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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period _______to________
Commission File Number 0-19175
PROTEON, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2531856
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Nine Technology Drive, Westborough, MA 01581
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 898-2800
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of each class) (Number of shares)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
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Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10K. [ ]
Aggregate market value of Registrant's voting stock held by non-affiliates of
the Registrant as of March 27, 1997; $25,778,750 (without admitting that any
person whose shares are not included in determining such value is an
affiliate).
Indicate the number of shares outstanding of each of the Registrant's classes of
comon stock as of the latest practicable date. Shares of Common Stock oustanding
as of March 27, 1997: 15,276,296
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the Company's
fiscal year ended December 31, 1996 (the "1996 Annual Report") are incorporated
by reference into Parts II and IV of this Report and portions of the
Registrant's Proxy Statement for its 1997 Annual Meeting of Shareholders to be
held on May 21st, 1997 (the "1997 Proxy Statement") are incorporated by
reference into Part III of this Report. With the exception of those portions of
the 1996 Annual Report and 1997 Proxy Statement expressly incorporated in this
Report by reference, such documents shall not be deemed filed as a part of this
Report.
Page 1 of 150 pages
Exhibit index at page
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PART I
ITEM 1. GENERAL BUSINESS
COMPANY OVERVIEW
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Proteon, Inc., together with its subsidiaries, including, OpenROUTE
Networks, Inc., ("Proteon," or "the Company") is known as an innovative product
provider in the multi-billion dollar data communications industry. Proteon and
its subsidiary, OpenROUTE Networks, have distinguished themselves as leaders in
helping customers with network connectivity. For more than 16 years, Proteon has
shipped network connectivity products that have helped customers grow and
prosper through deploying network computing. Historically, Proteon networking
products have provided connectivity solutions in more than 70 percent of the
Fortune 100 companies. Leveraging this expertise in mission-critical network
solutions, Proteon is delivering this same quality for Internet, Intranet, and
small to medium-sized enterprise users. The Company is committed to providing
access solutions that make networks more accessible, secure, easier to use,
manage, and operate. The Company's comprehensive line of access solutions
includes products for Internet/Intranet access, branch office access, Token Ring
and Ethernet switching, hubs and adapters.
The Company was incorporated in Massachusetts in January 1974 as
Proteon Associates, Inc. The Company changed its name to Proteon, Inc. in July
1983. Its executive offices are located at 9 Technology Drive, Westborough,
Massachusetts 01581, and its telephone number at that location is (508)
898-2800. The Company's manufacturing facilities are located at the same
address. In January 1997, the company announced the formation of a new
wholly owned subsidiary, OpenROUTE Networks, Inc. This new subsidiary was
incorporated in the state of Delaware, USA.
OpenROUTE Networks' markets encompass the fast growing components of the
networking industry. For Internet and Intranet connections, OpenROUTE
Networks' products combine cost effectiveness with ease of operation,
interoperability, network security, reliability and performance. The Company's
customers include both the Global 1000 multinationals, as well as those small
to medium-sized enterprises requiring connections to the Internet and to
suppliers, customers, and business products. Proteon, Inc.'s customers encompass
local area networking sites that implement Token Ring and Ethernet network
topologies. Specific products marketed by Proteon include network adapter
cards, network hubs, LAN switches, and a switch-router.
At the core of the Company's design philosophy is a commitment to
deliver reliable, high-performance networking products based on industry
standards. Proteon's and OpenROUTE Networks' products incorporate the highest
possible technical specifications to provide open, interoperable solutions for
today's shared bandwidth internetworks.
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NETWORKING INDUSTRY
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 LAN
segmentation using various switching technologies; and the massive drive for
businesses of all sizes and individuals to connect their systems and networks to
the Internet and Intranet.
The peer-to-peer evolution has created an increased demand for
client/server based applications. The first impact of client/server based
networks is the increasing demand for inexpensive, easy to use, remote access
routers. Remote offices can now access corporate databases while running local
application programs. The client/server shift has also created the demand for
greater performance in the LAN, and hence is driving the market for switching
solutions. Also, users are now gaining access to previously unreachable
resources including the Internet, corporate headquarters and other remote sites.
Any LAN-attached workstation with Internet Protocol (IP) client software can
send and receive electronic mail, access public databases worldwide, share files
and programs through File Transfer Protocol (FTP), participate in thousands of
business and consumer-related newsgroups, and easily browse the massive
quantities of information available on the World Wide Web.
Proteon and OpenROUTE Networks believe that one of the keys to their
success will be making networks more accessible to a new, broader base of
customers. The Company 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, use, network security and network compatibility.
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FORMATION OF NEW SUBSIDIARY
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The formation of the new OpenROUTE Networks subsidiary was decided in
keeping with the Company's strengthened focus on the rapidly growing market for
Internet and Intranet connectivity. The Company defines the Internet as a
"public" network representing it to all audiences, and the Intranet as a
"private," secure network with Internet-like characteristics that is most often
used only by the employees of a specific company or organization. This new
OpenROUTE Networks subsidiary will focus on the development, marketing and
distribution of the Company's award-winning GlobeTrotter router products.
The new subsidiary was formed to bring together the Company's resources on
the GlobeTrotter family of high-performance, low-cost remote access routers and
the ongoing licensing of its OpenROUTE internetworking software suite. The name
"OpenROUTE Networks" reflects the Company's specific emphasis in the remote
access marketplace. In conjunction with the establishment of this new
subsidiary, the Company also unveiled a new corporate logo. The new logo will
also be used in a corporate branding campaign to better position GlobeTrotter
products. The new name also reflects the "open" nature of the public Internet.
OpenROUTE Networks has a multi-faceted sales strategy to meet the growing need
to connect hundreds of thousands of organizations to the Internet in a cost-
effective and secure manner. A major OpenROUTE Networks sales thrust will be to
focus on key and emerging product features for Internet Service Providers (ISPs)
and the distributors who service this segment of the market. Major ISPs and
distributors to ISPs have already become important OpenROUTE Networks customers.
OpenROUTE Networks also markets products through OEM relationships. Digital
Equipment Corporation and Nippon Telegraph and Telephone's (NTT) Advanced
Technology Division currently resell GlobeTrotter remote access routers under
their own brand names. OpenROUTE Networks expects to announce other OEM
relationships during 1997. OpenROUTE Networks also sells remote access
products through some of the world's largest distributors such as Tech Data
Corp. and Ingram Micro. In addition, a large base of Value Added Resellers
(VARs), including Racal DataGroup, actively market GlobeTrotter products in all
domestic and international markets. OpenROUTE Networks is targeting major sales
in markets such as government, health care, education, publishing,
manufacturing, insurance, professional services, libraries and entertainment.
LAN PRODUCTS AGREEMENT
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Proteon, Inc. and Microvitec PLC jointly announced the signing of a
reseller agreement and a letter of intent, subject to contract closure, for an
additional series of agreements that provide Microvitec to resell Proteon's
products and obtain intellectual property rights for LAN products, manufacturing
licenses, and access to other Proteon resources to develop products and services
for the LAN marketplace.
