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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_________________
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the Fiscal Year Ended December 31, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission File Number 0-27460
PERFORMANCE TECHNOLOGIES, INCORPORATED
(Exact name of registrant as specified in its charter)
-------------------
Delaware 16-1158413
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
14620
315 Science Parkway, Rochester New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (716) 256-0200
______________________
Securities registered pursuant to section 12(b) of the Act:
NONE
------------------------
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of the close of business on March 1, 1999 was approximately
$63,000,000.
The number of shares outstanding of the registrant's Common Stock, $.01
par value, was approximately 7,323,000 as of March 1, 1999.
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 8, 1999, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 1998.
________________________________________________________________________________
Performance Technologies, Incorporated
Index to Annual Report on Form 10-K
Page
PART I
Item 1 Business 1
Item 2 Properties 11
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 11
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 12
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A Qualitative and Quantitative Disclosures
About Market Risk 20
Item 8 Financial Statements and Supplementary Data 20
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
EXHIBIT 10 Material Contracts
EXHIBIT 10.1 Revolving Credit Agreement
EXHIBIT 10.2 Revolving Credit Note
EXHIBIT 21 Subsidiaries of The Registrant
EXHIBIT 27 Financial Data Schedule (FDS)
PART I
ITEM 1 - Business
Performance Technologies, Incorporated designs, manufactures and markets a wide
variety of high reliability, high performance communications products that are
in one product segment and are grouped into five product categories: Wide Area
Networking products, LAN interface products, Mass Storage Interface products and
Inter-system Connectivity products. Most recently, the Company has been
developing its second generation family of high performance Network Switches for
Local Area Networks. The Company's products are targeted toward high
performance, mission critical applications found in the telecommunications,
financial services, defense and public safety industries. Applications include
network interfaces for cellular telephone communications, fiber optic data
communications products used aboard navy vessels, communications servers used in
air traffic control centers and enterprise Ethernet network switching products.
Since its inception in 1981, the Company has consistently produced innovative
networking solutions for a wide variety of computer architectures and has a
history of being able to adapt its products to a continually changing technology
driven 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 increase both sales and income over the last five years.
As the Company enters 1999, management is focusing on the development and
delivery of new products for two distinct communications markets: Wide Area
Networking communications and Local Area Network Switching.
Industry Overview
The need to collect, store, analyze and distribute information in a secure,
timely and efficient manner has become an integral part of the global economy.
The acceleration of developments in both computer technology and telephony
technology is driving the convergence of these two areas and opening up
substantial opportunities to supply infrastructure related products that address
these evolving technologies. Despite the recent rapid changes in the information
revolution, there has been a clear distinction between the traditional computer
systems and the telephone communications networks that connect to the computer.
Another distinction is between the network in which computers are connected
within a business office, Local Area Network (LAN) and the communications link
to outside the business office, Wide Area Network (WAN). Recently, computer
systems used for information processing and the telephone communication networks
are rapidly converging into one unified, but often geographically distributed,
architecture where the boundaries between the two traditional systems are
blurred. As a result, there have been many new hardware and software
opportunities emerging that are directly related to implementing this
convergence. There is little doubt that computer technology, integrated with
communication technology, is a convincing example of the "sum of the two being
greater than the whole."
Over the past decade, the computer systems used in many enterprises evolved from
large and expensive mainframes connected to numerous unintelligent terminals, to
a client/server computing model. This contemporary model replaces the mainframe
with one or more powerful servers interconnected to intelligent desktop
computers through high bandwidth local area networks. The growing paradigm of
Client/Server computer systems has been an ideal model to foster convergence of
data communications and telecommunications. The integration of computers into
the telecommunication systems has already provided enhanced services such as
800/900 numbers, call waiting, caller ID, greater cellular coverage, reduced
cell and long distance rates, and faster, more expansive Internet access.
Similarly, data communication systems have benefited from integration with
telecommunication systems as individual computers located throughout the world
are connected to vast communication facilities with enormous information access
capability.
As a result of this rapid convergence, the market opportunity for networking and
communication products is rapidly expanding. According to a recent industry
study, the Ethernet LAN switching market is forecasted to reach over $15 billion
in 1999 and has been growing at over 35% per year. The Wide Area Network
communication arena is expected to grow from $750 million in 1998 to over $4.0
billion by the year 2003. These impressive growth estimates, combined with other
market trends, are expected to cause the computer networking equipment industry
to experience a substantial increase in demand as they enter the next
millennium. The next rapidly growing phase of this convergence is likely to
center around the use of data communication networks to also carry real-time
voice and video traffic, in many instances bypassing the older voice centric
telecommunications infrastructure. The Company's WAN Communications and Local
Area Network Switching products address product segments of these larger
markets.
1
Strategy
The Company's strategies are directed at ensuring its products and services are
correctly positioned to take advantage of the many opportunities presented by
the changing technologies and convergence phenomena. 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
Wide Area and Local Area Networking. The Company's products provide unique
mission critical solutions where reliability and performance are the primary
concerns of the user. Typical applications that demonstrate this mission
critical focus include network interfaces for cellular telephone transmitter
sites, fault-tolerant Fiber Digital Data Interface (FDDI) adapter products used
aboard Navy vessels and terrestrial military vehicles, network adapters used in
the control and billing systems of traditional telecommunications networks and
communications servers used in both rail and air traffic control. To a large
degree, the Company has avoided networking and communication products that would
be sold into the commodity desktop office or home environment, often
characterized by low price, large volumes and fierce competition.
Exploit Technological Competencies. Since its inception, the Company has
pioneered many innovations in networking and computer technologies including the
VME64 industry standard, proprietary ASICs and innovative "hot swap" and
"failover" techniques to enhance equipment availability and reliability.
Building on a strong base of technological competency has allowed the Company to
develop innovative products that improve data communications performance and
reliability. Management intends to continue to leverage its competencies to
position the Company as a technological leader in high performance and high
availability WAN and LAN hardware and software products.
Continue to Develop Advanced Networking Products. The Company recognizes the
need to continually upgrade the performance of its existing products and to
develop new products which address the changing requirements of WAN and LAN
applications. Over the past 12 months, the Company has introduced a variety of
WAN and LAN products designed for the PCIBus and the new "industrialized" PCI
standard called CompactPCI (cPCI) which is being embraced by the
telecommunications and defense industries for next generation equipment. Several
of these products have been early and unique entrants into the growth oriented
PCIBus and cPCI arena aimed at supporting complex communications protocols and
network requirements associated with such applications as air traffic control
radar systems, Signaling System #7 (SS7) network control systems and channelized
T1/E1 high speed network interfaces. These new products have been responsible
for a variety of potentially significant OEM and partnering relationships. The
Company has also developed a family of switching products for Ethernet LANs
directed at specific applications requiring high availability. Delivery of these
LAN products began in 1998 with a unique fault tolerant model due for shipment
in 1999.
Expand International Markets. The data communication markets served by the
Company are international in scope. Global demand for network products is driven
by the increasing need of all societies to be able to successfully implement
advanced networking and communications infrastructures. Outside of North
America, the Company markets its products primarily in Western Europe and the
Asia Pacific. In an ongoing effort to increase international revenue, the
Company has been investing in the expansion of its marketing, sales and support
operations in these specific geographic areas. In 1998, the Company reorganized
its direct sales and support in the European Economic Community (E.E.C). The
Company now operates a sales and support office in the United Kingdom providing
coverage to the Western European markets. In addition to the direct Company
presence in the E.E.C., the Company continues to employ a variety of third party
organizations to assist in establishing both OEM and distribution accounts in
Europe and the Asia Pacific regions. In 1998, international revenue increased
substantially over the previous year and represented 23% of annual sales. This
growth was directly attributable to several successful OEM relationships in
Europe. As corporate revenue grows in the Pacific Asia area, the Company would
anticipate opening a direct sales and service center in this area of the world.
2
Leverage Software Expertise. The Company has a growing competency in
communications, networking and high availability software expertise. The Company
has significantly expanded its ability for offering communication protocols for
Wide Area Networks by combining its east and west coast software engineering
organizations. In addition, the Company has invested substantially in developing
fault tolerant and hardened software implementations used in both WAN and LAN
products. Management believes focusing on increasing software content in
products emphasizing high availability and reliability features is an important
element of the Company's future product strategy.
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 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
products and make timely shipments. The Company's manufacturing facility
operates under an integrated MRP system that significantly reduces lead-time and
inventory investment and facilitates effective demand forecasting. This in-house
manufacturing capability provides the Company with the means to quickly
manufacture new products without the delays normally associated with the use of
manufacturing subcontractors. During 1998, additional surface mount equipment
was installed to assure continued high quality assembly with sufficient capacity
to meet expected delivery requirements for the Company's expanding customer
base. The Company's manufacturing process is certified under the ISO 9002
quality program.
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. The Company's
products have traditionally been grouped into five categories: WAN
Communications products, LAN Interface Adapter products, Network Systems
products, Mass Storage Interface products and Inter-system Connectivity
products. The Company has also been developing its second generation of network
switches for Local Area Networks. As the Company enters 1999, management is
focusing on the development and delivery of new products for two distinct
communications markets: Wide Area Networking communications and Local Area
Network Switching.
WAN Communications Products. The Company's WAN Communications products provide
customers with hardware and software solutions which support a variety of open
system platforms. These open systems include VMEbus, SBus, PCIBus, CompactPCIbus
(cPCI) and PMCbus. The Company offers software support for its products across a
variety of commonly used operating systems including Microsoft's WindowsNTJ, Sun
Microsystems' SolarisJ, Wind River's VxWorks, and QNX. In addition to the
advanced hardware network interface products, the Company offers an extensive
suite of advanced communication software such as X.25, Frame Relay, High Level
Data Link Control (HDLC) variants, Signaling System #7 (SS7), and a variety of
protocols to facilitate high and low speed communications. The communications
software content is further expanded by the Company's channelized support for
T1/E1 data rates and software protocol tool kits for specialized customer
development. The growth in the Wide Area Networking (WAN) communications market
is being driven by the expansion of the Internet, cellular communications and
the convergence occurring between data communications and telecommunications.
WAN Communications product customers include Lucent Technologies, Compaq/Digital
Equipment Corporation, QualComm Inc., Alcatel Inc., Motorola Corporation and ADC
NewNet. Product applications cover a variety of uses including: High speed
Internet connections for server products, T1/E1 products used for SS7 products
and communications for rail and subway signaling.
