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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission File Number 0-27460
PERFORMANCE TECHNOLOGIES, INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware 16-1158413
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
14620
315 Science Parkway, Rochester New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (716) 256-0200
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Securities registered pursuant to section 12(b) of the Act:
NONE
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Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of the close of business on March 14, 1997 was approximately
$41,567,000.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, was approximately 4,807,000 as of March 14, 1997.
Documents Incorporated by Reference
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held June 10, 1997, which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1996.
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-Cover Page of 34 Pages-
Performance Technologies, Incorporated
Index to Annual Report on Form 10-K
Page
PART I
Item 1 Business 1
Item 2 Properties 10
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 11
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 11
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8 Financial Statements and Supplementary Data 16
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 32
PART III
Item 10 Directors and Executive Officers of the Registrant 33
Item 11 Executive Compensation 33
Item 12 Security Ownership of Certain Beneficial Owners
and Management 33
Item 13 Certain Relationships and Related Transactions 33
PART IV
Item 14 Exhibits, Financial Statement Schedules, Reports on Form 8-K 34
PART I
ITEM 1 - Business
Performance Technologies, Incorporated designs, manufactures and markets a wide
variety of fault-tolerant, high performance communications, networking and data
storage interface systems products. The Company's products are designed to
enhance the performance of customers' computer network systems and include local
and wide area network interface adapters, communications servers, mass storage
interface products and sophisticated software communications solutions. The
Company's products are targeted toward high performance, mission critical
networking solutions for the telecommunications, financial services, defense and
public safety industries. Applications include network interfaces for cellular
telephone communications, data storage products found in bank ATMs, fiber optic
data communications products used aboard navy vessels and communications servers
used in air traffic control centers.
Since its inception in 1981, the Company has consistently produced innovative
networking solutions for a wide variety of computer architectures and has a
proven record of being able to adapt its products to a continually changing
marketplace. The Company has focused its efforts on providing high performance,
unique application solutions where hardware and software reliability are a key
concern to the end user. This strategy has enabled the Company to significantly
increase both sales and income from continuing operations over the last five
years.
All references to the "Company" herein include Performance Technologies,
Incorporated, the Company's wholly-owned foreign sales subsidiary, PTI Virgin
Islands Company, Ltd. and the Company's wholly-owned subsidiary, UconX
Corporation (UconX).
Industry Overview
The need to collect, store, analyze and distribute information in a secure,
timely and efficient manner has become an integral part of operating a
successful organization. Developments in computer technology have resulted in
less reliance on centralized mainframes and greater reliance on distributed
computing which led to the computer software architecture concept of
"client/server" computing systems. Client/server computing systems typically
provide for a large number of desktop computers interconnected with one, or
often more than one, server. The server provides central resources to all remote
computer users and provides common services such as printing, communications and
data backup and information gateways to other local or distant client/server
systems. The fundamental premise of this architecture relies heavily on computer
networking for both LAN interconnections for desktop-to-server communications
and WAN interconnections for server-to-server communications.
As a result of the growing installed base of client/server computing systems,
the market opportunity for client/server networking products is rapidly
expanding. According to a recent industry study, there were approximately 33
million Ethernet connections installed worldwide in 1993, and the number of
those connections is expected to grow to over 84 million by 1998. This growth,
combined with other market trends, is expected to cause the computer networking
equipment industry to continue to experience substantial growth.
Strategy
The Company's strategy is to enhance the performance of customers' network
systems by providing a wide variety of fault tolerant, high performance and
easily managed networking solutions targeted toward mission critical
applications. Major elements of the Company's operational strategy include:
Focus on High Performance Mission Critical Solutions. The Company continues to
focus its development efforts on addressing specific needs for high performance
networking. The Company's products have provided unique mission critical
solutions where reliability and performance are the primary concerns of the
user. Applications include network interfaces for cellular telephone
communications, FDDI adapter products used aboard navy vessels, communications
servers used in air traffic control and data storage products found in bank
ATMs.
-1-
Exploit Technological Competencies. Since its inception, the Company has
pioneered many innovations in networking technology including the VME64 industry
standard, proprietary ASICs and the early use of SCSIbus standard for local area
networking. These technological competencies have allowed the Company to develop
products that improve network performance without rendering an end user's
network equipment obsolete. Management intends to continue to leverage off of
these competencies to position the Company as a technological leader in high
performance LAN and WAN hardware and software products.
Continue to Develop Advanced Networking Products. The Company recognizes the
need to continually upgrade the performance of its existing products and to
develop new products which address the changing requirements of LAN and WAN
users. Over the past 12 months, the Company has introduced a variety of WAN and
LAN products designed for the PCIbus. Several of these products have been early
and unique entrants into the growth oriented PCIbus arena for supporting complex
communications protocols and networks. These new products have been responsible
for a variety of potentially significant OEM and partnering relationships. The
Company is also developing switching products for Ethernet LANs directed at
specific applications requiring high availability.
Expand International Markets. The networking and computer markets served by the
Company are international in scope. Global demand for network products, such as
those manufactured by the Company, is driven by the increasing dependence of
business on the successful implementation of networking infrastructures. While
the Company actively markets its products in Europe and the Asia Pacific
countries, currently international sales only account for approximately 11% of
sales. During 1996 the Company expanded its direct sales presence into the
European Economic Community with the opening of a sales office in Munich,
Germany. The Company intends to continue expanding its international efforts in
the Asia Pacific countries with more direct presence planned for the second half
of 1997.
Leverage Software Expertise. The Company has successfully employed its software
expertise in targeted industries and applications, including financial data
information services, air traffic radar installations and defense applications
and deep space telemetry. The Company plans to continue to leverage its existing
networking and mass storage interface software expertise in distributed network
management and control, integration of legacy networking protocols and virtual
LAN implementation.
Capitalize on Internal Manufacturing Expertise. Unlike many of its industry
competitors, the Company does not rely upon third party manufacturing
subcontractors for assembly, test and quality control for the manufacturing of
its products. Instead, the Company operates a state-of-the-art manufacturing
facility that gives the Company the flexibility to meet customer requirements,
produce high quality equipment and make timely deliveries. The Company's
manufacturing facility operates under an integrated MRP system that
significantly reduces lead time and inventory investments and facilitates
effective demand forecast. This in-house manufacturing capability provides the
Company with the means to launch quickly new products without the delays
normally associated with the use of manufacturing subcontractors. This facility
has continued to undergo expansion to increase capacity, supporting the
Company's growth and to allow manufacture of the latest electronic packaging
such as "Ball Grid" components. It is expected that additional capital expansion
in surface mount component capacity will occur over the next 12-18 months to
assure continued high quality assembly with adequate capacity to meet expected
delivery requirements for the Company's expanding customer base.
Products
The Company's products include a wide variety of fault tolerant, high
performance solutions for WAN communications, LAN connectivity and mass
storage/retrieval applications. The Company historically has addressed the needs
of the client/server computing environment with a family of hardware and
software products which operate on a number of open standards and allow ease of
use with a variety of popular high performance computer platforms. These
platforms include systems built on the VMEbus standard, systems built on the
SBus standard and systems that include the new PCIbus standard now found on a
broad range of computer platforms. The Company's products are grouped into five
categories: WAN Interface Adapter Products, LAN Interface Adapter Products,
Network Systems Products, Mass Storage Interface Products and Inter-system
Connectivity Products.
-2-
WAN Interface Adapter Products. The Company's WAN interface adapter products
include "add-in" modules providing connectivity between the SBus, VMEbus or PCI
computer platforms and the wide area communications network. The Company's WAN
interface adapter products are found in a wide variety of applications which
include network interfaces for cellular telephone transmitter sites, billing and
control information for long distance telephone communications, and control of
remote police, ambulance and municipal radio transmitter locations. Selected
end-users include Lucent Technologies, Digital Equipment Corporation and
QualComm. Products include interface adapters for use in VMEbus systems and high
speed interface adapters for the Sun Microsystems' SBus market. During 1996, the
Company released three WAN interface adapters for the PCIbus architecture which
management believes are some of the first products available to PCI users for
high speed WAN communications. All of the Company's WAN interface adapter
products are designed for applications that require high performance and high
speed communications capability. Certain of the Company's products are
"intelligent," containing their own microprocessors and memory. This
architecture allows these interface adapters to off-load many of the lower-level
communications tasks that would typically be performed by the host platform,
greatly improving overall system performance. The family of WAN interface
adapter products is supported by extensive communications software developed by
both the Company and a variety of third party partners. WAN sales represented
42% of total sales for 1996 as compared to 36% for 1995.
LAN Interface Adapter Products. The Company's LAN interface adapter products
consist primarily of products often referred to as Network Interface Controllers
(NICs) for a variety of LANs and computer platforms. These products currently
operate on the PCIbus, SBus and VMEbus computer platforms and include
connections for a popular range of Ethernet and FDDI standards and a unique FDDI
concentrator product that operates on the VMEbus. Applications for the Company's
Ethernet and FDDI network adapter products include a convenient interface
between computer platforms and LANs used in commercial, educational or
industrial organizations and a shipboard FDDI LAN used by the United States Navy
to integrate tactical workstations on board Navy vessels. All of these NICs
permit easy integration of either a workstation (SBus), PCI or VMEbus computer
system to an FDDI or Ethernet LAN. The FDDI adapters support the Company's
alternate path FDDI topology, ensuring the highest available levels of
resiliency and data integrity for fault tolerant and mission critical markets.
The SBus FDDI network interface controller occupies only a single SBus slot,
freeing the remaining expansion bays for other uses. The Company is actively
expanding the support of its newest PCI based FDDI adapters to include
operations with computer platforms supporting Sun Microsystems' SolarisJ and
Microsoft's Windows NTJ. LAN sales represented 21% of total sales for 1996 as
compared to 18% in 1995.
Network Systems Products. The Company's network systems products consist of
systems level equipment used in the construction and deployment of computer
networks. These products represented 11% of total sales for 1996 as compared to
10% in 1995 and include:
Communications Servers. Communications servers are multi-purpose LAN-to-WAN
bridging systems supported by software from UconX. The products in this category
include a low cost, limited server solution for installations requiring from one
to six WAN connections and up to two Ethernet LAN connections. For larger
installations or special requirements, the Company offers a series of
communications servers built on the VMEbus standard which offer up to 96 WAN
connections and multiple Ethernet LAN connections. Using UconX software, the
communications servers can be configured to provide a variety of protocol
packages and supporting protocols including bisynchronous, asynchronous
communications financial market feeds and radar receivers. The communication
server products from the Company can be found in data collection applications
including NASA's deep space network and in air traffic control centers for
retrieving radar data from remote radar antenna sites.
