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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_________________
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, 1999
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)
-------------------
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
------------------------
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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of the close of business on March 3, 2000 was approximately
$233,000,000.
The number of shares outstanding of the registrant's Common Stock, $.01
par value, was approximately 13,211,000 as of March 3, 2000.
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 May 31, 2000, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 1999.
________________________________________________________________________________
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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 12
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 12
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A Qualitative and Quantitative Disclosures
About Market Risk 21
Item 8 Financial Statements and Supplementary Data 21
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 34
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
Item 14 Exhibits, Financial Statement Schedules, Reports
on Form 8-K 35
Signatures 36
EXHIBIT 3 Articles of Incorporation
EXHIBIT 3.2 Certificate of Amendment
EXHIBIT 4 Instruments Defining Rights of Security Holders
EXHIBIT 4.3 June 1998 Amendment to the Stock Option Plan
EXHIBIT 4.4 February 2000 Amendment to the Stock Option Plan
EXHIBIT 27 Financial Data Schedule (FDS)
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PART I
ITEM 1 - Business
Overview
Performance Technologies, Incorporated (the "Company") provides high performance
communications, networking and signaling products to the leading suppliers for
the next generation networks. These products are positioned to take advantage of
opportunities presented by the network convergence of voice and data, the growth
of the Internet and new wireless telephone services. The Company's engineering
efforts are directed toward developing standard products for three distinct
communications markets: Signaling Gateways, Ethernet Switching, and
Telecommunications and Wide Area Connectivity. The Company's products are
targeted at customers in the following sectors: telecommunications equipment
manufacturers, telecommunications service providers and operators such as
ILEC's, CLEC's, ISP's RBOC's, international wireless carriers, financial
services, defense, and public safety.
Since its founding in 1981, the Company has consistently designed innovative
solutions for a variety of computer and communications architectures and has a
rich history of adapting its products to a constantly changing technology-driven
marketplace. The Company has focused its efforts on providing unique application
solutions, where reliability and performance are key customer concerns.
Recent Developments
During 1999, the Company embarked on an expansion plan resulting in the
acquisition of MicroLegend Telecom Systems, Inc. ("MicroLegend"), a company
specializing in Signaling System 7 (SS7) products. SS7 is the industry-wide
standard signaling protocol used by traditional public switched telephone
networks and more recently by wireless communication networks and Internet
Protocol (IP) voice and data networks. The Company introduced its first SS7
products in 1997, and in 1999, the Company introduced Channel7(TM), a
comprehensive hardware and SS7 software product that provides telecom equipment
manufacturers with enabling SS7 technology (based on standard hardware,
operating system software and SS7 control software) they can easily bundle with
their software solutions, rather than develop the product internally.
MicroLegend significantly strengthens the Company's SS7 market opportunities by
expanding its SS7 product breadth and its ability to leverage their technology
in the telecommunications marketplace. MicroLegend has an internally developed
SS7 protocol software stack that can be utilized to develop new SS7 application
products for the rapidly expanding wireless communications and Voice-over-IP
(VoIP) markets.
Currently, MicroLegend markets SS7/IP signaling gateways and SS7 servers that
provide the interface between traditional public switched telephone networks and
Internet Protocol (IP) voice and data networks. These SS7 product solutions have
been installed for signaling interoperability between ANSI (American National
Standards Institute) SS7, ITU-T (International Telecommunications Union) C7 and
many national variants in public networks worldwide such as Japan, China,
Brazil, Mexico and Europe.
Industry Overview
The communications and networking industry is undergoing a profound and radical
change as a result of the Telecommunications Act of 1996. The consequences of
this significant regulatory decision, combined with the unprecedented growth of
the Internet, have increased the mounting pressure from vendors and users alike
to converge the traditional voice communications network with the data driven
Internet. Furthermore, the accelerating growth of wireless communications is
forcing service providers to improve infrastructure processes and to expand
product offerings. As a result, substantial opportunities exist for the Company
to supply infrastructure related products that address the evolving technologies
and applications required to create the next generation public wireline and
wireless networks.
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An essential element of the convergence paradigm, especially in the voice-driven
applications arena, is the SS7 network signaling protocol. Signaling plays a
vital role in the implementation of many new services, such as local number
portability (LNP), 800/900 toll-free services, wireless roaming, telephone
calling cards, call waiting, caller ID and greater cellular coverage. SS7 is now
the most pervasive signaling architecture used by the leading telephone
operators and wireless carriers worldwide. Although convergence of traditional
voice networks and IP based data networks is causing unprecedented change, one
thing remains certain, circuit-switched equipment in public telephone networks
will still need to communicate effectively with the packet-switched equipment in
data networks worldwide. This can only be achieved through the use of the SS7
signaling protocol. The Company plans to play an even greater role in the
convergence marketplace and the evolution of the current public telephone
network into the next generation network.
The demand for enhanced, value-added services (described above) is driving the
next generation, network convergence. High-volume growth is expected to
characterize VoIP gateway sales as quality of service, interoperability, and
billing capabilities improve. Cahners In-Stat Group, an industry analyst,
predicts VoIP gateway sales will reach $3.7 billion by the end of 2003, assuming
interoperability between different gateway vendor's equipment. This will allow
carriers to effectively hand off traffic to one another and bill accurately for
calls. Another similar forecast from the Synergy Research Group estimated the
worldwide VoIP equipment market was $782 million in 1999 and is forecasted to
climb to $5.7 billion by 2002.
For the SS7 market, industry analysts, VDC research, estimated the worldwide
market for SS7 products at $12 billion for 1998. VDC expects the growth rate of
the SS7 market to be 17% or greater over the next 5 years.
Ethernet switching represents about 17 percent of the $21 billion worldwide
Local Area Network market, according to International Data Corporation, industry
analysts, and is expected to nearly triple in size to provide $11 billion in
2003. With the pace of convergence accelerating, the classical demarcation lines
are blurring. Ethernet is now finding applications beyond the traditional
enterprise into the MAN (Metropolitan Area Network) and for connectivity
deployment within Carriers Points-of-Presence (POP's) and Central Offices
(CO's).
The growth in the Wide Area Networking (WAN) communications market is being
driven by the expansion of the Internet, wireless communications and the
convergence occurring between voice and data communications. According to recent
market studies, the WAN segment of the telecommunications connectivity markets
was approximately $1 billion in 1999 and is forecasted to grow to $4.8 billion
in 2003.
These impressive growth projections, combined with other market trends, are
expected to drive the networking equipment and communications industry to
experience a substantial increase in demand during the next five years. A new
breed of service providers are now busy building their infrastructures to create
the next generation public network, where the Internet will be used to carry
real-time voice and video traffic. Although VoIP technology is at an early stage
of development, market analysts estimate a large demand for products that
exploit this technology given its potential to save money. Management believes
that the Company's SS7 Signaling Gateway, Ethernet Switching and
Telecommunications connectivity products will play a significant role as these
new VoIP infrastructures are built.
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Strategy
The Company is well positioned to capitalize on the opportunities presented by
network convergence, the growth of the Internet and new wireless telephone
services. The Company's objective is to provide standard, high performance
communications, data networking and signaling products to the leading suppliers
for the next generation of wireless and VoIP networks. Key components of the
Company's business strategy include:
Addressing High-Growth Communications Markets. The Company will continue to
develop standard, high performance communications, networking and signaling
products for high growth markets. In particular, the Company is targeting two
particular high-growth markets:
o Wireless communications - The accelerating growth in wireless
communications and the demand for new, Internet related wireless
services are forcing wireless carriers to improve their infrastructure.
The Company will continue to focus on developing high performance, high
reliability SS7 signaling and telecommunications connectivity products
for this market.
o Voice-over-IP - There are significant marketplace pressures to converge
the traditional voice communications network with the data driven
Internet. Voice-over-IP (VoIP) gateway systems enable voice
communications to travel over data networks. VoIP gateways are
comprised of five elements: voice communication processing, digital
signal processing, data aggregation (packet switching), SS7 signaling
and call control. The Company currently markets products to VoIP system
manufacturers that enable the voice communications processing and SS7
signaling, and expects to offer data aggregation (packet switching)
products to these suppliers around mid-year 2000.
Exploit Technological Competencies. In the development of creative and
innovative products, the Company will continue to build on its core knowledge
and expertise in communications technologies, particularly in voice
communication processing, data networking and signaling control. Management will
continue to leverage its core competencies as a leading supplier of Signaling
Gateways, Ethernet Switching and Telecommunications Connectivity products for
carrier-class environments. The Company will continue to enhance the performance
of its existing products and to develop new products that address the changing
needs of its customers.
Leverage Software Expertise. The Company has a growing communications software
expertise in signaling, data networking and telecommunications. In addition, the
Company has invested substantially in developing "high-availability" and
"hardened" software implementations used in both local area network switching
products and wide area telecommunications applications. Management believes an
important element of the Company's future product strategy is to increase its
software Intellectual Property in its products.
Expand International Markets. Telecommunications markets are international in
scope. Global demand for communications and networking products is being driven
by an increasing need to successfully deploy advanced communications
infrastructures. Outside of North America, the Company markets its products
primarily in Western Europe and the Asia Pacific region. As part of its
international growth plan, the Company has been investing in the expansion of
its marketing, sales and support operations in these specific geographic areas.
The Company now operates a sales and support office in the United Kingdom,
providing coverage to Western European markets. In the Asia Pacific region, it
relies on agents to establish both OEM and distribution channels. Predicated
upon revenue growth, the Company expects to open a direct sales and service
center in the Asia Pacific region over the next eighteen months. Direct
shipments to international customers amounted to 16% of revenue in 1999.
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Products
The Company develops and markets high performance communications, networking and
signaling products to the leading suppliers for the next generation networks.
The Company has pioneered many recent innovations in networking and computer
technologies including proprietary ASICs for Ethernet switches, and innovative
"hot swap" and "failover" architectures to enhance equipment availability,
reliability and performance. The Company will continue to design new products
for standard hardware and operating systems. During 2000 and beyond, management
will focus on the development and delivery of new products in three distinct
communications markets: Signaling Gateways, Ethernet Switching and Communication
Servers, and Telecommunications and WAN Connectivity employing standardized
platforms.
Signaling Gateway Products. The Company's Signaling Gateway product line was
initially developed to address custom turnkey solutions for specific customer
requirements. Recognizing the need to bridge signaling traffic between
traditional telephone networks and IP-based data networks, the Company sold the
industry's first IP-enabled Signaling System 7 (SS7) server in 1997. Since 1997,
the Company's SS7/IP Signaling Gateway product has evolved to support
applications such as international wireless roaming, Voice-over-IP and enhanced
Internet-driven services. Numerous wireless carriers have installed the
Company's SS7/IP Signaling Gateway to allow their customers to travel to various
countries around the world and to initiate and receive telephone calls as if
they were at home. In addition, the SS7/IP Signaling Gateway is used for a
variety of applications ranging from "front ends" for distributed IP-hosted
databases, to long-haul transmission of SS7 messages delivered seamlessly over
IP networks. Customers continue to develop other unique and creative
applications for wireless and convergent networks, utilizing the Company's
SS7/IP Signaling Gateway.
