<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1996
Commission File number 0-19175
PROTEON, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2531856
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
NINE TECHNOLOGY DRIVE, WESTBOROUGH, MA 01581
(Address of principal executive offices) (Zip Code)
(508) 898-2800
(Registrant's telephone number)
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 report(s), and (2) has been subject to such filing
requirements for the past 90 days.
- ------------------------- -------------------------
YES X NO
- ------------------------- -------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 8, 1996.
Common Stock, $.01 par value 15,482,189
(Title of each class) (Number of shares)
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PROTEON, INC.
FORM 10-Q
QUARTERLY REPORT
SEPTEMBER 28, 1996
TABLE OF CONTENTS
Page
----
Table of Contents 2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
September 28, 1996 and December 31, 1995 3
Consolidated Statements of Operations
for the Three and Nine Months Ended
September 28, 1996 and September 30, 1995 4
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 28, 1996 and September 30, 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes In Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
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PROTEON, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
ASSETS
September 28, December 31,
1996 1995
------------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $13,063 $25,829
Marketable securities 8,593 6,863
Accounts receivable, net 9,743 12,138
Inventories 11,171 4,425
Deposits and other assets 1,597 1,457
------- -------
Total current assets 44,167 50,712
Property and equipment, net 7,132 8,317
Marketable securities 1,000 --
------- -------
Total assets $52,299 $59,029
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,988 $ 4,064
Accrued compensation 1,061 1,375
Accrued expenses 3,497 4,249
Accrued restructuring cost 271 457
Accrued warranty 1,083 1,561
------- -------
Total current liabilities 8,900 11,706
Stockholders' equity:
Preferred stock -- --
Common stock 156 156
Capital in excess of par value 49,263 49,141
Accumulated deficit (5,772) (1,805)
Cumulative translation adjustments 113 118
Less: treasury stock, at cost (361) (287)
------- -------
Total stockholders' equity 43,399 47,323
------- -------
Total liabilities and stockholders' equity $52,299 $59,029
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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PROTEON, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
Three months ended Nine months ended
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales:
Product $ 7,301 $11,822 $25,357 $39,072
Software licensing 1,948 2,133 5,630 11,264
Service and other 1,340 2,485 4,266 7,759
------- ------- ------- -------
Net sales 10,589 16,440 35,253 58,095
Cost of sales:
Product 4,173 5,941 14,457 20,594
Software licensing 160 446 278 2,334
Service and other 1,137 1,590 3,236 5,196
------- ------- ------- -------
Cost of sales 5,470 7,977 17,971 28,124
------- ------- ------- -------
Gross profit 5,119 8,463 17,282 29,971
Operating expenses:
Research and development 2,096 2,397 7,126 6,271
Selling and marketing 3,782 3,758 11,639 14,103
General and administrative 1,290 1,086 3,508 3,641
------- ------- ------- -------
Total operating expenses 7,168 7,241 22,273 24,015
------- ------- ------- -------
(Loss) income from operations (2,049) 1,222 (4,991) 5,956
Interest income, net 286 336 1,024 1,111
------- ------- ------- -------
(Loss) income before income taxes (1,763) 1,558 (3,967) 7,067
Provision for income taxes 0 -- 0 418
------- ------- ------- -------
Net (loss) income $(1,763) $ 1,558 $(3,967) $ 6,649
======= ======= ======= =======
(Loss) income per common share $ (0.11) $ 0.10 $ (0.26) $ 0.42
======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 15,521 15,697 15,499 15,654
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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PROTEON, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended
(in thousands)
<CAPTION>
September 28, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 37,648 $ 60,111
Cash paid to suppliers and employees (47,402) (58,414)
Interest received 1,031 1,111
Interest paid (7) --
Income taxes paid (319) (84)
-------- --------
Net cash (consumed) generated by operating activities (9,049) 2,724
Cash flows from investing activities:
Proceeds from the sale of fixed assets 117 --
Capital expenditures (1,147) (1,445)
Marketable securities sales 7,863 7,020
