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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _____ to _____
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)
Registrant's telephone number, including area code: (508) 898-2800
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 April 26, 1996.
Common Stock, $.01 par value 15,515,357
(Title of each class) (Number of shares)
Page 1 of 13 pages
Exhibit index at page 13
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Proteon, Inc.
Form 10-Q
Table of Contents Page
Part I. Financial Information
Consolidated Balance Sheets as of
March 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations
for the three months ended
March 30, 1996 and April 1, 1995 4
Consolidated Statements of Cash Flows
for the three months ended March 30, 1996 and April 1, 1995 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information 11
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PROTEON, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
ASSETS
March 30, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $23,691 $25,829
Marketable securities 8,649 6,863
Accounts receivable, net 9,711 12,138
Inventories 8,238 4,425
Deposits and other assets 1,785 1,342
Recoverable taxes 114 115
------- -------
Total current assets 52,188 50,712
Property and equipment, net 7,966 8,317
------- -------
Total assets $60,154 $59,029
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,739 $ 4,064
Accrued compensation 965 1,375
Accrued expenses 3,203 4,249
Accrued restructuring cost 271 457
Accrued warranty 1,443 1,561
------- -------
Total current liabilities 12,621 11,706
Stockholders' equity:
Preferred stock - -
Common stock 156 156
Capital in excess of par value 49,186 49,141
Accumulated deficit (1,664) (1,805)
Cumulative translation adjustments 142 118
Less treasury stock, at cost (287) (287)
------- -------
Total stockholders' equity 47,533 47,323
------- -------
Total liabilities and stockholders' equity $60,154 $59,029
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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PROTEON, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended
(in thousands, except per share data)
<CAPTION>
March 30, April 1,
1996 1995
--------- --------
<S> <C> <C>
Sales:
Product $10,297 $15,105
Software licensing 2,183 4,303
Service and other 1,538 2,737
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Net sales 14,018 22,145
Cost of sales:
Product 5,685 8,390
Software licensing 104 97
Service and other 998 1,870
------- -------
Cost of sales 6,787 10,357
------- -------
Gross profit 7,231 11,788
Operating expenses:
Research and development 2,669 1,935
Selling and marketing 3,764 5,328
General and administrative 1,116 1,243
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Total operating expenses 7,549 8,506
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(Loss) income from operations (318) 3,282
Interest income, net 459 268
------- -------
Income before income taxes 141 3,550
Provision for income taxes - 269
------- -------
Net income $ 141 $ 3,281
======= =======
Net income per common and common equivalent share $ 0.01 $ 0.21
======= =======
Weighted average number of common
shares outstanding 15,741 15,622
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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PROTEON, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended
(in thousands)
<CAPTION>
March 30, April 1,
1996 1995
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $16,444 $22,810
Cash paid to suppliers and employees (16,593) (21,747)
Interest received 464 281
Interest paid (5) (13)
Income taxes paid (313) (20)
------- -------
Net cash (consumed) generated by operating activities (3) 1,311
Cash flows from investing activities:
Proceeds from the sale of fixed assets 76 50
Capital expenditures (495) (771)
Marketable securities sales 4,863 400
Marketable securities purchases (6,648) (4,920)
------- -------
Net cash used in investing activities (2,204) (5,241)
Cash flows from financing activities:
Proceeds from the issuance of common stock 45 653
Effect of exchange rate changes on cash 24 71
------- -------
Net decrease cash and cash equivalents (2,138) (3,206)
Cash and cash equivalents at beginning of year 25,829 24,956
------- -------
Cash and cash equivalents at end of the period $23,691 $21,750
======= =======
Reconciliation of net income to net cash (consumed)
generated by operating activities:
Net income $ 141 $ 3,281
------- -------
Adjustments to reconcile net income to net cash
(consumed) generated by operating activities:
Depreciation and amortization 841 1,044
Gain on disposition of assets (72) (50)
Changes in assets and liabilities:
Decrease in accounts receivable 2,427 665
Increase in inventories (3,813) (697)
(Increase) decrease in deposits and other assets (442) 844
Increase (decrease) in accounts payable and accrued expenses 915 (3,776)
------- -------
Total adjustments (144) (1,970)
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Net cash (consumed) generated by operating activites ($3) $ 1,311
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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Proteon, Inc.