Front-end Communications Subsystems. The Company's "front-end" communications
subsystems product supports the concurrent use of up to eight SBus "add-in" disk
storage controllers or communication interface modules. This product has been
co-developed by the Company and a large OEM customer, and is used as a
communications nexus for high powered workstations, allowing them to link up
efficiently with a new line of supercomputers. The system, with its extended
SBus module capability, enables the OEM user to greatly increase the number of
workstations serviced by each front end processor, lowering costs and improving
system reliability.
-3-
Ethernet Switch. The Company is executing a market development effort through
acquired Ethernet switching technology which offers a variety of technical
features including store and forward, protocol filtering and WAN internetwork
connectivity for Ethernet LANs. This is the forerunner to a family of
company-designed second generation 100 Mbit/Gigabit Ethernet Switching products
targeted at high availability applications which the Company expects to
introduce within the next 12 months.
Mass Storage Interface Products. The Company's mass storage interface products
consist of adapters that connect various mass storage products using the SCSI
and newer UltraSCSI standard to computers based on VMEbus and SBus platforms.
The Company's existing SCSI interface products are often used to add external
disk storage to workstations. More complex applications include Redundant Array
of Inexpensive Disks (RAID) interfaces which are found in mission critical, high
reliability and high availability applications such as police/fire dispatch,
bank automated teller applications and hospital patient data base systems.
Coupled with the Company's RAID software, the interface product enables Sun
workstation users to connect RAID products sold by major OEM suppliers. Future
products are expected to expand the Company's already strong presence in this
market by adopting the new Fibre Channel protocol standards and expanding the
UltraSCSI capability to the PCIbus standard. Mass storage products represented
16% of total sales for 1996 as compared to 18% in 1995.
Inter-system Connectivity Products. The Company's inter-system connectivity
products permit dissimilar computer standards to be connected. These products
are typically provided to OEMs and systems integrators that are involved with
custom applications such as connecting a Sun workstation to printing press
control electronics for a new color printing press. Selected end-users include
Indigo, an Israeli printing equipment company, Data Cube, an imaging subsystem
supplier, and Credence Corporation, a manufacturer of equipment that produces
electronic integrated circuits. By allowing a customer to connect dissimilar
computer standards, the Company's products preserve that customer's investment
in existing installed equipment. These products represented 10% of total sales
in 1996 as compared to 18% in 1995. The Company is not investing in this group
of products and further decline in these revenues is expected in 1997.
Sales, Marketing and Distribution
The Company currently markets its products world-wide to a broad spectrum of end
user customers through various channels including OEMs, VARs, distributors and
systems integrators. Currently, nearly 90% of the Company's sales are made
domestically while the remainder represents international sales. Approximately
85% of the Company's North American business is sold through the Company's
direct sales force to OEMs and systems integrators. The remainder is sold to end
users through distributors and VARs.
In North America, the Company operates seven direct sales offices, located in
northern California, Rochester, New York, Old Saybrook, Connecticut, Dallas,
Texas, Washington, D.C., Boston, Massachusetts and San Diego, California. The
Company also maintains a European presence through a sales office in Munich,
Germany. Currently, eleven technically trained sales and support personnel
conduct the Company's selling efforts out of these offices. In addition,
independent sales representatives covering selected geographic areas and
distributors handling selected products supplement the Company's direct sales
team on a worldwide basis. The Company believes that, due to the technical
nature of its products, it is essential to employ sales people who are
knowledgeable in the network and communications fields and are able to
adequately respond to inquiries that arise concerning the capability and
performance levels of the Company's products.
Many of the Company's products are provided to OEMs and systems integrators and
are sold through a combination of selling efforts by the Company's sales force
and the efforts of a small number of independent sales representatives. These
independent sales representatives operate under the direct supervision of the
Company's sales force and carry out sales of specified products primarily in
selected North American geographic areas. The independent sales representatives
are compensated by commissions paid on product orders. The OEMs or systems
integrators serviced by the Company's sales organization and independent sales
representatives generally require a high level of technical support and are
usually involved with applications that require Company products that are
ultimately included as a subsystem or component in an OEM's or systems
integrator's final product.
-4-
The Company also sells products to distributors that are end user oriented, such
as network systems products, data storage interface products and certain LAN
interface products. Distributors purchase the Company's products and resell them
to their VARs or end-users. Distributors who sell the Company's products are
currently managed by the Company's direct sales force. The Company carries out
several marketing strategies to support these distributors, including
advertising in national and international trade publications, sponsoring
customer training sessions and participating in trade shows throughout North
America, Western Europe and the Pacific Rim.
OEM customers typically provide the Company with a rolling forecast for orders
placed two to three months in advance of shipment. Distributors typically
provide the Company with orders placed 30 days in advance of shipment. Sales of
the Company's products to OEM customers are subject to a number of factors
outside the Company's control, including pricing, availability and acceptance of
these products by the OEM's customers and potential customers.
With all of its products, the Company executes various ongoing marketing
strategies designed to attract new customers and to stimulate additional
purchases from existing customers. These strategies include direct mail
campaigns and catalogue distribution, direct telemarketing, special pricing
programs, active participation in technical standards group, participation in
national and regional trade shows and selected trade press advertisements and
technical articles.
Sales of software-based products developed by UconX are supported by a
UconX-directed sales force operating from offices in San Diego, California and
Boston, Massachusetts. International sales are handled through selected
distributors in Western Europe and the Pacific Rim.
The Company continues to believes that the international market represents
significant opportunities for the Company's products as sales outside the U.S.
represented only 11% of the Company's net sales in 1996 as compared to 14% and
12% for 1995 and 1994, respectively. In the past, the Company has sold its
products within Europe and the Asia Pacific countries through distributors
managed by sales individuals who reside at corporate offices in North America.
Management believes that it can develop expanded sales channels and marketing
alliances with respect to both new and existing international markets. The
Company's products are currently sold by 20 international distributors
throughout the major industrialized countries in Europe and the Asia Pacific
area. Recently the Company has established a sales office in Munich, Germany to
better support the Western European markets. The Company also expects to take
similar actions to more progressively support sales in the Pacific Rim in the
near future. International sales are subject to import and export controls,
transportation delays and interruptions, foreign currency exchange rates, and
foreign governmental regulations. All payments for sales outside the United
States are made in U.S. dollars.
Customers
The Company has over 300 active customers worldwide, including major OEMs,
systems integrators, and educational/research organizations, many of which are
Fortune 500 companies.
The Company has two general types of customers. The first category includes
customers that are technically oriented and assemble a product or system for a
specific end use, using components and subassemblies supplied by vendors such as
the Company. These products or systems are typically sold on either a repetitive
basis or on a lower volume, purpose-built basis. End use equipment or systems
sold by OEMs on a repetitive basis using the Company's products include a
sophisticated color printing press sold to "quick print" shops, a check scanning
console provided to banks to convert canceled check information into electronic
images and mass data storage equipment provided by RAID systems manufacturers to
commercial users such as police/fire departments, hospitals and government
organizations. Examples of lower volume purpose-built end use equipment
incorporating the Company's products include FDDI networks used by the United
States Navy for shipboard use, deep space network data collection for space
research and data collection/network systems for air traffic control and radar
installations. The second category includes customers that are less technically
proficient. These customer require products that are expected to be
self-installing and require limited knowledge of the products' internal
-5-
operation. These products are often referred to as "plug n' play" or "shrink
wrapped", implying a readiness to simply install the end application without the
need to have extensive technical knowledge. The Company's products that fit into
this category are the SBus and PCIbus mass storage interface, the SBus and
PCIbus LAN products (Ethernet and FDDI NICs) and selected WAN interface products
operating on the SBus and PCIbus standards. In 1996, Lockheed Martin accounted
for 12% of sales.
Backlog
At March 9, 1997, the backlog of scheduled orders was $6.1 million, compared to
$5.0 million at March 31, 1996. Although orders are subject to cancellation in
the normal course of business, historically the Company has filled most of its
firm orders. Management believes that the primary reason for the increase in the
Company's backlog of orders is the increasing demand for the Company's
networking, interface and systems products.
Seasonality
The Company's business is generally not seasonal in nature.
Environmental Matters
The Company does not believe that compliance with federal, state or local laws
or regulations relating to the protection of the environment has any material
effect on its capital expenditures, earnings or competitive position.
Competition
The market for computer communications, networking and mass storage interface
products is intensely competitive and characterized by rapid technological
innovations, resulting in new product introductions and frequent advances in
price/performance ratios. Competitive factors in this industry include product
performance and functionality, product quality and reliability, customer service
and support, marketing capability, corporate reputation and brand recognition
and increases in relative price/performance ratios. In the WAN interface product
market, the Company's products compete with products from SBE Incorporated,
Adax, Incorporated and Digi International, Incorporated. In the emerging PCIbus
arena, the Company's competition is less well-defined, although the PCI product
market is forecast to be highly competitive in many product areas. In the LAN
interface product market, the Company competes with Network Peripherals Inc.,
RNS a Division of Osicom Technologies, Incorporated and Interphase Corporation.
In the mass storage interface product market, the Company competes with such
companies as Interphase Corporation, MacroLink Incorporated and Sun
Microsystems, Inc.
Many of the Company's competitors have greater technical and capital resources,
more marketing experience, larger research and development staffs and better
production facilities than the Company. In recent years the internetworking
product market has become increasingly concentrated as a result of increased
consolidation in the industry. Cisco Systems Inc., the industry routing leader,
has acquired companies that have historically competed with the Company. These
consolidations are likely to permit Cisco and other of the Company's competitors
to devote significantly greater resources to the development and marketing of
new competitive networking products and the marketing of existing products
through their larger distribution networks to their larger installed customer
bases. The Company expects that competition will increase substantially as a
result of these and other industry consolidations, as well as the emergence of
new competitors and new technologies. Increased competition could result in
price reductions, reduced margins and loss of market share, all of which would
materially and adversely affect the Company's business, operating results and
financial condition.
Research and Development
The Company's research and development expenses, plus costs attributable to the
development of software, for 1994, 1995 and 1996 were approximately $1.4
million, $2.0 million and $3.0 million, respectively. This represents an
increase of 50% from 1995 to 1996. These expenses consist primarily of employee
costs and material consumed in developing and designing new products. To a
lesser degree, there have been limited expenses devoted to technology
acquisition, software license/tools and contract product development.