Marketable securities purchases (10,593) (11,883)
-------- --------
Net cash used in investing activities (3,760) (6,308)
Cash flows from financing activities:
Proceeds from the issuance of common stock 122 1,180
Purchase of treasury stock (74) --
-------- --------
Net cash provided by financing activities 48 1,180
Effect of exchange rate changes on cash (5) 216
-------- --------
Net decrease cash and cash equivalents (12,766) (2,188)
Cash and cash equivalents at beginning of year 25,829 24,956
-------- --------
Cash and cash equivalents at end of the period $ 13,063 $ 22,768
======== ========
Reconciliation of net income to net cash
(consumed) generated by operating activities:
Net (loss) income $ (3,967) $ 6,649
-------- --------
Adjustments to reconcile net income to net cash
(consumed) generated by operating activities:
Depreciation and amortization 2,323 2,745
Gain on disposition of assets (108) (59)
Changes in assets and liabilities:
Decrease in accounts receivable 2,395 2,016
Increase in inventories (6,746) (1,176)
Increase in deposits and other assets (140) (44)
Decrease in accounts payable and accrued expenses (2,806) (7,407)
-------- --------
Total adjustments (5,082) (3,925)
-------- --------
Net cash (consumed) generated by operating activites $ (9,049) $ 2,724
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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PROTEON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated balance sheet as of September 28, 1996 and the results of its
consolidated operations and consolidated cash flows for the interim periods
ended September 28, 1996 and September 30, 1995 are unaudited and, in the
opinion of the management of Proteon, Inc. (the "Company") reflect all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the results for the interim periods presented. It is
suggested that these statements be read in conjunction with the Company's
consolidated financial statements and notes thereto for the year ended December
31, 1995, included in the Company's 1995 Annual Report to Shareholders.
2. INVENTORIES
<TABLE>
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method.
<CAPTION>
(in thousands) September 28, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Raw materials $ 1,408 $ 134
Work in process 947 405
Finished goods 8,816 3,886
------- ------
Total inventories $11,171 $4,425
======= ======
</TABLE>
3. NET (LOSS) INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net (loss) income per share are computed based on the weighted average number of
common share and common share equivalents outstanding during the period. Common
share equivalents are determined under the assumption that outstanding stock
options are exercised and the proceeds are used to purchase treasury stock.
Fully diluted net income per common share is not materially different from
primary net income per common share at September 30, 1995. No common share
equivalents are included in the September 28, 1996 calculations as they would be
anti-dilutive.
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PROTEON, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES
Net sales for the quarter ended September 28, 1996 were $10,589,000 as compared
with $16,440,000 for the quarter ended September 30, 1995, a decrease of
$5,851,000, or 36%. For the nine months of 1996, net sales were $35,253,000 as
compared with $58,095,000 for the same period in 1995, a decrease of
$22,842,000, or 39%.
Product sales for the quarter ended September 28, 1996 were $7,301,000 as
compared with $11,822,000 for the quarter ended September 30, 1995, a decrease
of $4,521,000, or 38%. For the nine months of 1996, product sales were
$25,357,000 as compared with $39,072,000 for the same period in 1995, a decrease
of $13,715,000, or 35%. The Company's product sales are categorized as: Remote
Access, Local Access, and Corporate Enterprise. Prior to 1996, the Company
analyzed and discussed revenue in two product categories: Internetworking
Systems Division (ISD) and LAN Products Division (LPD). The Remote Access
product category now includes Proteon's GlobeTrotter, Remote Branch Routers,
Switching Router, and GT Access Manager product families. The Local Access
product category includes Token Ring and Ethernet Switches, The CSX900E Switch
Concentrator, Series 70 and Series 75 Stackable Hubs, Series 90 and S90 Boss
Chassis Hubs, Ethernet Hubs, and Token Ring and Ethernet Adapter Cards. The
Corporate Enterprise product category includes the CNX500 and CNX600 Router
products. Revenue from licensing of router source code is reported separately.