The Company's product line includes: SS7/IP Signaling Gateways, which bridge SS7
networks and Internet Protocol data networks; SS7 Routing Systems, which extend
traditional MTP message routing with enhanced capabilities such as n-digit
global title translation and routing based on message parameters; SS7 Link
Concentration, which reduce SS7 link costs by concentrating network traffic from
many under-utilized SS7 links onto fewer, long-haul links; SS7 Protocol
Conversion, which provides interoperability between ANSI SS7, ITU-T C7 and
numerous national variants. The entire range of SS7/IP Signaling Gateway
products uses an internally developed, network-proven, object-oriented SS7
protocol stack.
In mid-1999, the Company introduced a new family of Application Program
Interface (API) plug-ins for its SS7/IP Signaling Gateway product. The plug-ins
enable Internet Protocol (IP) voice and data network service providers to
quickly and effectively offer applications that utilize SS7 service oriented
(TCAP) messages.
Conforming to its high availability philosophy, a fault tolerant version of its
popular Versatile Signaling Point (VSP) SS7 signaling platform was introduced
during 1999. The new product family, called the VSP 500 Series, has a fault
tolerant architecture designed specifically for telecommunications applications
with stringent survivability and availability requirements. The architecture
enables the system to operate continuously despite the occurrence of any single
point of failure. In addition, the VSP runs on a carrier-class NEBS compatible
unit, in rack mountable hardware that was engineered specifically for the
stringent telecommunications application environments.
In mid-1999, the Company also announced support for the new Simple Control
Transmission Protocol (SCTP) standard for signaling convergence between SS7 and
IP networks. The inclusion of this industry standard protocol will allow
customers to integrate their SS7 and IP signaling networks reliably and with
greater efficiency.
The Internet Engineering Task Force (IETF) developed SCTP. SCTP will enhance the
interoperability of SS7 and IP networks and allow packet networks to process
signaling messages with the same degree of reliability and efficiency available
in SS7 signaling networks. The Company has been a contributing member of the
SCTP design team throughout the development period. With a firm commitment to
the adoption of industry standards and a first hand understanding of the
protocol's inner workings, the Company will incorporate SCTP into its SS7/IP
Signaling Gateway offering. The Company continues to work with the IETF, the
PacketCable group and other standards bodies to develop signaling protocols to
operate at other layers of the networking communications stack.
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Customers for the signaling gateway products include Alcatel Inc., Bell Canada,
Bridgewater, Cisco Systems, Ericsson, GTE Corporation, Lucent Technologies,
Motorola Corporation, Nortel Networks, Simplified Telesys, Swisscom, Telcordia
(Bellcore), Teleglobe, and Telus. Ethernet Switching and Communication Server
products. The Nebula 8000 Fault Tolerant switch, released in November 1999, is
being targeted towards server centric applications in server clusters. The
Nebula switch technology supports a redundant switch fabric designed for maximum
availability and its architecture can sustain operation in the event of a single
point of failure. The implementation of the Gigabit connectivity feature for the
Nebula product line has been submitted to Beta testing and if all goes well will
be released for production during the second quarter of 2000. The NEBS compliant
design effort for the Nebula 4000 and 6000 models applicable to
telecommunications applications is nearly completed and should undergo testing
during the second quarter of 2000. As the next generation telecom platform
architecture is implemented for Voice-over-IP, there is a requirement to handle
IP traffic. The Nebula technology will be expanded into a family of high
performance 100Mbit/Gigabit Ethernet Switches that are specifically targeted at
next generation telecom platforms. The Company's capabilities in fault tolerant
Ethernet switch architectures, cPCI packaging and "Hot Swap" availability will
be implemented into a third generation switch subsystem. This subsystem will
initially find application as a data aggregation device integrated in
carrier-class Voice over IP systems or in network edge access devices.
During 1999, the Company announced the introduction of its latest IP based Wide
Area Network (WAN) to Local Area Network (LAN) based communications server, the
MPS800. The MPS800 Multi-Protocol Communication Server represents the next
generation of the Company's MPS600 Server. The MPS800 provides one 10/100Base-T
Ethernet port and eight high speed WAN serial ports, making it ideal for
intelligent WAN bridging, T1/E1 multiplexing and remote WAN connectivity.
Virtually all computers and workstations equipped with TCP/IP on the LAN can
access information from these communication servers. The Company's complete
suite of WAN protocol products is available on the MPS800, including Frame
Relay, X.25, HDLC, Radar Receiver, Synchronous Bit Stream Interface,
Asynchronous Data Transfer, DDCMP and others.
Communications servers are multipurpose LAN-to-WAN bridging systems. 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. Using unique software, the communications servers can be
configured to provide a variety of protocol packages and supporting protocols
including SS7 conversion applications, bisynchronous, asynchronous
communications financial market feeds and radar receivers. The Company's
communication server products can be found in data collection applications
including NASA's deep space network, in air traffic control centers for
retrieving radar data from remote radar antenna sites and in the US Weather
Service infrastructure for retrieving weather satellite and radar images.
Management believes there will be increasing demand and applicability for
communications servers such as the MPS800.
Telecommunications and WAN Connectivity products. The Company's overall
Telecommunications and WAN Connectivity strategy is to develop and provide
products to the leading telecommunications suppliers that enable voice and data
communications. These products are comprised of hardware, software and
subsystems that support a variety of open system platforms and operating
systems. These open systems include CompactPCI (cPCI), PCI, PMC, SBus and VME.
Management believes that the Company's cPCI products are some of the first
products available to cPCI users for high-speed WAN communications. Product
applications cover many uses including high-speed Internet connections for
server products and T1/E1 products used for SS7. To support these applications,
the Company's products are "intelligent," with embedded microprocessors and
memory. This architecture allows lower-level protocols to be "off-loaded"
thereby greatly improving overall system performance and efficiency.
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The Company offers systems support for its products across a spectrum of popular
operating systems including UNIX, Sun Microsystems' Solaris(TM), Microsoft's
Windows NT(TM), Wind River's VxWorks and Linux. The Company offers an extensive
suite of advanced communication software consisting of Frame Relay, SS7, X.25,
and HDLC. The Company also offers ProtoKit, a development environment allowing
customers to integrate its specific protocols with adapters, as well as ComLink
and ChanneLink, development packages designed for operation with Sun's WAN
protocols in a Solaris environment. The Company's channelized support for T1/E1
data rates and software protocol tool kits for specialized customer development
further expand the software portfolio.
In June 1999, the Company introduced Channel7(TM), a comprehensive hardware and
SS7 software solution that provides telecom equipment manufacturers with
enabling technology for a broad range of applications and systems. Based on a
standardized cPCI platform, Channel7 is a highly configurable, scaleable and
high performance solution for developing SS7 network systems and is
complementary to the MicroLegend SS7/IP gateway system products. SS7 technology
is a basic building block for applications such as Voice-over-IP Gateways,
cellular roaming support, Caller ID and call routing to Call Centers. To
accelerate Channel7's acceptance in the marketplace, PTI partnered with several
SS7 application engineering firms and Channel7 was verified for use with Sun
Microsystems' new Netra(TM) ft 1800 fault tolerant telecom server systems.
Customers for the Company's Telecommunications and WAN Connectivity products
include Lucent Technologies, Compaq Corporation, QualComm Inc., Alcatel Inc.,
Motorola Corporation, ADC Telecom and Sun Microsystems.
Sales, Marketing and Distribution
The Company markets its products worldwide to a broad spectrum of customers
through various channels including OEMs, VARs, distributors and systems
integrators. Greater than 90% 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.
Due to the technical nature of the Company's products sold to OEMs, it is
essential that the Company's salespeople are technically oriented and are
knowledgeable in the network and communications fields. To supplement its sales
force, the Company has application engineers who assist prospective customers in
determining if the Company's products will meet their requirements.
The Company's corporate headquarters are in Rochester, N.Y. It has regional
sales and support facilities near Hartford, Connecticut, Chicago and the United
Kingdom, as well as co-located sales and engineering operations in San Diego,
California. The SS7 Signaling Gateway group has a sales and engineering facility
in Ottawa, Canada, with an additional engineering facility in Raleigh, North
Carolina. Currently, 25 sales, marketing and support personnel sell the
Company's products. In addition, independent sales representatives and agents
covering selected geographic areas nationally and internationally, and
distributors or integrators handling selected products, supplement the Company's
direct sales team on a worldwide basis.
A highly focused group of distributors, VARs and integrators are involved in
selling the Company's network and fault tolerant switching products. These
distributors, VARs and integrators, who have "vertical market" business focus,
are managed by the Company's direct sales force. Several marketing strategies
are used to support these third party organizations including advertising in
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. VARs, integrators and
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 OEMs customers and potential customers.
The Company executes various ongoing marketing strategies designed to attract
new OEM and end-user 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,
international and regional trade shows and selected trade press advertisements
and technical articles and an active campaign to direct potential customers to
the Company's web site.
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International sales represented 16% of the Company's net sales in 1999.
Management believes that international markets represent important untapped
opportunities for its products. Management believes that it can develop expanded
sales channels and marketing alliances with respect to new and existing
international markets and is actively pursuing these relationships. The
Company's products are currently sold by approximately 25 international
distributors throughout the major industrialized countries in Europe and in
Asia. The Company also operates a sales and marketing office in the United
Kingdom to better support its Western European customers. International sales
are subject to import and export controls, transportation delays and
interruptions, foreign currency exchange rates, and foreign governmental
regulations. All payments for shipments from the United States to outside the
United States are made in U. S. dollars and all payments for shipments from
Canada to Canada are made in Canadian dollars.
Customers
The Company has over 200 active customers worldwide, including major OEMs, VARs,
systems integrators, and educational/research organizations. Many of the
Company's major customers are Fortune 500 companies. In 1999, the largest single
customer represented 23% of sales (Lockheed Martin Corporation), and the top
four customers accounted for 43% of 1999 revenue.
Generally, the Company's customers can be characterized as either technical OEMs
or systems end-users. The technical OEMs assemble products or systems for a
specific end use, using components and subsystems supplied by vendors such as
the Company. Examples of technical OEM products and systems include
sophisticated enterprise servers with high speed WAN interconnections to the
Internet or private communication networks with specialized Signaling System 7
server clusters for 800/900 toll-free service implementations.
The systems end-user customers require products to be self-installing and have
limited knowledge of the product's internal operation. The Company's products
that fit into this description are SS7/IP Gateway and Communication server
products, PCIBus LAN products (Ethernet and FDDI), Ethernet switch products and
selected Wide Area Communications products.