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SIGNIFICANT EXECUTIVE APPOINTMENTS AND CHANGES
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In March 1996, the Company promoted William Greer to Vice President
of American Sales Operations. Greer had been serving as Regional Sales Director
for the Eastern Region of the United States since he joined Proteon in 1995.
Early in 1997, Mr. Greer was given additional responsibilities as Vice President
of Worldwide Sales. In this role, Greer is responsible for all sales programs in
North, Central and South America, Asia Pacific and Europe. He supervises
Proteon's sales force, as well as manages relationships with Proteon sales
partners including large scale systems integrators, Value Added Resellers,
master distributors, and Internet Service Providers.
In the fall of 1996, Robert J. Connaughton, the company's Chief Legal
Counsel, was given additional corporate responsibilities as Vice President of
Finance and Chief Financial Officer. Mr. Connaughton, who joined Proteon in
1995, has nearly two decades of experience in senior management, law, operations
and finance.
During the year, three senior executives resigned their positions. David
Allen resigned his position as Vice President of European Sales Operations.
Jeffrey B. Low resigned his position as Vice President of Worldwide Marketing,
and Joseph A. DiGiantomasso resigned his position as Chief Financial Officer.
Information regarding employee contracts is available in the Company's Proxy
filing with the Securities and Exchange Commission.
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REMOTE ACCESS (ROUTERS)
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OpenROUTE Networks' product focus is anticipated to be in the market
segment of Remote Access Routing. This rapidly growing market is fueled by
large corporations deploying client/server applications in remote offices and
connections to the Internet. Proteon shipped the industry's first "plug and
play" low end router, the DNX 300, in early 1993. In November 1994, Proteon
began shipping the RBX 200. This router is the product of a joint development
agreement with IBM and at that time differentiated itself, the Company
believes, through low price, custom designed, remote access routing features,
and a high degree of interoperability with IBM's internetworking products.
The RBX 200 runs the full range of the Company's OpenROUTE(TM) routing
software. To date, Proteon has shipped more than 150,000 access ports with its
routers.
In April 1996, the Company expanded its line of connectivity products with
the introduction of the Globe Trotter (GT) Access Manager Point-of-Presence
(POP) platform. The GT Access Manager POP has been specifically designed as a
total Point-of-Presence solution for the thousands of Internet Service Providers
(ISPs) around the world that are currently expanding their connectivity
infrastructure. With an attractive entry-level price point of $8,995 (U.S.) --
the lowest price in the industry in its class -- and a scaleable architecture,
the Company believes the GT Access Manager gives ISPs maximum flexibility to
accommodate the dynamic requirements of their customers. The GT Access Manager
includes resilient features such as dual power supplies, high density wide area
network (WAN) connections and a highly optimized RISC-based routing engine. The
Company continues to market this product along with its high-end routers, the
CNX 500 and CNX 600.
In April of 1996, the Company made one of its most significant product
announcements of the year when it announced a major expansion of its line of
GlobeTrotter Remote Access routers. This expansion included six new models that
address all the major options for Internet/Intranet connectivity. The new models
included:
o The GlobeTrotter 70-U, which provides full Internet Protocol (IP)
connectivity for Integrated Services Digital Network (ISDN) links and
includes an integrated NT-1. It is also the industry's only product of its
type for under $1,000;
o The GlobeTrotter 70-S/T, which provides the same features as the
GlobeTrotter 70-U, plus support for other ISDN peripherals through the S/T
interface, also at under $1,000;
o The GlobeTrotter 72-U, which provides IP, IPX, AppleTalk and bridging
connectivity for ISDN links with an integrated NT-1, priced at only $1,195;
o The GlobeTrotter 72-S/T, which provides IP, IPX, AppleTalk, and Bridging
connectivity, plus support for other ISDN peripherals through the S/T
interface, also priced at only $1,195;
o The GlobeTrotter 60 which now features asynchronous dial-up and synchronous
Frame Relay or leased-line IP connectivity, priced at only $795; and
o The GlobeTrotter 62, with the same asynchronous and synchronous
functionality, with additional protocol support for IPX, AppleTalk and
Bridging, priced at only $995.
The Company believes that the expansion of the GlobeTrotter line is
critical to growth in 1997. The Company believes that having a more complete
line of Remote Access routers will give it a better entry point into business
partnerships with ISPs and OEM prospects. This line of products is expected to
strengthen the Company's position in the market for ISDN routers.
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During the summer of 1996, the Company's ISDN product line was even further
strengthened when it participated in an industry-wide testing consortium. In
recent laboratory testing conducted by Proteon, the GlobeTrotter 70-U -- running
Version 5 of Stac(R) LZS(R) compression algorithm and compression control
protocols -- achieved data throughput rates over an ISDN link that were between
30 and 70 percent faster than competing products.
At the fall Networld+Interop industry trade show in Atlanta, the Company
released the results of another industry test that demonstrated the performance
of its ISDN products. The testing, which measured Integrated Services Digital
Network (ISDN) router and bridge performance, was sponsored by Strategic
Networks Consulting, Inc., Rockland, Mass., a leading market research firm and
networking consultant.
The GlobeTrotter 70 -- at a list price of only $995 per unit for unlimited
users -- beat out all competing products in two critical areas: data
compression and ISDN call setup.
MAJOR EMPHASIS ON NETWORK SECURITY
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In an effort to significantly expand its GlobeTrotter product line, the
Company launched a major product marketing effort for network security products.
The program has been designed to address the networking marketplace's need for
affordable and secure ways of remotely accessing the Internet and corporate
Intranets. The Secure Internet/Intranet Program is offered to Internet Service
Providers (ISPs) and end users, and is based on a security hierarchy that
recognizes the need for increasingly stronger security mechanisms depending upon
the type of user and the type of application. As 1997 unfolds, OpenROUTE
Networks intends to address each of those levels of users with strategic
partnerships and products. Recent industry research indicates that in a drive to
achieve greater business success in the face of increasing global competition,
Internet and Intranet-based services hold the key for today's virtual
organization. Acting as a global backbone, these networks can link branch
offices, telecommuters, partners, suppliers or customers directly into the
business process.
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The first product implementation of this program is being marketed as the
GTSecure-60 Firewall Router, a high-performance, cost-effective solution that
uniquely integrates both full firewall and routing capabilities into a single
product. The Company believes that it was one of the first in the industry to
offer this type of integrated security product. Most other solutions call for
users to manage security in a separate server environment running expensive
security software. The Company believes this low-cost approach provides adequate
network security for most small office users.
In the Fall of 1996, the Company added the GTSecure-70 Firewall Router
to its product line for ISDN connections. In addition, the Company added IP
filtering technology and began active participation in testing with the National
Computer Security Association. The GTSecure Firewall Routers were subsequently
certified by the NCSA. GTSecure Firewall Routers start at pricing levels of only
$1,395 per unit (U.S. list). As 1997 unfolds, the Company intends to offer other
products that integrate routing and security in the same system platform.
All of OpenROUTE Networks' routers feature the Company's award-winning
OpenROUTE(TM) internetworking software. By using OpenROUTE(TM) software, users
have assurance that the products will interoperate with a wide range of
existing installed equipment. OpenROUTE(TM) has been accepted by industry
leaders as the most open, standards-based internetworking software available.