-6-
The Company has, as a result of prior research and development expenditures,
developed significant core competencies applicable to high speed fiber-optic
local area networking, wide area networking, switching and mass storage
interface solutions. Research and development funding is anticipated to continue
to increase significantly in 1997. This funding will be directed at further
leveraging these competencies and carrying out additional product development in
the areas of communications and network switching. These research and
development programs are expected to include expansion of both hardware and
software related to WAN and LAN network adapter products, continued enhancement
of the current LAN/FDDI offerings, next generation Ethernet switching, expansion
of mass storage interface products to encompass Fiber Channel technologies and
expanded communication server products provided by UconX. In addition to
specific product related expenditures, the Company is investing in increasing
its internal capability to design and implement ASICs. This will be an important
cornerstone for continued future enhancements of WAN and LAN network adapters,
advanced mass storage interfaces and high performance switching architectures to
support the emerging Gigabit Ethernet LAN technology.
Proprietary Technology
The Company's success depends upon the Company's proprietary technology. To
date, the Company has relied principally upon trademark, copyright and trade
secret laws to protect its proprietary technology. The Company generally enters
into confidentiality or license agreements with its distributors, customers and
potential customers and limits access to and distribution of the source code to
its software and other proprietary information. The Company's employees are
subject to the Company's employment policy regarding confidentiality. The
Company's software products and accessories are provided to customers under
license, generally in the form of object code, which provides a high degree of
confidentiality with respect to the intellectual property value. Much of the
Company's proprietary technology is found in the Company's source code which is
embedded in silicon chips, making it extremely difficult to misappropriate or
reverse engineer. Such methods may not afford complete protection, however, and
there can be no assurance that the confidentiality agreements will not be
breached, that such agreements will be enforceable, that the Company will have
adequate remedies for any breach or that the Company's trade secrets will not
otherwise become known to or independently developed by competitors. If patent
applications are filed by the Company in the future, there can be no assurance
that any patents can be granted, or that, if granted, such patents would provide
the Company with meaningful protection from competition.
There can be no assurance that third parties will not assert intellectual
property infringement claims against the Company. Although no written claims or
litigation relating to any such matter are currently pending against the
Company, the Company has not conducted any searches or obtained an opinion of
counsel with respect to its proprietary rights. Accordingly, there can be no
assurance that no claims will be initiated, that the Company would prevail in
any such litigation seeking damages or an injunction against the sale of the
Company's products, or if necessary, that the Company would be able to obtain
any necessary licenses on reasonable terms or at all. Any such litigation could
be protracted and costly and could have a material adverse affect on the
Company's results of operations regardless of the outcome of the litigation.
Suppliers
Certain components used in the Company's products, such as specific single
source microprocessors, custom ASICs, FDDI interface components and highly
integrated PCIbus and VMEbus interface components, are only currently available
to the Company from limited sources. Although to date the Company has generally
been able to obtain adequate supplies of these components, the Company obtains
these components on a purchase order basis and does not generally have long-term
contracts with any of these suppliers. The Company's standard purchase order is
limited in nature. In addition, shortages of raw materials could negatively
affect the Company's ability to meet its production obligations and result in
increased prices to the Company for affected parts. The Company's inability in
the future to obtain sufficient limited-source components, or to develop
alternative sources, could result in delays in product introductions or
shipments, and increased component prices could negatively affect gross margins,
either of which could have a material adverse effect on the Company's results of
operations. The Company would also be negatively affected if it does not
maintain adequate capital resources to fund component purchases.
-7-
Manufacturing
The Company maintains a state-of-the art product assembly and manufacturing
facility at its Rochester, New York facility. This facility operates under an
integrated MRP system that significantly reduces lead time and inventory
investments and facilitates effective demand forecast. The Company is actively
involved in certification of its manufacturing facilities to ISO 9000 quality
standards. By maintaining an in-house manufacturing capability, management
believes that the Company has, to a certain extent, insulated itself from the
risks inherent in dealing with independent subcontractors. The Company does not
have to compete with those who may be using subcontractors, nor is it subject to
the timing delays that often result when subcontractors are unable to meet the
manufacturing requirements of their customers. In addition, through its in-house
manufacturing capability, the Company is able to oversee directly its quality
control process and the timeliness of product delivery. The Company has limited
alternative capabilities through third parties, however, to perform such
manufacturing activities. In the event of an interruption of production at its
manufacturing facility, the Company's ability to deliver products in a timely
fashion would be compromised, which would have a material adverse effect on the
Company's results of operations.
Employees
As of March 9, 1997, the Company had 132 full-time employees, eleven of whom
were employed by the Company's UconX subsidiary. 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 38
Marketing and Sales 19
Manufacturing 56
General and Administrative 19
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.
Risk Factors
Technological Change and New Product Introductions. The market for the Company's
products is characterized by rapid technological change and frequent
introduction of products based on new technologies. As these products are
introduced, the standards of the industry change. Additionally, the overall
computer networking industry is volatile as the effects of new technologies, new
standards, new products and short life cycles contribute to changes in the
industry and the performance of industry participants. The Company's future
revenues will depend upon its ability to anticipate technological change and to
develop and introduce enhanced products of its own on a timely basis that meet
or exceed new industry standards. New product introductions could contribute to
quarterly fluctuations in operating results as orders for new products commence
and orders for existing products decline. Moreover, significant delays can occur
between a product's introduction and commencement of volume production. The
inability to develop and manufacture new products in a timely manner, the
existence of reliability, quality or availability problems in the products or
their component parts, or the failure to achieve market acceptance would have a
material adverse effect on the Company's revenues and operating results.
-8-
Competition. The computer communications, networking and mass storage interface
business is extremely competitive and the Company faces competition from a
number of established and emerging computer communications and internetworking
device companies. Many of the Company's principal competitors have established
brand name recognition and market positions and have substantially greater
experience and financial resources to spend for promotion, advertising, research
and product development than the Company. Several of these competitors have
recently introduced or announced their intentions to introduce new competitive
products. In addition, as the Company broadens its product offerings, it may
face competition from new competitors. Companies in related markets could offer
products with functionality similar or superior to that offered by the Company's
products. Increased competition could result in price reductions, reduced
margins and loss of market share, all of which would materially and adversely
affect the Company's revenues and operating results. Several of the Company's
competitors have recently been acquired by major networking companies. These
acquisitions are likely to permit the Company's competition to devote
significantly greater resources to the development and marketing of new
competitive products and the marketing of existing competitive products to their
larger installed bases. The Company expects that competition will increase
substantially as a result of these and other industry consolidations and
alliances, as well as the emergence of new competitors. There can be no
assurance that the Company will be able to compete successfully with its
existing or new competitors or that competitive pressures faced by the Company
will not have a material adverse effect on the Company's revenues and operating
results.
Dependence on Key Customers. There can be no assurance that the Company's
principal customers will continue to purchase products from the Company at
current levels. Customers typically do not enter into long-term volume purchase
contracts with the Company and customers have certain rights to extend or delay
the shipment of their orders. The loss of one or more of the Company's major
customers, and the reduction, delay or cancellation of orders or a delay in
shipment of the Company's products to such customers would have a material
adverse effect on the Company's revenues and operating results.
Dependence on Sun Microsystems, Inc. Products. Many of the Company's products
are designed and manufactured to be compatible with workstations manufactured by
Sun Microsystems, Inc. The Company's business opportunities and results of
operations are dependent, in part, on continued growth and market acceptance of
systems manufactured and marketed by Sun Microsystems, Inc. In the event these
systems are no longer commercially acceptable, or in the event Sun Microsystems,
Inc. were to curtail its manufacturing and marketing of those systems, this
would have a material adverse effect on the Company's revenues and operating
results.
Potential Fluctuations in Annual and Quarterly Results. The Company's annual and
quarterly operating results may in the future vary significantly depending on
factors such as the timing and shipment of significant orders, new product
introductions by the Company and its competitors, market acceptance of new and
enhanced versions of the Company's products, changes in pricing policies by the
Company and its competitors, the mix of distribution channels through which the
Company's products are sold, inability to obtain sufficient supplies of sole or
limited source components for the Company's products, seasonal and general
economic conditions. The Company's expense levels are based, in part, on the
Company's expectations as to future revenue. Since a substantial portion of the
Company's revenue in each quarter result from orders shipped in the final month
of that quarter, revenue levels are extremely difficult to predict. If revenue
levels are below expectations, revenues and operating results will be adversely
affected. Net income would be disproportionately affected by a reduction in
revenue because only a small portion of the Company's net expenses varies with
its revenue.
Dependence on Third Party Component Suppliers. Certain components used in the
Company's products are currently available to the Company from one or a limited
number of sources. Although to date, the Company has generally been able to
obtain adequate supplies of these components, there can be no assurance that
future supplies will be adequate for the Company's needs or will be available on
prices and terms acceptable to the Company. The Company's inability in the
future to obtain sufficient limited-source components, or to develop alternative
sources, could result in delays in product introduction or shipments, and
increased component prices could negatively affect the Company's gross margins,
either of which will have a material adverse effect on the Company's revenues
and operating results.
-9-
Dependence on Internal Manufacturing. In order to avoid relying on outside
contract manufacturers, the Company manufactures all of its products at its
Rochester, New York facility. The Company does not have alternative
manufacturing capabilities, either internally or through third parties, to
perform those manufacturing functions. Even if the Company were able to identify
alternative third-party contract manufacturers, there can be no assurance that
the Company would be able to retain their services on terms and conditions
acceptable to the Company. In the event of an interruption in production, the
Company may not be able to deliver products on a timely basis, which will have a
material adverse effect on the Company's revenues and operating results.
Although the Company currently has business interruption insurance, no
assurances can be given that such insurance will adequately cover the Company's
lost business as a result of such an interruption.
Dependence on Proprietary Technology. The Company's success depends upon the
Company's proprietary technologies. To date, the Company has relied principally
upon trademark, copyright and trade secret laws to protect its proprietary
technologies. The Company generally enters into confidentiality or license
agreements with its distributors, customers and potential customers and limits
access to and distribution of the source code to its software and other
proprietary information. The Company's employees are subject to the Company's
employment policy regarding confidentiality. There can be no assurance that the
steps taken by the Company in this regard will be adequate to prevent
misappropriation of its technologies or to provide an effective remedy in the
event of a misappropriation by others. The Company holds no patents and has not
filed any patent applications for its products. If patent applications are filed
by the Company, there can be no assurance that any patents will be granted, or
that, if granted, such patents would provide the Company with meaningful
protection from competition.
Although management believes that the Company's products do not infringe the
proprietary rights of third parties, there can be no assurance that infringement
claims will not be asserted, resulting in costly litigation in which the Company
may not ultimately prevail. Adverse determinations in such litigation could
result in the loss of the Company's proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third parties
or prevent the Company from manufacturing or selling its products, any of which
will have a material adverse effect on the Company's revenues and operating
results.