During 1998, the Company released three new Wide Area Network interface adapters
for the cPCIbus architecture. These products were designed specifically with
features that are required in advanced telecommunications applications,
including the necessary capability for "hot swap replacement." Management
believes that the Company's cPCI products are some of the first products
available to cPCI users for high speed WAN communications. All of the Company's
WAN Communications products are designed for applications that require high
performance and high speed communications capability. To support these
applications, the Company's products are "intelligent," containing their own
microprocessors and memory. This architecture allows these network interface
products to perform many of the lower-level communications tasks that would
typically be performed by the host platform, greatly improving overall system
performance and capability. During 1998, the Company also expanded its family of
WAN software protocol products with emphasis on enhancing speed and reliability.
WAN product sales represented 58% of total sales for 1998, compared to 47% for
1997 and has been the highest growth product area for the Company over the past
three years .
3
Local Area Network Switching. The Company has been developing a second
generation family of high performance 100Mbit/Gigabit Network Switches for Local
Area Networks which offer a variety of unique technical features. During 1998,
the Company completed development of its new Nebula (TM) 4000 workgroup switch
and its new Nebula 6000 high density departmental switch. The centerpiece of the
Company's Local Area Network switch strategy is the Nebula 8000 Fault Tolerant
Backbone Switch. This 100/1000 Ethernet switch is the first network switch to
offer true fault tolerance at an affordable price. The Nebula 8000's redundant
switch fabric has been engineered for maximum availability and its innovative
design ensures that no single point of failure will shutdown a network.
The market demands for fault tolerant computing and networking are rising
rapidly. Server manufacturers including Compaq Computer Corp. and Tandem
Computers have developed server clusters to meet their customers' fault tolerant
server requirements. Networking companies, including Novell, are actively
promoting and selling networking solutions for mission critical applications.
Management believes that deployment of its fault tolerant technologies in the
new Nebula 8000 Backbone Switch differentiates PTI from the other vendors in the
network switching marketplace. This new product is being positioned for Ethernet
based business and mission critical applications in enterprises where
"round-the-clock" operations demand highly resilient network infrastructures.
Prospective customers in the banking, brokerage, medical imaging and defense
industries are expressing serious interest in this product.
As of March 1999, the Nebula 8000 was operating in a number of early beta sites,
including the Company's communications network. Additional beta sites have been
selected and units are expected to be installed in these locations in April and
May. Shipments to customers are expected to commence in the second quarter 1999.
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 represented
20% of sales in 1998 and 1997. 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 U.S. Department of Defense to integrate tactical
workstations onboard Navy vessels. All of these NICs permit easy integration of
SBus, PCIBus or VMEbus computer systems to an FDDI or Ethernet LAN. The FDDI
adapters support the Company's alternate path FDDI topology, ensuring the
highest available levels of resiliency and data integrity for fault-tolerant and
mission critical markets. The Company actively supports software supplied with
its newest PCI-based FDDI adapters to be compatible with computer platforms
utilizing both the Sun Microsystems' Solaris and WindowsNT operating systems. It
is management's belief that the FDDI technology as a LAN technology is not
growing and the Company's FDDI products are in the harvest phase of their
product life cycle and a decline can be predicted over the next 18-24 months.
Network Systems Products. The Company's Network Systems products consist of
system level equipment used in the construction and deployment of computer
networks. These products represented 6% of sales in 1998, compared to 9% in
1997. The engineering staff supporting this product group was reassigned at the
beginning of 1998 to develop software for WAN Communications products.
Traditionally this group has included:
4
Communications Servers. Communications servers are multipurpose LAN-to-WAN
bridging systems supported by software from the Company's San Diego based
communication protocol engineering center. The products in this category include
a low cost, limited server solution for installations requiring from one to six
WAN connections and up to two Ethernet LAN connections. Using unique software,
the communications servers can be configured to provide a variety of protocol
packages and supporting protocols including bisynchronous, asynchronous
communications financial market feeds and radar receivers. The communication
server products from the Company can be found in data collection applications
including NASA's deep space network, in air traffic control centers for
retrieving radar data from remote radar antenna sites and in the US Weather
Service infrastructure for retrieving weather satellite and radar images.
Management believes this product offering will see continued growth in 1999.
Since communications servers are directly aligned with the Company's Wide Area
Network communications products, these products will be reported in that
grouping in 1999.
Communications Subsystems. The Company's "front-end" I/O communications
subsystem product supports multiple disk storage controllers or communication
interface modules. This product was co-developed by the Company and a large OEM
customer and is used as a communications nexus for high powered workstations.
Since this is a very specialized product offering with a limited customer base,
management expects revenue from this product to decline in 1999.
Mass Storage Interface Products. The Company's Mass Storage Interface products
consist of adapters and software that connect various external disk storage
systems, such as Redundant Array of Inexpensive Disks (RAIDs) to computer
servers using the SCSI, UltraSCSI and Fibre Channel technologies. During 1998,
the Company introduced new products designed to operate on the PCIBus standard
using Fibre Channel. As the technologies have changed in this market, the
products have increasingly become "commoditized" thereby reducing the Company's
ability to achieve value-added pricing. While the Company is supporting the
current customer base in their transition from older technologies, it expects
revenue to decline in 1999 and beyond. This product group represented 9% of
sales in 1998, compared to 14% in 1997.
Inter-system Connectivity Products. The Company's Inter-system Connectivity
products permit dissimilar computer standards to be connected. These products
are typically used by OEMs and systems integrators for custom applications and
allow their customer's to maintain their investment in existing installed
equipment. These products represented 7% of sales in 1998, compared to 10% in
1997. Management does not believe these products are strategic to the Company's
future growth and is not investing in this business segment. Management believes
there will be further declines in this revenue during 1999.
Sales, Marketing and Distribution
The Company markets its products worldwide to a broad spectrum of customers
through various channels including OEMs, VARs, distributors and systems
integrators. Greater than 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.
Due to the technical nature of the Company's products sold to OEMs, it is
essential that the Company's salespeople are technically oriented and are
knowledgeable in the network and communications fields.
In North America, the Company operates four direct sales offices located in San
Diego California, Rochester New York, Old Saybrook Connecticut, and Houston
Texas. The Company also maintains its European sales and support office in
London. Currently, 22 sales, marketing and support personnel sell the Company's
products. In addition, independent sales representatives covering selected
geographic areas, and distributors or integrators handling selected products
supplement the Company's direct sales team on a worldwide basis.
The Company also sells products, including mass storage interface products and
certain LAN interface products, to distributors. In addition, a small, highly
focused group of distributors, VARs and integrators are involved in selling the
Company's network and fault tolerant switching products. The "vertical market"
business focus of these VARs and integrators is targeted toward specific
applications which are considered mission critical such as "7 day by 24 hour"
operations in the following industries: airline, trading floor applications for
the financial industry and medical systems in hospitals. Distributors, VARs and
integrators who sell the Company's products are managed by the Company's direct
sales force. Several marketing strategies are used to support these third party
organizations including advertising in trade publications, sponsoring customer
training sessions and participating in trade shows throughout North America,
Western Europe and the Pacific Rim.
5
OEM customers typically provide the Company with a rolling forecast for orders
placed two to three months in advance of shipment. VARs, integrators and
distributors typically provide the Company with orders placed 30 days in advance
of shipment. Sales of the Company's products to OEM customers are subject to a
number of factors outside the Company's control, including pricing, availability
and acceptance of these products by the OEM's customers and potential customers.
The Company executes various ongoing marketing strategies designed to attract
new OEM customers and to stimulate additional purchases from existing customers.
These strategies include direct mail campaigns and catalogue distribution,
direct telemarketing, special pricing programs, active participation in
technical standards groups, participation in national and regional trade shows
and selected trade press advertisements and technical articles and an active
campaign to direct potential customers to the corporate web site.
International sales represented 23% of the Company's net sales in 1998 (as
compared to 10% and 11% for 1997 and 1996, respectively). While 1998
international revenue represents a substantial increase over previous years, the
Company continues to believe that the international markets represent important
untapped opportunities for its products. Management believes that it can develop
expanded sales channels and marketing alliances with respect to new and existing
international markets and is actively pursuing these relationships. The
Company's products are currently sold by approximately 25 international
distributors throughout the major industrialized countries in Europe and the
Asia Pacific. The Company also operates a sales and marketing office in the
United Kingdom to better support its Western European customers. In addition,
the Company continues to engage two international marketing organizations to
assist in more aggressive development of the Pacific Rim and other territories
across all of its product offerings. Use of these third party organizations is
primarily viewed as an interim step that will to lead to additional direct sales
offices in Europe and the Pacific Rim, assuming the Asian economic climate
improves. International sales are subject to import and export controls,
transportation delays and interruptions, foreign currency exchange rates, and
foreign governmental regulations. All payments for shipments outside the United
States are made in U.S. dollars.
Customers
The Company has over 300 active customers worldwide, including major OEMs, Value
Added Resellers, systems integrators, and educational/research organizations.
Many of the Company's major customers are Fortune 500 companies. In 1998, the
largest single customer represented 13% of sales (Compaq Computer Corp.), and
the top five customers accounted for 39% of 1998 revenue.
Generally, the Company's customers can be grouped into two categories. 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 incorporating the
Company's products often include applications such as sophisticated enterprise
servers with high speed WAN interconnections to the Internet or private
communication facilitates specialized Signaling System #7 server clusters
installed worldwide by many telecommunications organizations for 800 and 900
number implementations. 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, communication servers for deep space network used
by space research organizations and data collection network systems for air
traffic control and radar installations.
The second category are customers requiring products to be self-installing and
require limited knowledge of the products' internal operation. These products
are often referred to as "plug n' play" or "shrink wrapped," implying a
readiness to simply install the end application without the need to have
extensive technical knowledge. The Company's products that fit into this
category are the SBus and PCIBus Mass Storage Interface, the SBus and PCIBus LAN
products (Ethernet and FDDI Niches) and selected WAN Interface products
operating on the SBus and PCIBus standards.
6
Backlog
At March 7, 1999, the backlog of scheduled orders was $7.7 million, compared to
$4.7 million at March 2, 1998. Although orders are subject to cancellation in
the normal course of business, historically the Company has filled most of its
firm orders. (See Management's Discussion & Analysis included elsewhere in this
report).
Seasonality
The Company's business is generally not considered to have large seasonal
swings, but some of the business (primarily LAN Interface products and Network
Systems products) is project-related, driven by customer demand, which can cause
quarterly fluctuations in revenues.
Environmental Matters
The Company does not believe that compliance with federal, state or local laws
or regulations relating to the protection of the environment has any material
effect on its capital expenditures, earnings or competitive position.