The Company has continued to devote significant engineering resources to
its OpenROUTE internetworking software. Recently, the Company announced two new
versions that encompass major new technologies and features. OpenROUTE Release
2.2 includes new features such as:
o Support for NetWare Link Service Protocol (NLSP), a technology that
provides link state routing for Internetwork Packet Exchange (IPX) based
networks that are among the largest in the industry;
o Implementation of IPXWAN Version 2, a link management and negotiation
protocol for use over serial lines and other wide area services; and
o A series of IPX enhancements that aid in routing traffic, load sharing,
bandwidth management and diagnostics.
One of the most attractive features of OpenROUTE 2.2 is the support for
NLSP. NLSP is a protocol for information exchanged among routers geared to the
needs of large IPX internetworks. IPX is the Network-Layer protocol used by the
NetWare operating system, and by the compatible network products of other system
providers. NLSP addresses the limitations of the IPX Routing Information
Protocol and Service Advertisement Protocol (RIP/SAP). Users are much better
able to scale their networks with NLSP. NLSP was designed and specified by
Novell. Support of NLSP makes the company's products attractive in the large
base of Novell users.
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OpenROUTE Release 2.3, which was recently announced, further expands the
capabilities of the software suite. This release introduces several new WAN
capabilities that significantly enhance the software for ISDN links. Key new
features include:
o Internet Protocol (IP) Address Assignment, a capability that allows IP
addresses to be automatically assigned to a router's WAN ports;
o Support for Callback, a new feature that allows an OpenROUTE GlobeTrotter
router to make or accept call requests to and from the remote routers or
access servers;
o Improved IP filters that block unwanted traffic and allow users to create a
collection of access control lists to route traffic based on an
organization's network policy; and
o Support for Internetwork Packet Exchange Wide Area Net (IPXWAN), a new
Novell protocol that standardizes the transfer of IPX packets over various
WAN media.
During 1997, the Company plans to introduce other new versions of OpenROUTE
that will expand the current product line and open new markets in the Remote
Access segment.
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JOINT DEVELOPMENT
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In the fall of 1996, the Company announced an important strategic
partnership with NTT Advanced Technology Corporation (NTT-AT) of Japan in
which OpenROUTE Networks and NTT-AT will work together to provide the Japanese
marketplace with high-performance connectivity products for ISDN. The companies
have jointly developed an ISDN router which is now being marketed in Japan.
These new products are being sold in Japan with an integrated NTT-AT Data
Service Unit (DSU). The Company believes that the market for network access
solutions in Japan is currently showing dramatic growth as small offices and
Internet/Intranet users take advantage of ISDN's high bandwidth capabilities.
NTT-AT has a high degree of proficiency in the data communications sector
utilizing LAN technologies, and now is focusing on the Remote Access market as
one of its key areas. The Company believes that this method of joint
development is important to its future growth. The Company intends to
aggressively seek out other, similar joint partnerships with
telecommunications carriers in both domestic and international markets.
OpenROUTE Networks also currently builds product under an OEM relationship
for Digital Equipment Corporation of Maynard, Mass. Digital currently markets a
small Remote Access router that carries the Digital name but is built by
OpenROUTE Networks.
BUSINESS PARTNERING WITH INTERNET SERVICE PROVIDERS
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A major initiative is the Company's decision to seek business
partnerships with Internet Service Providers. The Company believes that
Internet Service Providers offer a new path of wide-scale distribution for
GlobeTrotter routers. As ISPs have evolved around the world, their equipment
needs have paralleled this process. In many cases where ISPs are connecting
small businesses to the Internet or Intranet, the installation of a Remote
Access Router is necessary. By solidifying its presence with ISPs on a global
basis, the Company expands its distribution and increases the potential to grow
its business. The Company does not currently have any agreements with ISPs that
provide for the exclusive installation of OpenROUTE Networks products. However,
a major effort is being made to work on development with ISPs, thus ensuring
that OpenROUTE Networks' products are the preferred choice.
The Company's first significant relationship in this area was established
with PSINet, Inc. of Herndon, Virginia, in the Spring when OpenROUTE Networks
GlobeTrotter routers were certified to connect to PSINet's massive
Internet-optimized network. At the time, PSINet's network had more than 300
Points-of-Presence around the world. The certification is important to the
Company because it means that for business and corporate users PSINet may
specify OpenROUTE Networks products. The GlobeTrotter products were certified
after a series of rigid lab tests and comparisons with many competitive
products.
During the course of the year, OpenROUTE Networks expanded its relationship
with PSINet on many fronts. The companies jointly announced that they would
develop a range of technologies that strengthen the security of PSINet's
Internet Services and enable advanced network capabilities for future service
offerings. This technology from OpenROUTE Networks enables PSINet to enhance
security services that are integrated into the network itself. Subsequently,
this technology from OpenROUTE Networks was offered by
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PSINet under the name "RouteWaller." This joint development with PSINet also
enabled the Company to develop its own GTSecure Firewall Routers.
Going forward, the Company's strategy is to increase the number of ISPs
that carry OpenROUTE Networks routers. Other companies added in 1996 include
SundayNET, Northern Net, Best Internet, Supernet, EasyNET, Vossnet, SingNET,
Athena Internet, ContribNET, Tokyo Internet, ILK Internet, Global Internet, and
Asia On Line. During the year, the Company hopes to announce other agreements
with ISPs from around the world.
Designed in accordance with general ISP requirements, GlobeTrotter remote
access routers give users shared Internet access, thus avoiding multiple phone
line costs and expensive modem banks. GlobeTrotters feature plug-and-play
operation, user-friendly graphical interfaces, Internet Protocol (IP)
standards-based internetworking and security, and local and remote
manageability.
COMPANY AWARD
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OpenROUTE Networks won an important industry award when its comprehensive
portfolio of GlobeTrotter Remote Access routers won a 1996 Users' Choice Award
from Communications News. The honor singled out OpenROUTE Networks in the
category for internetworking equipment. The Communications News awards are based
on actual inquiries from subscribers. Inquiries about the OpenROUTE Networks
products came from communications and networking professionals at end user
sites.
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LOCAL AREA NETWORKING PRODUCTS
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The Company is continuing to market a number of LAN products. However, the
Company is putting less emphasis on LAN products than in previous years. The
decision to partner with third parties in license arrangements is intended to
enhance development.
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MARKETING, SALES AND CUSTOMERS
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End-users of the Company's products have typically been organizations with
critical applications requiring connectivity integrating their headquarters and
wide area computing environments. The Company'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,
original equipment manufacturers (OEMs), value added resellers (VARs),
telecommunications carriers, and distributors with experience in network
integration and a reputation for excellent service. As the Company moves
forward, it will be targeting a customer base that may not be familiar with
standard networking terms.