Backlog
At February 1, 2000, the backlog of scheduled orders was $11.1 million, compared
to $8.2 million at March 7, 1999. 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 is project-related, driven by customer demand,
which can cause quarterly fluctuations in revenue.
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.
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Competition
The market for communications and networking 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 Telecommunications and WAN connectivity market,
the Company's products compete with products from Natural Micro Systems, Adax
Incorporated, Radisys Corporation, SBS Technology and LAN Media Corporation. In
the LAN Interface product market, the Company competes with Network Peripherals
Inc., and Interphase Corporation.
In the enterprise Ethernet Switching market, the Company is focusing on a niche
application, fault tolerance. Many of the companies in this market focus on
broad applications products and have greater technical and capital resources,
more marketing capability, larger research and development staffs and better
production facilities than the Company. These competitors include Cisco Systems,
3Com Corp, Extreme Networks and Cabletron. In the past several years, the
network and telecommunications industry has become increasingly concentrated as
a result of consolidations in the market. These consolidations are likely to
permit 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. 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.
In the Signaling System 7 market, the Company competes with Ulticom, a
subsidiary of Comverse Technologies, Trillium Digital Systems, Inc., Tekelec and
several larger companies that have proprietary SS7 technology and products. The
SS7 market is growing rapidly and it is likely that more competitors will enter
this market.
Research and Development
The Company's research and development expenses were approximately $7.9 million,
$5.1 million and $4.6 million for 1999, 1998 and 1997, respectively. These
expenses consist primarily of employee costs and material consumed in developing
and designing new products. To a lesser degree, there have been expenses devoted
to software license/tools and contract product development. The Company expects
research and development expenditures will continue to increase significantly in
2000.
The Company has developed significant core competencies applicable to voice and
data communications; high availability, redundant switching technologies and
signaling communications. The Company has also invested substantially in
developing and expanding its communication and networking software competencies.
These competencies will contribute to the development of products for next
generation networks.
Proprietary Technology
The Company's success depends upon retaining and maximizing the Company's
proprietary technologies. 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 that is embedded in silicon chips, making it
extremely difficult to misappropriate or reverse engineer. Such methods may not
afford complete protection and there can be no assurance that the
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confidentiality agreements will not be breached, or that such agreements will be
enforceable, or 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. The Company currently has an outstanding
patent application pending for a variety of aspects associated with its fault
tolerant network switching products. Management expects the U. S. Patent office
to render a ruling on this application in 2000.
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 matters 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 effect on the
Company's results of operations regardless of the outcome of the litigation.
Suppliers
To date, the Company has generally been able to obtain adequate supplies of
components or has redesigned specific products when adequate components are not
available. The Company obtains components on a purchase order basis and does not
generally have long-term contracts with any of these suppliers.
Manufacturing
The Company maintains a state-of-the-art manufacturing facility in Rochester,
New York. This facility operates under an integrated MRP system that
significantly reduces lead-time, inventories investments and facilitates demand
forecast. The Company is ISO 9002 certified for 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 with subcontracted manufacturing. These risks include
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 maintain 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 January 1, 2000, the Company had 190 full-time employees, 8 part time and
contract employees and 2 Engineering Cooperative 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 87
Marketing and Sales 22
Manufacturing 55
General and Administrative 26
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.
9
<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
communications and 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 revenue 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 revenue and operating results.
Competition. The communications, networking and signaling business is extremely
competitive and the Company faces competition from a number of established and
emerging start-up 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 deploy on promotion, advertising,
research and product development than the Company. 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 revenue and operating
results. Major networking companies have recently acquired several of the
Company's competitors. 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 revenue 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 revenue and operating results. (See Management's
Discussion & Analysis included elsewhere in this report).
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
10
<PAGE>
Company's revenue in each quarter results from orders shipped in the final month
of that quarter, revenue levels are extremely difficult to predict. If revenue
levels are below expectations, revenue 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 revenue 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 revenue 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 but
currently has a patent review pending. 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 revenue 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 revenue and operating results.
11
<PAGE>
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 generally
not subject to employment agreements or non-competition covenants. Changes in
personnel could adversely affect the Company's operating results.
ITEM 2 - Properties
The corporate headquarters are located in 30,000 square feet of office and
manufacturing space in Rochester, New York. Corporate headquarters include the
executive offices, along with the core sales, marketing, engineering and
manufacturing operations for the telecommunications and switching groups of the
Company. There is currently no excess office space in the Rochester, New York
facility. Management has established a project team to identify and secure a
suitable facility prior to the expiration of the existing lease in May 2001.
Management believes there are adequate locations in and around the Rochester
area to construct or acquire the necessary facility to meet the current and
future requirements of the Company. The Company also leases office space for the
telecommunications and switching groups to house software engineering and sales
people in San Diego, California and three other locations.
The Company's core Signaling Gateway group is located in 22,000 square feet in
an office building located in downtown Ottawa, Canada. The Company has recently
completed negotiations for expanding this facility. The office lease in this
building expires in May 2003. As this group continues to grow, additional office
facilities will be required, probably before the lease expiration date.
Additional space may be available in the same office building or may be
available in nearby locations. The Signaling Gateway group also has an
engineering operation in Raleigh, North Carolina. At the present time,
negotiations are underway to expand this facility for an additional five year
term. As this group continues to grow, additional office facilities will be
required. Additional space may be available in the same office building or
should be available in nearby locations.
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, 1999.
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 the high and the low
quarterly closing prices of the Common Stock during the two most recent years,
as reported on the NASDAQ National Market System. 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 September 1, 1999.
12
<PAGE>
1999 High Low
<TABLE>
-----------------------------------------------------------------------
<S> <C> <C>
First Quarter $10.58 $ 6.42
Second Quarter 14.37 7.50
Third Quarter 28.19 12.17
Fourth Quarter $24.56 $ 16.31
1998 High Low
-----------------------------------------------------------------------
First Quarter $12.83 $ 8.75
Second Quarter 10.17 6.83
Third Quarter 7.75 6.00
Fourth Quarter $ 9.00 $ 6.00
</TABLE>
As of February 22, 2000, there were 206 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.
ITEM 6 - Selected Financial Data
(in thousands, except per share amounts)
<TABLE>
For the Years Ended December 31: 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $44,494 $34,118 $32,435 $26,151 $19,403
Income from continuing operations 6,226 6,047 5,271 3,882 2,772
Basic earnings per share:
Income from continuing
operations (1) $ .47 $ .46 $ .41 $ .31 $ .30
Weighted average common shares 13,165 13,077 13,012 12,695 9,051
Diluted earnings per share:
Income from continuing
operations (1) $ .45 $ .45 $ .39 $ .30 $ .30
Weighted average common and
common equivalent shares 13,789 13,517 13,449 13,038 9,101
Income from continuing operations
(Excluding $1.7 million charge
for acquisition expenses) $ 7,970 $ 6,047 $ 5,271 $ 3,882 $ 2,772
Basic earnings per share:
Income from continuing operations
(Excluding $1.7 million charge
for acquisition expenses) (1) $ .61 $ .46 $ .41 $ .31 $ .30
Diluted earnings per share:
Income from continuing operations
(Excluding $1.7 million charge
for acquisition expenses) (1) $ .58 $ .45 $ .39 $ .30 $ .30
At December 31: 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Working capital $39,009 $32,221 $26,889 $21,362 $ 6,545
Total assets 49,142 40,122 33,544 26,964 11,479
Long-term debt, less
current portion 6 18 30 57
Total stockholders' equity $40,828 $34,180 $28,661 $23,234 $ 7,869
</TABLE>
(1) All per share amounts have been adjusted where appropriate, for the
three-for-two stock split effected in September 1999
13
<PAGE>
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
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
All historical financial information contained herein has been restated to
reflect the acquisition of MicroLegend Telecom Systems, Inc. during the fourth
quarter 1999.
The Company achieved record revenue of $44.5 million for 1999, compared to $34.1
million in 1998, an increase of 30%. The Company's compounded annual growth rate
for revenue over the past five years has been 29%. Adjusted net income for 1999,
which excludes one-time acquisition expenses, increased 32% to a record $8.0
million, or $.58 per share, compared to $6.0 million, or $.45 per share in 1998.
Actual net income for 1999, including the one-time write-off of acquisition
expenses, was $6.2 million in 1999, or $.45 per share. Income from continuing
operations has increased seven consecutive years from 1993 through 1999 and for
all years as a publicly traded company.
The Company completed the acquisition of MicroLegend Telecom Systems, Inc. in
December 1999. This acquisition was accounted for as a pooling of interests;
accordingly, all historical financial information contained in this Form 10-K
has been restated to reflect the acquisition of MicroLegend Telecom Systems,
Inc. In connection with the acquisition, the Company recorded a one-time,
after-tax charge for acquisition costs of $1.7 million in 1999.
At the end of 1999, the Company had $31.8 million in cash, cash equivalents and
marketable securities and no long-term debt. For 1999, the Company generated
income from operations, excluding depreciation and amortization (EBITDA) of
$11.7 million and cash from operating activities amounted to $7.7 million,
compared to $6.5 million for 1998. Return on equity, excluding one-time
acquisition charges, for 1999 was 21% and return on assets, excluding one-time
acquisition charges, was 18%. International sales amounted to $7.0 million and
$7.2 million in 1999 and 1998, respectively.
On September 1, 1999, the Company effected a three-for-two stock split in the
form of a 50% stock dividend.
Performance Technologies provides communications, networking and signaling
products to the leading suppliers for the next generation networks. These
products are positioned to take advantage of opportunities presented by the
network convergence of voice and data, the growth of the Internet and new
wireless telephone services. The Company's engineering efforts are directed
toward developing products for three distinct communications markets: Signaling
Gateways, Ethernet Switching and Telecommunications and Wide Area Connectivity.
The Company's products are targeted at customers in the following sectors:
telecommunications equipment manufacturers, telecommunications service providers
and operators, international wireless carriers and financial services, defense,
and public safety.
Signaling Gateway products: The Company's Signaling Gateway product line is
comprised of SS7/IP Signaling Gateways, SS7 Routing Systems, SS7 Link
Concentration, SS7 Protocol Conversion, and an SS7 Application Program Interface
(API). The entire range of SS7/IP Signaling Gateway products uses an internally
developed network-proven, object-oriented SS7 protocol stack.
14
<PAGE>
The Company's SS7/IP Signaling Gateway is used for a variety of applications
ranging from international wireless roaming, Voice-over-IP, enhanced
Internet-driven services and for "front ends" for distributed IP-hosted
databases, to long-haul transmission of SS7 messages delivered seamlessly over
IP networks. Customers continue to develop other unique and creative
applications for wireless and convergent networks, utilizing the Company's
SS7/IP Signaling Gateway.
In mid-1999, the Company introduced a new family of Application Program
Interface (API) plug-ins for its SS7/IP Signaling Gateway product. The plug-ins
enable Internet Protocol, voice and data network service providers to quickly
and effectively offer applications, which utilize SS7 service, oriented (TCAP)
messages.