Competition
The market for 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 communications
market, the Company's products compete with products from SBE Incorporated, Adax
Incorporated and Digi International Incorporated. In the emerging cPCI arena,
the Company's competition is less well-defined, although early entrants include
Force Computers, a division of Solectron Corporation, and SBS Technologies, Inc.
In the LAN Interface product market, the Company competes with Network
Peripherals Inc., Osicom Technologies, Incorporated and Interphase Corporation.
In the Mass Storage Interface product market, the Company competes with such
companies as Interphase Corporation, MacroLink Incorporated, Sun Microsystems,
Emulex Corporation, Qlogic Corporation and Adpatec, Incorporated.
In the Local Area Network Switching market, the Company is focusing on a niche
application, fault tolerance. However, many of the companies in this market
focus on broad applications products and 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 local network
switching market has become increasingly concentrated as a result of
consolidations 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
such as Cabletron Systems, 3Com Corp and Xylan Corp, 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 1998, 1997 and 1996 were approximately $4.2
million, $3.7 million and $3.0 million, respectively. 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.
7
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, and fault tolerant switching. The
Company expects that research and development funding will continue to increase
significantly in 1999. This funding will be directed at further leveraging these
competencies and carrying out additional product development in the areas of
communications and network switching. In carrying out this focused effort, the
Company has increased its internal capability to design and implement ASICs and
has invested substantially in integrating and expanding its communication and
networking software competency. These competencies will be an important
cornerstone for continued future enhancements of WAN network products and high
performance fault tolerant 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 and there can
be no assurance that the confidentiality agreements will not be breached, or
that such agreements will be enforceable, or that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known to or independently developed by competitors. If patent
applications are filed by the Company in the future, there can be no assurance
that any patents can be granted, or that, if granted, such patents would provide
the Company with meaningful protection from competition. The Company currently
has an outstanding patent application pending for a variety of aspects
associated with its fault tolerant network switching products. Management
expects the U.S. Patent office to render a ruling on this application in 1999.
There can be no assurance that third parties will not assert intellectual
property infringement claims against the Company. Although no written claims or
litigation relating to any such matters are currently pending against the
Company, the Company has not conducted any searches or obtained an opinion of
counsel with respect to its proprietary rights. Accordingly, there can be no
assurance that no claims will be initiated, that the Company would prevail in
any such litigation seeking damages or an injunction against the sale of the
Company's products, or if necessary, that the Company would be able to obtain
any necessary licenses on reasonable terms or at all. Any such litigation could
be protracted and costly and could have a material adverse 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. Technology oriented markets are especially
subject to rapid change. As a result, over the course of short periods,
components utilized by the Company face ongoing "End of Life" risks. To date,
the Company has generally been able to obtain adequate supplies of components or
has redesigned specific products when adequate components are not available. The
Company obtains components on a purchase order basis and does not generally have
long-term contracts with any of these suppliers. 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, premature End of Life of the Company's products,
and/or increased component prices could negatively affect gross margins, any 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.
8
Manufacturing
The Company maintains a state-of-the-art product assembly and manufacturing
facility in Rochester, New York. This facility operates under an integrated MRP
system that significantly reduces lead-time and inventory investments and
facilitates effective demand forecast. In December 1997, the Company received
ISO 9002 certification of its manufacturing facilities and quality management
systems. By maintaining an in-house manufacturing capability, management
believes that the Company has, to a certain extent, insulated itself from the
risks inherent in dealing with independent subcontractors. These risks include
timing delays that often result when subcontractors are unable to meet the
manufacturing requirements of their customers. In addition, through its in-house
manufacturing capability, the Company is able to 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 1, 1999, the Company had 140 full-time employees, 10 part time and
contract employees and 3 Engineering Cooperative employees. Management believes
its relations with its employees are good. The Company's employees are not
subject to collective bargaining agreements.
These employees work in the following areas:
Research and Development 53
Marketing and Sales 22
Manufacturing 59
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
revenue will depend upon the Company's ability to anticipate technological
change and to develop and introduce enhanced products of its own on a timely
basis that meet or exceed new industry standards. New product introductions
could contribute to quarterly fluctuations in operating results as orders for
new products commence and orders for existing products decline. Moreover,
significant delays can occur between a product's introduction and commencement
of volume production. The inability to develop and manufacture new products in a
timely manner, the existence of reliability, quality or availability problems in
the products or their component parts, or the failure to achieve market
acceptance would have a material adverse effect on the Company's revenue and
operating results.
Competition. The 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 inter-networking
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 revenue 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 revenue and operating
results.
9
Dependence on Key Customers. There can be no assurance that the Company's
principal customers will continue to purchase products from the Company at
current levels. Customers typically do not enter into long-term volume purchase
contracts with the Company and customers have certain rights to extend or delay
the shipment of their orders. The loss of one or more of the Company's major
customers, and the reduction, delay or cancellation of orders or a delay in
shipment of the Company's products to such customers would have a material
adverse effect on the Company's revenue and operating results. (See Management's
Discussion & Analysis included elsewhere in this report).
Potential Fluctuations in Annual and Quarterly Results. The Company's annual and
quarterly operating results may in the future vary significantly depending on
factors such as the timing and shipment of significant orders, new product
introductions by the Company and its competitors, market acceptance of new and
enhanced versions of the Company's products, changes in pricing policies by the
Company and its competitors, the mix of distribution channels through which the
Company's products are sold, inability to obtain sufficient supplies of sole or
limited source components for the Company's products, seasonal and general
economic conditions. The Company's expense levels are based, in part, on the
Company's expectations as to future revenue. Since a substantial portion of the
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, revenue and operating results will be adversely
affected. Net income would be disproportionately affected by a reduction in
revenue because only a small portion of the Company's net expenses varies with
its revenue. (See Management's Discussion and Analysis included elsewhere in
this report).
Dependence on Third Party Component Suppliers. Certain components used in the
Company's products are currently available to the Company from one or a limited
number of sources. Although to date, the Company has generally been able to
obtain adequate supplies of these components, there can be no assurance that
future supplies will be adequate for the Company's needs or will be available on
prices and terms acceptable to the Company. The Company's inability in the
future to obtain sufficient limited-source components, or to develop alternative
sources, could result in delays in product introduction or shipments, and
increased component prices could negatively affect the Company's gross margins,
either of which will have a material adverse effect on the Company's revenue and
operating results.
Dependence on Internal Manufacturing. In order to avoid relying on outside
contract manufacturers, the Company manufactures all of its products at its
Rochester, New York facility. The Company does not have alternative
manufacturing capabilities, either internally or through third parties, to
perform those manufacturing functions. Even if the Company were able to identify
alternative third-party contract manufacturers, there can be no assurance that
the Company would be able to retain their services on terms and conditions
acceptable to the Company. In the event of an interruption in production, the
Company may not be able to deliver products on a timely basis, which will have a
material adverse effect on the Company's revenue and operating results. Although
the Company currently has business interruption insurance, no assurances can be
given that such insurance will adequately cover the Company's lost business as a
result of such an interruption.
Dependence on Proprietary Technology. The Company's success depends upon the
Company's proprietary technologies. To date, the Company has relied principally
upon trademark, copyright and trade secret laws to protect its proprietary
technologies. The Company generally enters into confidentiality or license
agreements with its distributors, customers and potential customers and limits
access to and distribution of the source code to its software and other
proprietary information. The Company's employees are subject to the Company's
employment policy regarding confidentiality. There can be no assurance that the
steps taken by the Company in this regard will be adequate to prevent
misappropriation of its technologies or to provide an effective remedy in the
event of a misappropriation by others. The Company holds no patents but
currently has a patent review pending. There can be no assurance that any
patents will be granted, or that, if granted, such patents would provide the
Company with meaningful protection from competition.
10
Although management believes that the Company's products do not infringe on the
proprietary rights of third parties, there can be no assurance that infringement
claims will not be asserted, resulting in costly litigation in which the Company
may not ultimately prevail. Adverse determinations in such litigation could
result in the loss of the Company's proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third parties
or prevent the Company from manufacturing or selling its products, any of which
will have a material adverse effect on the Company's revenue and operating
results.
Because of the existence of a large number of patents in the computer networking
industry and the rapid rate of issuance of new patents or new standards or to
obtain important new technology, it may be necessary for the Company to enter
into technology licenses from others. There can be no assurance that these third
party technology licenses will be available to the Company on commercially
reasonable terms. The loss of or inability to obtain any of these technology
licenses could result in delays or reductions in product shipments. Any such
delays or reductions in product shipments will have a material adverse effect on
the Company's revenue and operating results.
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, manufacturing and the majority of its
research and development personnel are located in a 30,000 square foot building
in Rochester, New York. 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.
There is currently no excess office capacity at this facility. Management
believes additional office space will be needed to accommodate the Company's
growth in the near term and that adequate office space is available in and
around the Rochester area. The Company also leases approximately 6,800 square
feet of office space in San Diego, California pursuant to a lease which expires
in November 1999. This facility houses part of the Company's software
engineering and sales operations. The Company also leases sales offices at three
other locations.
ITEM 3 - Legal Proceedings
In the normal course of business, the Company is involved in litigation relating
to claims arising out of its operations. 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, 1998.
11
PART II
ITEM 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock trades on The NASDAQ Stock Market under the trading
symbol "PTIX". The following table sets forth the high and the low quarterly
closing prices of the Common Stock during the two most recent years, as reported
on the NASDAQ Stock Market. These prices represent quotations among securities
dealers without adjustments for retail markups, markdowns or commissions and may
not represent actual transactions.
1998 High Low
--------------- ------- -------
First Quarter $ 19.25 $ 13.13
Second Quarter 15.25 10.25
Third Quarter 11.63 9.00
Fourth Quarter $ 13.50 $ 9.00
1997 High Low
--------------- ------- -------
First Quarter $ 8.67 $ 6.83
Second Quarter 10.33 7.00
Third Quarter 19.38 10.00
Fourth Quarter $ 21.75 $ 13.50
As of March 1, 1999, there were 188 stockholders of record of the Company's
Common Stock.
To date, the Company has not paid cash dividends on its Common Stock and there
can be no assurances that the Company will do so at any time in the future.
The following table summarizes the proceeds from the sale of securities and use
of proceeds therefrom in connection with the Registrant's Initial Public
Offering on January 24, 1996. Amounts reported represent an estimate of the
amount of these expenditures. As of December 31, 1998, offering proceeds have
been used in full.