MARKETING PROGRAMS
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The Company understands the critical nature of creating end-user awareness
for its products and capabilities. The Company's marketing programs in 1996 and
planned marketing programs for 1997 continue to focus on channel, ISP, and end-
user awareness through: direct mail campaigns; targeted advertising; significant
educational and product announcement activities; public relations; seminar
programs; electronic advertising mediums such as the Internet, and regional and
large, national industry trade shows. These programs are intended to enhance
brand name recognition for the Company and its products with end-users, generate
sales leads for the Company's field sales force and the Company's resellers, and
support the sales efforts of its resellers. In the future, the Company plans to
devote more time and money to branding of the OpenROUTE Networks nameplate. In
conjunction with the creation of OpenROUTE Networks, the Company launched a new,
colorful logo that will play a key role in the corporate campaign.
WORLD WIDE WEB SITE DEVELOPMENT
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To better communicate its messages, the Company is making a major
commitment to the World Wide Web. Since deploying its World Wide Web site in
1995, the Company has continued to enhance and improve the site. The current
site includes a wide range of Company information such as corporate
information, product information, investor information, business partners, etc.
To further improve its Web site, the Company intends to launch a new "business
oriented" site that is more closely tied to the Company's Remote Access
business. The new site, currently under construction, is found at URL
http://www.openroute.com. The Company is committed to using its Internet site
as an important factor for its business. In the near future, the Company also
plans to use the Internet for electronic commerce. To implement the new site,
the Company is using the outside resources of a web development vendor.
INVESTOR RELATIONS PROGRAMS
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The Company's marketing efforts also include an Investor Relations program
that encompasses a wide range of activities. On a daily basis, the Company has
communications personnel available to speak with current investors, investor
prospects, buy-side and sell-side analysts, portfolio managers, and others
interested in the Company's finances and products. The Company also conducts an
outreach program to present its business story to security analysts. These
analyst forums are typically conducted by the Company's Chief Executive
Officer. Venues have included New York City, San Francisco, and Boston. During
1997, the Company expects to continue to leverage its marketing efforts through
these analyst forums. The Company also conducts regular quarterly conference
calls with Wall Street securities analysts and makes its senior executives
available for on-site visits. Other investor relations activities include the
Company's annual meeting, annual report, financial reports, etc. The Company
recently launched a new service called "Shareholder direct." This
telecommunications-based service features a toll-free number for inbound
callers. Interested parties can hear recorded messages and retrieve documents
at no charge. The Company has instituted this service in lieu of quarterly
mailings. The Company believes this new system gives interested parties better
and faster access to financial statements and recent press announcements. The
Company also makes investor relations information available through its World
Wide Web site. The Company's Web site can be reached at http://www.proteon.com
or http://www.openroute.com.
VARs/ISPs
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The Company continues to reinforce its long-standing commitment to indirect
sales channels with the Premier Access and Internet Access Partner Program.
This is an ongoing cooperative effort designed to increase sales opportunities
for the hundreds of value added resellers (VARs) and ISPs that currently carry
the Company's product line, and expand the Company's reach into new
geographical regions.
Under the program, partners have a direct relationship with the Company,
but may continue to procure products through distribution. Access Partners are
authorized to sell all the Company's solutions, which currently includes
products for Internet access, Small Office/Home Office Access, Branch Office
Access, Shared Remote Access Routing and Local Access Token Ring and Ethernet
switching, hubs and adapters.
Access Partners have to meet certain criteria in order to qualify
for the program. Once qualified, this group of partners is eligible for co-op
funding on all products purchased. The Company also provides training,
evaluation, and beta testing programs exclusively to these partners. The new
plan creates one partner program for all classifications of resellers including
network integrators, VARs, Internet service providers, national integrators, and
systems integrators. The Company works with its sales partners to guarantee
geographical and product exclusivity for partner products and provides free
sales and technical training. The Company also participates in joint sales
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calls and provides its partners with qualified sales leads by territory. Access
Partners also receive early access to new products and technical information,
and are eligible for a demonstration/evaluation equipment program.
FIELD SALES FORCE
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The Company's field sales force is primarily responsible for providing
sales support and training to the Company's systems integrators, OEMs, ISPs,
VARs, telecommunications carriers, and distributors. In 1996, the Company
focused a portion of its sales force on direct presence at end-user sites with
the goal of providing awareness to the end-user of Proteon and OpenROUTE
Networks' products and the development of leads to support its reseller
partners. The field sales force has a number of offices in the United States,
and international offices in London, Singapore, North Sydney, Tokyo, Toronto,
Paris, Kelkheim, and Hong Kong.
SYSTEMS INTEGRATORS AND OEMS
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Proteon and OpenROUTE Networks sell networking products primarily through a
large number of systems integrators and OEMs. These organizations typically have
technical expertise and an installed customer base in either telecommunications
or computer communications, and are experienced in the sale and support of
complex networking solutions.
18
<PAGE> 15
DISTRIBUTORS
- ------------
Proteon sells a substantial portion of its Token Ring and Ethernet adapter
and intelligent hub and wirecenter products in North America to a number of
distributors, which usually resell to resellers and dealers, including several
national chains. Typically, distributors market Proteon's Token Ring and
intelligent hub products to dealers, whereas VARs sell the complete product
line, including routers, to end-users. The Company's distributors include Ingram
Micro and Tech Data. The Company also decided to initiate programs to sell its
router and switch products through distributors. As a result of this initiative,
certain distributors will carry OpenROUTE Networks' internetworking products and
service the needs of VARs and other types of system integrators. The Company
believes this new sales distribution channel for internetworking products will
broaden the accessibility of its products.
INTERNATIONAL SALES
- -------------------
The Company's products are currently marketed, sold and serviced
internationally by over 60 distributors, VARs, and OEMs. These resellers have
generally non-exclusive agreements applying to a country-wide territory. In
1996, international sales accounted for 38.3% of net sales. In 1995, the number
was 35.7%. In 1994, the number was 35.3%.
19
<PAGE> 16
CUSTOMER SUPPORT AND SERVICE
- ----------------------------
The Company's customer service organization provides a comprehensive suite
of service and support programs for resellers and end-users. The underlying
philosophy of the Company is to provide end-users with alternatives for
acquiring services for their networking requirements. The Company's users have
the option of contracting directly with the Company, or with a number of Company
supported service providers, enabling them to choose the service model that best
complements their business model.
Proteon and OpenROUTE Networks' product warranties range from 90 days for
software products to a Lifetime Hardware Warranty for network adapter cards. The
service offerings consist of technical support (remote and on-site), maintenance
contracts, hardware and software upgrades, product exchange, spares, depot
repair, and professional services.
The Company significantly enhanced its service capabilities when it
announced a joint support agreement with IBM. The agreement further
strengthened the Company's ability to provide on-site
20
<PAGE> 17
support across the United States and Canada. The three-year agreement pairs
IBM's service and support resources with OpenROUTE Networks' comprehensive line
of multiprotocol internetworking systems to provide users with more options in
servicing their growing, mission-critical networks.
Under the terms of the agreement, OpenROUTE Networks' customers will be
able to choose from multiple on-site support options. OpenROUTE Networks'
expects its own customer service unit to handle most U.S. requirements. When
on-site support is required, OpenROUTE Networks will contact IBM's national
dispatch center and make all necessary arrangements. OpenROUTE Networks will
continue to be responsible for problem resolution. IBM provides direct support
for Canadian maintenance requirements, including telephone support, equipment
exchange, and on-site service. While OpenROUTE Networks provides second and
third level technical support, IBM Canada maintains ownership through problem
resolution.