Because of the existence of a large number of patents in the computer networking
industry and the rapid rate of issuance of new patents or new standards or to
obtain important new technology, it may be necessary for the Company to enter
into technology licenses from others. There can be no assurance that these third
party technology licenses will be available to the Company on commercially
reasonable terms. The loss of or inability to obtain any of these technology
licenses could result in delays or reductions in product shipments. Any such
delays or reductions in product shipments will have a material adverse effect on
the Company's revenues and operating results.
Dependence on Personnel. The Company's success depends on the continued
contributions of its personnel, many of whom would be difficult to replace. It
will also depend on its ability to attract and retain skilled employees.
Although the Company's employees are subject to the Company's employment policy
regarding confidentiality and ownership of inventions, employees are not
otherwise subject to employment agreements or non-competition covenants. Changes
in personnel could adversely affect the Company's operating results.
ITEM 2 - Properties
The Company's principal executive offices, research and development and
manufacturing facilities are located in Rochester, New York in a 30,000 square
foot building that was constructed specifically for the Company in 1990. This
building is located in a high technology business park. The lease for this
facility expires in the year 2001. The Company has an option to renew the lease
for two successive five-year terms. The Company also leases sales offices at
four locations. The terms of these leases are on an annual basis for three
locations and month to month for the remaining location. The Company's UconX
subsidiary leases approximately 6,800 square feet of office space in San Diego,
California pursuant to a lease which expires November 30, 1999. Management
believes that its facilities will be sufficient for at least 1997 after which
additional space may be required.
-10-
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, 1996.
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 under the
trading symbol "PTIX". The following table sets forth, for the periods
indicated, the high and the low closing prices for the Common Stock, as reported
on the NASDAQ National Market since January 24, 1996, the effective date of the
Company's Registration Statement on Form S-1 for the Company's initial public
offering of its Common Stock. These prices represent quotations among securities
dealers without adjustments for retail markups, markdowns or commissions and may
not represent actual transactions.
1996 High Low
- ------------------------------------ ---- ---
First Quarter (from January 24, 1996) $12.75 $ 8.00
Second Quarter 17.75 11.75
Third Quarter 14.50 12.125
Fourth Quarter $12.25 $ 9.656
As of March 14, 1997, there were 144 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)
For the Years Ended December 31: 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
Sales $24,843 $17,891 $12,562 $10,805 $8,185
Income from continuing operations 3,734 2,393 1,618 1,218 754
Loss from discontinued operations (19) (1,133) (455) (293)
Income per common share from continuing
operations $.76 $.73 $.50 $.38 $.24
Weighted average number of common shares
outstanding 4,907 3,284 3,262 3,217 3,196
At December 31: 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
Working capital $20,965 $6,215 $4,369 $4,689 $2,825
Total assets 26,089 10,523 9,312 9,246 6,142
Long-term debt, less current portion $ 30 $ 57 $ 622 $1,504 $ 175
-11-
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The following discussion and analysis of the Company's financial condition and
results of operations during the periods included in the accompanying financial
statements focuses on the Company's continuing operations and does not include
any discussion or analysis with respect to the Company's discontinued
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
The Company achieved record sales and operating income in 1996. For the second
consecutive year, revenues increased by approximately 40% and income from
continuing operations increased by approximately 50%. At the end of 1996, the
Company had approximately $16 million in cash and marketable securities, no
significant debt and generated income from operations excluding depreciation and
amortization (EBITDA) of $5.9 million. Return on equity for 1996 was 24.7% and
return on assets was 20.4%. On January 24, 1996, the Company completed the
initial public offering of its Common Stock which resulted in net proceeds to
the Company of approximately $11.4 million.
The Company's revenues are generated from products designed to enhance the
performance of network systems based on varied computer architectures including
VMEbus, SBus and PCIbus. The Company's products operate on various operating
systems including UNIX, Windows NTJ and most recently Linux. The Company has a
proven record of adapting its products to a continually changing marketplace.
During 1996, the Company began shipping several new products for the Wide and
Local Area Networks and the mass storage markets, continued its efforts to
develop new advanced networking switching products, expanded its sales and
marketing efforts to broaden market penetration and increased the unit sales
volumes of existing products.
During 1996, the Company entered into a number of strategic partnering
relationships including: SysKonnect, Inc. and Sun Microelectronics, a division
of Sun Microsystems, Inc. The relationship with SysKonnect combines their PCI
FDDI technology with the Company's expertise in developing network software for
Solaris x.86 and other UNIX environments. In October, the Company introduced its
first PCI based, FDDI adapter for FDDI networks. This was the Company's first
Local Area Network communications product introduced for the PCIbus market and
complemented its two Wide Area Network communications adapter products for the
PCIbus market already being shipped to customers.
While the desktop PCIbus market has already taken off, it now appears that the
workstation server market is poised to expand rapidly as major workstation
manufacturers prepare to announce PCI based workstations and servers. In
November, Sun Microelectronics selected the Company as a supplier of WAN
communications solutions for Sun's new SPARCengineJ Ultra AXJ mother board.
These products support the industry standard PCI hardware architecture recently
adopted by Sun Microsystems, Inc. Management believes that as a result of the
growth in the PCI marketplace there will be significant market opportunities for
the Company in the PCIbus server market utilizing both Sun Solaris and Windows
NT platforms. The Company expects in 1997 to introduce several new
communications and mass storage interface products into this expanding market.
-12-
The Company has increased sales primarily by developing new products and by
increasing the unit sales volumes of existing products. International sales were
$2.6 million in 1996, compared to $2.5 million for 1995. In April 1996, the
Company opened a direct sales office in Munich, Germany to sell its WAN, LAN and
mass storage interface systems products. During the third quarter of 1996, the
Company's PCI and SBus communications, networking and mass storage interface
products received the CE Mark and were approved for sale throughout the European
Community. The CE Mark can be placed only on products that meet rigorous
electromagnetic compatibility testing standards and is required for many
electronic products sold in Europe.
Historically, approximately 65% to 75% of the Company's sales have been to OEMs.
During 1996, several new and significant OEM relationships were established
and/or expanded. Emphasis is being placed on developing a larger worldwide
distribution network of VARs, distributors and systems integrators for the
Company's SBus, PCI and network switching products. At the present time, the
Company has approximately 35 distributors throughout the world for its products.
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,
1996 1995 1994
------ ------ -----
Sales 100.0% 100.0% 100.0%
Cost of goods sold 43.7 44.4 49.1
------ ------ -----
Gross profit 56.3 55.6 50.9
------ ------ -----
Operating expenses:
Selling and marketing 12.9 11.8 9.9
Research and development 11.9 10.9 10.9
General and administrative 11.0 14.6 10.4
------ ------ -----
Total operating expenses 35.8 37.3 31.2
------ ------ -----
Income from operations 20.5 18.3 19.7
Other income (expense), net 3.0 1.1 (0.4)
------ ------ -----
Income before taxes and minority interest 23.5 19.4 19.3
Provision for income taxes 8.4 5.8 6.3
Minority interest (0.1) (0.2) (0.1)
------ ------ -----
Income from continuing operations 15.0% 13.4% 12.9%
====== ====== =====
Year Ended December 31, 1996, Compared with the Year Ended December 31, 1995
Sales. Sales for 1996 increased by $6,952,000 (39%) to $24,843,000, from
$17,891,000 for 1995. The Company's products are grouped into five categories:
WAN Interface Adapter products, LAN Interface Adapter products, Network Systems
products, Mass Storage Interface products and Inter-system Connectivity
products. The increase in sales is primarily attributable to the growing demand
for the Company's WAN and LAN Adapter products. The Company began shipping new
PCI based WAN and LAN adapter products in 1996 and revenues nearly reached $1
million for these products. WAN and LAN adapter product sales each grew by 62%
in 1996 and represented 42% and 21%, respectively of total sales for the year.
Network Systems products grew 57% in 1996 and were 11% of total sales for 1996.
Revenues from Mass Storage interface products increased to $3,869,000 in 1996
and grew by 20% for the year. Inter-system Connectivity product revenues
decreased from 18% of sales in 1995, to 10% in 1996. The Company is not
investing in this group of products and a further decline in these revenues is
expected in 1997.
-13-
Gross Profit. Gross profit consists of sales, less cost of goods sold including
materials costs, manufacturing expenses and amortization of software development
costs. Gross profit for 1996 increased by $4,051,000 to $13,994,000, from
$9,943,000 for 1995 due to increased sales volumes. Gross margin percentage
improved to 56.3% of sales for 1996, from 55.6% in 1995. The improved margin is
attributable to favorable product mix along with manufacturing efficiencies
associated with higher sales volumes.
Total Operating Expenses. Total operating expenses increased to $8,907,000, or
35.8% of sales for 1996, from $6,670,000, or 37.3% of sales for 1995. The
Company made significant investments in sales, marketing, research and
development during 1996 while reducing its general and administrative expenses
as a percentage of sales.
Selling and marketing expenses increased by 52% to $3,210,000, or 12.9% of sales
for 1996, from $2,106,000, or 11.8% of sales for 1995. The Company added sales
people in North America and in Europe and commissions increased due to higher
sales levels. The Company was also added staff to the marketing department in an
effort to promote the Company's products more extensively. The Company spent an
additional $600,000 in advertising and trade show expenses in 1996 to introduce
several new products and to improve its presence in the marketplace. Management
expects to hire additional sales and marketing people in 1997 and to increase
its marketing expenditures for advertising, trade shows and promotion in an
effort to expand its business in both the domestic and international markets.
Research and development expenses increased by 51% to $2,960,000, or 11.9% of
sales for 1996, compared to $1,955,000, or 10.9% of sales for 1995. Research and
development expenses consist primarily of employee salaries and benefits costs,
cost of materials consumed in developing and designing new products and, to a
lesser extent, contract development. Certain engineering expenses associated
with the development of software are capitalized and amortized to cost of goods
sold. The increase in research and development expenses in 1996 was primarily
attributable to hiring additional hardware and software engineers and
compensation related expenses. The Company needs to continually invest in new
product development to stay abreast of technological changes in its markets. The
Company expects to commit greater resources, as a percentage of sales, to
research and development in the future including hiring several engineers over
the next twelve months to accelerate new product development.
General and administrative expenses increased by 5% to $2,737,000, or 11.0% of
sales for 1996, compared to $2,609,000, or 14.6% of sales for 1995. The decrease
as a percentage of sales, is primarily attributable to maintaining a tight
control on administrative expenses while sales increased by nearly 40%.
Other income (expense), net. Other income consists primarily of interest income.
During 1996, the Company earned interest income on the net proceeds of its
initial public offering of Common Stock. The funds are primarily invested in
money market funds, high quality short term commercial paper and US Treasury
securities maturing in 8 to 12 months.
