<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 June 29, 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 Identification Number)
incorporation or organization)
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 August 5, 1996.
Common Stock, $.01 par value 15,533,292
(Title of each class) (Number of shares)
Page 1 of 34 pages
Exhibit index at page 19
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PROTEON, INC.
FORM 10-Q
QUARTERLY REPORT
JUNE 29, 1996
TABLE OF CONTENTS
Page
Table of Contents 2
PART I. FINANCIAL INFORMATION
Item 1.Consolidated Financial Statements
Consolidated Balance Sheets as of
June 29, 1996 and December 31, 1995 3
Consolidated Statements of Operations
for the Three and Six Months Ended
June 29, 1996 and July 1, 1995 4
Consolidated Statements of Cash Flows
for the Six Months Ended
June 29, 1996 and July 1, 1995 5
Notes to Consolidated Financial Statements 6
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1.Legal Proceedings 17
Item 2.Changes In Securities 17
Item 3.Defaults Upon Senior Securities 17
Item 4.Submission of Matters to a Vote of Security
Holders 17
Item 5.Other Information 17
Item 6.Exhibits and Reports on Form 8-K 17
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PROTEON, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
ASSETS
June 29, December 31,
1996 1995
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $19,283 $25,829
Marketable securities 7,621 6,863
Accounts receivable, net 6,616 12,138
Inventories 11,591 4,425
Deposits and other assets 1,823 1,342
Recoverable taxes 114 115
------- -------
Total current assets 47,048 50,712
Property and equipment, net 7,755 8,317
------- -------
Total assets $54,803 $59,029
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,733 $ 4,064
Accrued compensation 1,261 1,375
Accrued expenses 2,886 4,249
Accrued restructuring cost 271 457
Accrued warranty 1,431 1,561
------- -------
Total current liabilities 9,582 11,706
Stockholders' equity:
Preferred stock - -
Common stock 156 156
Capital in excess of par value 49,220 49,141
Accumulated deficit (4,009) (1,805)
Cumulative translation adjustments 141 118
Less: Treasury stock, at cost (287) (287)
------- -------
Total stockholders' equity 45,221 47,323
------- -------
Total liabilities and stockholders' equity $54,803 $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
(in thousands, except per share data)
<CAPTION>
Three months ended Six months ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Product $ 7,759 $12,147 $18,056 $27,252
Software licensing 1,499 4,826 3,682 9,129
Service and other 1,388 2,537 2,926 5,274
------- ------- ------- -------
Net sales 10,646 19,510 24,664 41,655
Cost of sales:
Product 4,599 6,263 10,284 14,654
Software licensing 14 1,791 118 1,888
Service and other 1,101 1,735 2,099 3,605
------- ------- ------- -------
Cost of sales 5,714 9,789 12,501 20,147
------- ------- ------- -------
Gross profit 4,932 9,721 12,163 21,508
Operating expenses:
Research and development 2,361 1,940 5,030 3,874
Selling and marketing 4,093 5,017 7,857 10,345
General and administrative 1,102 1,311 2,218 2,555
------- ------- ------- -------
Total operating expenses 7,556 8,268 15,105 16,774
------- ------- ------- -------
(Loss) income from operations (2,624) 1,453 (2,942) 4,734
Interest income, net 279 506 738 775
------- ------- ------- -------
(Loss) income before income taxes (2,345) 1,959 (2,204) 5,509
Provision for income taxes - 149 - 418
------- ------- ------- -------
Net (loss) income $(2,345) $ 1,810 $(2,204) $ 5,091
======= ======= ======= =======
(Loss) income per common share $ (0.15) $ 0.12 $ (0.14) $ 0.33
======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 15,515 15,645 15,514 15,633
======= ======= ======= =======
</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 six months ended
(in thousands)
<CAPTION>
June 29, July 1,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 30,185 $ 42,321
Cash paid to suppliers and employees (35,483) (41,209)
Interest received 745 775
Interest paid (7) -
Income taxes paid (317) (34)
-------- --------
Net cash (consumed) generated by operating activities (4,877) 1,853
Cash flows from investing activities:
Proceeds from the sale of fixed assets 114 -
Capital expenditures (1,127) (826)
Marketable securities sales 7,863 7,020
Marketable securities purchases (8,621) (4,920)
-------- --------
Net cash (used in) provided by investing activities (1,771) 1,274
Cash flows from financing activities:
Proceeds from the issuance of common stock 79 787
Effect of exchange rate changes on cash 23 223
-------- --------
Net (decrease) increase in cash and cash equivalents (6,546) 4,137
Cash and cash equivalents at beginning of year 25,829 24,956
-------- --------