Conforming to its high availability philosophy, a fault tolerant version of its
popular Versatile Signaling Point (VSP) SS7 signaling platform was introduced
during 1999. The new product family, called the VSP 500 Series, has a fault
tolerant architecture designed specifically for telecommunications applications
with stringent survivability and availability requirements. The architecture
enables the system to operate continuously despite the occurrence of any single
point of failure.
In mid-1999, the Company also announced support for the new Simple Control
Transmission Protocol (SCTP) standard for signaling convergence between SS7 and
IP networks. The inclusion of this industry standard protocol will allow
customers to integrate their SS7 and IP signaling networks reliably and with
greater efficiency.
Customers for the gateway products include Alcatel Inc., Bell Canada,
Bridgewater, Cisco Systems, Ericsson, GTE Corporation, Lucent Technologies,
Motorola Corporation, Nortel Networks, Simplified Telesys, Swisscom, Telcordia
(Bellcore), Teleglobe, and Telus.
Ethernet Switching and Communication Server products: The Nebula 8000 Fault
Tolerant switch, released in November 1999, is being targeted towards server
centric applications in server clusters. The switch technology supports a
redundant switch fabric designed for maximum availability and its architecture
can sustain operation in the event of a single point of failure. The
implementation of the Gigabit connectivity feature for the Nebula product line
has been submitted to Beta testing and if all goes well will be released for
production during the second quarter of 2000. The NEBS compliant design effort
for the Nebula 4000 and 6000 models applicable to telecommunications
applications is nearly completed and should undergo testing during the second
quarter of 2000. As the next generation telecom platform architecture is
implemented for Voice-over-IP, there is a requirement to handle IP traffic. The
Nebula technology will be expanded into a family of high performance
100Mbit/Gigabit Ethernet Switches that are specifically targeted at next
generation telecom platforms. The Company's capabilities in fault tolerant
Ethernet switch architectures, cPCI packaging and "Hot Swap" availability will
be implemented into a third generation switch subsystem. This subsystem will
initially find application as a data aggregation device integrated in
carrier-class Voice-over-IP systems or in network edge access devices.
With the pace of voice and data convergence accelerating, the classical
demarcation lines are blurring. Ethernet is now finding applications beyond the
traditional enterprise and into the MAN (Metropolitan Area Network) and for
connectivity deployment within carriers Points of Presence (POP's) and Central
Offices (CO's).
During 1999, the Company announced the introduction of its latest Internet
Protocol (IP) based Wide Area Network (WAN) to Local Area Network (LAN) based
communications server, the MPS800. The MPS800 provides one 10/100Base-T Ethernet
port and eight high-speed WAN serial ports, making it ideal for intelligent WAN
bridging, T1/E1 multiplexing and remote WAN connectivity. Virtually all
computers and workstations equipped with TCP/IP on the LAN can access
information from these communication servers. The Company's complete suite of
WAN protocol products is available on the MPS800. The communication server
products from the Company can be found in data collection applications including
NASA's deep space network, in air traffic control centers for retrieving radar
data from remote radar antenna sites and in the US Weather Service
infrastructure for retrieving weather satellite and radar images. Management
believes there will be increasing demand and applicability for communications
servers such as the MPS800 in 2000.
15
<PAGE>
Telecommunications and Wide Area Connectivity products: The Company's overall
Telecommunications and Wide Area Connectivity strategy is to develop and provide
products to the leading telecommunications suppliers that enable voice and data
communications. These products are comprised of hardware, software and subsystem
solutions that support a variety of open system platforms and operating systems.
These open systems include: CompactPCI (cPCI), PCI, PMC, SBus and VME. Product
applications cover many uses including high-speed Internet connections for
server products and T1/E1 products used for SS7 products. The Company offers
systems support for its products across a spectrum of popular operating systems
including UNIX, Sun Microsystem's Solaris(TM), Microsoft's Windows NT(TM), Wind
River's VxWorks and Linux. The Company offers an extensive suite of advanced
communications software consisting of Frame Relay, SS7, X.25, and HDLC. The
Company's channelized support for T1/E1 data rates and software protocol tool
kits for specialized customer development further expand the software portfolio.
In June, the Company introduced Channel7(TM), a comprehensive hardware and
Signaling System 7 (SS7) software product that provides telecom equipment
manufacturers with enabling technology for a broad range of applications and
systems. Based on a standardized cPCI platform, Channel7 is a highly
configurable, scaleable and a high performance solution for developing SS7
network systems and is complementary to the MicroLegend SS7/IP Gateway System
products. Channel7 was the Company's first major milestone in the Signaling
System 7 marketplace. SS7 technology is a basic building block for applications
such as Voice over IP Gateways, cellular roaming support, Caller ID and call
routing to Call Centers. To accelerate Channel7's acceptance in the marketplace,
PTI partnered with several SS7 application engineering firms and Channel7 was
verified for use with Sun Microsystems' new Netra(TM) ft 1800 fault tolerant
telecom server systems.
The growth in the Wide Area Networking (WAN) communications market is being
driven by the expansion of the Internet, wireless communications and the
convergence occurring between voice and data communications. Customers include
Lucent Technologies, Compaq Corporation, QualComm Inc., Alcatel Inc., Motorola
Corporation, ADC Telecom and Sun Microsystems.
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:
Year Ended December 31,
1999 1998 1997
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of goods sold 34.1 40.0 40.6
----- ----- -----
Gross profit 65.9 60.0 59.4
----- ----- -----
Operating expenses:
Selling and marketing 13.0 13.0 13.1
Research and development 17.8 15.0 14.3
General and administrative 8.4 8.9 9.3
Acquisition charges 3.9
----- ----- -----
Total operating expenses 43.1 36.9 36.7
----- ----- -----
Income from operations 22.8 23.1 22.7
Other income, net 3.3 3.8 3.3
----- ----- -----
Income before income taxes 26.1 26.9 26.0
Provision for income taxes 12.1 9.2 9.7
----- ----- -----
Net income 14.0% 17.7% 16.3%
===== ===== =====
Excluding one-time acquisition expenses:
Income before income taxes
(Excluding $1.7 million charge
for acquisition expenses) 30.0% 26.9% 26.0%
Provision for income taxes 12.1 9.2 9.7
----- ----- -----
Adjusted Net income 17.9% 17.7% 16.3%
===== ===== =====
16
<PAGE>
Year Ended December 31, 1999, compared with the Year Ended December 31, 1998
Sales. Sales for 1999 increased 30% to $44,494,000, compared to $34,118,000 for
1998. For the years indicated, the Company's sales are in one product segment
and are grouped into four product categories: WAN communications products, LAN
interface products, Network Switching products, and Other products.
WAN communication product revenue, which included the Channel7 and Signaling
Gateway products, increased to $24,892,000 for 1999, compared to $21,433,000 in
1998. The Company developed several new CompactPCI WAN products, the Channel7
product and broadened the Signaling Gateway product line during 1999. Management
expects revenue from these new products to contribute to the Company's revenue
growth in 2000.
Shipments of LAN interface products amounted to 33% of sales in 1999, compared
to 18% of sales in 1998. The largest share of the Company's LAN interface
product business is generated from Commercial Off-the-Shelf (COTS) Department of
Defense projects. During 1998, a new follow-on Department of Defense procurement
contract was awarded to the Company in September, after having been delayed
since the beginning of the year. Beginning in April 1999, new follow-on orders
were awarded to the Company totaling $10.9 million. Deliveries on these orders
began in the second quarter 1999 and were expected to continue through the
second quarter of 2000. At the end of 1999, approximately $1.0 million of
product remained to be shipped on these orders. Discussions are currently being
held to determine the customer's procurement requirements after this contract
expires in June 2000. At the present time, PTI is unable to determine the extent
of a new follow-on order, if any. Total LAN revenue in 1999 was greater than in
1998 due to the impact (on 1998) of the delay in the award of the new contract
and because the Company received significant new Department of Defense orders
beginning in April 1999 that were shipped during the year.
The general release of the Nebula 8000 Fault Tolerant Network Switch
product was delayed during 1999 due to technical issues revealed during the Beta
testing process. The production release of the product occurred in mid-November
1999. As the product was brought to market, a number of new opportunities were
uncovered for the high availability, redundant switch fabric in the
telecommunications market. As a result, in 2000, the Company has embarked on the
development of a family of third generation, high performance 100Mbit/Gigabit
Ethernet Switch subsystems based on the cPCI platform standard. These new
products are targeted for introduction in 2000 and are expected to become an
integral part of the next generation networks.
Other product revenue amounted to $4.8 million in 1999, compared to $6.7
million in 1998. Other products include the Company's older/legacy products
previously grouped in Network System products, Mass Storage Interface products
and Inter-system Connectivity products. Many of these products are project
oriented and shipments can fluctuate on a quarterly basis. Management expects
revenue from these products to continue to decline during 2000 as these
technologies are replaced.
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 in 1999 increased by $8,831,000 to $29,320,000, from
$20,489,000 in 1998. Gross margin improved to 66% of sales in 1999, compared to
60% in 1998. Gross margin on the WAN, LAN and Other products improved during
1999 primarily due to manufacturing efficiencies based on higher volumes and
rising sales of separately priced communications software. Gross margin on
Signaling Gateway products improved to approximately 80% in 1999, compared to
67% in 1998 due to the increased value-added for the software in the product.
Gross margin on the Nebula network switch subsystems products approximated 40%
in 1999. The new family of cPCI telecommunications switches to be introduced
during 2000 is expected to have a gross margin similar to the Wide Area and
Telecommunications Connectivity products.
17
<PAGE>
Total Operating Expenses. Total operating expenses increased to $19,173,000 for
1999, from $12,594,000 for 1998. As a percentage of sales, total operating
expenses increased from 36.9% in 1998 to 39.2% in 1999, excluding one-time
acquisition charges of $1.7 million. As a percentage of sales, the Company
increased its investment in research and development during 1999 and reduced its
general and administrative expenses.
Selling and marketing expenses increased to $5,767,000 in 1999, from $4,434,000
in 1998, or 13% of sales in 1999 and 1998. The allowance for doubtful accounts
was increased by $512,000 in late 1999 due to a significant OEM customer closing
their doors for business in January 2000. This customer did $1.3 million in
business with the Company during 1999. The loss of this customer will have an
impact on the Company's business in 2000. Management expects to more
aggressively market its new products in 2000 and sales and marketing expenses
are expected to increase as a percentage of sales.
Research and development expenses increased to $7,906,000, or 18% of sales in
1999, compared to $5,121,000, or 15% of sales in 1998. During 1999, significant
development efforts were focused on bringing new products to market including
new cPCI WAN products, Channel7, the Nebula 8000 and the Signaling Gateway
products. The Company's engineering staff, including MicroLegend, increased by
21 people, to 87 engineers at the end of 1999. The increase in research and
development expenses for 1999 is primarily attributable to these factors.