Income Taxes. The provision for income taxes for 1996 is based upon the combined
federal and state effective tax rate of 35.6%, compared to 29.8% in 1995. The
primary reasons for the increase in the combined tax rate are the higher
utilization of carryforward research and development tax credits in 1995 and the
foreign sales exemption.
Year Ended December 31, 1995, Compared with the Year Ended December 31, 1994
Sales. Sales for 1995 increased by $5,329,000 (42.4%) to $17,891,000, from
$12,562,000 for 1994. The demand for the Company's products in 1995 improved
over 1994 for the following reasons: introduction of new WAN products, including
both hardware and software releases; introduction of significant enhancements
for the Company's LAN/FDDI products; and an increase in the volume of sales of
mass storage interface products related to RAID applications. International
sales amounted to $2,538,000 for the year ended December 31, 1995, compared to
$1,554,000 in 1994.
-14-
Gross Profit. Gross profit consists of sales, less cost of goods sold including
material costs, manufacturing expenses and amortization of software development
costs. Gross profit for 1995 increased by $3,555,000 (56%) to $9,943,000, from
$6,388,000 for 1994. Gross margin percentage improved to 55.6% of sales for
1995, from 50.9% for 1994. The improved margin is attributable to a number of
factors, including a reorganization of the Company's manufacturing operations
which enhanced overall efficiency and resulted in substantially reduced
overtime, a change in the mix of products shipped to include higher margin
products, such as WAN products, and greater discounts obtained from several
major component suppliers related to higher purchasing volumes.
Total Operating Expenses. Total operating expenses increased to $6,670,000, or
37.3% of sales for 1995, from $3,916,000, or 31.2% of sales for 1994. Higher
staffing levels and compensation expenses were the primary contributors to the
increase in operating expenses.
Selling and marketing expenses increased to $2,106,000, or 11.8% of sales for
1995, from $1,242,000, or 9.9% of sales for 1994. This increase resulted from
significantly greater commission expenses associated with higher sales levels,
staff additions in the marketing function including the hiring of a Vice
President-Marketing in March 1995, and an increase in the allowance for doubtful
accounts to reflect the potential uncollectibility of a significant accounts
receivable balance.
Research and development expenses were $1,955,000, or 10.9% of sales for 1995,
compared to $1,366,000, or 10.9% of sales for 1994. Research and development
expenses consist primarily of employee salaries and benefits costs, cost of
materials consumed in developing and designing new products and, to a lesser
extent, contract development and equipment rental. Certain engineering expenses
associated with the development of software are capitalized and amortized to
cost of goods sold.
General and administrative expenses increased to $2,609,000, or 14.6% of sales
for 1995, compared to $1,308,000, or 10.4% of sales for 1994. The increase is
primarily attributable to compensation expense related to warrants, corporate
bonuses and increases in head count, as well as legal, accounting and other
expenses associated with the growth of the business.
Income Taxes. The provision for income taxes for 1995 is based upon the combined
federal and state effective tax rate of 29.8%, compared to 32.7% in 1994. The
primary reasons for the decrease in the combined tax rate are the utilization of
research and development tax credits and the foreign sales exemption.
Liquidity and Capital Resources
At December 31, 1996, the Company's primary source of liquidity included cash
and cash equivalents of $10,027,000, marketable securities with a maturity less
than one year of $6,102,000 and available borrowings of $3,000,000 under a
revolving credit facility with a bank. No amounts were outstanding under this
credit facility as of December 31, 1996. The Company had working capital of
$20,965,000 at December 31, 1996, compared to $6,215,000 at December 31, 1995.
Cash generated by operating activities was $3,642,000, $3,297,000 and $1,091,000
in 1996, 1995 and 1994, respectively. The increase in cash generated from
operating activities in 1996 is attributable to greater net income offset, in
part, by a net increase in operating assets and liabilities, due to a higher
volume of business.
Cash used in investing activities was $7,469,000, $619,000 and $889,000 in 1996,
1995 and 1994, respectively. During 1996, investing activities included the
purchase of marketable securities of $6,102,000, net capital equipment purchases
of $719,000 and the purchase of the remaining shares of the Company's UconX
subsidiary for $268,000 which resulted in UconX becoming a wholly-owned
subsidiary of the Company. Capital equipment purchases consist primarily of
manufacturing equipment, office equipment and computer and related equipment
used in engineering. Such capital equipment purchases have increased during the
past three years reflecting the growth of the business and investment in
maintaining and upgrading the manufacturing operation. In addition, the Company
capitalizes certain software development costs. Amounts capitalized and included
within investing activities were $380,000, $193,000 and $364,000 in 1996, 1995
and 1994, respectively.
-15-
Cash provided by financing activities of $11,388,000 for 1996 was principally
the result of the Company's initial public offering of its Common Stock in
January 1996. During 1995 and 1994 financing activities were primarily
borrowings and repayment of borrowings on the Company's line of credit.
Assuming there is no significant change in the Company's business, management
believes that its current cash and marketable securities together with cash
generated from operations and available borrowings under the Company's loan
agreement will be sufficient to meet the Company's anticipated needs, including
working capital, for at least the next twelve months.
ITEM 8 - Financial Statements and Supplementary Data
Index to Financial Statements: Page
Reports of Independent Accountants 17
Consolidated Balance Sheets at December 31, 1996 and 1995 19
Consolidated Statements of Income for the Three
Years Ended December 31, 1996 20
Consolidated Statements of Changes in Stockholders'
Equity for the Three Years Ended December 31, 1996 21
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1996 22
Notes to Consolidated Financial Statements 24
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.
-16-
Report of Independent Accountants
February 14, 1997
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, 1996
and 1995, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/Price Waterhouse LLP
- -----------------------
-17-
Independent Auditor's Report
Board of Directors and Stockholders
Performance Technologies, Incorporated and Subsidiaries
Rochester, New York
We have audited the accompanying consolidated statements of income, changes in
stockholders' equity, and cash flows of Performance Technologies, Incorporated
and Subsidiaries for the year ended December 31, 1994. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of Performance
Technologies, Incorporated and Subsidiaries referred to above present fairly, in
all material respects, the results of their operations and their cash flows for
the year ended December 31, 1994, in conformity with generally accepted
accounting principles.
/s/Rotenberg & Company, LLP
- ---------------------------
Rochester, New York
March 3, 1995
-18-
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1996 1995
------ ------
Current assets:
Cash and cash equivalents $10,027,000 $ 2,466,000
Marketable securities 6,102,000
Accounts receivable, net (Notes B, G) 3,234,000 2,210,000
Inventories, net (Notes C, G) 4,032,000 3,412,000
Prepaid income taxes 334,000
Prepaid expenses and other 284,000 294,000
Deferred taxes (Note J) 419,000 238,000
----------- -----------
Total current assets 24,098,000 8,954,000
Equipment and improvements, net (Notes D, G) 1,267,000 1,078,000
Software development, net (Note K) 549,000 418,000
Other assets (Note E) 175,000 73,000
----------- -----------
Total assets $26,089,000 $10,523,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt (Note G) $ 26,000 $ 73,000
Accounts payable 953,000 1,427,000
Income taxes payable 23,000
Accrued expenses (Note F) 2,131,000 1,239,000
----------- -----------
Total current liabilities 3,133,000 2,739,000
Long term debt, less current portion (Note G) 30,000 57,000
Deferred taxes (Note J) 219,000 157,000
----------- -----------
Total liabilities 3,382,000 2,953,000
----------- -----------
Commitments (Note H)
Minority interest 83,000
Stockholders' equity (Notes I, N)
Preferred stock - $.01 par value: 1,000,000 shares
authorized; none issued at December 31, 1996 and 1995
Common stock - $.01 par value; 15,000,000 shares authorized;
4,899,418 and 3,263,598 shares issued at December 31,
1996 and 1995, respectively 49,000 33,000
Additional paid-in capital 12,885,000 1,414,000
Retained earnings 9,930,000 6,196,000
Treasury stock-at cost, 98,117 and 98,080 shares held
at December 31, 1996 and 1995 (157,000) (156,000)
----------- -----------
Total stockholders' equity 22,707,000 7,487,000
----------- -----------
Total liabilities and stockholders' equity $26,089,000 $10,523,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
-19-
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1996 1995 1994
---- ---- ----
Sales $ 24,843,000 $ 17,891,000 $ 12,562,000
Cost of goods sold 10,849,000 7,948,000 6,174,000
------------ ------------ ------------
Gross profit 13,994,000 9,943,000 6,388,000
------------ ------------ ------------
Operating expenses:
Selling and marketing 3,210,000 2,106,000 1,242,000
Research and development 2,960,000 1,955,000 1,366,000
General and administrative 2,737,000 2,609,000 1,308,000
------------ ------------ ------------
Total operating expenses 8,907,000 6,670,000 3,916,000
------------ ------------ ------------
Income from operations 5,087,000 3,273,000 2,472,000
Other income (expense), net 750,000 203,000 (48,000)
------------ ------------ ------------
Income before taxes and minority interest 5,837,000 3,476,000 2,424,000
Provision for income taxes (Note J) 2,079,000 1,037,000 794,000
------------ ------------ ------------
Income before minority interest 3,758,000 2,439,000 1,630,000
Minority interest (24,000) (46,000) (12,000)
Income from continuing operations 3,734,000 2,393,000 1,618,000
Loss from discontinued operations, net of
tax benefits (Notes J, N) (19,000) (1,133,000)
------------ ------------ ------------
Net income $ 3,734,000 $ 2,374,000 $ 485,000
============ ============ ============
Earnings per share:
Income from continuing operations $ .76 $ .73 $ .50
============ ============ ============
Loss from discontinued operations ( .01) ( .35)
============ ============ ============
Net income $ .76 $ .72 $ .15
============ ============ ============
Weighted average common and common equivalent
shares (Note A) 4,907,288 3,283,531 3,261,928
============ ============ ============
The accompanying notes are an integral part of these financial statements.