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,
network security and ensure interoperability with other vendors' standards-based
products. The Company is also helping to define and support emerging industry
standards that underly the use of new technological capabilities. The Company
is currently participating in a variety of Internet Engineering Task Force
(IETF) working groups, and the IEEE 802.5 and 802.12 subcommittees.
The Company believes it is essential to work cooperatively with other
organizations that have complementary technologies. Significant relationships
have been developed with IBM, Motorola ISG, Digital Equipment Corp., Yokogawa
Digital Computer Corp. (Japan), Plaintree Systems, AT&T, and TELDAT,
S.A. of Spain. The Company believes that interoperability with other vendors'
networking products will be of increasing importance in the future. The
Company expends considerable efforts on interoperability to increase market
acceptance of its products.
The Company's laboratories conduct ongoing interoperability tests with IBM
and other vendors' products. In several cases, development partners provide
reciprocal testing. To pursue broader interoperability, Proteon, in 1992, helped
found the University of New Hampshire Token Ring Interoperability Laboratory,
and joined other vendors in the Token Ring Interoperability Laboratory (TRIL).
In 1996, 1995, and 1994, the Company's research and product development
expenditures were $9,353,000, $8,802,000, and $11,162,000, respectively. All of
the Company's expenditures for hardware and software research and development
costs have been expensed as incurred.
MANUFACTURING
- -------------
21
<PAGE> 18
The Company's manufacturing operations primarily consist of assembly,
testing and quality control of materials, components, subassemblies, and
systems. The Company has developed a strategic relationship with SCI Systems
(SCI), a major subcontract manufacturer with access to cost-effective, high
volume manufacturing, distribution, and repair capability worldwide. SCI
manufactures a majority of the Company's board assemblies for its router, hub,
and adapter card product lines. The Company believes that in the event of an
interruption in manufacturing at SCI, alternative subcontractors could be
brought on line quickly. However, such a transition could result in production
delays which might adversely affect the Company's business. The Company also
subcontracts board assemblies with other local vendors for lower volume
products. Proteon and OpenROUTE Networks does some final assembly and testing of
its intelligent hubs and routers at its Westborough, Massachusetts manufacturing
facility. A repair depot and logistic operation is also located at Westborough,
coordinating global service requirements for all products.
In the fall of 1996, the Company's manufacturing facilities were
consolidated into Company headquarters at 9 Technology Drive. The Company has
since undertaken efforts to sub-lease its now unused manufacturing space, and
expects to do so in the near future.
22
<PAGE> 19
INTELLECTUAL PROPERTY RIGHTS
- ----------------------------
The Company was granted a patent on February 18, 1992, for its Token Ring
synchronization technology, commonly referred to as JitterBuster. On July 21,
1992 the Company was granted a patent for Token Ring Equalizer. Each of these
patents has a life of 17 years from the date of grant.
Currently, Proteon relies principally upon a combination of contractual
rights, trade secrets, and copyright laws to establish and protect its
proprietary rights in its products. The Company believes that, because of the
rapid pace of technological change in the data communications and computer
industries, the 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.
Certain technology used in the Company's products is licensed by the
Company from third parties, generally on a non-exclusive basis. These license
agreements generally require the Company to pay royalties (certain of these
license agreements include minimum royalty requirements) and to fulfill
confidentiality obligations in order to maintain the licenses. One of the
Company's license agreements is an exclusive license for a portion of the
software incorporated in the Company's bridging routers. In order to maintain
the exclusivity of this license, the Company must make minimum annual royalty or
other payments in addition to those required to maintain the license. The sum of
these payments for each year is relatively insignificant to the Company. The
maximum royalties
23
<PAGE> 20
payable under this license are limited in accordance with a formula. Generally,
if the Company does not pay minimum royalties or make other minimum payments
each year under this license, the license may be terminated. Absent a breach of
this license agreement by the Company, the license may be continued indefinitely
at the Company's option. The termination of this license would have a material
adverse effect on the Company's operations because the technology licensed under
this agreement is included in the software incorporated in the Company's
bridging router products, which provide a significant portion of the Company's
revenues.
RISK FACTORS
- ------------
In this 10K, under the provisions of the "safe harbor" section of the
Private Securities Litigation Reform Act of 1995, Proteon, Inc. makes
forward-looking statements that involve a number of risks and uncertainties.
Among the factors that could cause actual future results to differ materially
are the level of acceptance of Proteon's and OpenROUTE Networks' products in
the marketplace; the company's ability to generate revenue across all existing
product lines; future reventues generated by the licensing of OpenROUTE
software; general competitive pressures in the marketplace; the company's
ability to sign agreements with reseller partners including both Premier Access
Partner VARs and Internet Service Providers (ISPs); the ability to sign OEM
agreements; and continued overall growth in the networking industry. Risk
factors are listed in the company's annual report, Form 10-K, Form 10-Q, and
other filings with the Securities and Exchange Commission.
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 mature, 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.
The Company is still in the process of repositioning itself from a company
emphasizing deployment of Token Ring solutions to one that is focused on
network access - or shared access. The Company's overall business strategy is
to provide leading edge product solutions in this 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 (1) its continuing ability to enhance and expand its existing
products; (2) to develop or private label other manufacturer's technology; and
(3) 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.
24
<PAGE> 21
INTELLECTUAL PROPERTY
- ---------------------
Currently, the Company 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 the Company 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.
25
<PAGE> 22
INTERNETWORKING SOFTWARE LICENSING
- ----------------------------------
OpenROUTE(TM), the Company's world class internetworking software suite,
is the foundation of the Company's high performance local and remote access
internetworking products. All of the Company's internetworking products ship
with some variant of this software technology installed. The Company licenses
this software to other providers of internetworking products.
The market for routers and bridges is dominated by Cisco Systems. The
Company's intent, as a smaller participant, is to: develop innovative new
products for emerging niche markets with superior performance characteristics
and cost effectiveness; license its proprietary router software source code to
major manufacturers for use in their routing
27
<PAGE> 23
and bridging products; identify markets for its routing, bridging and shared
access products; and develop and market products which have the features desired
by the market and interoperate with the products manufactured by the major
industry participants.
While the Company has had some success in implementing this strategy, there
can be no assurance that this strategy will prove to be the correct one for the
future. Similarly, there can be no assurance that the Company has chosen the
right products for development, that it will be able to develop and produce the
chosen products, or that those products will gain acceptance in the marketplace.
In addition, while each router source code license sale can produce significant
revenue, there is a limited market of customers for the Company's router source
code and each license draws heavily on the Company's engineering resources.
Failure by the Company to identify new licensing prospects, to continue to
make such licensing arrangements, or to be able to support the sales made to
date would have an adverse effect on the Company's operations. Additionally, as
routing technology progresses, the Company may be required to modify its routing
and bridging software to maintain compatibility 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.
It is the Company's intention to rely less on software licensing as an
overall source or revenue. The Company also expects that in future months
certain revenue streams from IBM and Digital Equipment Corp. will diminish and
end. The loss of these revenue streams could adversely affect future results
unless the Company generates revenues from other products.