Management will continue to invest a significant percentage of sales in research
and development to bring new products to market.
General and administrative expense, excluding one-time acquisition charges,
increased to $3,756,000, or 8% of sales in 1999, compared to $3,039,000, or 9%
of sales in 1998. The Company continues to maintain tight control over its
general and administrative expenses and management expects general and
administrative expenses to decline as a percentage of sales in 2000 as revenue
increases. Acquisition charges of $1,744,000 consisted primarily of fees for
investment bankers, attorneys, accountants and other related charges.
Other Income, net. Other income consists primarily of interest income from cash
equivalents and marketable securities. The funds are primarily invested in high
quality Municipal and U.S. Treasury securities with maturities of less than one
year.
Income Taxes. The provision for income taxes for 1999 is based upon the combined
federal and state effective tax rate of 46%, compared to 34% in 1998. The
increase in the effective tax rate for 1999 is primarily due to non-deductible
acquisition charges.
Year Ended December 31, 1998, compared with the Year Ended December 31, 1997
Sales. Sales for 1998 were $34,118,000, compared to $32,435,000 for 1997. The
Company's sales are in one product segment and are grouped into five product
categories: WAN communications products (including MicroLegend's products), LAN
interface products, Network System products, Mass Storage Interface products,
and Inter-system Connectivity products.
18
<PAGE>
WAN communications products represented 63% of sales during 1998, compared to
50% in 1997. The increase in WAN sales is primarily attributable to the
development of several new PCIBus products being sold to customers including Sun
Microsystems, Compaq Computers and ADC Telecom. During 1998, the Company
experienced a decline in VMEbus and SBus revenue as customers moved to newer
technology. The Company has developed several new WAN products for the
CompactPCI market and these products are in evaluation by numerous
telecommunications and defense suppliers.
Shipments of LAN interface products amounted to 17% of sales in 1998 and 19% of
sales in 1997. The largest share of the Company's LAN interface product business
is generated from Commercial Off-the-Shelf (COTS) Department of Defense
projects. Defense project revenue declined in 1998 by 13% because the award of a
significant multi-year contract was delayed until mid-September and interim
orders were not received during the delay period. Also in the third quarter of
1998, a significant contract was received from a new OEM customer for PCIBus LAN
products. PCIBus products represented almost 13% of LAN revenue in 1998, versus
0% in 1997.
Shipments of Network Systems products represented 6% of sales in 1998, compared
to 9% in 1997. Network Systems products include shipments of I/O subsystems to
an OEM customer and sales of specialized communication server hardware and
protocol software for specialty WAN applications. As anticipated, shipments to
the OEM customer declined by approximately $1 million in 1998 and sales of
specialized communication servers also declined in 1998. The engineering staff
supporting the server business was reassigned at the beginning of 1998 to
develop software for WAN communications products.
Shipments of Mass Storage Interface products for 1998 amounted to 8% of sales,
compared to 13% in 1997. The technologies used in this market are moving from
SBus to PCIBus and from SCSI to Fibre Channel. The PCIBus market has become a
commodity market with greater competition and lower pricing. While this market
was also moving to the Fibre Channel technology, there were delays in the
adoption of standards. As a result of these factors, the Company's Mass Storage
Interface products no longer effectively competed in the marketplace.
Shipments of Inter-system Connectivity products represented 6% of sales i
1998, compared to 9% in 1997. The Company is not investing in this group
of products.
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 in 1998 increased by $1,209,000 to $20,489,000, from
$19,280,000 in 1997.
Gross margin improved to 60% of sales in 1998, from 59% in 1997.
Total Operating Expenses. Total operating expenses remained relatively constant
at 37% of sales in 1998 and 1997. As a percentage of sales, the Company
increased its investment in research and development during 1998, while
controlling sales and marketing expenses and reducing its general and
administrative expenses.
Selling and marketing expenses increased to $4,434,000 in 1998, from $4,250,000
in 1997, or 13% of sales in 1998 and 1997. During 1998, the Company delayed
certain planned marketing and promotional activities associated with the Nebula
8000 in order to coordinate spending with the product's availability. During the
second half of 1998, the sales and marketing staffs of the network switch group
were increased in order to have a greater impact on sales in 1999.
Research and development expenses increased by 10% to $5,121,000, or 15% of
sales in 1998, compared to $4,656,000, or 14% of sales in 1997. Recruiting and
hiring engineers continues to be one of the Company's greatest challenges at the
headquarters office. While a number of engineers were hired during 1998, the
Company continues to actively recruit to fill open positions and has engaged
outside engineering consultants to assist in development activities. The
increase in research and development expenses in 1998 was primarily the result
of new engineers hired, higher costs of outside engineering consultants, and
higher development costs for new products.
19
<PAGE>
General and administrative expenses in 1998 were $3,039,000 compared to
$3,006,000 in 1997. The Company continues to maintain tight control over its
general and administrative expenses.
Other Income, net. Other income consists primarily of interest income from cash
equivalents and marketable securities. The funds are primarily invested in high
quality Municipal and U.S. Treasury securities with maturities of less than one
year.
Income Taxes. The provision for income taxes for 1998 is based upon the
combined federal and state effective tax rate of 34%, compared to 38% in
1997.
Liquidity and Capital Resources
At December 31, 1999, the Company's primary source of liquidity included cash
and cash equivalents of $9,792,000, marketable securities of $22,007,000 and
available borrowings of $5,000,000 under a revolving credit facility with a
bank. No amounts were outstanding under this credit facility as of December 31,
1999. The Company had working capital of $39,009,000 at December 31, 1999,
compared to $32,221,000 at December 31, 1998.
Cash generated by operating activities was $7,674,000, $6,542,000 and $6,408,000
in 1999, 1998 and 1997, respectively. In 1999, net income and non-cash
adjustments increased by $954,000, plus net operating assets and liabilities
decreased by $154,000.
Cash used in investing activities was $23,222,000. During 1999, investing
activities included the purchase of marketable securities of $23,007,000, the
maturity of marketable securities of $1,000,000, and capital equipment purchases
of $1,047,000. 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
$168,000, $761,000 and $809,000 in 1999, 1998 and 1997, respectively.
In March 1998, the Board of Directors authorized the repurchase of up to $5.0
million of the Company's Common Stock. The Company repurchased a total of 45,000
shares at a total cost of $932,000 during 1999 and 78,000 shares at a total cost
of $736,000 in 1998. During December 1999, the Board of Directors withdrew the
common stock buy-back program. Cash provided by financing activities of $78,000
for 1997 was principally the result of the exercise of stock options less the
repayment of debt.
Impact of the Year 2000 Issue
Many companies were facing a potential issue regarding the ability of
information systems to accommodate the coming year 2000. The Year 2000 issue was
the result of computer programs using only the last two digits to indicate the
year. If uncorrected, such computer programs would be unable to interpret dates
beyond the year 1999, which could cause computer system failure or other
computer errors disrupting operations. The Company recognized the importance of
the Year 2000 issue and created a corporate-wide Year 2000 project team whose
objective was to ensure an uninterrupted transition into the Year 2000. The
project outcome was a success, as the Company has not experienced any Year 2000
problems since the date change on January 1, 2000. Costs of the project were
estimated to be $150,000 and costs during the year 2000 do not appear to be
significant.
The Company has not experienced any material Year 2000 issues with key suppliers
and customers and it appears that such organizations have successfully
transitioned to the Year 2000. However, there can be no assurance that problems
will not arise for the Company, its suppliers, its customers or others with whom
the Company does business later in 2000, either in connection with the leap year
or with systems that have not yet been fully tested. The Company intends to
continue to monitor its compliance, as well as the compliance of others whose
operations are material to the Company's business.
20
<PAGE>
ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks in the normal course of business,
primarily interest rate risk and changes in the market value of its investments
and believes its exposure to such risk is minimal. The Company's investments are
made in accordance with the Company's investment policy and primarily consist of
U.S. Treasury securities, municipal securities and corporate obligations. The
Company does not participate in the investment of derivative financial
instruments.
ITEM 8 - Financial Statements and Supplementary Data
Index to Financial Statements: Page
Report of Independent Accountants 21
Consolidated Balance Sheets at December 31, 1999 and 1998 22
Consolidated Statements of Income for the Three Years Ended
December 31, 1999 23
Consolidated Statements of Changes in Stockholders' Equity for the
Three Years Ended December 31, 1999 24
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1999 25
Notes to Consolidated Financial Statements 26
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.