Overall product sales results reflect our ongoing product transition from
Corporate Enterprise and LAN product solutions to Network Access products.
Overall product revenue was down from a year ago for the quarter and nine months
ended September 28, 1996 due to anticipated decreases in both our LAN products
and our Corporate Enterprise categories. For the quarter and nine months ended
September 28, 1996, the decreases in LAN products net sales were due primarily
to lower average selling prices and declining unit volumes of Adapter Cards,
Switches and Hubs. The Corporate Enterprise reductions are due to planned
reduction in CNX backbone Router units as the company shifts to remote access
Routers. Although total units in the Remote Access category increased 158% from
the third quarter of 1995, and 71% for the nine months of 1996 as compared to
the nine months of 1995, primarily due to GlobeTrotter sales, these increased
volumes were not enough to offset these anticipated product revenue declines in
the LAN products and Corporate Enterprise categories.
The Company continues the process of positioning itself as a Network Access
supplier. During the latter part of the third quarter of 1995, the Company
introduced a line of Network Access products, which included Internet and
Intranet Access Routers. The Company believes that these products will continue
to contribute a larger percentage of revenue in future quarters.
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Software licensing revenue for the quarter ended September 28, 1996, was
$1,948,000 compared to $2,133,000 for the quarter ended September 30, 1995, a
decrease of $185,000, or 9%. For the nine months of 1996, software licensing
revenues were $5,630,000 as compared with $11,264,000 for the same period in
1995, a decrease of $5,634,000 or 50%. This anticipated reduction in software
licensing revenue is a result of residual revenue flow, during 1996, from two
major multi-year agreements with IBM and Digital Equipment Corporation. Software
licensing revenues from these two companies are dependent on meeting certain
milestones and, as a result, revenue from these licenses varies significantly
from quarter to quarter. The Company expects that in future quarters software
licensing revenue will continue to experience this variability and decrease in
total as the development driven milestones are completed.
For the quarter ended September 28, 1996 service and other revenues decreased by
$1,145,000 or 46%, to $1,340,000, as compared to $2,485,000 for the quarter
ended September 30, 1995. For the nine months of 1996, services and other
revenues were $4,266,000 as compared with $7,759,000 for the same period in
1995, a decrease of $3,493,000, or 45%. These decreases were primarily due to
the reduction in service spares and upgrades revenue worldwide.
GROSS PROFIT
Total gross profit decreased as a percentage of net sales to 48% for the quarter
ended September 28, 1996, from 52% for the quarter ended September 30, 1995 and
to 49% from 52% for the nine months of 1996 and 1995, respectively. The
decreases are primarily the result of decreased contributions to gross profit
from highly profitable software licensing revenue. The Company's product gross
profit decreased to 43% from 50% when compared to the same period in the prior
year due primarily to declining unit margin and decreased volume in the token
ring adapter card segment of the LAN product category. For the quarter, gross
profit for software licensing was 92% versus 79% a year ago because of decreased
engineering efforts related to existing agreements. For the quarter, service and
other gross profit was down to 15% versus 36% a year ago due to fixed costs
being allocated across reduced licensing revenues.
RESEARCH AND DEVELOPMENT
Research and development expenses were $2,096,000 or 20% of net sales for the
quarter ended September 28, 1996, compared to $2,397,000 or 15% of net sales for
the same period in the prior year. The decrease in expenses of $301,000 was
primarily due to lower personnel and personnel related costs including decreased
outside consulting related to software licensing contracts and fewer customer
funded development projects. For the nine months of 1996, research and
development expenses were $7,126,000 or 20% of net sales compared to $6,271,000
or 11% of net sales for the nine months of 1995. The increase in expenses of
$855,000 for the nine months of 1996 was due primarily to fewer R&D costs being
allocated to software licensing contracts and externally funded development
projects. The Company considers investments in research and development to be
critical to future revenues and intends to manage these expenditures to focus on
Remote Access products.