Notes to Consolidated Financial Statements
Management's Opinion:
In the opinion of the management of Proteon, Inc. (the "Company"), the Company's
consolidated financial position as of March 30, 1996 and the results of its
consolidated operations and consolidated cash flows for the interim periods
ended March 30, 1996 and April 1, 1995, reflect all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly 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.
Utilization of Estimates:
To prepare the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. In
particular, the Company records reserves for estimated product returns and
regarding the collectiblity of accounts receivable. Actual results could differ
from the estimates and assumptions used by management.
Inventories:
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method.
<TABLE>
<CAPTION>
March 30, 1996 December 31, 1995
<S> <C> <C>
Raw materials $1,283 $ 134
Work in process 648 405
Finished goods 6,307 3,886
Total inventories $8,238 $4,425
</TABLE>
Net Income (Loss) Per Common and Common Equivalent Share:
Net income (loss) 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 (loss) per common share is not materially different
from primary net income (loss) per common share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Net Sales
For the quarter ended March 30, 1996, net sales decreased by $8,127,000, or
36.7%, to $14,018,000 as compared to $22,145,000 for the quarter ended April 1,
1995.
Product Sales decreased $4,808,000, or 31.8%, to $10,297,000 as compared to
$15,105,000. 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 Router, First Generation Remote
Branch Router, 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 product category includes the CNX500 and CNX600 Router
products.
Overall Product Sales results reflect our ongoing product transition from
Corporate Enterprise and LAN product solutions to Network Access products.
Overall revenue was down from a year ago due to anticipated decreases in both
our LAN products and our Corporate Enterprise categories. The decrease in LAN
products net sales was due primarily to continued price reductions and declining
unit volumes of Adapter Cards 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 more than 20% from the first quarter of 1995, primarily due to RBX200
and 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 Remote Access and
Internet Access Routers, Token Ring and Ethernet workgroup switching products,
and Token Ring adapter cards. The Company believes that these new products,
which began shipping in December of 1995 and Q1 of 1996, will begin to
contribute a larger percentage of total revenue in future quarters.
Software licensing revenue for the quarter ended March 30, 1996, was $2,183,000
compared to $4,303,000 for the quarter ended April 1, 1995. This anticipated
reduction in
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software licensing revenue reflects 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 future quarter's
software licensing revenue will continue to experience this variability.
Service and Other revenues decreased by $1,199,000 or 43.8%, to $1,538,000, as
compared to $2,737,000 for the quarter ended April 1, 1995. This decrease was
primarily due to the reduction in Service spares and upgrades revenue from the
CNX500 and CNX600 Routers of our Corporate Access product category.
Gross Profit
Gross profit decreased as a percentage of net sales to 51.6% for the quarter
ended March 30, 1996, from 53.2% for the quarter ended April 1, 1995. This
decrease is primarily the result of reduced contributions to gross profit from
highly profitable software licensing revenue. The Company's gross profit, as a
percentage of product sales, increased slightly to 44.8% from 44.5% when
compared to the same period of the prior year. Gross profit for software
licensing was 95.2% versus 97.7% a year ago due to additional engineering
efforts related to Q1 1996 agreements. Service and Other gross profits were up
3.4% to 35.1% versus 31.7% a year ago due to lower personnel and personnel-
related costs as well as lower Spares and Upgrade revenue which had low margins
in Q1 of 1995.
Research and Development
Research and development expenses were $2,669,000 or 19% of net sales for the
quarter ending March 30, 1996, compared to $1,935,000 or 8.7% of net sales for
the same quarter of the prior year. The increase in expenses of $734,000 was
primarily due to a decrease in allocations to cost of goods sold for research
and development expenses related to software licensing contracts and externally
funded development projects, and more to research and development expense. 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.