Report of Independent Accountants
January 31, 2000
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, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Rochester, New York
21
<PAGE>
<TABLE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
December 31,
1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,792,000 $25,741,000
Marketable securities 22,007,000
Accounts receivable, net 9,474,000 5,808,000
Inventories, net 3,910,000 4,461,000
Prepaid expenses and other 684,000 1,087,000
Deferred taxes 1,129,000 549,000
----------- -----------
Total current assets 46,996,000 37,646,000
Equipment and improvements, net 1,695,000 1,423,000
Software development, net 451,000 1,053,000
----------- -----------
Total assets $49,142,000 $40,122,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 6,000 $ 12,000
Accounts payable 904,000 2,133,000
Income taxes payable 1,990,000 618,000
Accrued expenses 5,087,000 2,662,000
----------- ---------
Total current liabilities 7,987,000 5,425,000
Long term debt, less current portion 6,000
Deferred taxes 327,000 511,000
----------- -----------
Total liabilities 8,314,000 5,942,000
----------- -----------
Stockholders' equity:
Preferred stock-$.01 par value; 1,000,000
shares authorized; none issued
Common stock-$.01 par value; 15,000,000
shares authorized; 13,186,526 and 9,632,144
shares issued at December 31, 1999
and 1998, respectively 132,000 97,000
Additional paid-in capital 12,665,000 13,228,000
Retained earnings 28,003,000 21,777,000
Treasury stock-at cost, 340,378 shares (917,000)
Cumulative translation adjustments 28,000 (5,000)
----------- -----------
Total stockholders' equity 40,828,000 34,180,000
----------- -----------
Total liabilities and
stockholders'equity $49,142,000 $40,122,000
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales $44,494,000 $34,118,000 $32,435,000
Cost of goods sold 15,174,000 13,629,000 13,155,000
----------- ----------- -----------
Gross profit 29,320,000 20,489,000 19,280,000
----------- ----------- -----------
Operating expenses:
Selling and marketing 5,767,000 4,434,000 4,250,000
Research and development 7,906,000 5,121,000 4,656,000
General and administrative 3,756,000 3,039,000 3,006,000
Acquisition charges 1,744,000
----------- ----------- -----------
Total operating expenses 19,173,000 12,594,000 11,912,000
----------- ----------- -----------
Income from operations 10,147,000 7,895,000 7,368,000
Other income, net 1,478,000 1,293,000 1,060,000
----------- ----------- -----------
Income before income taxes 11,625,000 9,188,000 8,428,000
Provision for income taxes 5,399,000 3,141,000 3,157,000
----------- ----------- -----------
Net income $ 6,226,000 $ 6,047,000 $ 5,271,000
=========== =========== ===========
Basic earnings per share $ .47 $ .46 $ .41
=========== =========== ===========
Diluted earnings per share $ .45 $ .45 $ .39
=========== =========== ===========
Net income available to
common stockholders $ 6,226,000 $ 6,047,000 $ 5,271,000
=========== =========== ===========
Weighted average number of common
shares used in basic earnings
per share 13,164,903 13,076,897 13,012,085
Common equivalent shares 623,976 440,096 436,524
----------- ----------- -----------
Weighted average number of common
shares used in diluted earnings
per share 13,788,879 13,516,996 13,448,609
=========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Additional Other
Common Stock Paid-in Retained Treasury Comprehensive
Shares Amount Capital Earnings Stock Income Total
------------------ ----------- --------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
January 1, 1997
As previously
reported 4,899,418 $ 49,000 $12,885,000 $ 9,930,000 $(157,000) $ $22,707,000
MicroLegend
Telecom Systems,
Inc. pooling
of interests 2,165,732 22,000 (22,000) 529,000 1,000 530,000
---------- ------- ----------- ----------- --------- ------- -----------
Balance -
January 1,
1997 7,065,150 71,000 12,863,000 10,459,000 (157,000) 1,000 23,237,000
1997 Net income 5,271,000 5,271,000
Currency
translation
adjustment (41,000) (41,000)
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 - 106
shares (1,000) (1,000)
---------- ------ ----------- ----------- --------- ------- -----------
Balance -
December 31,
1997 9,580,464 96,000 13,033,000 15,730,000 (158,000) (40,000) 28,661,000
1998 Net income 6,047,000 6,047,000
Currency
translation
adjustment 35,000 35,000
Exercise of
options 51,680 1,000 101,000 102,000
Tax benefit
option plan 94,000 94,000
Purchase of
treasury
stock - 119,445
shares (759,000) (759,000)
---------- ------ ----------- ----------- --------- ------- -----------
Balance -
December 31,
1998 9,632,144 97,000 13,228,000 21,777,000 (917,000) (5,000) 34,180,000
1999 Net income 6,226,000 6,226,000
Currency
translation
adjustment 33,000 33,000
Exercise of
options 4,500 928,000 334,000 1,262,000
Issuance of
options 715,000 715,000
Tax benefit
option plan 62,000 62,000
Three-for-two
stock split 3,735,056 37,000 (37,000)
Purchase of
treasury
stock - 91,584
shares (1,650,000) (1,650,000)
Retirement of
treasury
stock (185,174) (2,000) (2,231,000) 2,233,000
---------- -------- ----------- ----------- --------- ------- -----------
Balance -
December 31,
1999 13,186,526 $132,000 $12,665,000 $28,003,000 $ $28,000 $40,828,000
========== ======== =========== =========== ========= ======= ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
24
<PAGE>
<TABLE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 6,226,000 $ 6,047,000 $ 5,271,000
Non-cash adjustments:
Depreciation and amortization 1,545,000 1,208,000 1,618,000
Provision for bad debts 602,000 23,000 21,000
Reserve for inventory obsolescence 779,000 802,000 262,000
Deferred income taxes (764,000) 45,000 73,000
Compensation expense 715,000
Changes in operating assets
and liabilities:
Accounts receivable (4,255,000) (344,000) (2,373,000)
Inventories (228,000) (1,934,000) 446,000
Prepaid expenses and other 410,000 (345,000) (57,000)
Accounts payable accrued expenses 1,210,000 631,000 936,000
Income taxes payable 1,434,000 409,000 211,000
---------- ---------- -----------
Net cash provided by
operating activities 7,674,000 6,542,000 6,408,000
---------- ----------- -----------
Cash flows from investing activities
Purchases of equipment and
improvements, net (1,047,000) (748,000) (828,000)
Capitalized software development (168,000) (761,000) (809,000)
Purchase of marketable securities (23,007,000) (5,698,000) (13,165,000)
Maturities of marketable securities 1,000,000 18,010,000 7,100,000
---------- ----------- -----------
Net cash (used) provided by
investing activities (23,222,000) 10,803,000 (7,702,000)
---------- ----------- -----------
Cash flows from financing activities
Repayment of long-term debt (12,000) (12,000) (26,000)
Exercise of stock options 543,000 79,000 104,000
Purchase of treasury stock (932,000) (736,000)
---------- ----------- -----------
Net cash (used) provided by
financing activities (401,000) (669,000) 78,000
---------- ----------- -----------
Net (decrease) increase
in cash and cash equivalents (15,949,000) 16,676,000 (1,216,000)
Cash and cash equivalents
at beginning of year 25,741,000 9,065,000 10,281,000
---------- ----------- -----------
Cash and cash equivalents
at end of year $ 9,792,000 $25,741,000 $ 9,065,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 15,000 $ 4,000 $ 4,000
Income taxes paid $ 4,319,000 $ 2,827,000 $ 2,865,000
Non-cash financing activity:
Exercise of stock options using 46,849,
1,800 and 106 shares of common stock
in 1999, 1998 and 1997, respectively $ 718,000 $ 23,000 $ 1,000
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
25
<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 (the Company) was formed in
1981 under the laws of the State of Delaware and maintains its corporate offices
in Rochester, New York. The Company designs, develops, manufactures and markets
high reliability, and high availability voice, data and signaling
telecommunications products.
Segment Data, Geographic Information and Significant Customers: The Company
operates in one industry segment. Export sales to customers outside the United
States represent 16%, 21% and 9% of the Company's sales for the years ended
December 31, 1999, 1998 and 1997, respectively. For 1999, 1998 and 1997, four
customers accounted for approximately 43%, 31% and 28%, respectively, of the
Company's sales, with no single customer representing greater than 23%, 11% and
8%, respectively, of the Company's sales.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. Effective December
10, 1999, the Company merged with MicroLegend Telecom Systems, Inc.
(MicroLegend), which has been accounted for as a pooling of interests and
accordingly all prior period consolidated financial statements have been
restated to include the combined results (Note B). All intercompany transactions
have been eliminated.
Foreign Currency Translation: Canadian currency is the functional currency of
the Company's Canadian subsidiary. Assets and liabilities of foreign operations
are translated to U.S. dollars at current rates of exchange, and revenue and
expenses are translated using average rates. Gains and losses from foreign
currency translation are included as a separate component of stockholders'
equity. Translation adjustments are not tax-effected as they relate to
investments considered permanent in nature. Foreign currency transaction gains
and losses are included in the Consolidated Statements of Income.
Use of Estimates: The preparation of the consolidated 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 revenue 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.
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, 1999, as the maturity of these
instruments are generally short term.
Cash Equivalents: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
26
<PAGE>
Note A - Nature of Business and Summary of Significant Accounting Policies
(continued)
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.
Inventories: Inventories are valued at the lower of cost or market using the
first-in, first-out method. The Company provides inventory reserves for excess,
obsolete or slow moving inventory based on changes in customer demand,
technology developments or other economic factors.
Revenue Recognition: Revenue is recognized upon product shipment. Arrangements
for software systems requiring significant production, modification, or
customization of software are accounted for as a long-term contract. Revenue
from consulting and other services is recognized at the time the services are
rendered. Any anticipated losses on contracts are charged to operations as soon
as such losses are determined. Revenue from software maintenance contracts is
recognized ratably over the contractual period, or as the service is performed.
Equipment and Improvements: Equipment and improvements are recorded at cost
reduced by accumulated depreciation. Depreciation is provided for using the
straight-line method over the following estimated useful lives:
Machinery and equipment 3-10 years
Software 3 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 included as a
component of "Other income" in the Consolidated Statements of Income.
Long-Lived Assets: The Company regularly assesses all of its long-lived assets
for impairment when events or circumstances indicate their carrying amounts may
not be recoverable, in accordance with Statement of Financial Accounting
Standards No. 121(SFAS 121), Accounting for the Impairment of Long-Lived Assets.
During 1998, the Company recorded a charge for the remaining amount of
unamortized goodwill as its value had significantly decreased. Amortization
expense for goodwill was $123,000 and $50,000 for 1998 and 1997.
Research and Development: Research and development costs are expensed as
incurred.
Advertising: Advertising costs are expensed as incurred and recorded in "Selling
and marketing" in the Consolidated Statements of Income. Advertising expense
amounted to $254,000, $306,000 and $341,000 for 1999, 1998 and 1997,
respectively.
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.
27
<PAGE>
Note A - Nature of Business and Summary of Significant Accounting Policies
(continued)
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.
Earnings Per Share: Earnings per share is presented in accordance with the
provisions of SFAS No. 128, "Earnings Per Share." Basic earnings per share is
computed by dividing net income available by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
calculations reflect the assumed exercise and conversion of employee stock
options and warrants.
Stock-Based Compensation: Compensation costs are recognized in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," based on the difference, if any, between the quoted market price
of the stock on the grant date and the exercise date. In early 1999, a
compensation charge of $715,000 was recorded to operating expenses for the
issuance of stock options granted to MicroLegend employees with an exercise
price below the fair market value of its common stock.
Note B - Business Combination
On December 10, 1999, MicroLegend Telecom Systems, Inc. was merged with and into
a subsidiary of the Company, and approximately 2,166,000 shares of the Company's
common stock were issued in exchange for all of the outstanding common stock of
MicroLegend. MicroLegend develops and markets Signaling System 7 (SS7)
telecommunications gateway products that provide signaling and control for
wireless, voice-over-IP and other packet applications. The merger has been
accounted for as a pooling of interests under Accounting Principles Board
Opinion No. 16. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of MicroLegend as though it had always been a
part of the Company.
Prior to the merger, MicroLegend's fiscal year ended on July 31. In recording
the business combination, MicroLegend's prior period financial statements have
been restated to a year ended December 31, to conform to the Company's fiscal
year-end. There were no material adjustments required to conform the accounting
policies of the two companies, except for recording a charge to compensation
expense of $715,000 for the issuance of stock options in early 1999. There were
no intercompany transactions requiring elimination.
The following information presents certain income statement data of the separate
companies for the periods preceding the merger:
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, December 31,
1999 1998 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Revenue:
Performance Technologies, Inc. $28,060,000 $30,202,000 $30,336,000
MicroLegend Telecom Systems, Inc. 3,539,000 3,916,000 2,099,000
----------- ----------- -----------
$31,599,000 $34,118,000 $32,435,000
=========== =========== ===========
Net income (loss):
Performance Technologies, Inc. $ 5,665,000 $ 5,783,000 $ 5,131,000
MicroLegend Telecom Systems, Inc. (952,000) 264,000 140,000
----------- ----------- -----------
$ 4,713,000 $ 6,047,000 $ 5,271,000
=========== =========== ===========
</TABLE>
28
<PAGE>
During the three months ending December 31, 1999, the Company recorded a charge
to operating expenses of approximately $1.7 million, or $.12 per common share
for costs pertaining to the merger transaction. Acquisition charges consisted
primarily of fees for investment bankers, attorneys, accountants and other
related charges.