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SELLING AND MARKETING
Selling and marketing expenses were $3,782,000 or 36% of net sales for the
quarter ended September 28, 1996, compared to $3,758,000 or 23% of net sales for
the quarter ended September 30, 1995 an increase of $24,000, or 1%. For the
first months of 1996, selling and marketing expenses were $11,639,000 or 33% of
net sales compared to $14,103,000 or 24% of net sales for the same period of the
prior year, a decrease of $2,464,000, or 17%. The absolute decreases in expenses
were due primarily to lower personnel and personnel-related costs as well as a
reduction in advertising expenses for the nine months ended September 28, 1996
when compared with the same respective periods in 1995.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1,290,000, or 12% of net sales for the
quarter ended September 28, 1996, compared to $1,086,000 or 7% of net sales for
the quarter ended September 30, 1995, an increase of $204,000, or 19%. The
increase was due primarily to additional legal fees incurred in the trial phases
of litigated matters. For the nine months of 1996, general and administrative
expenses were $3,508,000, or 10% of net sales, compared to $3,641,000, or 6% of
net sales, for the same period of the prior year, a decrease of $133,000 or 4%.
The absolute decrease in expenses was due mainly to a lower level of personnel
and personnel-related costs for the nine months ended September 28, 1996 when
compared with the same period in 1995.
PROVISION FOR INCOME TAXES
For the quarter and nine months ended September 28, 1996, the Company did not
record an income tax provision as a result of the current loss position and the
utilization of previously reserved deferred tax deductions to offset current
foreign tax provisions. The Company's effective tax rate of 5.9% for 1995 varies
from the statutory rate due to the realization of net operating loss
carryforwards. The 1995 tax provision relates to alternative minimum federal
taxes, and state and foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months of 1996, the Company consumed $9,049,000 of cash from
operating activities. The was consumed primarily by increased inventories of
$6,746,000, as well as payment of accounts payable and accrued expenses of
$2,806,000. These were offset by a reduction in accounts receivable of
$2,395,000.
Investing activities for the first nine months consumed $3,760,000 due
principally to the purchase of marketable securities and the acquisition of
capital equipment of $1,147,000. Financing activities consisted of the proceeds
from issuances of common stock to employees exercising employee stock options
and purchasing common stock pursuant to the Employee Stock Purchase Plan, offset
by the amount of funds extended in repurchases of treasury common stock.
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The Company's management believes that its cash, cash equivalents and marketable
securities will satisfy its expected working capital and capital expenditure
requirements through the next twelve months.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This Form 10-Q filing contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are based on management's current
expectations and involve a number of risks and uncertainties. The Company's
future results remain difficult to predict and may be affected by the factors
described below.
RISK FACTORS
TECHNOLOGICAL CHANGE, NEW PRODUCTS AND INDUSTRY STANDARDS
The data communications industry continues to undergo a fundamental shift away
from hierarchical single-vendor systems to open, peer-to-peer communications
networks and information management tools that provide users with greater
computing power and access to information. This evolution has fostered the
growth of two dynamic markets: workstations and networking. Workstations deliver
increasingly powerful, personal productivity tools, and data communications
networks provide the "highways" that distribute and share this processing power
throughout an organization, enabling users to more fully leverage and manage
information resources.
As the deployment of networks matures, four recent trends continue to develop:
networking of remote sites to the headquarters office via remote access routers;
reduction of network congestion with the implementation of local area networks
(LAN's); segmentation using various switching technologies; and the push by
businesses of all sizes and individuals to connect their systems and networks to
the Internet.
