regarding the stock options issued in 1997 and 1996 was that 33%
of such options vested annually. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1997 and 1996:
dividend yield of 0%; expected volatility of 61% and 65%; risk-free interest
rate of 6.5% and 6.2%; and expected lives of five years.
Note J - Income Taxes
The provisions for income taxes from continuing operations for 1997, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
Current income taxes ................. 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal ...........................$ 2,814,000 $ 1,852,000 $ 916,000
State ............................. 374,000 346,000 194,000
----------- ----------- -----------
3,188,000 2,198,000 1,110,000
Deferred provision (benefit) ...... (46,000) (119,000) (73,000)
----------- ----------- -----------
Total provision ................ $ 3,142,000 $ 2,079,000 $ 1,037,000
=========== =========== ===========
</TABLE>
The provision for income taxes from continuing operations differs from those
computed using the federal tax rate of 34% due to the following:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal income tax at statutory rate ........... 34.0% 34.0% 34.0%
Research and development tax credits ........... (2.0) (2.7) (4.8)
State tax provision, net of federal benefit .... 2.9 3.9 3.6
Other .......................................... 3.1 0.4 (3.0)
------ ------ ------
Effective tax rate ............................. 38.0% 35.6% 29.8%
====== ====== ======
</TABLE>
The company's net deferred income tax balance as of December 31, 1997 and 1996
consists of the following:
<TABLE>
<CAPTION>
December 31,
Deferred tax liabilities 1997 1996
- ------------------------ ------ ------
<S> <C> <C>
Capitalized software development cost, net $ 220,000 $ 219,000
------------ -------------
Deferred tax assets
- -------------------
Accrued vacation, payroll and
other accrued expenses (101,000) (121,000)
Inventory obsolescence reserve and
other inventory related items (205,000) (171,000)
Bad debt reserve (73,000) (68,000)
Research tax credits (31,000) (35,000)
Other (56,000) (24,000)
------------ -------------
Total deferred tax assets (466,000) (419,000)
------------ -------------
Net deferred tax asset $ (246,000) $ (200,000)
============ =============
</TABLE>
The carryforward research credits begin to expire in 2006.
30
<PAGE>
Note K - Research and Software Development Costs
The Corporation incurred research and software development costs relating to the
development of new products for continuing operations during 1997, 1996 and 1995
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Gross expenditures for engineering
and software development $ 4,764,000 $ 3,460,000 $ 2,177,000
Less: amounts capitalized (1,044,000) (500,000) (222,000)
------------- ----------- -----------
Net charged to operating expenses $ 3,720,000 $ 2,960,000 $ 1,955,000
============= =========== ===========
</TABLE>
Software Development costs consisted of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
December 31,
1997 1996
------ ------
<S> <C> <C>
Capitalized software development costs $ 2,442,000 $ 1,398,000
Less: accumulated amortization (1,863,000) (849,000)
----------- -----------
Net $ 579,000 $ 549,000
=========== ===========
</TABLE>
Amortization of software development costs for continuing operations included in
cost of goods sold was $1,014,000, $369,000 and $323,000 for 1997, 1996 and
1995, respectively.
Note L - Earnings Per Share
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
was adopted by the company in the fourth quarter of 1997. This statement
replaces the presentation of primary earnings per share with basic earnings per
share, and also requires presentation of diluted earnings per share. Basic
earnings per share (EPS) is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the company.
The following table illustrates the calculation of both basic and diluted EPS
for the years ending December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Basic earnings per share
Net income available
to common stockholders $ 5,131,000 $ 3,734,000 $ 2,374,000
------------- ----------- -----------
Weighted average common shares 7,230,902 7,019,746 4,590,450
------------- ----------- -----------
Basic earnings per share $ .71 $ .53 $ .52
============= =========== ===========
Year ended December 31,
1997 1996 1995
------ ------ ------
Diluted earnings per share
Net income available
to common stockholders $ 5,131,000 $ 3,734,000 $ 2,374,000
------------- ----------- -----------
Weighted average common shares 7,230,902 7,019,746 4,590,450
Common equivalent shares 291,016 228,631 32,903
------------- ----------- -----------
Weighted average common and
common equivalent shares 7,521,918 7,248,377 4,623,353
------------- ----------- -----------
Diluted earnings per share $ .68 $ .52 $ .51
============= =========== ===========
</TABLE>
Discontinued operations reduced diluted earnings per share by $.01 for 1995.