Proceeds from the sale of securities:
Gross proceeds $ 12,800,000
Less: Underwriter's commission 896,000
Finder's fees 0
Underwriter's expenses 27,000
Payments to Directors, Officers, General Partners 0
Other 461,000
------------
Net proceeds $ 11,416,000
============
Use of Proceeds:
Construction of facilities $ 0
Purchase of machinery 1,976,000
Purchase of real estate 0
Acquisition of other business(es) 0
Repayment of debt 0
General working capital purposes 0
Temporary investments 0
Inventory for new products 1,265,000
Software development 1,575,000
Product development 6,600,000
------------
Total use of proceeds $ 11,416,000
============
12
ITEM 6 - Selected Financial Data
(in thousands, except per share amounts)
For the Years Ended December 31: 1998 1997 1996 1995 1994
- ------------------------------- ----- ----- ----- ----- -----
Sales $30,202 $30,336 $24,843 $17,891 $12,562
Income from continuing operations 5,783 5,131 3,734 2,393 1,618
Loss from discontinued operations (19) (1,133)
Basic earnings per share:
Income from continuing operations $ .80 $ .71 $ .53 $ .52 $ .36
Weighted average common shares 7,274 7,231 7,020 4,590 4,549
Diluted earnings per share:
Income from continuing operations $ .76 $ .68 $ .52 $ .52 $ .34
Weighted average common and common
equivalent shares 7,568 7,522 7,248 4,623 4,705
At December 31: 1998 1997 1996 1995 1994
- ------------------------------- ----- ----- ----- ----- -----
Working capital $31,790 $26,584 $20,965 $ 6,215 $ 4,369
Total assets 37,835 31,626 26,089 10,523 9,312
Long-term debt, less current portion $ 6 $ 18 $ 30 $ 57 $ 622
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's annual operating performance is subject to various risks and
uncertainties. The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere herein as
well as the section appearing in Item 1 of this Form 10-K under the heading
"Risk Factors." The Company's future operating results may be affected by
various trends and factors which are beyond the Company's control. These
include, among other factors, general business and economic conditions, rapid or
unexpected changes in technologies, cancellation or delay of customer orders,
changes in the product or customer mix of sales, delays in new product
development, customer acceptance of new products and customer delays in
qualification of products.
Matters discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this Form 10-K include forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Act of 1934, as amended, and
are subject to the safe harbor provisions of those sections. The Company's
actual results could differ materially from those discussed in the forward
looking statements.
Overview
The Company achieved record earnings for the fifth consecutive year in 1998 and
the third consecutive year as a publicly traded company. Net income in 1998
amounted to $5.8 million, 19% of sales, compared to $5.1 million in 1997.
Revenue was $30.2 million in 1998, compared to $30.3 million in 1997. The
Company did not meet management's revenue expectations in 1998 primarily because
the award of a follow-on Department of Defense contract was delayed until
September 1998 and because completion of the Nebula 8000 fault tolerant network
switch has been delayed until the second quarter of 1999. The Company's
financial performance improved significantly during the second half of 1998:
Sales during the second half of the year were 25% higher than in the first half
and diluted earnings per share were $.46, compared to $.29, 58% higher. At
year-end 1998, the Company had $25.6 million in cash and cash equivalents
($3.38/per share) and virtually no debt. For 1998, the Company generated income
from operations, excluding depreciation and amortization (EBITDA) of $8.6
million and cash from operating activities amounted to $6.5 million, compared to
$5.8 million for 1997. Return on equity for 1998 was 19% and return on assets
was 17%. During 1998, international sales increased to $7.2 million, or 23% of
sales, compared to $3.0 million, or 10% of sales in 1997.
13
As the Company enters 1999, management is focusing on the development and
delivery of new products for two distinct communications markets: Wide Area
Networking communications and Local Area Network Switching.
Wide Area Networking: The Company's overall Wide Area Networking strategy is to
provide customers with hardware and software product solutions which support a
variety of open system platforms and operating systems. The growth in the Wide
Area Networking (WAN) communications market is being driven by the expansion of
the Internet, cellular communications and the convergence occurring between data
communications and telecommunications. At the same time, the technologies for
Wide Area Networking products are changing dramatically. Server, workstation,
and telecommunications providers are migrating their platforms and applications
from older bus standards such as VMEbus and SBus, to the newer standard hardware
bus architectures; PCIBus and CompactPCI. These technology changes offer a
significant opportunity for the Company. PTI began developing WAN communications
products for the PCIBus market in 1995. In 1996, PCIBus products represented
less than 7% of the Company's WAN revenue. Through a combination of internal
development, licensing and strategic partnering, the Company created a
comprehensive group of Wide Area Networking communications products for this
market. During 1997 and 1998, PTI WAN product revenue increased by 90% and
PCIBus products represented 48% of the Company's WAN revenue in 1998. The next
emerging WAN market the Company is addressing is CompactPCI (cPCI). cPCI is a
new standard hardware bus architecture that combines the attributes of the
VMEbus and PCIBus into a ruggedized industrial hardware system for the embedded
OEM marketplace. The telecommunications and defense industries are expressing
great interest in the cPCI system architecture for meeting their application
requirements. Currently, the Company's cPCI WAN products are being evaluated for
numerous potential integration opportunities and we expect shipments of cPCI
products in the second half of 1999.
To complement the Company's hardware development, communication software
protocols have been developed for the PCIBus and cPCI product lines including:
Frame Relay, Signaling System #7 (SS7), X.25, High-Level Data Link Control
(HDLC) and a variety of protocols to facilitate high and low speed
communications.
The markets and applications for Wide Area Network products are expanding
rapidly. In order to gain broader market penetration, the Company established
strategic partnering relationships with a number of major server, workstation
and telecommunications equipment suppliers including Sun Microsystems, Compaq
Computers, Nortel Networks and ADC NewNet, as well as several leading CompactPCI
platform manufacturers.
Local Area Network Switching: The Company has been developing its second
generation family of high performance 100Mbit/Gigabit Network Switches for Local
Area Networks. During 1998, the Company completed development of its new
Nebula(TM) 4000 workgroup switch and its new Nebula 6000 high density
departmental switch. The centerpiece of the Company's Local Area Network switch
strategy is the Nebula 8000 Fault Tolerant Backbone Switch. This 100/1000
Ethernet switch is the first network switch to offer true fault tolerance at an
affordable price. The Nebula 8000's redundant switch fabric has been engineered
for maximum availability and its innovative design ensures that no single point
of failure will shutdown a network.
The market demands for fault tolerant computing and networking are rising
rapidly. Server manufacturers including Compaq Computers and Tandem Computers
have developed server clusters to meet their customers' fault tolerant server
requirements. Networking companies including Novell are actively promoting and
selling networking solutions for mission critical applications. Management
believes that deployment of its fault tolerant technologies in the new Nebula
8000 Backbone Switch differentiates PTI from the other vendors in the network
switching marketplace. This new product is being positioned for Ethernet based
business and mission critical applications in enterprises where
"round-the-clock" operations demand highly resilient network infrastructures.
Prospective customers in the banking, brokerage, medical imaging and defense
industries are expressing serious interest in this product.
As of March 1999, the Nebula 8000 was operating in a number of early beta sites,
including the Company's communications network. Additional beta sites have been
selected and units are expected to be installed in these locations in April and
May. Shipments to customers are expected to commence in the second quarter.
14
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,
1998 1997 1996
----- ----- -----
Sales .............................................. 100.0% 100.0% 100.0%
Cost of goods sold ................................. 40.9 41.8 43.7
----- ----- -----
Gross profit ....................................... 59.1 58.2 56.3
----- ----- -----
Operating expenses:
Selling and marketing ........................... 13.3 13.1 12.9
Research and development ........................ 13.8 12.3 11.9
General and administrative ...................... 6.7 8.9 11.0
----- ----- -----
Total operating expenses .................. 33.8 34.3 35.8
----- ----- -----
Income from operations ............................. 25.3 23.9 20.5
Other income, net .................................. 4.2 3.4 3.0
----- ----- -----
Income before income taxes and minority interest ... 29.5 27.3 23.5
Provision for income taxes ......................... 10.4 10.4 8.4
Minority interest .................................. 0.0 0.0 (0.1)
----- ----- -----
Net income ...................................... 19.1% 16.9% 15.0%
===== ===== =====
Year Ended December 31, 1998, compared with the Year Ended December 31, 1997
Sales. Sales for 1998 were $30,202,000, compared to $30,336,000 in 1997. The
Company's sales are in one product segment and are grouped into five product
categories: WAN communications products, LAN interface products, Network Systems
products, Mass Storage Interface products and Inter-system Connectivity
products. Beginning in 1999, sales will be grouped into four product categories:
WAN communications products, LAN interface products, Network Switching and Other
(combining Network Systems products, Mass Storage Interface products and
Inter-system Connectivity products).
Shipments of WAN communications products represented 58% of sales during 1998,
compared to 47% in 1997. The increase in WAN sales is primarily attributable to
the development of several new PCIBus products being sold to customers including
Sun Microsystems, Compaq Computers and ADC NewNet. During 1998, the Company
experienced a decline in VMEbus and SBus revenue as customers moved to newer
technologies. The Company has developed several new WAN products for the
CompactPCI market and these products are in evaluation by numerous
telecommunications and defense suppliers. Management expects PCIBus and
CompactPCI revenue to increase in 1999 while the VMEbus and SBus revenue
declines as these technologies become less prevalent.
Shipments of LAN interface products amounted to 20% of sales in 1998 and 1997.
The largest share of the Company's LAN interface product business is generated
from Commercial Off-the-Shelf (COTS) Department of Defense projects. Defense
project revenue declined in 1998 by 13% because the award of a significant
multi-year contract was delayed until mid-September and interim orders were not
received during the delay period. Also in the third quarter of 1998, a
significant contract was received from a new OEM customer for PCIBus LAN
products. PCIBus products represented almost 13% of LAN revenue in 1998, versus
0% in 1997. Revenue from this OEM customer could approach $1.0 million in 1999.
Shipments of Network Systems products represented 6% of sales in 1998, compared
to 9% in 1997. Network Systems are primarily comprised of shipments of I/O
subsystems to an OEM customer and sales of specialized communication server
hardware and protocol software for specialty WAN applications. As anticipated,
shipments to the OEM customer declined by approximately $1 million in 1998 and
sales of specialized communication servers also declined in 1998. The
engineering staff supporting the server business was reassigned at the beginning
of 1998 to develop software for WAN communications products. A further decline
in Network Systems product revenue is expected in 1999 and beyond.
15
Shipments of Mass Storage Interface products for 1998 amounted to 9% of sales,
compared to 14% in 1997. The technologies used in this market are moving from
SBus to PCIBus and from SCSI to Fibre Channel. The PCIBus market has become a
commodity market with greater competition and lower pricing. While this market
was also moving to the Fibre Channel technology, there were delays in the
adoption of standards. As a result of these factors, the Company's PCIBus and
Fibre Channel products do not effectively compete in today's market. A further
decline in mass storage product revenue is forecasted in 1999 and beyond.