Proteon is in the process of repositioning itself from a company emphasizing
deployment of Token Ring solutions to one that is focused on the network access
market. Proteon views the network access market as having two segments -- remote
access and local access. Its current strategy is based upon concentration on the
remote access market segment
The market for the Company's products is characterized by rapidly changing
technology, new product introductions and a multiplicity of current and evolving
industry standards. Accordingly, the Company believes that its future success
will depend on its continuing ability to enhance and expand its existing
products and to develop or private label other manufacturer's technology and
introduce in a timely fashion new products which incorporate new technologies,
conform to standards and achieve market acceptance.
There can be no assurance that the Company's strategy is the correct one under
the circumstances; that the
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Company has correctly assessed trends in the marketplace; that the Company will
be able to develop, market or support, or secure external supplies of, such
products successfully; or that the Company will be able to respond effectively
to technological changes, new product announcements by others or new industry
standards.
MANUFACTURING AND SUPPLY; DEPENDENCE ON SUPPLIERS
The Company's manufacturing operations primarily consist of assembly, testing
and quality control of materials, components, subassemblies, and systems. SCI
Systems (SCI), a major subcontract manufacturer with access to cost-effective,
high volume manufacturing, distribution, and repair capability worldwide,
manufactures the majority of Proteon's board assemblies for its router, hub, and
adapter card product lines.
The Token Ring chipsets used in the Company's 4/16 Mbps and 4 Mbps adapters are
currently manufactured for external sale solely by Texas Instruments. The
Company has an agreement with Texas Instruments under which it believes it will
be able to obtain adequate supplies of these chipsets in a timely manner to meet
customer demand.
Certain logic semiconductors, signal processors, and subassembly components used
in the Company's products are also available only from limited sources. The
Company has not experienced any significant problems in obtaining required
supplies of such limited source components and believes that alternative sources
could be developed quickly, if necessary.
Proteon continues to have OEM arrangements with manufacturers for some of its
Ethernet product offerings. The Company does not feel these arrangements
jeopardize the quality of the products the Company is shipping. In most cases,
if supplies from one vendor were interrupted or reduced, the Company could find
a comparable source for the affected product with limited delays in shipment.
The inability to obtain sufficient sole or limited source components as
required, or to develop alternative sources if and as required in the future,
could result in delays or reductions in product shipments which would adversely
affect the Company's operating results. There can be no assurance that, in the
event of interruptions in contract manufacturing, supplies of components from
sole or limited sources or supplies of units from OEM vendors or similar
occurrences, the Company could find and engage suitable alternatives in a timely
manner. Such interruptions or the inability of Proteon to counteract them
successfully could have an adverse effect on the Company's business, operations
and finances.
INTELLECTUAL PROPERTY
Currently, Proteon relies principally upon a combination of contractual rights,
trade secrets, and copyright laws to establish and protect proprietary aspects
of its products. The Company believes that, because of the rapid pace of
technological change in the data communications and computer industries, legal
protection for its products is a less significant factor in the Company's
success than the knowledge, ability, and experience of the Company's employees,
the frequency of
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product enhancements and the timeliness and quality of support services provided
by the Company. However, should a successful challenge be mounted against the
rights of Proteon in and to its intellectual property, by allegations of
infringement on the rights of others or for any other reason, the Company's
business, operations and finances could be adversely affected. Certain
technology used in the Company's products is licensed by the Company from third
parties. The termination of certain of these licenses would have a material
adverse effect on the Company's operations.
PRODUCT COMPATIBILITY AND COMPETITION
Network Interface Card Products
- -------------------------------
The market for Token Ring network interface card products is dominated by IBM.
While Token Ring networking is an industry standard, Proteon believes that its
ability to address successfully the market for Token Ring network products is
dependent upon the compatibility and interoperability of the Company's products
with products offered by IBM and upon maintaining compatibility with the Token
Ring standard as it continues to evolve.
Remote Access (Routers)
- -----------------------
Proteon expects to participate significantly in the market segment of remote
access routing specifically addressing the needs to users to connect to the
internet or build corporate intranets. The Company has enhanced its remote
access capabilities with the introduction of new products and expanded its
presence in the Integrated Services Digital Networks (ISDN) marketplace.