31
<PAGE>
Note M - Employee Benefit Plans
The company's Retirement Savings Plan qualifies under Section 401(k) of the
Internal Revenue Code. Generally, all eligible full time employees may
contribute up to 20% of their compensation subject to the IRS limitation of
$9,500 per year toward their retirement on a tax deferred basis. The company has
contributed matching contributions to the plan up to 2%, 3% and 3% of the
participant's compensation in 1997, 1996 and 1995, respectively. The Plan is
administered by the Principal Financial Group. Contributions from continuing
operations amounted to $92,000, $126,000 and $67,000 for 1997, 1996 and 1995,
respectively. In conjunction with the company's Flexible Benefits plan, the
company made additional qualified nonelective contributions to employee accounts
in 1997 amounting to $108,000.
Note N - Transactions with Related Parties
The company leases its primary facility from an entity controlled by two
directors of the company, one of whom is an officer. During 1997, 1996, and
1995, the company paid rent of $318,000, $307,000 and $297,000, respectively,
for the use of this location. (Note H)
Note O - Discontinued Operations
In March 1995, the company sold the assets of the Manutech business unit for a
net purchase price of $168,000. Effective March 31, 1995, the company completed
a spin-off transaction (the "Spin-Off") whereby the company's Performance
Telecom business unit, the InformationView business unit, and its wholly owned
subsidiary, Videk Corporation, were combined into a new entity, Performance
Telecom Corporation, the stock of which was distributed to the Company's
stockholders. To accomplish the Spin-Off, the Company's Board of Directors
declared a distribution to each of the Company's stockholders of one share of
Performance Telecom stock for each share of the Company's Common Stock owned by
its stockholders. The Spin-Off was structured to qualify as a tax-free
transaction under the Internal Revenue Code. This transaction represents a
distribution to stockholders and, therefore, there is no gain or loss reflected
in the company's Consolidated Statements of Income.
The disposal of Manutech and the operations distributed in the Spin-Off are
reflected as discontinued operations in the company's consolidated financial
statements.
A summary of discontinued operations for the year ended December 31, 1995 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Sales $ 1,634,000
=============
Loss before income taxes $ (189,000)
Income tax benefit 170,000
-------------
Loss from discontinued operations $ (19,000)
=============
</TABLE>
32
<PAGE>
Note P - Quarterly Results (unaudited)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
(in thousands, except per share data)
Mar. 31 Jun. 30 Sept. 30 Dec. 31
------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales $7,434 $7,539 $7,606 $7,757
Gross profit 4,102 4,514 4,343 4,682
Income from operations 1,563 1,700 1,996 1,963
Net income $1,112 $1,200 $1,402 $1,417
Basic earnings per share $ 0.15 $ 0.17 $ 0.19 $ 0.20
====== ====== ====== ======
Dluted earnings per share $ 0.15 $ 0.16 $ 0.18 $ 0.18
====== ====== ====== ======
1996
-----------------------------------------------------
(in thousands, except per share data)
Mar. 31 Jun. 30 Sept. 30 Dec. 31
------- ------- -------- -------
Sales $5,537 $6,463 $6,412 $6,431
Gross profit 3,174 3,721 3,506 3,593
Income from operations 1,313 1,298 1,254 1,222
Net income $ 897 $ 910 $ 912 $1,015
Basic earnings per share $ 0.14 $ 0.13 $ 0.13 $ 0.14
====== ====== ====== ======
Diluted earnings per share $ 0.13 $ 0.12 $ 0.12 $ 0.14
====== ====== ====== ======
</TABLE>
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
33
<PAGE>
PART III
The information required by Part III and each of the following items is omitted
from this Report and presented in the company's definitive proxy statement to be
filed, pursuant to Regulation 14A not later than 120 days after the end of the
fiscal year covered by this Report, in connection with the company's Annual
Meeting of Stockholders to be held on June 3, 1998, which information included
therein is incorporated herein by reference.
ITEM 10 - Directors and Executive Officers of the Registrant
The section entitled "Election of Directors" appearing in the company's proxy
statement for the Annual Meeting of Stockholders to be held on June 3, 1998,
sets forth certain information with respect to the directors of the company and
is incorporated herein by reference.