-20-
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-In Treasury Retained
Shares Amount Capital Stock Earnings Total
Balance - January 1, 1994 3,102,002 $31,000 $1,024,000 $(138,000) $3,907,000 $4,824,000
1994 Net income 485,000 485,000
Exercise of options/warrants 54,686 1,000 99,000 100,000
--------- ------- ---------- --------- ---------- ----------
Balance - December 31, 1994 3,156,688 32,000 1,123,000 (138,000) 4,392,000 5,409,000
1995 Net income 2,374,000 2,374,000
Exercise of options/warrants 106,910 1,000 165,000 166,000
Issuance of warrants 62,000 62,000
Tax benefit - warrant and
option plans 64,000 64,000
Purchase of treasury stock -
6,084 shares (18,000) (18,000)
Distribution to stockholders -
spin off (Note N) (570,000) (570,000)
--------- ------- ---------- --------- ---------- ----------
Balance - December 31, 1995 3,263,598 33,000 1,414,000 (156,000) 6,196,000 7,487,000
1996 Net income 3,734,000 3,734,000
Exercise of options/warrrants 35,820 74,000 74,000
Tax benefit - warrant and
option plans 25,000 25,000
Purchase of treasury stock -
37 shares (1,000) (1,000)
Initial Public Offering
stock proceeds (Note I) 1,600,000 16,000 11,372,000 11,388,000
--------- ------- ---------- --------- ---------- ----------
Balance - December 31, 1996 4,899,418 $49,000 $12,885,000 $(157,000) $9,930,000 $22,707,000
========= ======= =========== ========= ========== ===========
The accompanying notes are an integral part of these financial statements.
-21-
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31,
1996 1995 1994
--------- --------- --------
Cash flows from operating activities
Net income $ 3,734,000 $ 2,374,000 $ 485,000
Non-cash adjustments:
Depreciation and amortization 831,000 675,000 388,000
Reserve for inventory obsolescence 609,000 293,000 180,000
Deferred income taxes (119,000) (73,000) 34,000
Other (113,000) 236,000 48,000
Changes in operating assets and liabilities:
Accounts receivable (895,000) (803,000) 536,000
Inventories (1,229,000) (783,000) (798,000)
Prepaid expenses and other 25,000 (239,000) (14,000)
Accounts payable (474,000) 385,000 (199,000)
Accrued expenses 892,000 834,000 (142,000)
Income taxes payable 381,000 (97,000) 733,000
Discontinued operations - non-cash charges and
working capital charges 495,000 (160,000)
------------ ----------- ----------
Net cash provided by operating activities 3,642,000 3,297,000 1,091,000
------------ ----------- ----------
Cash flows from investing activities
Cash purchases of equipment and improvements, net (719,000) (297,000) (158,000)
Capitalized software development (380,000) (193,000) (364,000)
Purchase of remaining shares in subsidiary (268,000)
Purchase of marketable securities (6,102,000)
Investing activities of discontinued operations (129,000) (367,000)
------------ ----------- ----------
Net cash used by investing activities (7,469,000) (619,000) (889,000)
------------ ----------- ----------
Cash flows from financing activities
Payments on capital lease obligations (62,000) (63,000) (61,000)
Borrowings from line of credit 535,000 2,169,000
Repayment of line of credit and notes payable (12,000) (1,446,000) (2,545,000)
Exercise of stock options and warrants 74,000 142,000 72,000
Net proceeds from issuance of common stock 11,388,000
Financing activities of discontinued operations 435,000
------------ ----------- ----------
Net cash provided (used) by financing activities 11,388,000 (832,000) 70,000
------------ ----------- ----------
Net increase in cash 7,561,000 1,846,000 272,000
Cash and cash equivalents at beginning of year 2,466,000 620,000 348,000
------------ ----------- ----------
Cash and cash equivalents at end of year $ 10,027,000 $ 2,466,000 $ 620,000
============ =========== ==========
The accompanying notes are an integral part of these financial statements.
-22-
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year ended December 31,
1996 1995 1994
--------- --------- --------
Interest paid $ 13,000 $ 24,000 $ 70,000
Income taxes paid $ 1,853,000 $ 1,371,000 $ 53,000
SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS
Spin off to stockholders
Accounts receivable $ 13,000
Inventory 642,000
Prepaid expenses 29,000
Deferred tax assets 47,000
Equipment and improvements, net of accumulated depreciation 331,000
Software capitalization, net of amortization 472,000
Accounts payable (139,000)
Accrued expenses (117,000)
Income taxes payable (5,000)
Capital lease obligations, short term (1,000)
Deferred tax liabilities (202,000)
Loan payable (500,000)
------------
Net distribution $ 570,000
============
The accompanying notes are an integral part of these financial statements.
-23-
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Nature of Business and Summary of Significant Accounting Policies
The Company: Performance Technologies, Incorporated was formed in 1981 under the
laws of the State of Delaware and maintains its corporate offices at 315 Science
Parkway, Rochester, New York. The Company and its subsidiaries design, develop,
manufacture and market high performance communications, networking and data
storage interface systems products. The Company's products are designed to
enhance the performance of customers' computer network systems and include local
and wide area network interface adapters, communication servers and mass storage
interface products. The Company also provides sophisticated software
communications solutions. Applications for the Company's products are targeted
toward high performance, mission critical networking solutions and include:
network interfaces for cellular telephone communications, FDDI adapter products
used aboard navy vessels, communications servers used in air traffic control
centers and data storage products found in bank automated teller machines.
Segment Data, Geographic Information and Significant Customers: The Company
operates in one industry segment. Export sales to customers outside the United
States represent 10.8%, 14.2%, and 12.4% of the Company's sales for the years
ended December 31, 1996, 1995 and 1994, respectively. For 1996, 1995 and 1994,
four customers accounted for approximately 30%, 21% and 30%, respectively, of
the Company's sales, with no single customer representing greater than 12%, 6%
and 15%, respectively, of the Company's sales.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, PTI Virgin Islands
Company, Ltd., and UconX Corporation (Note E). Manutech Corporation of
Rochester, Videk Corporation, the Performance Telecom business unit and the
InformationView business unit have been shown in the Statements of Income and
Statements of Cash Flows for the years ended December 31, 1995 and 1994 as
discontinued operations (Note N). All significant inter-company transactions
have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Concentration of Credit Risk: Financial instruments which potentially expose the
Company to significant concentrations of credit risk consist principally of bank
deposits, investments and accounts receivable. Investments consist of high
quality short-term interest bearing financial instruments. The Company performs
ongoing credit evaluations of its customers' financial condition and the Company
maintains an allowance for uncollectible accounts receivable based upon the
expected collectibility of all accounts receivable.
Inventories: Inventories are valued at the lower of cost or market using the
first-in, first-out method.
Fair Value of Financial Instruments: The carrying amount of the Company's
financial instruments, including cash and cash equivalents, marketable
securities, accounts receivable, accounts payable, accrued expenses and loans
approximates their fair value at December 31, 1996, as the maturity of these
instruments are all short term. Due to differences in the interest rates on
certain of the long term debt and capital lease obligations compared to
prevailing rates, the fair value of these instruments does vary from their
carrying amounts, however, such differences are immaterial.
Cash Equivalents: The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
-24-
Note A - Nature of Business and Summary of Significant Accounting Policies
(continued)
Revenue Recognition: Revenue from hardware sales is recognized upon product
shipment. Revenue from consulting and other professional service contracts is
recognized when earned on the basis of hours incurred at contract rates for time
and material agreements. Revenue relating to licenses of the Company's software
products is recognized when a binding agreement is entered into to purchase and
after delivery of the product to the customer. Revenue associated with customer
maintenance agreements on software licenses is recognized on a monthly basis as
earned. Costs associated with providing maintenance service are recorded as
incurred.
Marketable Securities: The Company has classified all of its marketable debt
securities as held to maturity and has accounted for these investments at
amortized cost. Accordingly, no adjustment for unrealized holding gains or
losses has been reflected in the Company's financial statements. Marketable
securities classified as held to maturity are high credit quality securities in
accordance with the Company's investment policy. At December 31, 1996, cost
approximates fair market value.
Equipment and Improvements: Equipment and improvements are recorded at cost.
Depreciation is provided for using the straight-line method over the following
useful lives:
Machinery and equipment 3-10 years
Office furniture and equipment 3-5 years
Leasehold improvements The lesser of 10 years or the lease term
Upon retirement or disposal of an asset, the asset and the related accumulated
depreciation are eliminated from the accounts with gains or losses recorded in
the Statements of Income.
Intangible Assets: Intangible assets consist of the excess purchase price over
fair value of net assets acquired and are being amortized on a straight-line
basis over five years. These assets are included in other assets in the
consolidated financial statements. The Company re-evaluates goodwill whenever
significant events or changes occur which might impair recovery of recorded
costs (Note E).
Research and Development: Research and development costs are expensed as
incurred.
Software Development Costs: Software development costs incurred subsequent to
the establishment of technological feasibility and prior to general release of
the product are capitalized and amortized on a product-by-product basis over
their estimated remaining economic life, generally three years, or using the
ratio of current revenues to current and anticipated revenues from such
software, whichever provides greater amortization.
Income Taxes: The Company accounts for income taxes using the asset and
liability approach which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax basis of such assets and liabilities. This
method utilizes enacted statutory tax rates in effect for the year in which the
temporary differences are expected to reverse and gives immediate effect to
changes in income tax rates upon enactment. Deferred tax assets are recognized,
net of any valuation allowance, for deductible temporary differences and tax
credit carry-forwards. Deferred income tax expense (benefit) represents the
change in net deferred tax asset and liability balances.
Earnings Per Share: Earnings per share is computed using the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares consist of stock options and stock warrants as computed
using the treasury stock method. Common equivalent shares from stock options and
warrants are excluded from the computation if their effect is anti-dilutive,
except that, pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin, common and common equivalent shares issued between November 21, 1994
and the closing of the Company's initial public offering on January 24, 1996,
have been included in the computation using the treasury stock method as if they
were outstanding for the years ending December 31, 1995 and 1994.
-25-
Note B - Accounts Receivable
Accounts receivable consisted of the following at December 31, 1996 and 1995:
December 31,
1996 1995
------ ------
Accounts receivable $ 3 ,405,000 $ 2,507,000
Less: allowance for doubtful accounts (171,000) (297,000)
------------- -------------
Net $ 3,234,000 $ 2,210,000
============= =============
Note C - Inventories
Inventories consisted of the following at December 31, 1996 and 1995:
December 31,
1996 1995
------ ------
Purchased parts and components $ 1,601,000 $ 1,467,000
Work in process 2,641,000 1,691,000
Finished goods 292,000 383,000
------------- -------------
4,534,000 3,541,000
Less: reserve for inventory obsolescence (502,000) (129,000)
-------------- -------------
Net $ 4,032,000 $ 3,412,000
============= =============
Note D - Equipment and Improvements
Equipment and improvements consisted of the following at December 31, 1996 and
1995:
December 31,
1996 1995
------ ------
Engineering equipment and software $ 1,247,000 $1,336,000
Manufacturing equipment 1,295,000 651,000
Furniture and equipment 702,000 560,000
Leasehold improvements 123,000 94,000
------------- ----------
3,367,000 2,641,000
Less: accumulated depreciation and amortization (2,100,000) (1,563,000)
------------- -----------
Net $ 1,267,000 $ 1,078,000
============= ===========
Total depreciation and amortization expense for equipment and improvements from
continuing operations for 1996, 1995 and 1994 was $538,000, $318,000 and
$210,000, respectively.