Remote Access (Switch/Router)
- -----------------------------
The Company has begun to address a market segment for remote access corporate
users with the introduction of a single device that incorporates switching and
routing.
Local Access
- ------------
The Company continues to sell Token Ring Switches; intelligent hubs that provide
connectivity and management of different network cabling schemes and LAN
topologies; Ethernet hubs, the ProNET/E series, for the workgroup market
segment; Token Ring hubs, the Series 75 Stackable Hub family for building
networked and extended workgroups; Token Ring adapters for physical connectivity
and Token Ring signaling between a PC or workstation and LAN cabling; a
multi-port Token Ring PCI network adapter card; a line of Ethernet network
adapter cards intended to provide a full range of solutions for the
client/server marketplace. The company also seeks opportunities to leverage
technology via licensing arrangements.
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Internetworking Software
- ------------------------
OpenROUTE[Trademark], Proteon's internetworking software suite , is the
foundation of the Company's high performance local and remote access
internetworking products. All of Proteon's internetworking products ship with
this software technology installed. Also, Proteon licenses this software to
other providers of internetworking products.
As routing technology progresses, the Company may be required to modify its
routing and bridging software to maintain compatibility of its products with
various standards and interoperability with other manufacturers router products.
Failure by the Company to maintain such compatibility, interoperability, and
technical competencies could adversely affect the Company's business, operations
and finances.
COMPETITION
The data communications, networking and computer industries are highly
competitive and characterized by rapidly changing technology and evolving
industry standards. These advances result in frequent new product introductions,
increased capabilities and improvements in the relative price/performance of
networking products. As a competitor in the networking industry, Proteon
believes one of the keys to success will be making networks more accessible to a
broader base of customers. Proteon is committed to open, standards-based
products, innovative solutions to customer requirements for reliable and high
performance networks, a favorable price/performance ratio, ease of installation
and ease of use.
The Company competes with several companies having greater research and
development, marketing and financial resources, manufacturing capability,
customer support organizations, and name recognition than those of the Company.
There can be no assurance that the Company will be able to compete successfully
in the future or that competitive pressures will not adversely affect the
Company's business.
RESEARCH AND PRODUCT DEVELOPMENT
Management believes the Company's future success depends in large part upon
timely enhancement of existing products and the development of new products that
not only maintain technological excellence, but also improve the capabilities,
efficiency, and cost-effectiveness of the end users' data communications
networks. The Company is developing new products to improve price/performance
ratios, enhance its network management capabilities, simplify ease of use, and
ensure interoperability with other vendors' standards-based products.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's quarterly operating results may vary significantly depending upon
factors such as the timing of new product announcements and releases by the
Company and its competitors, the timing of significant orders, the mix of
products sold and the mix of distribution channels through which the products
are sold. In addition, substantially all of the Company's sales in each quarter
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result from orders booked in that quarter. Consequently, if sales do not close
in any quarter as anticipated, the Company's results of operations for that
quarter would be adversely affected. Further, the Company's expense levels are
based, in part, on its expectations as to future sales. If sales levels are
below expectations, operating results may be adversely affected. Also, quarterly
results can be materially affected by timing of software licensing revenues.
METHOD OF DISTRIBUTION
The Company sells its products to end users worldwide primarily through an
indirect sales channel comprised of Internet Service Providers ("ISPs"),
Original Equipment Manufacturers ("OEMs"), Value Added Resellers ("VARs") and
distributors. These resellers also represent other lines of products which are,
in some cases, identical or complementary to, or which compete with, those of
the Company. While the Company attempts to encourage these resellers to focus on
its products through marketing and support programs, there is a risk that these
resellers may give higher priority to products of other suppliers, thereby
reducing their efforts devoted to selling the Company's products. One reseller,
Ingram Micro, accounted for approximately 13%, 11% and 12%, of the Company's
sales in 1993, 1994 and 1995, respectively, and a second reseller, Tech Data,
accounted for approximately 10% of the Company's sales in 1993, and 1995.