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 that one of the keys to success will be making networks more accessible
to a broader base of customers. The Company 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, security, interoperability and ease of use. There is no
guarantee that the Company will be able to fully succeed against the
competition.
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
28
<PAGE> 24
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.
METHOD OF DISTRIBUTION
- ----------------------
The Company sells its products to end users worldwide primarily through an
indirect sales channel comprised of large systems integrators, OEMs, 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 14%, 12%, and 11%, of the Company's
sales in 1996, 1995, and 1994, respectively, and a second reseller, Tech Data,
accounted for approximately 14% and 10% of the Company's sales in 1996 and 1995,
respectively.
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 the Company's products have typically been organizations with
critical applications requiring connectivity integrating their branch offices or
headquarters and wide area computing environments. OpenROUTE Networks' 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, original equipment manufacturers (OEMs), value added
resellers (VARs), and distributors with experience in network integration and
reputation for excellent service. In addition, the Company's strategy includes
increased presence of its sales force in end-user sites. In some cases, the
Company will sell directly to an end user. However, this accounts for a very
small percentage of overall sales.
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
- ---------
29
<PAGE> 25
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. Significant reductions
in revenue could cause adverse effects on cost and the ability to finance
operations.
INTERNATIONAL SALES, REGULATORY STANDARDS AND CURRENCY EXCHANGE
- ---------------------------------------------------------------
International sales accounted for 38.3%, 35.7%, and 35.3% in 1996, 1995,
and 1994, respectively, of the Company's net sales. The Company expects that
international sales will continue to be a significant portion of the its
business. Foreign regulatory bodies often establish standards different from
those in the United States, and the Company's products are designed generally
to meet those international 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 as well as by risks such as tariff regulations and difficulties
in obtaining export licenses.
SHARES ELIGIBLE FOR FUTURE SALE
- -------------------------------
Approximately 15,428,000 outstanding shares of Common Stock are now freely
tradable on the open market. A total of 522,604 shares are exercisable under
vested options as of December 31, 1996, and the shares issuable upon exercise
of any such option will be tradable or eligible for sale in the public market
pursuant to a registration statement, 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,
quarterly variations in financial results, or other events 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.
EMPLOYEES
- ---------
As of December 31, 1996, the Company employed a total of 193 persons,
including 63 in sales, marketing and customer support, 53 in engineering and
product development,
30
<PAGE> 26
55 in manufacturing, and 22 in finance and administration. None of the Company's
employees are represented by a labor union. The Company has experienced no work
stoppages and believes its employee relations are in good standing.
REGISTERED TRADEMARKS
- ---------------------
Proteon, OpenROUTE, TokenVIEW and ProNET are registered trademarks and
JitterBuster CNX 600, CNX 500, CNX 400, DNX 350, DNX 300, RapiDriver, OneVIEW,
and OverVIEW are trademarks of Proteon. Ethernet is a registered trademark and
XNS is a trademark of Xerox Corporation. IBM and NetView are registered
trademarks and SNA is a trademark of IBM. Motorola is a trademark of Motorola,
Inc. AMD is a trademark of Advanced Micro Devices, Inc. AT&T is a trademark of
AT&T.
31
<PAGE> 27
ITEM 2. PROPERTIES
The Company's principal administrative, marketing, manufacturing and
product development facilities are located in one building in Westborough,
Massachusetts and occupy a total of approximately 42,000 square feet as of
December 31, 1996. The Company occupies these facilities under an agreement
which expires in April 2002. In addition, the Company leases 11 sales and
support offices elsewhere in the United States and abroad. The Company believes
that its existing facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to any material
legal proceedings nor is any property of the Company or its subsidiaries the
subject of material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the fiscal year ended December 31, 1996.
32
<PAGE> 28
PART II
ITEM 5. MARKET FOR PROTEON COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The section entitled "Stock Price History" on page __ of the 1996 Annual
Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The table entitled "Selected Consolidated Financial Data" contained on page
__ of the 1996 Annual Report is incorporated herein by reference. The table
should be read in conjunction with the consolidated financial statements and
related notes and other financial information appearing elsewhere in the 1996
Annual Report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages __ through __ of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained on pages __ through __ of the
1996 Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The sections entitled "Consolidated Balance Sheets," "Consolidated
Statements of Operations," "Consolidated Statements of Stockholders' Equity,"
"Consolidated Statements of Cash Flows," "Notes to Consolidated Financial
Statements," and "Report of Independent Accountants" contained on pages __
through __ of the 1996 Annual Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
33
<PAGE> 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF PROTEON
The sections entitled "Information About The Executive Officers," "Proposal
1: Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" contained in the Company's 1997 Proxy Statement which the
Company intends to file with the Securities and Exchange Commission on or about
April 11, 1997 are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Compensation of Directors and Executive Officers"
contained in the 1997 Proxy Statement (except for those portions entitled
"Certain Relationships and Related Transactions", "Information About the
Executive Officers", "Compensation Committee Report on Executive Compensation",
"Compensation Committee Report on Option Repricing", and "Comparison of
Cumulative Total Return Since Initial Public Offering among Proteon, Inc.,
NASDAQ Stock Market and H & Q Communication Section Index") is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Principal Shareholders" contained in the 1997 Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions"
contained in the 1997 Proxy Statement is incorporated herein by reference.
34
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS,
SCHEDULE, AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedule, and Exhibits
<TABLE>
The financial statements, schedule, and exhibits listed below are filed as
part of this Report:
<CAPTION>
Sequentially
Numbered Page
-------------
<S> <C>
1. Financial statements (Data incorporated by reference from
the attached 1996 Annual Report to the shareholders of
Proteon, Inc.):
Consolidated Balance Sheets as of December 31, 1996 and 1995 ___
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 ___
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 ___
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 ___
Notes to Consolidated Financial Statements ___
Report of Independent Accountants ___
2. Schedule:
II Valuation and Qualifying Accounts __
</TABLE>
Schedules not listed above are omitted because of the absence of conditions
under which they are required or because the required information is included in
the consolidated financial statements or notes submitted.
35
<PAGE> 31
<TABLE>
3. Exhibits:
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
(3.1) Restated Articles of Organization as Amended
(3.3) By-Laws, as amended and restated
(4.1) Article 4 of the Restated Articles of Organization, (See Exhibit 3.1)
(4.2) Form of Common Stock Certificate
(10.1) Agreement to Manufacture, dated December 1, 1988 between the
Registrant and SCI Manufacturing, Inc.
(10.3) Purchase Agreement, dated December 1, 1990 between the
Registrant and Texas Instruments, Inc.
(10.4) Software License Agreement, dated January 1, 1990 between the
Registrant and Noel Chiappa
(10.5)* 1991 Restated Stock Option Plan
(10.6)* 1988 Nonqualified Stock Option Plan
(10.7)* Restated Employee Stock Award Plan
(10.8)* Consulting Agreement, dated August 31, 1989 between the
Registrant and David Clark
(10.9) Form of Indemnification Agreement. An Indemnification Agreement was
entered into by and between the Registrant and each of:
David Allen, Steven J. Bielagus, Daniel J. Capone, Jr., David Clark,
Robert J. Connaughton Jr., Joe Grillo, Jeffrey B. Low, Julius Marcus,
Howard C. Salwen, L.J. Sevin, and certain other former
Directors and Executives. Although the agreements were executed
on various dates, each is the same as the Form of Indemnification
Agreements in all material respects and details, and therefore the
individual agreements are not filed herewith.