Fixed assets include $271,000 and $298,000 of equipment and software held under
capital lease agreements at December 31, 1996 and 1995, respectively. Related
accumulated amortization at December 31, 1996 and 1995 was $238,000 and
$209,000, respectively. Related amortization expense from continuing operations
was $29,000, $60,000 and $21,000 for 1996, 1995 and 1994, respectively.
Note E - Other Assets
During 1996, the Company paid $268,000 to acquire the remaining shares of UconX
Corporation resulting in UconX becoming a wholly-owned subsidiary. In connection
with this transaction, additional goodwill of $188,000 was recorded.
Amortization expense from continuing operations for goodwill was $45,000,
$34,000 and $34,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
-26-
Note F - Accrued Expenses
Accrued expenses consisted of the following at December 31, 1996 and 1995:
December 31,
1996 1995
------ ------
Accrued compensation $ 1,431,000 $ 918,000
Accrued payroll and other taxes 266,000 103,000
Other accrued expenses 434,000 218,000
------------- -----------
Total $ 2,131,000 $ 1,239,000
============= ===========
Note G - Long Term Debt and Credit Agreement
During 1996, the Company signed a new two year revolving credit loan agreement
with a bank increasing the available borrowing capacity to $3 million. The
Company's subsidiary, UconX Corporation, is the guarantor of the agreement.
Borrowings bear interest ranging between 150 basis points above the Libor rate
to the bank's prime rate and are collateralized by trade accounts receivable,
inventory, equipment, contract rights and intangibles. The new agreement
requires the Company to meet certain financial and non-financial covenants. The
Company was in compliance with such covenants at December 31, 1996. There were
no balances outstanding under this agreement at December 31, 1996 and 1995.
In June 1993, the Company borrowed $80,000 from the City of Rochester to
purchase equipment. The seven year loan bears interest at 2%. The loan is fully
collateralized by an irrevocable letter of credit. This agreement contains a
covenant requiring the Company to maintain substantially all of its operations
located within the boundaries of the municipality.
The Company has guaranteed $500,000 for Performance Telecom Corporation, a
former subsidiary spun-off in 1995 (Note N). At December 31, 1996, PTC had a
$450,000 loan balance outstanding and during January 1997 an additional $250,000
was paid reducing the balance under this guarantee to $200,000.
A summary of the long term debt outstanding at December 31, 1996 and 1995 is as
follows:
December 31,
1996 1995
------ ------
Loans payable $ 41,000 $ 53,000
Capital lease obligations 15,000 77,000
----------- ------------
56,000 130,000
Less: current portion (26,000) (73,000)
----------- ------------
Long term portion $ 30,000 $ 57,000
=========== ============
As of December 31, 1996, the aggregate maturities of loans payable and
obligations under capital leases are as follows:
Year ended
December 31, Amount
------------- ------
1997 $26,000
1998 12,000
1999 12,000
2000 6,000
-------
$56,000
=======
-27-
Note H - Commitments
The Company leases facilities and equipment under operating leases. Under the
terms of the facility lease which expires in the year 2001, the Company agrees
to pay an annual rental of $270,000 with an adjustment each year based upon the
Consumer Price Index. The Company is also required to pay their pro rata share
of the real property taxes and assessments, expenses and other charges
associated with this facility. The Company has the option to renew the lease for
two successive periods of five years each at an annual rental in accordance with
the provisions of the lease agreement. The Company has co-guaranteed
approximately $1,250,000 of the mortgage obtained to finance the building. In
recognition of this guarantee, the Company has the right of first refusal to
purchase the facility at a discounted price, should the owners elect to sell.
Future minimum lease payments for all operating leases having a remaining term
in excess of one year at December 31, 1996 are as follows:
Operating
Leases
------------
1997 $ 404,000
1998 396,000
1999 383,000
2000 311,000
2001 129,000
-----------
Total minimum lease payments $1,623,000
===========
Rental expense from continuing operations amounted to $500,000, $563,000 and
$311,000 for 1996, 1995 and 1994, respectively. Rental income from continuing
operations amounted to $9,000, $134,000 and $0 for 1996, 1995 and 1994,
respectively.
Note I - Stockholders' Equity
In connection with the initial public offering of the Company's common stock,
the Company's Board of Directors authorized on November 14, 1995 to increase the
authorized number of shares of common stock to be issued from 6,000,000 to
15,000,000 shares and for the issuance of 1,000,000 shares of preferred stock,
$0.01 par value. On November 22, 1995, the Company filed a Registration
Statement on Form S-1 with the Securities and Exchange Commission to register up
to 2,000,000 shares of its common stock for sale to the public. Of these shares,
400,000 were sold by selling shareholders. On January 24, 1996, the Registration
of these securities became effective and the Company completed a public offering
of 1.6 million shares of its common stock at $8 per share. Aggregate net
proceeds from the sale of shares approximated $11.4 million.
In 1986, the Company established an Incentive Stock Option Plan pursuant to
which 700,000 shares of common stock have been reserved for grant by the Board
of Directors. Options may be granted to any officer, director or employee at not
less than the fair market value at the date of grant (not less than 110% of the
fair market value in the case of holders of more than 10% of the Company's
common stock). Options granted under the plan generally expire five years from
the date of grant and generally vest 20% after one year, 50% after two years and
100% after three years.
-28-
The following table summarizes stock option activity under this plan:
Number of Shares Price Ranges
Outstanding at January 1, 1994 226,150
Granted 38,964 $2.28-$3.01
Exercised (50,666) $1.75-$2.50
Expired (32,314) $1.75-$2.50
--------
Outstanding at December 31, 1994 182,134
Granted 16,000 $2.74-$3.01
Exercised (58,410) $1.83-$3.00
Expired (6,400) $2.28-$2.50
--------
Outstanding at December 31, 1995 133,324 $1.83-$3.01
Granted 232,000 $10.00-$14.75
Exercised (32,340) $1.83-$2.74
Expired (855) $2.28-$2.74
--------
Outstanding at December 31, 1996 332,129 $1.83-$14.75
=======
At December 31, 1996, 102,061 options were vested and 164,575 options were
available for future grant under the stock option plan.
On March 31, 1995, 55,888 options issued to employees who terminated employment
with the Company and became employees of PTC were amended to become
non-qualified options on that date. There was no change in the exercise price,
vesting provisions or expiration date for these options.
At December 31, 1994, 39,500 common stock warrants were outstanding and during
1994, no warrants were issued, 6,000 warrants were exercised and 3,000 warrants
expired. During 1995, all previously issued warrants were exercised.
During 1995, 50,000 warrants were issued to two of the Company's officers, 2,000
warrants were issued to an outside director and 500 warrants were issued to a
consultant. The warrants are exercisable for five years from the date of grant
and have an exercise price of $2.74 per share. The warrants were valued at
$62,000 and the related charge to continuing operations was recorded to
operations in 1995. During 1996, 2,000 of such warrants were exercised.
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option plan.
The effect of this pronouncement on 1995, prior to the public offering of the
Company's common stock, is not significant. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
date for awards in 1996 consistent with the provisions of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts of $3,198,000 and $.65, respectively.
The assumption regarding the stock options issued to executives in 1996 was that
33% of such options vested in 1996. 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 1996: dividend
yield of 0%; expected volatility of 65%; risk-free interest rate of 6.2%; and
expected lives of five years.
-29-
Note J - Income Taxes
The provisions for income taxes from continuing operations for 1996, 1995 and
1994 were as follows:
Year ended December 31,
Current income taxes 1996 1995 1994
--------- -------- ---------
Federal $ 1,852,000 $ 916,000 $ 490,000
State 346,000 194,000 270,000
----------- --------- ---------
2,198,000 1,110,000 760,000
Deferred provision (benefit) (119,000) (73,000) 34,000
----------- --------- ---------
Total provision $ 2,079,000 $1,037,000 $ 794,000
=========== ========== =========
The provisions (benefits) for income taxes from continuing operations differ
from those computed using the federal tax rate of 34% due to the following:
Year ended December 31,
1996 1995 1994
------ -------- ---------
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Utilization of research and development tax credits (2.7) (4.8) (0.7)
State tax provision, net of federal benefit 3.9 3.6 7.6
Other 0.4 (3.0) (8.1)
---- ---- ----
Total provision for income taxes 35.6% 29.8% 32.8%
==== ==== ====
The Company's net deferred income tax balance as of December 31, 1996 and 1995
consists of the following:
December 31,
Deferred tax liabilities 1996 1995
- ------------------------ ------ ------
Capitalized software development cost, net $ 219,000 $ 167,000
Other (10,000)
---------- ----------
Total deferred tax liabilities $ 219,000 $ 157,000
---------- ----------
Deferred tax assets
Accrued vacation, payroll and other accrued expenses (121,000) (67,000)
Inventory obsolescence reserve and other inventory related items (171,000) (52,000)
Bad debt reserve (68,000) (119,000)
Research tax credits (35,000)
Other (24,000)
----------
Total deferred tax assets (419,000) (238,000)
---------- ----------
Net deferred tax asset $ (200,000) $ (81,000)
========== ==========
The carryforward research credits begin to expire in 2006.
Note K - Research and Software Development Costs
The Corporation incurred research and software development costs relating to the
development of new products for continuing operations during 1996, 1995 and 1994
as follows:
Year Ended December 31,
1996 1995 1994
------- ------ -------
Gross expenditures for engineering
and software development $3,460,000 $2,177,000 $1,757,000
Less: amounts capitalized (500,000) (222,000) (391,000)
---------- ---------- ----------
Net charged to operating expenses $2,960,000 $1,955,000 $1,366,000
========== ========== ==========
Amortization of software development costs for continuing operations included in
cost of goods sold was $369,000, $323,000 and $144,000 for 1996, 1995 and 1994,
respectively.
-30-
Software Development costs consisted of the following at December 31, 1996 and
1995:
December 31,
1996 1995
------ ------
Capitalized software development costs $ 1,398,000 $ 898,000
Less: accumulated amortization (849,000) (480,000)
----------- ---------
Net $ 549,000 $ 418,000
============ ==========
Note L - Employee Benefit Plans
The Company's Retirement Savings Plan qualifies under Section 401(k) of the
Internal Revenue Code. Generally, all eligible full time employees may
contribute up to 20% of their compensation subject to the IRS limitation of
$9,500 per year toward their retirement on a tax deferred basis. The Company has
made matching contributions up to three-quarters of the amounts contributed by
participating employees, but no more than 3% of the participant's compensation.