ITEM 11 - Executive Compensation
The section entitled "Executive Compensation" appearing in the company's proxy
statement for the Annual Meeting of Stockholders to be held on June 3, 1998,
sets forth certain information with respect to the compensation of management of
the company and is incorporated herein by reference.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the company's proxy statement for the Annual Meeting of
Stockholders to be held on June 3, 1998, set forth certain information with
respect to the ownership of the company's Common Stock and is incorporated
herein by reference.
ITEM 13 - Certain Relationships and Related Transactions
The section entitled "Certain Transactions" appearing in the company's proxy
statement for the Annual Meeting of Stockholders to be held on June 3, 1998,
sets forth certain information with respect to certain business relationships
and transactions between the company and its directors and officers and is
incorporated herein by reference.
34
<PAGE>
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules, Reports on Form 8-K
(1) Financial Statements
The financial statements filed as part of this report are included in the
response to Item 8 of Part III of this 10-K report.
(2) Financial Statement Schedules
There were no financial statement schedules required to be filed because
they are not applicable or the required information is shown in the consolidated
financial statements or notes thereto.
(3) Exhibits
Exhibit Ref.
Number Number Description
- ------- ------ -----------
3.1 (1) Restated Certificate of Incorporation
3.2 (1) Amended By-Laws
4.1 (1) Form of Common Stock Certificate
4.2 (3) Amended and Restated Stock Option Plan
10 (1) Material Contracts
10.1 (2) Revolving Credit Agreement dated as of October 31,
1996 between the Registrant and The Chase Manhattan
Bank, N.A.
10.2 (2) Revolving Credit Note in the amount of $3,000,000
dated October 31, 1996 given by the Registrant to
The Chase Manhattan Bank, N.A.
10.3 (1) Security Agreements granted by the Registrant to
The Chase Manhattan Bank, N.A. dated as of
April 13, 1985, April 13, 1993 and as of June 17,
1993, and with respect to Performance
Computer Corporation only, the Security
Agreement dated as of June 17, 1993 granted to
The Chase Manhattan Bank, N.A. by Performance
Computer Corporation and certain other
Affiliates of the Registrant (which other
Affiliates have been released) and all
amendments and modifications thereto
10.4 (1) Letter of Intent from the City of Rochester to the
Registrant dated May 4, 1993
10.5 (1) Irrevocable Standby Letter of Credit from The Chase
Manhattan Bank, N.A. dated June 4, 1993
10.6 (1) Promissory Note in the amount of $80,000 dated June 8,
1993 given by the Registrant to the City of
Rochester
10.7 (1) Letter of Credit and Reimbursement Agreement
between C & J Enterprises and Chase Lincoln First
Bank, N.A. dated September 1, 1990
10.8 (1) Corporation Guaranty Agreement granted by the
Registrant, PTI Acquisition Corporation to Chase
Lincoln First Bank, N.A. dated as of September 1,
1990
10.9 (1) Guaranty Agreement dated August 31, 1995 between the
Registrant and the City of Rochester
10.10 (1) Sublease Agreement between the Registrant and C & J
Enterprises dated as of September 1, 1990
10.11 (1) Master Equipment Lease between the Registrant and
Fleet Credit Corporation dated as of March 30, 1992
10.12 (1) Master Equipment Lease between the Registrant and
M & M Associates dated February 1, 1993
10.13 (1) Master Equipment Lease between the Registrant and
M & M Associates dated November 1, 1993
10.14 (1) Agreement between the Registrant and Loral Test &
Information Systems dated November 2, 1995
10.15 (1) License Agreement between the Registrant and Willemijn
Houdstermaatschappij BV dated as of January 1, 1994
35
<PAGE>
Exhibit Ref.
Number Number Description
- ------- ------ -----------
10.16 (1) License Agreement between the Registrant and Spider
Systems Limited dated March 18, 1992
10.17 (1) Technology Transfer Agreement between the Registrant and
Newbridge Networks Corporation dated July 5, 1995
10.18 (1) Real Property Lease for UconX Corporation, as Lessee
10.19 (1) Line of Credit and Security Agreement between the
Registrant and UconX Corporation dated as of
September 1, 1992
10.20 (1) Amendment to Line of Credit Agreement and Security
Agreement between the Registrant and UconX
Corporation dated as of July 1, 1993
10.21 (1) Second Amendment to Line of Credit and Security
Agreement between the Registrant and UconX
Corporation dated as of September 2, 1994
10.22 (1) Employee Confidentiality, Non-Disclosure,
Non-Competition and Assignment Agreement between
the Registrant, UconX Corporation and Thomas R.