Note C - Accounts Receivable, Net
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
At December 31,
1999 1998
---- ----
<S> <C> <C>
Accounts receivable $10,269,000 $ 6,001,000
Less: allowance for doubtful accounts (795,000) (193,000)
----------- -----------
Net $ 9,474,000 $ 5,808,000
=========== ===========
</TABLE>
Note D - Inventories, Net
Inventories consisted of the following:
<TABLE>
<CAPTION>
At December 31,
1999 1998
---- ----
<S> <C> <C>
Purchased parts and components $ 1,822,000 $ 1,941,000
Work in process 2,893,000 3,011,000
Finished goods 113,000 130,000
----------- -----------
4,828,000 5,082,000
Less: reserve for inventory obsolescence (918,000) (621,000)
----------- -----------
Net $ 3,910,000 $ 4,461,000
=========== ===========
</TABLE>
Note E - Equipment and Improvements, Net
Equipment and improvements consisted of the following:
<TABLE>
<CAPTION>
At December 31,
1999 1998
---- ----
<S> <C> <C>
Engineering equipment and software $ 2,839,000 $ 2,058,000
Manufacturing equipment 1,332,000 1,269,000
Furniture and equipment 1,254,000 1,047,000
Leasehold improvements 130,000 134,000
----------- -----------
5,555,000 4,508,000
Less: accumulated depreciation and amortization (3,860,000) (3,085,000)
------------ -----------
Net $ 1,695,000 $ 1,423,000
============ ===========
</TABLE>
Total depreciation and amortization expense for equipment and improvements
for 1999, 1998 and 1997 was $775,000, $582,000 and $521,000, respectively.
29
<PAGE>
Note F - Accrued Expenses
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
At December 31,
1999 1998
---- ----
<S> <C> <C>
Accrued compensation $ 2,702,000 $ 984,000
Accrued professional services 1,030,000 408,000
Deferred revenue 404,000 387,000
Other accrued expenses 951,000 883,000
----------- -----------
Total $ 5,087,000 $ 2,662,000
=========== ===========
</TABLE>
Note G - Credit Agreement
At December 31, 1999, the Company had a revolving credit loan agreement with a
bank under which it can borrow up to $5 million. Borrowings bear interest
ranging either at the bank's prime rate or one month LIBOR plus applicable basis
points as outlined in the agreement. Borrowings 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,
1999. There were no balances outstanding under this agreement at December 31,
1999 and 1998. The annual fee on the credit loan agreement is immaterial.
Note H - Commitments
The Company leases facilities and equipment under operating leases. Under the
terms of the facility lease in Rochester, NY, 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 leased
facilities in its other operating locations in North America that expire between
2003 through 2005.
Future minimum lease payments for all operating leases having a remaining term
in excess of one year at December 31, 1999 are as follows:
Operating Leases
2000 $ 785,000
2001 607,000
2002 460,000
2003 194,000
2004 and thereafter 146,000
----------
Total minimum lease payments $2,192,000
==========
Rental expense amounted to $787,000, $590,000 and $629,000 for 1999, 1998 and
1997, respectively.
Note I - Stockholders' Equity
The Company repurchased 44,735 and 78,437 of its common shares in 1999 and 1998,
respectively, pursuant to its stock repurchase program authorized by the Board
of Directors in 1998. The total cost of repurchasing such shares was $932,000
and $736,000 in 1999 and 1998, respectively. On December 10, 1999, the Company
terminated the stock repurchase program. In connection with the merger with
MicroLegend Telecom Systems, Inc., the Company retired 185,174 shares of
Treasury stock, at an average cost of $12.06 per share for a total cost of $2.2
million.
30
<PAGE>
The Company declared three-for-two stock splits of the Company's common stock
effected in the form of 50% stock dividends on the outstanding shares payable to
shareholders of record as of August 26, 1999 and July 31, 1997, with respective
distribution dates of September 1, 1999 and September 15, 1997. Basic and
diluted earnings per share, weighted average number of shares outstanding and
all applicable footnotes have been adjusted to reflect the aforementioned stock
splits. 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.
Note J - Stock Option Plan
In 1986, the Company established an Incentive Stock Option Plan pursuant to
which the Board of Directors reserved 2,700,000 shares of common stock for
grant. Options may be granted to any officer 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 Weighted-Average Option
of Shares Exercise Price Price Range
--------- -------------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1997 747,291 $3.90 $.81 - $6.56
Granted 214,875 $5.42 $4.83 - $8.67
Exercised (98,427) $1.07 $.81 - $5.22
Expired (3,487) $3.28 $.81 - $5.22
--------- ----- --------------
Outstanding at December 31, 1997 860,252 $4.60 $.89 - $8.67
Granted 228,375 $9.23 $6.17 - $9.75
Exercised (77,520) $1.31 $.89 - $5.05
Expired (1,500) $8.49 $8.67
--------- ----- --------------
Outstanding at December 31, 1998 1,009,607 $5.89 $1.01 - $9.75
Granted 385,375 $13.60 $8.15 - $18.75
Exercised (253,164) $4.91 $1.22 - $9.75
Expired (26,400) $8.49 $1.22 - $9.17
--------- ----- --------------
Outstanding at December 31, 1999 1,115,418 $8.72 $1.22 - $18.75
========= ===== ==============
</TABLE>
At December 31, 1999, 576,700 options were vested and 698,056 options were
available for future grant under the stock option plan. At December 31, 1999,
112,500 warrants are held by two of the Company's directors at an exercise price
of $1.22 per share and expire in the year 2001.
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.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant date for awards in 1999, 1998 and 1997 consistent
with the provisions of SFAS No. 123, the Company's net income would have been
reduced to the pro forma amounts of $4,765,000, $4,881,000 and $4,510,000,
respectively. Basic earnings per share would have been reduced to the pro forma
amounts of $.36, $.37 and $.35, respectively. Diluted earnings per share would
have been reduced to the pro forma amounts of $.34, $.36 and $.34, respectively.
The assumption regarding the stock options issued in 1999, 1998 and 1997 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 1999, 1998 and
1997: dividend yield of 0%; expected volatility of 65%, 62% and 61%; risk-free
interest rate of 5.4%, 5.5% and 6.5%; and expected lives of three in 1999 and
five years in 1998 and 1997, respectively.
31
<PAGE>
Note K - Income Taxes
The provisions for income taxes were as follows:
<TABLE>
<CAPTION>
Current income taxes 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal $ 4,603,000 $ 2,711,000 $ 2,814,000
State 765,000 450,000 374,000
Foreign 610,000 (40,000) 15,000
----------- ----------- -----------
5,978,000 3,121,000 3,203,000
Deferred provision (benefit) (579,000) 20,000 (46,000)
----------- ----------- -----------
Total provision $ 5,399,000 $ 3,141,000 $ 3,157,000
=========== =========== ===========
</TABLE>
Reconciliation of the statutory U.S. federal income tax rate to effective rates
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rate 35.0% 34.0% 34.0%
State tax provision, net of federal benefit 4.2 3.3 2.9
Acquisition charges 6.0
Other 1.2 (3.1) 0.6
---- ---- ----
Effective tax rate 46.4% 34.2% 37.5%
==== ==== ====
</TABLE>
The Company's net deferred income tax balance consists of the following:
<TABLE>
<CAPTION>
At December 31,
Deferred tax liabilities 1999 1998
- ------------------------ ---- ----
<S> <C> <C>
Capitalized software development cost, net $ (189,000) $(363,000)
Difference in tax basis of assets (138,000) (23,000)
Investment tax credit (125,000)
---------- ---------
Total deferred tax liabilities $ (327,000) $(511,000)
---------- ---------
Deferred tax assets
Accrued vacation, payroll and other
accrued expenses $ 550,000 $ 199,000
Inventory obsolescence reserve and
other inventory related items 213,000 188,000
Bad debt reserve 279,000 68,000
Research tax credits 6,000 27,000
Other 81,000 67,000
---------- --------
Total deferred tax assets 1,129,000 549,000
---------- --------
Net deferred tax asset $ 802,000 $ 38,000
========== =========
</TABLE>
As of December 31, 1999, no deferred taxes have been provided on the
undistributed earnings of the Company's Canadian subsidiary, as the Company does
not plan to initiate any action that would require the payment of income taxes.
It is not practicable to estimate the amount of additional tax that might be
payable on these undistributed earnings. Note L - Research and Software
Development Costs
The Corporation incurred research and software development costs relating to the
development of new products as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Gross expenditures for engineering
and software development $8,074,000 $ 5,938,000 $5,806,000
Less: amounts capitalized (168,000) (817,000) (1,150,000)
---------- ----------- ----------
Net charged to operating expenses $7,906,000 $ 5,121,000 $4,656,000
========== =========== ==========
</TABLE>
32
<PAGE>
Software Development costs consisted of the following:
<TABLE>
<CAPTION>
At December 31,
1999 1998
---- ----
<S> <C> <C>
Capitalized software development costs $ 2,729,000 $2,561,000
Less: accumulated amortization (2,278,000) (1,508,000)
----------- ----------
Net $ 451,000 $1,053,000
=========== ==========
</TABLE>
Amortization of software development costs included in cost of goods sold was
$770,000, $503,000, and $1,047,000 for 1999, 1998 and 1997, respectively.
Note M - Employee Benefit Plans
The Company's Retirement Savings Plan qualifies under Section 401(k) of the
Internal Revenue Code. The Company's discretionary matching contributions to the
plan were $116,000, $86,000 and $92,000 for 1999, 1998 and 1997, respectively.
In conjunction with the Company's Flexible Benefits plan, the Company made
additional discretionary qualified contributions to employee accounts which vest
immediately amounting to $134,000, $128,000 and $108,000 for 1999, 1998 and
1997, respectively.
Note N - Transactions with Related Parties
The Company leases its primary facility in Rochester, New York from an entity
controlled by two directors of the Company, one of whom is an officer. During
1999, 1998, and 1997, the Company paid rent of $323,000, $319,000 and $318,000,
respectively, for the use of this location. (Note H)
Note O - Subsequent Event
On February 9, 2000, at a Special Meeting of Stockholders, the stockholders
approved an amendment to the Company's Restated Certificate of Incorporation to
increase the number of the authorized common shares, from 15 million shares to
50 million shares, and an amendment to the Company's Stock Option Plan to
increase by 500,000 shares the number of authorized shares that may be issued
pursuant to the Stock Option Plan.
Note P - Quarterly Results (unaudited)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 1999 and 1998.