Shipments of Inter-system Connectivity products represented 7% of sales in 1998
compared to 10% of sales in 1997. The Company is not investing in this group of
products and a declining trend for this revenue is expected.
Gross Profit. Gross profit consists of sales, less cost of goods sold including
materials costs, manufacturing expenses and amortization of software development
costs. Gross profit in 1998 increased by $222,000 to $17,863,000, from
$17,641,000 in 1997. Gross margin improved to 59% of sales in 1998, from 58% in
1997. While gross margin for the Company's WAN, LAN interface and Other products
is expected to average 59% or 60% in 1999, the gross margin on the new network
switching products is forecasted to average approximately 45% for the year
because the Company intends to aggressively price these products in the market.
Total Operating Expenses. Total operating expenses remained relatively constant
at 34% of sales in 1998 and 1997. The Company increased its investment in
research and development during 1998, while controlling selling and marketing
expenses and reducing its general and administrative expenses.
Selling and marketing expenses increased to $4,023,000 in 1998, from $3,988,000
in 1997, 13% of sales in 1998 and 1997. During 1998, the Company delayed certain
planned marketing and promotional activities associated with the Nebula 8000 in
order to coordinate spending with the product's availability. During the second
half of 1998, the sales and marketing staff for the network switch group was
increased in order to have a greater impact on sales in 1999. Management intends
to market its new products aggressively in 1999 and expects sales and marketing
expenses to increase as a percentage of sales.
Research and development expenses increased by 12.0% to $4,165,000, or 14% of
sales in 1998, compared to $3,720,000, or 12% of sales in 1997. Recruiting and
hiring engineers continues to be one of the Company's greatest challenges. While
a number of engineers were hired during 1998, the Company continues to actively
recruit to fill open positions and has engaged outside engineering consultants
to assist on new product development projects. The increase in research and
development expenses in 1998 was primarily the result of new engineers hired,
outside engineering consultants, and higher development costs for new products.
Management believes research and development expenses can fluctuate quarterly
during 1999 but will only increase modestly as a percentage of sales for the
year.
General and administrative expenses decreased to $2,035,000, or 7% of sales in
1998, compared to $2,711,000, or 9% of sales in 1997. While the Company
maintains tight control over its general and administrative expenses, more than
one-half of the 1998 expense reduction was associated with the Company not
achieving the internal growth goals and objectives established in the Company's
1998 annual incentive plan. Management believes general and administrative
expenses should decline as a percentage of sales in 1999.
Other income, net. Other income consists primarily of interest income from cash
equivalents and marketable securities. The funds are primarily invested in high
quality Municipal and U.S. Treasury securities with maturities of less than one
year.
Income Taxes. The provision for income taxes for 1998 is based upon the combined
federal and state effective tax rate of 35%, compared to 38% in 1997.
16
Year Ended December 31, 1997, compared with the Year Ended December 31, 1996
Sales. Sales for 1997 increased by $5,493,000 (22%) to $30,336,000, from
$24,843,000 for 1996. The Company's products are grouped into five categories:
WAN Interface Adapter products, LAN Interface Adapter products, Network Systems
products, Mass Storage Interface products and Inter-system Connectivity
products.
Shipments of WAN Interface Adapter products amounted to 47% of sales during
1997, compared to 42% for 1996. This increase is attributable to introductions
over the last twelve to eighteen months of several new WAN products and several
new OEM customers integrating these products into their product applications.
Shipments of LAN Interface Adapter products for 1997 amounted to 20% of sales,
compared to 21% for 1996. The largest share of the Company's LAN business is
generated from Commercial Off-the-Shelf (COTS) Defense applications which is
project-oriented and is difficult to predict on a quarterly basis. Combined WAN
and LAN sales grew by 30% in 1997 and represented 77% of the Company's business
in the fourth quarter of 1997.
Shipments of Network Systems products represented 9% of total sales in 1997 and
11% for 1996. Network Systems are primarily comprised of shipments of I/O
subsystems to a major OEM customer and specialty protocol software business sold
by the Company's subsidiary, UconX Corporation. During the first nine months of
1997, shipments of the I/O subsystem to this customer represented $1.6 million
of revenue. Due to what appears to be a slowdown in orders for the customer's
product that incorporates the Company's I/O subsystem product, this customer
requested delays of its fourth quarter deliveries and has not placed any orders
for product deliveries for the first half of 1998. The specialty software
protocol business is typically project-oriented which can result in
fluctuations. The volume of this business in 1997 was less than originally
forecasted and at the end of 1997, the Company integrated the UconX organization
into its corporate structure. The products and services of UconX will continue
to be sold but future engineering efforts will be more focused on PTI's WAN
projects.
Shipments of Mass Storage Interface products for 1997 amounted to 14% of sales,
compared to 16% in 1996. The decrease in sales volume is believed to be
attributable to a slow down in the RAID/disk drive market primarily associated
with the Pacific Rim economic issues in the fourth quarter and technology
changes occurring in this market. These changes include customers transitioning
from SBus to PCIBus applications and from the slower SCSI adapters to faster
Fibre Channel adapters. The Company has been transitioning its products and
customers into these new technologies; however, the decline in the SBus business
has been greater than the increase in the PCI business.
Shipments of Inter-system Connectivity products represented 10% of sales 1997
and 10% of total sales 1996. The Company is not investing in this group of
products and a declining trend in these revenues is expected.
Gross Profit. Gross profit consists of sales, less cost of goods sold including
materials costs, manufacturing expenses and amortization of software development
costs. Gross profit for 1997 increased by $3,647,000 to $17,641,000, from
$13,994,000 for 1996 due to increased sales volumes. Gross margin percentage
improved to 58.2% of sales for 1997, from 56.3% in 1996. The improved margin is
attributable to favorable product mix along with manufacturing efficiencies
associated with higher sales volumes.
Total Operating Expenses. Total operating expenses increased to $10,419,000 for
1997, from $8,907,000 for 1996, but declined as a percentage of sales from 35.8%
in 1996 to 34.3% in 1997. The Company made significant investments in sales,
marketing, research and development during 1997 while reducing its general and
administrative expenses as a percentage of sales.
Selling and marketing expenses increased by 24.2% to $3,988,000, or 13.1% of
sales for 1997, from $3,210,000, or 12.9% of sales for 1996. The Company added
staff to the sales and marketing departments resulting in an increase of
compensation-related expenses in an effort to promote the Company's products
more extensively and increase market penetration. Spending for marketing and
promotion increased in 1997 as compared to 1996, primarily due to the costs
incurred to introduce the new switching products and to improve the Company's
presence in the marketplace.
17
Research and development expenses increased by 25.7% to $3,720,000, or 12.3% of
sales for 1997, compared to $2,960,000, or 11.9% of sales for 1996. Research and
development expenses consist primarily of employee salaries and benefits costs,
cost of materials consumed in developing and designing new products and, to a
lesser extent, contract development. Certain engineering expenses associated
with the development of software are capitalized and amortized to cost of goods
sold. The increase in research and development expenses in 1997 was primarily
attributable to the hiring of eight additional engineers and the development of
the new ASIC for the new switching products. The Company needs to continually
invest in new product development to stay abreast of technological changes in
its markets.
General and administrative expenses decreased to 8.9% of sales for 1997, or
$2,711,000, compared to $2,737,000, or 11.0% of sales for 1996. The decrease as
a percentage of sales is primarily attributable to maintaining control of
administrative expenses.
Other income, net. Other income consists primarily of interest income from cash
equivalents and marketable securities. The funds are primarily invested in money
market funds, high quality short term commercial paper and U.S. Treasury
securities maturing in less than 12 months.
Income Taxes. The provision for income taxes for 1997 is based upon the combined
federal and state effective tax rate of 38%, compared to 35.6% in 1996. The
primary reasons for the increase in the combined tax rate are the higher
research and development tax credits generated in 1996 and a lower benefit of
state income taxes in 1997.
Liquidity and Capital Resources
At December 31, 1998, the Company's primary source of liquidity included cash
and cash equivalents of $25,627,000 and available borrowings of $5,000,000 under
a revolving credit facility with a bank. No amounts were outstanding under this
credit facility as of December 31, 1998. The Company had working capital of
$31,790,000 at December 31, 1998, compared to $26,584,000 at December 31, 1997.
Cash generated by operating activities was $6,503,000, $5,821,000 and $3,642,000
in 1998, 1997 and 1996, respectively. The increase in cash generated from
operating activities in 1998 is attributable to greater net income and non-cash
adjustments offset by a net increase in operating assets and liabilities.
Cash provided by investing activities was $10,960,000 in 1998 and cash used in
investing activities was $7,093,000 and $7,469,000 in 1997 and 1996,
respectively. During 1998, investing activities included the purchase of
marketable securities of $6,000,000, the maturity of marketable securities of
$18,010,000, and capital equipment purchases of $429,000. Capital equipment
purchases consist primarily of manufacturing equipment, office equipment and
computer and related equipment used in engineering. In addition, the Company
capitalizes certain software development costs. Amounts capitalized were
$621,000, $704,000 and $380,000 in 1998, 1997 and 1996, respectively.
In March 1998, the Board of Directors authorized the repurchase of up to $5.0
million of the Company's Common Stock. As of December 31, 1998, the Company had
repurchased a total of 78,437 shares at total cost of $736,000. The program
authorized in 1998 is still in effect. Cash provided by financing activities of
$67,000 and $78,000 for 1998 and 1997, respectively, was principally the result
of the exercise of stock options. During 1996, cash provided by financing
activities was principally the result of the Company's initial public offering
of its Common Stock in January 1996.
18
Impact of the Year 2000 Issue
Many companies are facing a potential issue regarding the ability of information
systems to accommodate the coming year 2000. The Year 2000 issue is the result
of computer programs using only the last two digits to indicate the year. If
uncorrected, such computer programs will be unable to interpret dates beyond the
year 1999, which could cause computer system failure or other computer errors
disrupting operations. The Company recognizes the importance of the Year 2000
issue and has been giving it high priority. The Company created a corporate-wide
Year 2000 project team and the team's objective is to ensure an uninterrupted
transition into the Year 2000. The scope of the Year 2000 readiness effort
includes (i) information technology ("IT") such as software and hardware; (ii)
non-IT systems or embedded technology; and (iii) readiness of key third parties,
including suppliers and customers. If needed modifications and conversions are
not made on a timely basis, the Year 2000 issue could have a material adverse
effect on the Company's results of operations or financial condition.