Cash and cash equivalents at end of the period $ 19,283 $ 29,093
======== ========
Reconciliation of net income to net cash (consumed)
generated by operating activities:
Net (loss) income $ (2,204) $ 5,091
-------- --------
Adjustments to reconcile net income to net cash
(consumed) generated by operating activities:
Depreciation and amortization 1,680 1,504
Gain on disposition of assets (105) (52)
Changes in assets and liabilities:
Decrease in accounts receivable 5,522 667
Increase in inventories (7,166) (1,398)
(Increase) decrease in deposits and other assets (480) 688
Decrease in accounts payable and accrued expenses (2,124) (4,647)
-------- --------
Total adjustments (2,673) (3,238)
-------- --------
Net cash (consumed) generated by operating activites $ (4,877) $ 1,853
======== ========
</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 June 29, 1996 and the results of its
consolidated operations and consolidated cash flows for the interim periods
ended June 29, 1996 and July 1, 1995 are unaudited and, in the opinion of the
management of Proteon Inc., 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>
June 29, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Raw materials $ 1,487 $ 134
Work in process 817 405
Finished goods 9,287 3,886
------- -------
Total inventories $11,591 $ 4,425
======= =======
</TABLE>
3. 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 per common share is not materially different from
primary net income per common share at July 1, 1995. No common share equivalents
are included in the June 29, 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 June 29, 1996 were $10,646,000 as compared with
$19,510,000 for the quarter ended July 1, 1995, a decrease of $8,864,000, or
45%. For the first six months of 1996, net sales were $24,664,000 as compared
with $41,655,000 for the same period in 1995, a decrease of $16,991,000, or 41%.
Product sales for the quarter ended June 29, 1996 were $7,759,000 as compared
with $12,147,000 for the quarter ended July 1, 1995, a decrease of $4,388,000,
or 36%. For the six months of 1996, product sales were $18,056,000 as compared
with $27,252,000 for the same period in 1995, a decrease of $9,196,000, or 34%.
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 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 six months
ended June 29, 1996 due to anticipated decreases in both our LAN products and
our Corporate Enterprise categories. For the quarter and six months ended June
29, 1996, the decreases in LAN products net sales were due primarily to lower
average selling prices 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 54% from the second quarter of
1995, and 36% for the first six months of 1996 as compared to the first six
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.
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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. 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 June 29, 1996, was $1,499,000
compared to $4,826,000 for the quarter ended July 1, 1995, a decrease of
$3,327,000, or 69%. For the first six months of 1996, software licensing
revenues were $3,682,000 as compared with $9,129,000 for the same period in
1995, a decrease of $5,447,000 or 60%. This anticipated reduction in software
licensing revenue reflects residual revenue flow, during 1996, from two major
multi-year agreements with IBM and Digital Equipment Corporation which expire in
late 1996 and early 1997. 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 quarters' software licensing revenue will continue to experience this
variability.
For the quarter ended June 29, 1996, service and other revenues decreased by
$1,149,000 or 45%, to $1,388,000, as compared to $2,537,000 for the quarter
ended July 1, 1995. For the first six months of 1996, service and other revenues
were $2,926,000 as compared with $5,274,000 for the same period in 1995, a
decrease of $2,348,000, or 45%. These decreases were 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
Total gross profit decreased as a percentage of net sales to 46% for the quarter
ended June 29, 1996, from 50% for the quarter ended July 1, 1995 and to 49% from
52% for the first six 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 gross profit margin on
products decreased to 41% from 48% when compared to the same quarter of
the prior year due primarily to declining margin and decreased volume on the
token ring adapter card segment of the local access product category. For the
quarter, gross profit for software licensing was 99% versus 63% a year ago due
to limited engineering efforts related to Q2 1996 agreements. For the quarter,
service and other gross profit margins were down to 21% versus 32% a year ago
due to increased personnel and personnel-related costs.