<TABLE>
1999
(in thousands, except per share data)
Mar. 31 Jun. 30 Sept. 30 Dec. 31
------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales $8,689 $10,020 $12,890 $12,895
Gross profit 5,497 6,670 8,460 8,693
Income from operations 1,294 2,510 3,311 3,032(1)
Net income $ 945 $ 1,498 $ 2,270 $ 1,513(1)
Basic earnings per share $ 0.07 $ 0.11 $ 0.17 $ 0.11(1)
====== ======= ======= =======
Diluted earnings per share $ 0.07 $ 0.11 $ 0.16 $ 0.11(1)
====== ======= ======= =======
(1) Includes one-time acquisition expenses of approximately $1.7 million, or
$.12 per share.
1998
(in thousands, except per share data)
Mar. 31 Jun. 30 Sept. 30 Dec. 31
------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales $8,576 $6,489 $8,412 $10,641
Gross profit 5,388 3,846 5,050 6,205
Income from operations 2,246 695 1,590 3,364
Net income $1,592 $ 942 $1,434 $ 2,079
Basic earnings per share $ 0.12 $ 0.07 $ 0.11 $ 0.16
====== ====== ====== =======
Diluted earnings per share $ 0.12 $ 0.07 $ 0.11 $ 0.15
====== ====== ====== =======
</TABLE>
33
<PAGE>
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
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 May 31, 2000, 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 May 31, 2000,
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 May 31, 2000,
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 May 31, 2000, 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 May 31, 2000,
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 (*) Certificate of Amendment
3.2 (1) Amended By-laws
4.1 (1) Form of Common Stock Certificate
4.2 (1) Amended and Restated Stock Option Plan
4.3 (*) June 1998 Amendment to the Stock Option Plan
4.4 (*) February 2000 Amendment to the Stock Option Plan
10 (1) Material Contracts
10.1 (3) Revolving Credit Agreement dated as of December 30,
1998 between the Registrant and The Chase
Manhattan Bank, N.A.
10.2 (3) Revolving Credit Note in the amount of $5,000,000
dated December 30, 1998 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
10.16 (1) License Agreement between the Registrant and Spider
Systems Limited dated March 18, 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
10.32 (4) Share Acquisition Agreement between Registrant
and MicroLegend Telecom Systems, Inc. as of
December 2, 1999
10.32 (4) Amendment to Share Acquisition Agreement between
Registrant and MicroLegend Telecom Systems,
Inc. as of December 10, 1999
21 (1) Subsidiaries
- --------------------------------------------------------------------------------
(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 Statement on Form S-8 filed
July 30, 1997.
(3) Incorporated by reference to the Registrant Statement on Form 10-K filed
March 30,1999.
(4) Incorporated by reference to the Registrant Statement on Form S-3 filed
January 28, 2000.
(*) Filed with this Form 10-K.
35
<PAGE>
(4) Reports on Form 8-K
A Report on Form 8-K, dated December 21, 1999, was filed during the
three-month period ended December 31, 1999. Item 5 Other item; reported the
acquisition of MicroLegend Telecom Systems, Inc., by the acquisition of all of
the outstanding shares of capital stock of MicroLegend.
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 28, 2000 By:/s/ DONALD L. TURRELL
------------------------
Donald L. Turrell
President and
Chief Executive Officer
By:/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, the
following persons on behalf of the registrant and in the capacities and on the
dates indicated have signed this report.
Signature Title Date
/s/CHARLES E. MAGINNESS Chairman of the Board March 28, 2000
- -----------------------
Charles E. Maginness
/S/DONALD L. TURRELL President, Chief Executive March 28, 2000
- -----------------------
Donald L. Turrell Officer and Director
/s/DORRANCE W. LAMB Chief Financial Officer, and March 28, 2000
- -----------------------
Dorrance W. Lamb Vice President of Finance
/s/BERNARD KOZEL Director March 28, 2000
- -----------------------
Bernard Kozel
/s/JOHN E. MOONEY Director March 28, 2000
- -----------------------
John E. Mooney
/s/JOHN M. SLUSSER Director March 28, 2000
- -----------------------
John M. Slusser
/S/PAUL L. SMITH Director March 28, 2000
- -----------------------
Paul L. Smith
CERTIFICATE OF AMENDMENT
of the
CERTIFICATE OF INCORPORATION
of
PERFORMANCE TECHNOLOGIES, INCORPORATED
Duly Adopted in Accordance with Section 242 of the
Delaware General Corporation Law
PERFORMANCE TECHNOLOGIES, INCORPORATED, a corporation organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
I. The present name of the Corporation is Performance Technologies,
Incorporated and the date of the filing of the original Certificate of
Incorporation with the Secretary of State of the State of Delaware was
the 20th day of February, 1981.
II. The restated Certificate of Incorporation of the Corporation is hereby
amended by the following resolution of the Board of Directors and
Shareholders of the Corporation:
RESOLVED, that the restated Certificate of Incorporation of
the Corporation be, and it hereby is, amended to increase the
number of authorized shares by deleting paragraph FOURTH of
the Restated Certificate of Incorporation in its entirety and
substituting in lieu thereof the following:
FOURTH: The amount of total authorized capital stock
of the Corporation is divided into 50,000,000 common shares
with a par value of one cent ($.01) per share and 1,000,000
shares of Preferred Stock with a par value of one cent ($.01)
as provided by Article "TENTH".
III. That the amendment of the Restated Certificate of Incorporation herein
certified has been duly adopted by the vote of the holders of a
majority of shares of the Corporation's common stock at a Special
Meeting held on February 9, 2000, in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
IV. That the capital of the Corporation shall not be reduced under or by
reason of said amendment
IN WITNESS WHEREOF, the Corporation has caused this Certificate
of Amendment to be signed by Donald L. Turrell, its Chief Executive Officer and
President, and Kenneth R. Donaldson, its Secretary, as of the 9th day of
February, 2000 and they each hereby affirm the truth of the statements contained
herein under penalties of perjury.
/s/Donald L. Turrell
--------------------
Donald L. Turrell,
Chief Executive Officer
and President
/s/Kenneth R. Donnaldson
------------------------
Kenneth R. Donaldson,
Secretary
PERFORMANCE TECHNOLOGIES, INCORPORATED
AMENDMENT TO STOCK OPTION PLAN
WHEREAS, Performance Technologies, Incorporated (the "Company") adopted
the PERFORMANCE TECHNOLOGIES, INCORPORATED STOCK OPTION PLAN (the "Plan") on May
1, 1986, amended and restated the Plan effective January 1, 1987, amended the
Plan on May 3, 1990, amended and restated the Plan on April 18, 1994, amended
the Plan on November 14, 1995, amended and restated the Plan on June 5, 1996 and
amended the Plan again on June 10, 1997; and
WHEREAS, the Company desires to amend Section 17 of the Plan to provide
that the grant of options to Outside Participating Directors shall be
prospective as an incentive to service rather than as a reward for past service,
to amend Section 20 of the plan to amend the vesting provisions of such options
and to amend Section 21 of the Plan to make it consistent with the provisions of
amended Section 20.
NOW, THEREFORE, Sections 17, 20 and 21 of the Plan are hereby amended to
read in their entirety effective June 3, 1998, subject to approval of the
Company's stockholders, as follows:
17. Outside Participating Directors. As of each Grant Date as
defined in Section 18, each member of the Board of Directors
who (a) is not an employee of the Company or any of its
subsidiaries and (b) will serve as a member of the Board of
Directors subsequent to the Grant Date is deemed an Outside
Participating Director and is eligible to receive options in
accordance with Section 18 below.
20. Vesting and Expiration of Outside Participating Director
Stock Options. Each option granted to an Outside Participating
Director shall vest and shall become exercisable on the first
anniversary of the Grant Date in accordance with Section 5 of
this Plan. Each option shall expire on the fifth anniversary
of the Grant Date, and to the extent any option remains
unexercised on such fifth anniversary, it shall be forfeited.
21. Cessation of Service of an Outside Participating Director.
(a) Cessation of Service. An Outside Participating
Director's cessation of service as a member of the Board of
Directors for any reason shall not have any effect on options
that have been granted and vested prior to the date of
cessation of service. Upon the death of an Outside
Participating Director or former Outside Participating
Director, all vested options held by the decedent must be
exercised by his legal representative within one year after
the date of death (but in no event after the expiration of the
option) or they shall be forfeited.
(b) Loss of Eligibility. If an Outside Participating
Director becomes an employee of the Company or otherwise no
longer satisfies the requirements for eligibility set forth in
Section 17 hereof, then all options already granted to him
hereunder shall continue in full force and effect, in
accordance with their original terms, for so long as he
remains a member of the Board of Directors, but he shall be
entitled to no further formula grants of options pursuant to
Section 17 through Section 21 hereof.
All other terms and conditions of the Plan shall remain in full force
and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment to Stock
Option Plan to be executed this the 3rd day of June, 1998.
PERFORMANCE TECHNOLOGIES, INC.
By:/s/Donald L. Turrell
-----------------------
Donald L. Turrell
Chief Executive Officer
PERFORMANCE TECHNOLOGIES, INCORPORATED
AMENDMENT TO STOCK OPTION PLAN
WHEREAS, Performance Technologies, Incorporated (the "Company") adopted
the PERFORMANCE TECHNOLOGIES, INCORPORATED STOCK OPTION PLAN (the "Plan") on May
1, 1986, amended and restated the Plan effective January 1, 1987, amended the
Plan on May 3, 1990, amended and restated the Plan on April 18, 1994, amended
the Plan on November 14, 1995, amended and restated the Plan on June 5, 1996,
amended the Plan June 10, 1997 and amended the Plan again on June 3, 1998; and
WHEREAS, the Company desires to amend Section 3 of the Plan to increase
the number of shares of the Company's Common Stock reserved for issuance under
the Option Plan by 500,000 shares to 3,200,000.
NOW, THEREFORE, Section 3 of the Plan is hereby amended to read in its
entirety effective February 9, 2000, subject to approval of the Company's
stockholders, as follows:
3. Stock Subject to Options. Subject to the provisions of Section 9 hereof,
options may be granted under the Plan to purchase, in the aggregate, not more
than 3,200,000 Shares. The Shares may, in the discretion of the Board of
Directors of the Company, consist either in whole or in part of authorized but
unissued Shares or shares held in the treasury of the Company, and the Shares
may, in the discretion of the Committee, become subject to incentive stock
options or non-statutory stock options. Any Shares subject to an option, which
for any reason expires or is terminated unexercised as to such Shares, shall
continue to be available for options under the Plan.
All other terms and conditions of the Plan shall remain in full force and
effect.
IN WITNESS WHEREOF, the Company has caused this Amendment to Stock
Option Plan to be executed this 9th day of February, 2000.
PERFORMANCE TECHNOLOGIES, INC.
By:/s/Donald L. Turrell
-----------------------
Donald L. Turrell
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE DECEMBER 31, 1999 FINANCIAL STATEMENTS OF PERFORMANCE
TECHNOLOGIES, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> PERFORMANCE TECHNOLOGIES, INC.
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<S> <C>
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<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
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0
0
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