The Company has completed phase I of its readiness plan for its IT systems and
non-IT systems. This phase consisted of evaluating its systems and equipment
based on the current status and normal scheduled upgrade and replacement of such
system components. The Company is in the process of completing Phase II which
consists of testing IT system and non-IT system components whose Year 2000
status cannot be determined by research and has begun certain parts of Phase
III, upgrading its IT system. The remaining parts of Phase III are planned
during the third quarter 1999, and will consist of upgrading and/or replacement
of non-IT system components specifically required for Year 2000 readiness. Phase
IV, planned during the fourth quarter of 1999, will consist of finalizing
contingency plans for temporary operation should unexpected difficulties with IT
systems and non-IT systems occur. The development of these contingency plans
began in conjunction with upgrading its IT system.
In addition to internal Year 2000 IT and non-IT remediation activities, the
Company has contacted key suppliers to assure no interruption in the
relationship between the Company and these important third parties from the Year
2000 issue. The Company is waiting for responses from these suppliers to assess
if such third parties have any known Year 2000 issues. If third parties do not
convert their systems in a timely manner and in a way that is compatible with
the Company's systems, the Year 2000 issue could have a material adverse effect
on Company operations. The Company believes that its diligent actions with key
suppliers will minimize these risks.
The vast majority of the Company's products are not date sensitive. The Company
has of summarized information on its products and this information has been
available to customers since November 1998.
While the Company expects its internal IT and non-IT systems to be Year 2000
compliant by the dates specified within its internal plan, the Company is
working on a contingency plan specifying what the Company will do if it or
important third parties are not Year 2000 compliant by the required dates. The
Company expects to have such a contingency plan finalized by the second half of
1999.
Through December 1998, the Company has not incurred significant incremental
costs related to the Year 2000 issue. The total projected incremental cost is
estimated to be $150,000. The Company is expensing as incurred all costs related
to the assessment and remediation of the Year 2000 issue unless the nature of
the item is an upgrade or replacement of a system with a useful life that meets
the capitalization policy of the Company. These costs are being funded through
operating cash flows. The Company's total cost for the Year 2000 issue includes
estimated costs and time associated with interfacing with third parties' Year
2000 issues. These estimates are based on current information.
The Company's current estimates of the amount of time and costs necessary to
remediate and test its computer systems are based on the facts and circumstances
existing at this time. The estimates were made using assumptions of future
events including the continued availability of certain resources, Year 2000
modification plans, implementation success by key third-parties, and other
factors. New developments may occur that could affect the Company's estimates of
the amount of time and costs necessary to modify and test its IT and non-IT
systems for Year 2000 compliance. These developments include, but are not
limited to: (i) the availability and cost of personnel trained in this area;
(ii) the ability to locate and correct all relevant computer codes and
equipment, and (iii) the planning and Year 2000 compliance success that key
customers and suppliers attain.
19
Year 2000 compliance is an issue for virtually all businesses, whose computer
systems and applications may require significant hardware and software upgrades
or modifications. Companies owning and operating such systems may plan to devote
a substantial portion of their information systems' spending to fund such
upgrades and modifications. It is the Company's intention to fulfill its plan
and become Year 2000 compliant; however, uncertainties exist about the
thoroughness of how other companies, vendors, customers and other service
providers, that the Company does business with will be successful at also
becoming Year 2000 compliant. These other companies, regardless of the dollar
volume transacted with the Company, may significantly affect either directly or
indirectly the operations of the Company. Where practicable, the Company will
attempt to mitigate its risks with respect to the failure of suppliers to be
Year 2000 compliant. In the event that suppliers are not Year 2000 compliant,
the Company will seek alternative sources of supplies. However, such failures
remain a possibility and could have an adverse impact on the Company's results
of operations or financial condition.
ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks in the normal course of business,
primarily interest rate risk and changes in the market value of its investments,
and believes its exposure to such risk is minimal. The Company's investments are
made in accordance with the Company's investment policy and primarily consists
of U.S. Treasury securities, municipal securities and corporate obligations. The
Company does not participate in the investment of derivative financial
instruments.
ITEM 8 - Financial Statements and Supplementary Data
Index to Financial Statements: ..................................... Page
Report of Independent Accountants ............................... 21
Consolidated Balance Sheets at December 31, 1998 and 1997 ....... 22
Consolidated Statements of Income for the Three Years
Ended December 31, 1998 ...................................... 23
Consolidated Statements of Changes in Stockholders' Equity
for the Three Years Ended December 31, 1998 .................. 24
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1998 ...................................... 25
Notes to Consolidated Financial Statements ...................... 26
Index to Financial Statement Schedules:
All schedules have been omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
20
Report of Independent Accountants
February 12, 1999
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, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Rochester, New York
21
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1998 1997
------ ------
Current assets:
Cash and cash equivalents ............... $25,627,000 $ 8,833,000
Marketable securities ................... 12,010,000
Accounts receivable, net ................ 4,799,000 4,956,000
Inventories, net ........................ 4,425,000 3,329,000
Prepaid expenses and other .............. 679,000 346,000
Deferred taxes .......................... 549,000 466,000
----------- -----------
Total current assets .............. 36,079,000 29,940,000
Equipment and improvements, net ............ 934,000 982,000
Software development, net .................. 822,000 579,000
Other assets ............................... 125,000
----------- -----------
Total assets ...................... $37,835,000 $31,626,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt ......... $ 12,000 $ 12,000
Accounts payable .......................... 1,932,000 824,000
Income taxes payable ...................... 507,000 255,000
Accrued expenses .......................... 1,838,000 2,265,000
----------- -----------
Total current liabilities ........... 4,289,000 3,356,000
Long term debt, less current portion ......... 6,000 18,000
Deferred taxes ............................... 288,000 220,000
----------- -----------
Total liabilities ................... 4,583,000 3,594,000
----------- -----------
Commitments
Stockholders' equity:
Preferred stock - $.01 par value: 1,000,000
shares authorized; none issued
Common stock - $.01 par value; 15,000,000 shares
authorized; 7,466,412 and 7,414,732 shares issued
at December 31, 1998 and 1997, respectively .. 75,000 74,000
Additional paid-in capital ..................... 13,250,000 13,055,000
Retained earnings .............................. 20,844,000 15,061,000
Treasury stock - at cost, 226,919 and 147,282
shares held at December 31, 1998 and 1997,
respectively .................................. (917,000) (158,000)
----------- -----------
Total stockholders' equity ................ 33,252,000 28,032,000
----------- -----------
Total liabilities and stockholders' equity $37,835,000 $31,626,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
22
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1998 1997 1996
------------ ------------ ------------
Sales ........................... $ 30,202,000 $ 30,336,000 $ 24,843,000
Cost of goods sold .............. 12,339,000 12,695,000 10,849,000
------------ ------------ ------------
Gross profit .................... 17,863,000 17,641,000 13,994,000
------------ ------------ ------------
Operating expenses:
Selling and marketing ........ 4,023,000 3,988,000 3,210,000
Research and development ..... 4,165,000 3,720,000 2,960,000
General and administrative ... 2,035,000 2,711,000 2,737,000
------------ ------------ ------------
Total operating expenses 10,223,000 10,419,000 8,907,000
------------ ------------ ------------
Income from operations .......... 7,640,000 7,222,000 5,087,000
Other income, net ............... 1,289,000 1,051,000 750,000
------------ ------------ ------------
Income before income taxes and
minority interest .............. 8,929,000 8,273,000 5,837,000
Provision for income taxes ...... 3,146,000 3,142,000 2,079,000
------------ ------------ ------------
Income before minority interest . 5,783,000 5,131,000 3,758,000
Minority interest ............... (24,000)
Net income ...................... $ 5,783,000 $ 5,131,000 $ 3,734,000
============ ============ ============
Basic earnings per share ........ $ .80 $ .71 $ .53
============ ============ ============
Diluted earnings per share ...... $ .76 $ .68 $ .52
============ ============ ============
The accompanying notes are an integral part of these financial statements.
23
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,
1996 3,263,598 $33,000 $ 1,414,000 $ (156,000)$ 6,196,000 $ 7,487,000
1996 Net income 3,734,000 3,734,000
Exercise of
options/warrants 35,820 74,000 74,000
Tax benefit -
warrant and
option plans 25,000 25,000
Purchase of
treasury stock -
37 shares (1,000) (1,000)
Initial public
offering stock
proceeds 1,600,000 16,000 11,372,000 11,388,000
--------- ------- ----------- ---------- ----------- -----------
Balance -
December 31,
1996 4,899,418 49,000 12,885,000 (157,000) 9,930,000 22,707,000
1997 Net income 5,131,000 5,131,000
Exercise of
options 51,325 1,000 104,000 105,000
Tax benefit -
option plan 90,000 90,000
Three-for-two
stock split 2,463,989 24,000 (24,000)
Purchase of
treasury stock -
71 shares (1,000) (1,000)
--------- ------- ----------- ---------- ----------- -----------
Balance -
December 31,
1997 7,414,732 74,000 13,055,000 (158,000) 15,061,000 28,032,000
1998 Net income 5,783,000 5,783,000
Exercise of
options 51,680 1,000 101,000 102,000
Tax benefit -
option plan 94,000 94,000
Purchase of
treasury stock -
79,637 shares (759,000) (759,000)
--------- ------- ----------- ---------- ----------- -----------
Balance -
December 31,
1998 7,466,412 $75,000 $13,250,000 $ (917,000)$20,844,000 $33,252,000
========= ======= =========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
24
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1998 1997 1996
------ ------ ------
Cash flows from operating activities
Net income $ 5,783,000 $ 5,131,000 $ 3,734,000
Non-cash adjustments:
Depreciation and amortization 975,000 1,490,000 831,000
Reserve for inventory obsolescence 802,000 262,000 609,000
Deferred income taxes (15,000) (46,000) (119,000)
Other 23,000 21,000 (113,000)
Changes in operating assets
and liabilities:
Accounts receivable 137,000 (1,743,000) (895,000)
Inventories (1,898,000) 441,000 (1,229,000)
Prepaid expenses and other (331,000) (62,000) 25,000
Accounts payable and
accrued expenses 681,000 5,000 418,000
Income taxes payable 346,000 322,000 381,000
------------ ------------ ------------
Net cash provided by
operating activities 6,503,000 5,821,000 3,642,000
------------ ------------ ------------
Cash flows from investing activities
Purchase of equipment
and improvements, net (429,000) (481,000) (719,000)
Capitalized software development (621,000) (704,000) (380,000)
Purchase of marketable securities (6,000,000) (13,008,000) (6,102,000)
Maturities of marketable securities 18,010,000 7,100,000
Purchase of remaining shares
in subsidiary (268,000)
------------ ------------ ------------
Net cash provided (used)
by investing activities 10,960,000 (7,093,000) (7,469,000)
------------ ------------ ------------
Cash flows from financing activities
Repayment of long-term debt (12,000) (26,000) (74,000)
Exercise of stock options and
warrants 79,000 104,000 74,000
Purchase of treasury stock (736,000)
Net proceeds from issuance of
common stock 11,388,000
------------ ------------ ------------
Net cash (used) provided
by financing activities (669,000) 78,000 11,388,000
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents 16,794,000 (1,194,000) 7,561,000
Cash and cash equivalents
at beginning of year 8,833,000 10,027,000 2,466,000
------------ ------------ ------------
Cash and cash equivalents
at end of year $ 25,627,000 $ 8,833,000 $ 10,027,000
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 4,000 $ 4,000 $ 13,000
Income taxes paid $ 2,827,000 $ 2,865,000 $ 1,853,000
Non-cash financing activity
Exercise of stock options using
1,200 shares of common stock $ 23,000
The accompanying notes are an integral part of these financial statements.