(10.10) Amendment dated April 18, 1991 to Agreement to Manufacture, dated
December 1, 1988 between the Registrant and SCI Manufacturing, Inc.
(10.11)* Executive Compensation Arrangements Not Set Forth in Formal
Documents
(10.12)* Consulting Agreement, dated August 25, 1993, between the
Registrant and Howard Salwen
(10.13)* Employment Agreement, dated February 25, 1994, between
Registrant and Joseph A. DiGiantommaso
(10.14)* Employment Agreement, dated March 18, 1994, between the
Registrant and Steven J. Bielagus
(10.15)* Employment Agreement, dated June 27, 1994 between the
Registrant and Daniel J. Capone, Jr.
(10.16) Lease Agreement dated December 19, 1994 between the Registrant
and WCB Twenty Limited Partnership
(10.17) Lease Agreement dated December 1, 1994 between the Registrant
and John Hancock Mutual Life Insurance Company
(10.18)* Letter Agreement dated March 2, 1995, between the Registrant and
Jeffrey B. Low
(10.19)* Letter Agreement dated April 11, 1995, between the Registrant and
Bruce W. Lichorowic
(10.20)* Severance Compensation Agreement dated October 11, 1995
between the Registrant and Daniel J. Capone, Jr.
</TABLE>
36
<PAGE> 32
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
(10.21)* Severance Compensation Agreement dated October 11, 1995
between the Registrant and Joseph A. DiGiantommaso
(10.22)* Severance Compensation Agreement dated October 18, 1995
between the Registrant and Steven J. Bielagus
(10.23)* Severance Compensation Agreement dated October 30, 1995
between the Registrant and Jeffrey B. Low
(10.24)* Severance Compensation Agreement dated November 15, 1995
between the Registrant and Bruce W. Lichorowic
(10.25)* Employment Separation Agreement dated February 9, 1996 between
the Registrant and Bruce W. Lichorowic
(10.26)* Employment Agreement, dated January 4, 1996 between the
Registrant and Robert J. Connaughton, Jr.
(10.27)* Employment Agreement, dated March 11, 1996 between the
Registrant and William T. Greer
(10.28)* Severance Compensation Agreement dated March 11, 1996
between the Registrant and William T. Greer
(10.29)* Employment Agreement, dated October 16, 1996 between the
Registrant and Robert J. Connaughton, Jr.
(10.30)* Severance Compensation Agreement dated October 21, 1996
between the Registrant and Robert J. Connaughton, Jr.
(11) Statement RE: Computation of Per Share Earnings
(13) The Annual Report to Stockholders of the Company for the fiscal
year ended December 31, 1996 (except for the pages and information
thereof expressly incorporated by reference in this Form 10-K,
the Annual Report to Shareholders is provided solely for the
information of the Securities and Exchange Commission and is not
deemed "filed" as part of this Form 10-K)
(21) Subsidiaries of the Registrant
(23) Consent of Coopers & Lybrand L.L.P.
(27) Financial Data Schedule
* Exhibit is a management contract or compensatory plan, contract or
arrangement required to be filed as an Exhibit to this Form 10-K.
</TABLE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K with the Securities and Exchange
Commission during the last quarter of the fiscal year ended December 31, 1996.
37
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Proteon, Inc. has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized on March 27,
1997.
PROTEON, INC.
(Registrant)
March 27, 1997 By: /s/ Daniel J. Capone, Jr.
-----------------------------
Daniel J. Capone, Jr.
President & Chief Executive Officer
(principal executive officer)
Authorized Signatory
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
on the dates indicated.
March 27, 1997 By: /s/ Robert J. Connaughton, Jr.
-----------------------------
Robert J. Connaughton, Jr.
Vice President, Finance and Administration
Chief Financial Officer
Treasurer and Clerk
(principal financial officer)
March 27, 1997 By: /s/ David Clark
-----------------------------
David Clark, Director
March 27, 1997 By: /s/ Julius Marcus
-----------------------------
Julius Marcus, Director
March 27, 1997 By: /s/ Howard C. Salwen
-----------------------------
Howard C. Salwen, Director
March 27, 1997 By: /s/ L.J. Salwen
-----------------------------
L.J. Salwen, Director
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Proteon, Inc.:
Our report on the consolidated financial statements of Proteon, Inc. has been
incorporated by reference in the Form 10-K from page 30 of the 1996 Annual
Report to Shareholders of Proteon, Inc. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 35 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 11, 1997
38
<PAGE> 35
SCHEDULE II
<TABLE>
PROTEON, INC.
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Balance at Uncollectible Balance at
Allowance for Beginning Provision Accounts End of
Doubtful Accounts of Period for Bad Debt Written Off Period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996 $889,276 $ - $(217,521) $671,755
Year ended December 31, 1995 887,524 - 1,752 889,276
Year ended December 31, 1994 419,393 348,000 120,131 887,524
</TABLE>
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
<S> <C> <C>
(3.1) Restated Articles of Organization as Amended*(c) (filed as Exhibit 3.1)
(3.3) By-Laws, as amended and restated, of the Registrant * (a)
(filed as Exhibit 3.3)
(4.1) Article 4 of the Restated Articles of Organization, (See Exhibit 3.1)
(4.2) Form of Common Stock Certificate * (b) (filed as Exhibit 4.2)
(10.1) Agreement to Manufacture, dated December 1, 1988 between the
Registrant and SCI Manufacturing, Inc. * (a) (filed as Exhibit 10.2)(+)
(10.3) Purchase Agreement, dated December 1, 1990 between the Registrant
and Texas Instruments, Inc. * (a) (filed as Exhibit 10.4) (+)
(10.4) Software License Agreement, dated January 1, 1990 between the
Registrant and Noel Chiappa * (a) (filed as Exhibit 10.5) (+)
(10.5) 1991 Restated Stock Option Plan * (d) (filed as Exhibit 19.1)
(10.6) 1988 Nonqualified Stock Option Plan * (a) (filed as Exhibit 10.7)
(10.7) Restated Employee Stock Award Plan * (a) (filed as Exhibit 10.8)
(10.8) Consulting Agreement, dated August 31, 1989 between the Registrant
and David Clark * (a) (filed as Exhibit 10.11)
(10.9) Form of Indemnification Agreement. An Indemnification Agreement
was entered into by and between the Registrant and each of:
David Allen, Steven J. Bielagus, Daniel J. Capone, Jr., David Clark,
Robert J. Connaughton Jr., Jeffrey B. Low, Julius Marcus,
Howard C. Salwen, L.J. Sevin, and certain other former Directors
and Executives. Although the agreements were executed on various
dates, each is the same as the Form of Indemnification Agreements
in all material respects and details, and therefore the individual
agreements are not filed herewith. * (a) (filed as Exhibit 10.17)
(10.10) Amendment dated April 18, 1991 to Agreement to Manufacture, dated
December 1, 1988 between the Registrant and SCI Manufacturing, Inc.