8
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RESEARCH AND DEVELOPMENT
Research and development expenses were $2,361,000 or 22% of net sales for the
quarter ended June 29, 1996, compared to $1,940,000 or 10% of net sales for the
same quarter of the prior year. The increase in expenses of $421,000 was
primarily due to fewer costs being allocated to software licensing contracts and
externally funded development projects. A greater portion of such costs was
allocated to internal research and development expense. For the first six months
of 1996, research and development expenses were $5,030,000 or 20% of net sales
compared to $3,874,000 or 9% of net sales for the first half of 1995. The
increase in expenses of $1,156,000 for the first six months of 1996 was due
primarily to the reasons stated above. 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 $4,093,000 or 38% of net sales for the
quarter ended June 29, 1996, compared to $5,017,000 or 26% of net sales for the
quarter ended July 1, 1995 a decrease of $924,000 or 18%. For the first six
months of 1996, selling and marketing expenses were $7,857,000 or 32% of net
sales compared to $10,345,000 or 25% of net sales for the same period of the
prior year, a decrease of $2,488,000, or 24%. 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 quarter and the six months ended June
29, 1996 when compared with the same periods in 1995.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1,102,000, or 10% of net sales for the
quarter ended June 29, 1996, compared to $1,311,000 or 7% of net sales for the
quarter ended July 1, 1995, a decrease of $209,000, or 16%. For the first six
months of 1996, General and Administrative expenses were $2,218,000, or 9% of
net sales compared to $2,555,000 or 6% of net sales for the same period of the
prior year, a decrease of $337,000 or 13%. The absolute decreases in expenses
were due mainly to a lower level of personnel and personnel-related costs for
the quarter and the six months ended June 29, 1996 when compared with the same
periods in 1995.
PROVISION FOR INCOME TAXES
For the quarter and six months ended June 29, 1996, the Company did not record
an income tax provision as a result of the current year loss position and the
utilization of previously reserved deferred tax deductions to offset current
foreign tax provisions.
9
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LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1996, the Company consumed $4,877,000 of cash
from operating activities. The cash consumed was due primarily to an increase in
inventories of $7,166,000 as well as the pay down of accounts payable and
accrued expenses of $2,124,000. These were offset by a reduction in accounts
receivable of $5,522,000.
Investing activities for the first six months consumed $1,771,000 due
principally to the purchases of marketable securities and the acquisition of
capital equipment of $1,127,000.
The Company received proceeds of $79,000 from the issuance of common stock.
These proceeds were generated by the issuance of common stock from the exercise
of employee stock options and the Employee Stock Purchase Plan.
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, three 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.
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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 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 and 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.
The RISC processor presently used in the Company's CNX 600 and CNX 500 bridging
router is available solely from AMD. The Company believes, however, that other
available RISC processors could be substituted for the AMD chip, if necessary,
with some product modifications.
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 supply from one vendor
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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 shipment which would adversely
affect the Company's operating results. There can be no assurance that, in the
event of interruptions in contract manufacturing, supply of components from sole
or limited sources, supply 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 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.
IBM from time to time establishes strategic working relationships with
independent networking vendors relating to IBM's long-term product development
programs. The Company currently has such a relationship with IBM.
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Remote Access (Routers)
- - -----------------------
Proteon expects to participate significantly in the market segment of remote
access routing. 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
- - ------------
Proteon has introduced a new Ethernet local access product, the CSX 900E
Switching Concentrator, which combines high performance and low price per port.
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.
Internetworking Software
- - ------------------------
OpenROUTE [Trademark], Proteon's world class internetworking software suite , is
the foundation of the Company's high performance local and remote access
internetworking products. All of Proteon's internetworking products (local and
remote) 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
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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. Proteon is
also helping to define and support emerging industry standards underlying the
use of new technological capabilities.