Selling and Marketing
Selling and marketing expenses were $3,764,000 or 26.9% of net sales for the
quarter ended March 30, 1996, compared to $5,328,000 or 24.1% of net sales for
the quarter ended April 1, 1995. For the quarter ending March 30, 1996, the
decrease in expenses of $1,564,000 was due to lower personnel and
personnel-related costs as well as a reduction in advertising expenses.
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General and Administrative
General and administrative expenses were $1,116,000, or 8.0% of net sales for
the quarter ended March 30, 1996, compared to $1,243,000 or 5.6% of net sales
for the quarter ended April 1, 1995. The decrease in expenses for the first
quarter of 1996 when compared to the first quarter of 1995 was due mainly to a
lower level of personnel and personnel-related costs.
Provision for Income Taxes
For the quarter ended March 31, 1996, the Company did not record an income tax
provision as a result of the lower level of profitability and the utilization of
previously reserved deferred tax deductions to offset current provisions. In
1996, the Company expects an effective tax rate in the range of between 5% and
10%, which will be comprised primarily of taxes in foreign jurisdictions. The
actual rate will depend on the level of profitability in these foreign
jurisdictions.
Liquidity and Capital Resources
During the first quarter of 1996, the Company did not consume significant cash
from operating activities compared to $1,311,000 of cash generated in the first
quarter of 1995. The cash consumed from operating activities was due mainly to
increased investments in inventory of $3,813,000, primarily for new products.
These investments were offset by a reduction in Accounts Receivable of
$2,427,000.
Investing activities consumed $2,204,000 during the first quarter of 1996. The
increase in cash consumed for investing activities was due principally to an
increase in the purchase of marketable securities.
The Company received proceeds of $45,000 from the issuance of common stock.
These proceeds were generated by the issuance of common stock from the exercise
of employee stock options.
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 a number of
factors including: business conditions within the
9
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networking industry; timing of orders from, and shipments to, major customers;
timing of new product introductions; acceptance of products in the marketplace;
increased competition; changes in manufacturing costs; changes in the mix of
product sales; and changes in world economic conditions. Other risk factors are
listed from time to time in required documents filed with the SEC, including the
company's Form 10-Q and Form 10-K filings.
10
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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:
Exhibit
Number Description
(4.1) Article 4 of Restated Articles of
Organization
(4.2) Form of Common Stock Certificate
(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 March 30, 1996.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Proteon,
Inc. has duly caused this Quarterly Report on Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized, on May 10, 1996.
PROTEON, INC.
(REGISTRANT)
May 10, 1996 By: /s/ by: Joseph A. DiGiantommaso
------------------------------------------
Joseph A. DiGiantommaso
Vice President, Finance and Administration
Chief Financial Officer
Treasurer and Clerk
(principal financial officer)
Authorized Signatory
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EXHIBIT INDEX
Exhibit
Number Description Page
(4.1) Article 4 of Restated Articles of
Organization * (c) (filed as Exhibit 4.1)
(4.2) Form of Common Stock Certificate * (b)
(filed as Exhibit 4.2)
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 Registration Statement on Form S-1 Registration No. 33-40073.
(b) Amendment No. 1 on Form 8 to the Registrant's Registration Statement on
Form 8-A, File No. 0-19175.
(c) Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
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.
13
<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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-30-1996
<EXCHANGE-RATE> 1
<CASH> 23,691
<SECURITIES> 8,649
<RECEIVABLES> 9,711
<ALLOWANCES> 0
<INVENTORY> 8,238
<CURRENT-ASSETS> 52,188
<PP&E> 32,343
<DEPRECIATION> 24,377
<TOTAL-ASSETS> 60,154
<CURRENT-LIABILITIES> 12,621
<BONDS> 0
<COMMON> 49,186
0
0
<OTHER-SE> (1,653)
<TOTAL-LIABILITY-AND-EQUITY> 60,154
<SALES> 10,297
<TOTAL-REVENUES> 14,018
<CGS> 5,685
<TOTAL-COSTS> 6,787
<OTHER-EXPENSES> 7,549
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (459)
<INCOME-PRETAX> 141
<INCOME-TAX> 0
<INCOME-CONTINUING> 141
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