There can be no assurance that the Company has selected appropriate channels of
distribution for its products or that existing resellers will dedicate adequate
resources to sales of the Company's products. Failure to do so could result in
an adverse impact on the Company's business, operations and finances.
MARKETING, SALES AND CUSTOMERS
End users of Proteon's products have typically been organizations with critical
applications requiring connectivity integrating their headquarters and wide area
computing environments. Proteon's marketing and distribution strategy is to
reach these end users primarily through an indirect sales channel comprised of
internet service providers ("ISPs"), OEMs, VARs, and distributors with
experience in network integration and reputation for excellent service. In
addition, the Company's strategy includes increased presence of Proteon's sales
force in end-user sites.
Proteon's markets encompass the fast growing local access switching and remote
access internetworking segments of the network access market. Proteon's
customers include both the Global 1000 multinationals, as well as those small to
medium-sized enterprises requiring connection to the internet and to suppliers,
customers, and business products.
There can be no assurance that the Company has correctly formulated its end-user
profile or selected appropriate methods of marketing and selling its products.
Failure to do so could result in an adverse impact on the Company's business,
operations and finances.
LIQUIDITY
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Failure of the Company to create and maintain adequate working capital and
liquidity, by sales of equity, obtaining lines of credit or otherwise, could
adversely impact the Company's business, operations and finances.
INTERNATIONAL SALES, REGULATORY STANDARDS AND CURRENCY EXCHANGE
International sales accounted for 35.3%, 35.1% and 35.7% in 1993, 1994 and 1995,
respectively, of the Company's net sales and the Company expects that
international sales will continue to be a significant portion of the Company's
business. Foreign regulatory bodies continue to establish standards different
from those in the United States, and the Company's products are designed
generally to meet those standards. The inability of the Company to design
products in compliance with such foreign standards could have an adverse effect
on the Company's operating results. The Company's international business may be
affected by changes in demand resulting from fluctuation in currency exchange
rates and tariffs and difficulties in obtaining export licenses.
SHARES ELIGIBLE FOR FUTURE SALE
Approximately 15,508,645 outstanding shares of Common Stock are now freely
tradable on the open market. In addition, options to acquire an aggregate of
440,778 shares of Common Stock were vested as of December 31, 1995, and the
shares issuable upon exercise of any such option will be freely tradable or
eligible for sale in the public market. Additional shares will become eligible
for resale in the public market at subsequent dates. Sales of substantial
numbers of such shares in the public market could adversely affect the market
price of the Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
Based on the recent trading of the Company's stock, the Company believes factors
such as announcements of new products by the Company or its competitors and
quarterly variations in financial results could cause the market price of the
Common Stock to fluctuate substantially. In addition, the stock market has
experienced volatility which has particularly affected the market prices for
many high technology companies' stock and which often has been unrelated to the
operating performance of such companies. These market fluctuations may adversely
affect the price of the Company's Common Stock.
CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company's Amended and Restated Articles of Organization and By-Laws contain
certain provisions that could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. Certain of such provisions allow the Company to issue
preferred stock with rights senior to those of the Common Stock and impose
various procedural and other requirements which could make it more difficult for
stockholders to effect certain corporate actions.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
Not applicable.
Item 2. Changes in Securities:
Not applicable.
Item 3. Defaults upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
Not applicable.
Item 5. Other Information:
Not applicable.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits: See Exhibit Index, p.19
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended September 28, 1996.
16
<PAGE> 17
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROTEON, INC.
November 12, 1996 By: /s/by: Daniel J. Capone, Jr.
----------------------------
Daniel J. Capone, Jr.
President & Chief Executive Officer
(principal executive officer)
By: /s/by: Robert J. Connaughton, Jr.
---------------------------------
Robert J. Connaughton, Jr.