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
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 large systems integrators, OEMs ("Original
Equipment Manufacturers"), VARs ("Value Added Resellers") 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
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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
selected large systems integrators, internet service providers, 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
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 often 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
15
<PAGE> 16
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 as well as by risks such as tariff regulations 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 pursuant to this Prospectus, or Rule 144
or Rule 701 under the Securities Act. 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.
16
<PAGE> 17
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
At the Company's Annual Meeting of Shareholders held on May 22, 1996,
the following matters were voted upon:
(1) The following persons were elected as Directors: Daniel J. Capone, Jr.
with 14,387,491 shares voting for election and votes of 286,368 shares
withheld; Howard C. Salwen with 14,384,043 shares voting for election
and votes of 289,846 shares withheld; Dr. David Clark with 14,399,122
shares voting for election and votes of 284,737 shares withheld;
Julius L. Marcus with 14,402,722 shares voting for election and votes
of 271,137 shares withheld; and L.J. Sevin with 14,340,868 shares
voting for election and votes of 332,991 shares withheld.
(2) A proposed amendment to the Company's Employee Stock Purchase Plan to
increase by 300,000 the number of shares reserved for issuance in
respect of purchases by employees pursuant to the Plan was approved.
13,825,805 shares were voted for approval; 551,784 shares were voted
against; 263,770 shares voted to abstain; and there were 32,500 broker
non-votes.
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 six months ended June 29, 1996.
17
<PAGE> 18
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.
August 8, 1996 By: /s/by: Daniel J. Capone, Jr.
----------------------------
Daniel J. Capone, Jr.
President & Chief Executive Officer
(principal executive officer)
By: /s/by: Joseph A. DiGiantommaso
------------------------------
Joseph A. DiGiantommaso
Vice President, Finance and Administration
Chief Financial Officer
Treasurer and Clerk
(principal financial officer)
By: /s/by Philip A. Gardella, Jr.
-----------------------------
Philip A. Gardella, Jr.
Corporate Controller
(principal accounting officer)
18
<PAGE> 19
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered
- - ------ ----------- --------
Page
- - ----
(3.1) Restated Articles of Organization as Amended*(c) (filed
as (filed as Exhibit 3.1) xx
(3.3) By-Laws, as amended and restated, of the Registrant * (a) xx
(filed as Exhibit 3.3)
(4.1) Article 4 of the Restated Articles of Organization, (See
Exhibit (filed as Exhibit 3.3) xx
(4.2) Form of revised Common Stock Certificate 20
(10.24) Severance Compensation Agreement dated 22
November 15, 1995 between the Registrant and
William T. Greer.
(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
the documents with the corresponding letter, and are hereby incorporated by
reference from the such documents:
(a) Registrant's Registration Statement on Form S-1 Registration
No. 33-40073.
(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.
19
<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>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-30-1996 JUN-29-1996
<EXCHANGE-RATE> 1 1
<CASH> 23,691 19,283
<SECURITIES> 8,649 7,621
<RECEIVABLES> 9,711 6,616
<ALLOWANCES> 0 0
<INVENTORY> 8,238 11,591
<CURRENT-ASSETS> 52,188 47,048
<PP&E> 32,343 32,892
<DEPRECIATION> 24,377 25,137
<TOTAL-ASSETS> 60,154 54,803
<CURRENT-LIABILITIES> 12,621 9,582
<BONDS> 0 0
<COMMON> 49,186 49,220
0 0
0 0
<OTHER-SE> (1,653) (3,999)
<TOTAL-LIABILITY-AND-EQUITY> 60,154 54,803
<SALES> 10,297 18,056
<TOTAL-REVENUES> 14,018 24,664
<CGS> 5,685 10,284
<TOTAL-COSTS> 6,787 12,501
<OTHER-EXPENSES> 7,549 15,105
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (459) 738
<INCOME-PRETAX> 141 (2,204)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 141 (2,204)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 141 (2,204)
<EPS-PRIMARY> .01 (.14)
<EPS-DILUTED> .01 (.14)
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