25
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 in Rochester,
New York. The Company designs, develops, manufactures and markets high
reliability, and high availability network switching and other communications
solutions.
Segment Data, Geographic Information and Significant Customers: The Company
operates in one industry segment. Export sales to customers outside the United
States represent 23%, 10% and 11% of the Company's sales for the years ended
December 31, 1998, 1997 and 1996, respectively. For 1998, 1997 and 1996, four
customers accounted for approximately 35%, 28% and 30%, respectively, of the
Company's sales, with no single customer representing greater than 13%, 8% and
12%, respectively, of the Company's sales.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated (Note E).
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 revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Concentration of Credit Risk: Financial instruments which potentially expose the
Company to significant concentrations of credit risk consist principally of bank
deposits, marketable securities and accounts receivable. Marketable securities
consist of high quality short-term interest bearing financial instruments. The
Company performs ongoing credit evaluations of its customers' financial
condition and the Company maintains an allowance for uncollectible accounts
receivable based upon the expected collectibility of all accounts receivable.
Fair Value of Financial Instruments: The carrying amounts of the Company's
financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses and loans approximate fair value at December
31, 1998, as the maturity of these instruments are generally short term. Due to
differences in the interest rates on the long term debt compared to prevailing
rates, the fair value of these instruments does vary from their carrying
amounts, however, such differences are immaterial.
Cash Equivalents: The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
Marketable Securities: The Company has classified all of its marketable debt
securities as held to maturity and has accounted for these investments at
amortized cost. Accordingly, no adjustment for unrealized holding gains or
losses has been reflected in the Company's financial statements. Marketable
securities classified as held to maturity are high credit quality securities in
accordance with the Company's investment policy.
Inventories: Inventories are valued at the lower of cost or market using the
first-in, first-out method.
Revenue Recognition: Revenue from hardware sales is recognized upon product
shipment.
26
Note A - Nature of Business and Summary of Significant Accounting Policies
(continued)
Equipment and Improvements: Equipment and improvement purchases are recorded at
cost. Depreciation is computed using the straight-line method over the following
useful lives:
Machinery and equipment 3-10 years
Office furniture and equipment 3-5 years
Leasehold improvements The lesser of 10 years or the lease term
Upon retirement or disposal of an asset, the asset and the related accumulated
depreciation are eliminated from the accounts with gains or losses recorded in
the Consolidated Statements of Income.
Research and Development: Research and development costs are expensed as
incurred.
Software Development Costs: Software development costs incurred subsequent to
the establishment of technological feasibility and prior to general release of
the product are capitalized and amortized on a product-by-product basis over
their estimated remaining economic life, generally three years, or using the
ratio of current revenues to current and anticipated revenues from such
software, whichever provides greater amortization.
Income Taxes: The Company accounts for income taxes using the asset and
liability approach which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax basis of such assets and liabilities. This
method utilizes enacted statutory tax rates in effect for the year in which the
temporary differences are expected to reverse and gives immediate effect to
changes in income tax rates upon enactment. Deferred tax assets are recognized,
net of any valuation allowance, for deductible temporary differences and tax
credit carryforwards. Deferred income tax expense (benefit) represents the
change in net deferred tax asset and liability balances.
Note B - Accounts Receivable
Accounts receivable consisted of the following:
At December 31,
1998 1997
------ ------
Accounts receivable $ 4,992,000 $ 5,148,000
Less: allowance for doubtful accounts (193,000) (192,000)
----------- -----------
Net $ 4,799,000 $ 4,956,000
=========== ===========
Note C - Inventories
Inventories consisted of the following:
At December 31,
1998 1997
------ ------
Purchased parts and components $ 1,905,000 $ 954,000
Work in process 3,011,000 2,580,000
Finished goods 130,000 333,000
----------- -----------
5,046,000 3,867,000
Less: reserve for inventory obsolescence (621,000) (538,000)
----------- -----------
Net $ 4,425,000 $ 3,329,000
=========== ===========
27
Note D - Equipment and Improvements
Equipment and improvements consisted of the following:
At December 31,
1998 1997
------ ------
Engineering equipment and software $ 1,442,000 $ 1,294,000
Manufacturing equipment 1,269,000 1,140,000
Furniture and equipment 874,000 785,000
Leasehold improvements 134,000 130,000
----------- -----------
3,719,000 3,349,000
Less: accumulated depreciation and amortization (2,785,000) (2,367,000)
----------- -----------
Net $ 934,000 $ 982,000
=========== ===========
Total depreciation and amortization expense for equipment and improvements for
1998, 1997 and 1996 was $418,000, $426,000 and $417,000, respectively.
Note E - Other Assets
Effective January 1, 1998, the Company integrated the operations and assets of
its San Diego based subsidiary, Uconx Corporation, into its corporate
operations. The Company recorded a charge to operating expenses for the
remaining amount of unamortized goodwill during 1998 as its value had
significantly decreased as a result of declining revenue of this subsidiary.
Amortization expense for goodwill was $123,000, $50,000 and $45,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Note F - Accrued Expenses
Accrued expenses consisted of the following:
At December 31,
1998 1997
------ ------
Accrued compensation $ 844,000 $1,500,000
Other accrued expenses 994,000 765,000
---------- ----------
Total $1,838,000 $2,265,000
========== ==========
Note G - Long Term Debt and Credit Agreement
During 1998, the Company signed a new two-year revolving credit loan agreement
with a bank increasing the available borrowing capacity to $5 million.
Borrowings bear interest ranging between the bank's prime rate or one month
LIBOR plus applicable basis points as outlined in the agreement. Borrowings are
collateralized by trade accounts receivable, inventory, equipment, contract
rights and intangibles. The agreement requires the Company to meet certain
financial and non-financial covenants. The Company was in compliance with such
covenants at December 31, 1998. There were no balances outstanding under this
agreement at December 31, 1998 and 1997.
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 amount outstanding at
December 31, 1998 and 1997 was $18,000 and $30,000, respectively, and the long
term amount outstanding at December 31, 1998 and 1997 was $6,000 and $18,000,
respectively. As of December 31, 1998, the aggregate maturities of the loan
payable for the years ending December 31, 1999 and 2000 are $12,000 and $6,000,
respectively.
28
Note H - Commitments
The Company leases facilities and equipment under operating leases. Under the
terms of the facility lease for its primary operations 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.
Future minimum lease payments for all operating leases having a remaining term
in excess of one year at December 31, 1998 are as follows:
Operating
Leases
1999 $ 512,000
2000 431,000
2001 236,000
2002 81,000
-----------
Total minimum lease payments $ 1,260,000
===========
Rental expense amounted to $471,000, $557,000 and $500,000 for 1998, 1997 and
1996, respectively.
Note I - Stockholders' Equity
In March 1998, the Board of Directors authorized the repurchase of up to $5.0
million of the Company's Common Stock. During 1998, the Company repurchased a
total of 78,437 shares at a total cost of $736,000.
On July 31, 1997, the Board of Directors declared a three-for-two stock split of
the Company's common stock effected in the form of a stock dividend paid on
September 15, 1997. All agreements concerning stock options and other
commitments payable in shares of the Company's common stock provided for the
issuance of additional shares due to the declaration of the stock split. An
amount equal to the par value of the common shares issued was transferred from
capital in excess of par value to the common stock account. All references to
number of shares and to per share information in the consolidated financial
statements, except shares authorized and 1996 common shares, have been adjusted
to reflect the stock split on a retroactive basis.
On January 24, 1996, the Company completed the issuance of an additional 1.6
million shares of its common stock through an initial public offering, resulting
in net proceeds of $11.4 million.
Under the Incentive Stock Option Plan established in 1986, 1.8 million common
shares were reserved for grant by the Board of Directors. Options may be granted
to any officer, director or employee at not less than the fair market values at
the date of grant (not less than 110% of the fair market value in the case of
holders of more than 10% of the Company's common stock). Options granted under
the plan generally expire five years from the date of grant and generally vest
20% after one year, 50% after two years and 100% after three years.
With respect to non-qualified options, the Company recognizes a tax benefit upon
exercise in an amount equal to the tax effect of the difference between the
option price and the fair market value of the common stock. Tax benefits related
to such non-qualified stock options are credited to additional paid-in capital.
29
The following table summarizes stock option activity under this plan:
Weighted-Average Option
Number of Shares Exercise Price Price Range
---------------- ---------------- -----------
Outstanding at January 1, 1996 199,986 $1.57 $1.22-$ 2.01
Granted 348,000 $7.66 $6.67-$ 9.83
Exercised (48,510) $1.39 $1.22-$ 1.83
Expired (1,282) $1.69 $1.52-$ 1.83
------- ------ ------------
Outstanding at December 31, 1996 498,194 $5.84 $1.22-$ 9.84
Granted 143,250 $8.13 $7.25-$13.00
Exercised (65,618) $1.60 $1.21-$ 7.83
Expired (2,325) $4.93 $1.21-$ 7.83
------- ------ ------------
Outstanding at December 31, 1997 573,501 $6.90 $1.33-$13.00
Granted 152,250 $13.84 $9.25-$14.63
Exercised (51,680) $1.97 $1.33-$ 7.58
Expired (1,000) $13.00 $13.00
------- ------ ------------
Outstanding at December 31, 1998 673,071 $8.84 $1.52-$14.63
======= ===== ============
At December 31, 1998, 430,267 options were vested and 704,687 options were
available for future grant under the stock option plan. At December 31, 1998,
75,000 warrants are held by two of the Company's directors at an exercise price
of $1.83 per share and expire in the year 2000. During 1996, 3,750 warrants were
exercised by an outside director and a consultant.