Chief Financial Officer,
Vice President
Treasurer and Clerk
(principal financial officer)
By: /s/by: Philip A. Gardella, Jr.
------------------------------
Philip A. Gardella, Jr.
Corporate Controller
(principal accounting officer)
17
<PAGE> 18
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
(3.1) Restated Articles of Organization as Amended * (a)
(filed as Exhibit 3.1 to registration statement) xx
(3.3) By-Laws, as amended and restated, of the Registrant * (b)
(filed as Exhibit 3.3 to 1991 Form 10-K) xx
(4.1) Article 4 of the Restated Articles of Organization,
(See 3.1 above) xx
(4.2) Form of Common Stock Certificate * (c)
(filed as Exhibit 4.2 to Form 10-Q) xx
(10.25) Severance Compensation Agreement dated October 23, 1996
between Registrant and Robert J. Connaughton, Jr. 21
(27) Financial Data Schedule (electronic filing only) xx
All exhibit descriptions followed by an asterisk and a letter in parentheses
were previously filed with the Securities and Exchange Commission as Exhibits
to, and are hereby incorporated by reference from, the document to which the
letter in parentheses corresponds, as set forth below:
(a) Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
(b) Registrant's Registration Statement on Form S-1 Registration No. 33-40073.
(c) Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June
29, 1996.
Where documents are incorporated by reference from previous filings, the Exhibit
number of the document in that previous filing is indicated in parentheses after
the incorporation by reference code.
19
<PAGE> 1
EXHIBIT 11
PROTEON, INC.
<TABLE>
COMPUTATION OF PRIMARY AND FULLY DILUTED
(LOSS) INCOME PER SHARE
(in thousands)
<CAPTION>
Three months ended Nine months ended
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net (Loss) Income $(1,763) $ 1,558 $(3,967) $ 6,649
======= ======= ======= =======
Weighted average number of
common shares outstanding 15,521 15,456 15,499 15,388
Weighted average common
equivalent shares -- 241 -- 266
------- ------- ------- -------
Weighted average number of
common and common equivalent
shares outstanding used to
calculate per share data 15,521 15,697 15,499 15,654
======= ======= ======= =======
Net (loss) income per share
Primary $ (0.11) $ 0.10 $ (0.26) $ 0.42
======= ======= ======= =======
Fully diluted $ (0.11) $ 0.10 $ (0.26) $ 0.42
======= ======= ======= =======
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PROTEON, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-30-1996 JUN-29-1996 SEP-30-1996
<EXCHANGE-RATE> 1 1 1
<CASH> 23,691 19,283 13,063
<SECURITIES> 8,649 7,621 8,593
<RECEIVABLES> 9,711 6,616 9,743
<ALLOWANCES> 0 0 0
<INVENTORY> 8,238 11,591 11,171
<CURRENT-ASSETS> 52,188 47,048 44,167
<PP&E> 32,343 32,892 32,753
<DEPRECIATION> 24,377 25,137 25,621
<TOTAL-ASSETS> 60,154 54,803 52,299
<CURRENT-LIABILITIES> 12,621 9,582 8,900
<BONDS> 0 0 0
<COMMON> 49,186 49,220 49,263
0 0 0
0 0 0
<OTHER-SE> (1,653) (3,999) (5,864)
<TOTAL-LIABILITY-AND-EQUITY> 60,154 54,803 52,299
<SALES> 10,297 18,056 25,357
<TOTAL-REVENUES> 14,018 24,664 35,253
<CGS> 5,685 10,284 14,457
<TOTAL-COSTS> 6,787 12,501 17,971
<OTHER-EXPENSES> 7,549 15,105 22,273
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (459) (738) (1,024)
<INCOME-PRETAX> 141 (2,204) (3,967)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 141 (2,204) (3,967)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 141 (2,204) (3,967)
<EPS-PRIMARY> .01 (.14) (.26)
<EPS-DILUTED> .01 (.14) (.26)
</TABLE>