The Plan's assets are administered by the Principal Financial Group.
Contributions for continuing operations amounted to $126,000, $67,000 and
$11,000 for 1996, 1995 and 1994, respectively.
Note M - Transactions with Related Parties
The Company leases its primary facility from an entity controlled by two
directors of the Company, one of whom is an officer. During 1996, 1995, and
1994, the Company paid rent of $307,000, $297,000 and $290,000, respectively,
for the use of this location. (Note H)
Note N - Discontinued Operations
In March 1995, the Company sold the assets of the Manutech business unit for a
net purchase price of $168,000. Effective March 31, 1995, the Company completed
a spin-off transaction (the "Spin-Off") whereby the Company's Performance
Telecom business unit, the InformationView business unit, and its wholly owned
subsidiary, Videk Corporation, were combined into a new entity, Performance
Telecom Corporation, the stock of which was distributed to the Company's
stockholders. To accomplish the Spin-Off, the Company's Board of Directors
declared a distribution to each of the Company's stockholders of one share of
Performance Telecom stock for each share of the Company's Common Stock owned by
its stockholders. The Spin-Off was structured to qualify as a tax-free
transaction under the Internal Revenue Code. This transaction represents a
distribution to stockholders and, therefore, there is no gain or loss reflected
in the Company's Statement of Income.
The disposal of Manutech and the operations distributed in the Spin-Off are
reflected as discontinued operations in the Company's consolidated financial
statements.
A summary of discontinued operations for 1995 and 1994 is as follows:
Year ended December 31,
1995 1994
------ ------
Sales $ 1,634,000 $ 6,055,000
=========== ===========
Loss before income taxes $ (189,000) $(1,725,000)
Income tax benefit 170,000 630,000
----------- -----------
Loss from discontinued operations (19,000) (1,095,000)
Loss on sale of Manutech including operating losses during the
phase out period, net of tax benefit of $12,000 (38,000)
----------- -----------
$ (19,000) $(1,133,000)
=========== ===========
-31-
Note O - Quarterly Results (unaudited)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 1996 and 1995.
December 31, 1996
Mar. 31 Jun.30 Sept.30 Dec.31
-------- ------- -------- -------
Sales $5,537 $6,463 $6,412 $6,431
Gross profit 3,174 3,721 3,506 3,593
Income from operations 1,313 1,298 1,254 1,222
Income before taxes and minority interest 1,444 1,473 1,456 1,463
Net income $ 897 $ 910 $ 912 $1,015
Earnings per share $ 0.20 $ 0.18 $ 0.18 $ 0.21
====== ====== ====== ======
December 31, 1995
Mar. 31 Jun.30 Sept.30 Dec.31
-------- ------- -------- -------
Sales $3,931 $4,144 $4,997 $4,819
Gross profit 2,228 2,219 2,644 2,852
Income from operations 712 719 1,005 837
Income before taxes and minority interest 764 753 976 983
Net income $ 440 $ 517 $ 677 $ 740
Earnings per share $ 0.13 $ 0.16 $ 0.20 $ 0.23
====== ====== ====== ======
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
-32-
PART III
The information required by Part III and each of the following items is omitted
from this Report and presented in the Company's definitive proxy statement to be
filed, pursuant to Regulation 14A not later than 120 days after the end of the
fiscal year covered by this Report, in connection with the Company's Annual
Meeting of Stockholders to be held on June 10, 1997, which information included
therein is incorporated herein by reference.
ITEM 10 - Directors and Executive Officers of the Registrant
The section entitled "Election of Directors" appearing in the Company's proxy
statement for the Annual Meeting of Stockholders to be held on June 10, 1997,
sets forth certain information with respect to the directors of the Company and
is incorporated herein by reference.
ITEM 11 - Executive Compensation
The section entitled "Executive Compensation" appearing in the Company's proxy
statement for the Annual Meeting of Stockholders to be held on June 10, 1997,
sets forth certain information with respect to the compensation of management of
the Company and is incorporated herein by reference.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Company's proxy statement for the Annual Meeting of
Stockholders to be held on June 10, 1997, set forth certain information with
respect to the ownership of the Company's Common Stock and is incorporated
herein by reference.
ITEM 13 - Certain Relationships and Related Transactions
The section entitled "Certain Transactions" appearing in the Company's proxy
statement for the Annual Meeting of Stockholders to be held on June 10, 1997,
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.
-33-
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 10K 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
- ------- ------ -----------
1.1 (1) Form of Underwriting Agreement
2.1 (1) Agreement and Plan of Reorganization and Corporate
Separation between the Registrant and Performance
Telecom Corporation dated March 15, 1995
3.1 (1) Restated Certificate of Incorporation
3.2 (1) Amended By-Laws
4.1 (1) Form of Common Stock Certificate
4.2 (1) Amended and Restated Stock Option Plan
5.1 (1) Opinion of Harter, Secrest & Emery
10 (1) Material Contracts
10.1 (2) Revolving Credit Agreement dated as of October 31,
1996 between the Registrant and The Chase Manhattan
Bank, N.A.
10.2 (2) Revolving Credit Note in the amount of $3,000,000
dated October 31, 1996 given by the Registrant to
The Chase Manhattan Bank, N.A.
10.3 (1) Security Agreements granted by the Registrant to
The Chase Manhattan Bank, N.A. dated as of
April 13, 1985, April 13, 1993 and as of June 17,
1993, and with respect to Performance
Computer Corporation only, the Security
Agreement dated as of June 17, 1993 granted to
The Chase Manhattan Bank, N.A. by Performance
Computer Corporation and certain other
Affiliates of the Registrant (which other
Affiliates have been released) and all
amendments and modifications thereto
10.4 (1) Letter of Intent from the City of Rochester to the
Registrant dated May 4, 1993
10.5 (1) Irrevocable Standby Letter of Credit from The Chase
Manhattan Bank, N.A. dated June 4, 1993
10.6 (1) Promissory Note in the amount of $80,000 dated June 8,
1993 given by the Registrant to the City of
Rochester
10.7 (1) Letter of Credit and Reimbursement Agreement
between C & J Enterprises and Chase Lincoln First
Bank, N.A. dated September 1, 1990
10.8 (1) Corporation Guaranty Agreement granted by the
Registrant, PTI Acquisition Corporation to Chase
Lincoln First Bank, N.A. dated as of September 1,
1990
10.9 (1) Guaranty Agreement dated August 31, 1995 between the
Registrant and the City of Rochester
10.10 (1) Sublease Agreement between the Registrant and C & J
Enterprises dated as of September 1, 1990
10.11 (1) Master Equipment Lease between the Registrant and
Fleet Credit Corporation dated as of March 30, 1992
10.12 (1) Master Equipment Lease between the Registrant and
M & M Associates dated February 1, 1993
10.13 (1) Master Equipment Lease between the Registrant and
M & M Associates dated November 1, 1993
-34-
Exhibit Ref.
Number Number Description
- ------- ------ -----------
10.14 (1) Agreement between the Registrant and Loral Test &
Information Systems dated November 2, 1995
10.15 (1) License Agreement between the Registrant and Willemijn
Houdstermaatschappij BV dated as of January 1, 1994
10.16 (1) License Agreement between the Registrant and Spider
Systems Limited dated March 18, 1992
10.17 (1) Technology Transfer Agreement between the Registrant and
Newbridge Networks Corporation dated July 5, 1995
10.18 (1) Real Property Lease for UconX Corporation, as Lessee
10.19 (1) Line of Credit and Security Agreement between the
Registrant and UconX Corporation dated as of
September 1, 1992
10.20 (1) Amendment to Line of Credit Agreement and Security
Agreement between the Registrant and UconX
Corporation dated as of July 1, 1993
10.21 (1) Second Amendment to Line of Credit and Security
Agreement between the Registrant and UconX
Corporation dated as of September 2, 1994
10.22 (1) Employee Confidentiality, Non-Disclosure,
Non-Competition and Assignment Agreement between
the Registrant, UconX Corporation and Thomas R.
Stockey dated August 14, 1992
10.23 (1) Employee Confidentiality, Non-Disclosure,
Non-Competition and Assignment Agreement between
the Registrant,UconX Corporation and Robert S.
Lindstrom dated August 14, 1992
10.24 (1) Employee Confidentiality, Non-Disclosure,
Non-Competition and Assignment Agreement between
the Registrant, UconX Corporation and Jean M.
Lindstrom dated August 14, 1992
10.25 (1) Employee Confidentiality, Non-Disclosure,
Non-Competition and Assignment Agreement between
UconX Corporation and Kevin Quick dated August 16,
1992
10.26 (1) Employee Confidentiality, Non-Disclosure,
Non-Competition and Assignment Agreement between
UconX Corporation and Tim Barba dated August 14,
1992
10.27 (1) Shareholders' Agreement among the Registrant,
Shareholders of UconX Corporation and UconX
Corporation dated as of September 1, 1992
10.28 (1) Adoption Agreement between the Registrant and Principal
Mutual Life Insurance Company dated September 20,
1993
10.29 (1) The Principal Financial Group Prototype Basic Savings
Plan dated May 7, 1990
10.30 (1) Form of Stock Option Agreement
10.31 (1) Form of Warrant Agreement
11 (1) Statement re computation of per share earnings
16 (1) Letter re change in certifying public accountant
21 (1) Subsidiaries
24.1 (1) Corporate Power of Attorney
24.2 (1) Officer and Director Power of Attorney
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the Registrant's Registration Statement of Form
S-1 filed on November 22, 1995.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q/A for the Quarterly Period Ended September 30, 1996 filed November 14,
1996.
(4) Reports on Form 8-K
None
-35-
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
By:/s/CHARLES E. MAGINNESS
Charles E. Maginness
Chief Executive Officer
/S/DORRANCE W. LAMB
Dorrance W. Lamb
Chief Financial Officer and
Vice President of Finance
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/CHARLES E. MAGINNESS Chairman of the Board, Chief March 28, 1997
- ---------------------- Executive Officer and Director
Charles E. Maginness
S/DONALD L. TURRELL President and Director March 28, 1997
- ----------------------
Donald L. Turrell
/s/DORRANCE W. LAMB Chief Financial Officer, and March 28, 1997
- ----------------------- Vice President of Finance
Dorrance W. Lamb
/s/JOHN M. SLUSSER Director March 28, 1997
- ----------------------
John M. Slusser
/s/BERNARD KOZEL Director March 28, 1997
- ----------------------
Bernard Kozel
/s/JOHN E. MOONEY Director March 28, 1997
- ----------------------
John E. Mooney
/S/PAUL L. SMITH Director March 28, 1997
- ----------------------
Paul L. Smith
-36-