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option plan.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant date for awards in 1998 and 1997 consistent with
the provisions of SFAS No. 123, the Company's net income would have been reduced
to the pro forma amounts of $4,617,000 and $4,371,000, respectively. Basic
earnings per share would have been reduced to the pro forma amounts of $.63 and
$.60, respectively. Diluted earnings per share would have been reduced to the
pro forma amounts of $.61 and $.58, respectively.
The assumption regarding the stock options issued in 1998 and 1997 was that 33%
of such options vested annually. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1998 and 1997:
dividend yield of 0%; expected volatility of 62% and 61%; risk-free interest
rate of 5.5% and 6.5%; and expected lives of five years.
Note J - Income Taxes
The provisions for income taxes were as follows:
Current income taxes 1998 1997 1996
------ ------ ------
Federal $ 2,711,000 $ 2,814,000 $ 1,852,000
State 450,000 374,000 346,000
----------- ----------- -----------
3,161,000 3,188,000 2,198,000
Deferred benefit (15,000) (46,000) (119,000)
----------- ----------- -----------
Total provision $ 3,146,000 $ 3,142,000 $ 2,079,000
=========== =========== ===========
30
The provision for income taxes from differ from those computed using the federal
tax rate of 34% due to the following:
1998 1997 1996
------ ------ ------
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Research and development tax credits (0.5) (2.0) (2.7)
State tax provision, net of federal benefit 3.3 2.9 3.9
Other (1.6) 3.1 0.4
------ ------ ------
Effective tax rate 35.2% 38.0% 35.6%
====== ====== ======
The Company's net deferred income tax balance consists of the following:
At December 31,
Deferred tax liabilities 1998 1997
- ------------------------ ------ ------
Capitalized software development cost, net $ 288,000 $ 220,000
----------- -----------
Deferred tax assets
- -------------------
Accrued vacation, payroll
and other accrued expenses (199,000) (101,000)
Inventory obsolescence reserve and
other inventory related items (188,000) (205,000)
Bad debt reserve (68,000) (73,000)
Research tax credits (27,000) (31,000)
Other (67,000) (56,000)
----------- -----------
Total deferred tax assets (549,000) (466,000)
----------- -----------
Net deferred tax asset $ (261,000) $ (246,000)
=========== ===========
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 as follows:
1998 1997 1996
------ ------ ------
Gross expenditures for engineering
and software development $ 4,842,000 $ 4,764,000 $ 3,460,000
Less: amounts capitalized (677,000) (1,044,000) (500,000)
----------- ----------- -----------
Net charged to operating expenses $ 4,165,000 $ 3,720,000 $ 2,960,000
=========== =========== ===========
Software Development costs consisted of the following:
At December 31,
1998 1997
------ ------
Capitalized software development costs $ 2,216,000 $ 1,723,000
Less: accumulated amortization (1,394,000) (1,144,000)
----------- -----------
Net $ 822,000 $ 579,000
=========== ===========
Amortization of software development costs included in cost of goods sold was
$434,000, $1,014,000 and $369,000 for 1998, 1997 and 1996, respectively.
31
Note L - Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed giving effect to all dilutive potential
common shares that were outstanding during the period. Dilutive potential common
equivalent shares consist of the incremental common shares issuable upon
exercise of stock options and warrants. The following table illustrates the
calculation of both basic and diluted EPS:
1998 1997 1996
------ ------ ------
Net income available
to common stockholders $5,783,000 $5,131,000 $3,734,000
---------- ---------- ----------
Weighted average common shares 7,274,110 7,230,902 7,019,746
---------- ---------- ----------
Basic earnings per share $ .80 $ .71 $ .53
========== ========== ==========
Diluted earnings per share
Net income available
to common stockholders $5,783,000 $5,131,000 $3,734,000
---------- ---------- ----------
Weighted average common shares 7,274,110 7,230,902 7,019,746
Common equivalent shares 293,396 291,016 228,631
---------- ---------- ----------
Weighted average common and
common equivalent shares 7,567,506 7,521,918 7,248,377
---------- ---------- ----------
Diluted earnings per share $ .76 $ .68 $ .52
========== ========== ==========
Note M - Employee Benefit Plans
The Company's Retirement Savings Plan qualifies under Section 401(k) of the
Internal Revenue Code. The Company's discretionary matching contributions to the
plan were $86,000, $92,000 and $126,000 for 1998, 1997, and 1996, respectively.
In conjunction with the Company's Flexible Benefits plan, the Company made
additional discretionary qualified contributions to employee accounts which vest
immediately amounting to $128,000, $108,000 and zero for 1998, 1997 and 1996.
Note N - Transactions with Related Parties
The Company leases its primary facility from an entity controlled by two
directors of the Company, one of whom is an officer. During 1998, 1997, and
1996, the Company paid rent of $319,000, $318,000 and $307,000, respectively.
(Note H)
32
Note O - Quarterly Results (unaudited)
1998
(in thousands, except per share data)
Mar. 31 Jun. 30 Sept. 30 Dec. 31
------- ------- -------- -------
Sales $7,411 $6,051 $7,857 $8,883
Gross profit 4,548 3,569 4,910 4,836
Income from operations 1,906 1,021 2,017 2,696
Net income $1,419 $ 861 $1,530 $1,973
Basic earnings per share $ 0.20 $ 0.12 $ 0.21 $ 0.27
====== ====== ====== ======
Diluted earnings per share $ 0.18 $ 0.11 $ 0.20 $ 0.26
====== ====== ====== ======
1997
(in thousands, except per share data)
Mar. 31 Jun. 30 Sept. 30 Dec. 31
------- ------- -------- -------
Sales $7,434 $7,539 $7,606 $7,757
Gross profit 4,102 4,514 4,343 4,682
Income from operations 1,563 1,700 1,996 1,963
Net income $1,112 $1,200 $1,402 $1,417
Basic earnings per share $ 0.15 $ 0.17 $ 0.19 $ 0.20
====== ====== ====== ======
Diluted earnings per share $ 0.15 $ 0.16 $ 0.18 $ 0.18
====== ====== ====== ======
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
33
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 8, 1999, 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 8, 1999,
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 8, 1999,
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 8, 1999, 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 8, 1999,
sets forth certain information with respect to certain business relationships
and transactions between the Company and its directors and officers and is
incorporated herein by reference.
34
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules, Reports on Form 8-K
(1) Financial Statements
The financial statements filed as part of this report are included in
the response to Item 8 of Part III of this 10-K report.
(2) Financial Statement Schedules
There were no financial statement schedules required to be filed because
they are not applicable or the required information is shown in the Consolidated
Financial Statements or notes thereto.
(3) Exhibits
Exhibit Ref.
Number Number Description
3.1 (1) Restated Certificate of Incorporation
3.2 (1) Amended By-laws
4.1 (1) Form of Common Stock Certificate
4.2 (2) Amended and Restated Stock Option Plan
10 (1) Material Contracts
10.1 (--)* Revolving Credit Agreement dated as of December 30,
1998 between the Registrant and The Chase
Manhattan Bank, N.A.
10.2 (--)* Revolving Credit Note in the amount of $5,000,000
dated December 30, 1998 given by the
Registrant to The Chase Manhattan Bank, N.A.
10.3 (1) Security Agreements granted by the Registrant to
The Chase Manhattan Bank, N.A. dated as of
April 13, 1985, April 13, 1993 and as of
June 17, 1993, and with respect to
Performance Computer Corporation only, the
Security Agreement dated as of June 17, 1993
granted to The Chase Manhattan Bank, N.A. by
Performance Computer Corporation and certain
other Affiliates of the Registrant (which
other Affiliates have been released) and all
amendments and modifications thereto
10.4 (1) Letter of Intent from the City of Rochester to the
Registrant dated May 4, 1993
10.5 (1) Irrevocable Standby Letter of Credit from The Chase
Manhattan Bank, N.A. dated June 4, 1993
10.6 (1) Promissory Note in the amount of $80,000 dated June
8, 1993 given by the Registrant to the City
of Rochester
10.7 (1) Letter of Credit and Reimbursement Agreement
between C & J Enterprises and Chase Lincoln
First Bank, N.A. dated September 1, 1990
10.8 (1) Corporation Guaranty Agreement granted by the
Registrant, PTI Acquisition Corporation to
Chase Lincoln First Bank, N.A. dated as of
September 1, 1990
10.9 (1) Guaranty Agreement dated August 31, 1995 between
the Registrant and the City of Rochester
10.10 (1) Sublease Agreement between the Registrant and C & J
Enterprises dated as of September 1, 1990
10.11 (1) Master Equipment Lease between the Registrant and
Fleet Credit Corporation dated as of March
30, 1992
10.12 (1) Master Equipment Lease between the Registrant and M
& M Associates dated February 1, 1993
10.13 (1) Master Equipment Lease between the Registrant and M
& M Associates dated November 1, 1993
10.14 (1) Agreement between the Registrant and Loral Test &
Information Systems dated November 2, 1995
35
Exhibit Ref.
Number Number Description
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
10.28 (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
21 (--)* Subsidiaries
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 filed November 22, 1995.
(2) Incorporated by reference to the Registrant
Statement on Form S-8 filed July 30, 1997.
* Filed with this Form 10-K
(4) Reports on Form 8-K
None
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PERFORMANCE TECHNOLOGIES, INCORPORATED
Date: March 22, 1999 By:/s/DONALD L. TURRELL
-----------------------
Donald L. Turrell
President and
Chief Executive Officer
/s/DORRANCE W. LAMB
-----------------------
Dorrance W. Lamb
Chief Financial Officer and
Vice President of Finance
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/CHARLES E. MAGINNESS Chairman of the Board March 22, 1999
- -----------------------
Charles E. Maginness and Director
S/DONALD L. TURRELL President, Chief Executive March 22, 1999
- -----------------------
Donald L. Turrell Officer and Director
/s/DORRANCE W. LAMB Chief Financial Officer, and March 22, 1999
- -----------------------
Dorrance W. Lamb Vice President of Finance
/s/BERNARD KOZEL Director March 22, 1999
- -----------------------
Bernard Kozel
/s/JOHN E. MOONEY Director March 22, 1999
- -----------------------
John E. Mooney
/s/JOHN M. SLUSSER Director March 22, 1999
- -----------------------
John M. Slusser
/S/PAUL L. SMITH Director March 22, 1999
- -----------------------
Paul L. Smith
37