Stockey dated August 14, 1992
10.23 (1) Employee Confidentiality, Non-Disclosure,
Non-Competition and Assignment Agreement between
the Registrant,UconX Corporation and Robert S.
Lindstrom dated August 14, 1992
10.24 (1) Employee Confidentiality, Non-Disclosure,
Non-Competition and Assignment Agreement between
the Registrant, UconX Corporation and Jean M.
Lindstrom dated August 14, 1992
10.25 (1) Employee Confidentiality, Non-Disclosure,
Non-Competition and Assignment Agreement between
UconX Corporation and Kevin Quick dated August 16,
1992
10.26 (1) Employee Confidentiality, Non-Disclosure,
Non-Competition and Assignment Agreement between
UconX Corporation and Tim Barba dated August 14,
1992
10.27 (1) Shareholders' Agreement among the Registrant,
Shareholders of UconX Corporation and UconX
Corporation dated as of September 1, 1992
10.28 (1) Adoption Agreement between the Registrant and Principal
Mutual Life Insurance Company dated September 20,
1993
10.29 (1) The Principal Financial Group Prototype Basic Savings
Plan dated May 7, 1990
10.30 (1) Form of Stock Option Agreement
10.31 (1) Form of Warrant Agreement
11 (1) Statement re computation of per share earnings
21 (1) Subsidiaries
23 Consent of Price Waterhouse LLP, independent accountants
27 Financial Data Schedule, pursuant to Item 601(c) of
Regulation S-K.
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 filed November 22, 1995.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q/A for the Quarterly Period Ended September 30, 1996 filed November 14,
1996.
(3) Incorporated by reference to the Registrant Statement on Form S-8 filed July
30, 1997.
(4) Reports on Form 8-K
None
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PERFORMANCE TECHNOLOGIES, INCORPORATED
Date: March 19, 1998 By:/s/DONALD L. TURRELL
--------------------
Donald L. Turrell
President and
Chief Executive Officer
/s/DORRANCE W. LAMB
--------------------
Dorrance W. Lamb
Chief Financial Officer and
Vice President of Finance
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/CHARLES E. MAGINNESS Chairman of the Board March 19, 1998
- -----------------------
Charles E. Maginness and Director
S/DONALD L. TURRELL President, Chief Executive March 19, 1998
- -----------------------
Donald L. Turrell Officer and Director
/s/DORRANCE W. LAMB Chief Financial Officer, March 19, 1998
- -----------------------
Dorrance W. Lamb and Vice President of Finance
/s/BERNARD KOZEL Director March 19, 1998
- -----------------------
Bernard Kozel
/s/JOHN E. MOONEY Director March 19, 1998
- -----------------------
John E. Mooney
/s/JOHN M. SLUSSER Director March 19, 1998
- -----------------------
John M. Slusser
/S/PAUL L. SMITH Director March 19, 1998
- -----------------------
Paul L. Smith
37
<PAGE>
Exhibit 23
Consent of Independent Accounts
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-24477) of Performance Technologies, Incorporated
of our report dated February 16, 1998 appearing on page 19 of this Form 10-K.
/s/Price Waterhouse LLP
- -----------------------
Price Waterhouse LLP
Rochester, New York
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE DECEMBER 31, 1997 FINANCIAL STATEMENTS OF PERFORMANCE
TECHNOLOGIES, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001003950
<NAME> PERFORMANCE TECHNOLOGIES, INC
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<EXCHANGE-RATE> 1
<CASH> 8,833
<SECURITIES> 12,010
<RECEIVABLES> 4,956
<ALLOWANCES> 0
<INVENTORY> 3,329
<CURRENT-ASSETS> 29,940
<PP&E> 3,349
<DEPRECIATION> 2,367
<TOTAL-ASSETS> 31,626
<CURRENT-LIABILITIES> 3,356
<BONDS> 18
0
0
<COMMON> 74
<OTHER-SE> 27,958
<TOTAL-LIABILITY-AND-EQUITY> 31,626
<SALES> 30,336
<TOTAL-REVENUES> 30,336
<CGS> 12,695
<TOTAL-COSTS> 10,419
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,273
<INCOME-TAX> 3,142
<INCOME-CONTINUING> 5,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,131
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.68
</TABLE>