* (a) (filed as Exhibit 10.24)
(10.11) Executive Compensation Arrangement Not Set Forth in Formal Document*
(e) (filed as Exhibit 10.26)
(10.12) Consulting Agreement, dated August 25, 1993, between the Registrant and
Howard Salwen * (f) (filed as Exhibit 10.1)
(10.13) Employment Agreement, dated February 25, 1994, between Registrant and
Joseph A. DiGiantommaso *(h) (filed as Exhibit 10.2)
(10.14) Employment Agreement, dated March 18, 1994, between the Registrant and
Steven J. Bielagus * (h) (filed as Exhibit 10.3)
(10.15) Employment Agreement, dated June 27, 1994 between the Registrant and
Daniel J. Capone, Jr. * (i) (filed as Exhibit 10.4)
(10.16) Lease Agreement dated December 19, 1994 between the Registrant and WCB
Twenty Limited Partnership * (j) (filed as Exhibit 10.31) (10.17) Lease
Agreement dated December 1, 1994 between the Registrant and John
Hancock Mutual Life Insurance Company * (j) (filed as Exhibit 10.32)
</TABLE>
41
<PAGE> 37
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
<S> <C> <C>
(10.18) Letter Agreement dated March 2, 1995, between the Registrant and Jeffrey B.
Low * (j) (Filed as Exhibit 10.33)
(10.19) Letter Agreement dated April 11, 1995, between the Registrant and Bruce W.
Lichorowic * (k) (Filed as Exhibit 10.1)
(10.20) Severance Compensation Agreement dated October 11, 1995 between the
Registrant and Daniel J. Capone, Jr.* (l) (Filed as Exhibit 10.20) 40
(10.21) Severance Compensation Agreement dated October 11, 1995 between the
Registrant and Joseph A. DiGiantommaso* (l) (Filed as Exhibit 10.21) 51
(10.22) Severance Compensation Agreement dated October 18, 1995 between the
Registrant and Steven J. Bielagus* (l) (Filed as Exhibit 10.22) 65
(10.23) Severance Compensation Agreement dated October 30, 1995 between the
Registrant and Jeffrey B. Low* (l) (Filed as Exhibit 10.23) 79
(10.24) Severance Compensation Agreement dated November 15, 1995 between the
Registrant and Bruce W. Lichorowic* (l) (Filed as Exhibit 10.24) 92
(10.25) Employment Separation Agreement dated February 9, 1996 between the
Registrant and Bruce W. Lichorowic* (l) (Filed as Exhibit 10.25) 106
(10.26) Employment Agreement, dated January 4, 1996 between the Registrant and
Robert J. Connaughton, Jr.
(10.27) Employment Agreement, dated March 11, 1996 between the Registrant and
William T. Greer
(10.28) Severance Compensation Agreement dated March 11, 1996 between the Registrant
and William T. Greer
(10.29) Employment Agreement, dated October 16, 1996 between the Registrant and
Robert J. Connaughton, Jr.
(10.30) Severance Compensation Agreement dated October 21, 1996 between the
Registrant and Robert J. Connaughton, Jr.
(11) Statement RE: Computation of Per Share Earnings 112
(13) The Annual Report to Stockholders of the Company for the fiscal year ended
December 31, 1996 (except for the pages and information thereof expressly
incorporated by reference in this Form 10-K, the Annual Report to Shareholders
is provided solely for the information of the Securities and Exchange
Commission and is not deemed "filed" as part of this Form 10-K) 113
(21) Subsidiaries of the Registrant 149
(23) Consent of Coopers & Lybrand L.L.P. 150
(27) Financial Data Schedule
</TABLE>
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 following documents:
(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.
(d) Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 27, 1992.
(e) Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.
42
<PAGE> 38
(f) Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 2, 1993.
(g) Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.
(h) Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 2, 1994.
(i) Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 2, 1994.
(j) Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(k) Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 1, 1995.
(l) Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
All exhibit descriptions followed by a (+) indicate documents with
respect to which confidential treatment has been granted.
43
<PAGE> 1
Exhibit 10.26
proteon Proteon Inc.
- ------- Nine Technology Drive
Wesborough, MA 01581-1799
508 / 898-2800
January 4, 1996
Mr. Robert J. Connaughton, Jr.
102 Den Quarry Road
Lynn, MA 01904
Dear Bob:
It is my pleasure to offer you the position of General Counsel reporting to me.
The terms of our agreement will be as follows:
- - BASE SALARY: Your initial base salary for this position will be $4,230.77
bi-weekly ($110,000 annualized) which will be reviewed annually on the
anniversary date of hire. After completion of your first six (6) months of
employment you will receive a prorated performance evaluation. As well,
your title and level of responsibility will be re-evaluated within the
first twelve (12) months of employment.
- - BONUS: You will be eligible for Proteon's Management Incentive Program
annual bonus of 25% of base salary. Payment of this bonus is based upon
Proteon's Executive Compensation Plan and goals mutually agreed to.
- - STOCK: A recommendation will be made to the Compensation Committee that you
receive an option to purchase 15,000 shares of stock which vest over a
4 year period.
- - SEVERANCE BENEFIT: A severance benefit of six (6) months salary then
current (base) continuation benefit for you should your position be
involuntarily or constructively eliminated for any reason other than cause
within the first 24 months of employment will be granted. As well, a
severance benefit of eight (8) months salary then current (base)
continuation benefit for you should your position be involuntarily or
constructively eliminated for any reason other than cause commencing after
24 months of employment, as defined in Proteon's Policies and Procedures
Manual, will be granted. Should you become employed at any time during
payment of the severance period, such severance payments shall terminate
except to the extent that base salary in your new employment is less than
the installment portion amount. In such event Proteon shall only be
obligated to pay the amount equal to the difference for the balance of the
severance period.
- - PROTEON GROUP HEALTH PLAN: You will be eligible to participate in Proteon's
comprehensive benefits package (see enclosed benefits summary).
<PAGE> 2
Page -2-
Offer letter - R. Connaughton, Jr.
January 4, 1996
This offer is contingent upon providing proper identification and employment
eligibility documents according to Immigration and Naturalization Service
Regulation. Please complete Section I of the enclosed Employment Verification
Form (I-9) and present it with original documents as outlined in Section II, on
your first day of employment.
Bob, I look forward to your decision to accept our offer and join Proteon as
General Counsel. Please indicate your acceptance of this offer by signing below
and returning it by January 8, 1996. Also enclosed are two copies of Proteon's
Proprietary Information Agreement. Proteon requires all individuals joining the
company to sign this standard agreement. Please return one copy of the signed
agreement along with the signed offer letter.
If you have any questions regarding this offer or Proteon in general, please
give me a call.
Sincerely,
/s/ Michele Scholl for Joe DiGiantommaso
Joseph A. DiGiantommaso
Vice President and C.F.O.
Accepted by: /s/ Robert J. Connaughton, Jr. Start date: 1/29/96
------------------------------------- -------------------
Robert J. Connaughton, Jr.
proteon
- -------
<PAGE> 1
Exhibit 10.27
proteon Proteon. Inc
- -------- Nine Technology Drive
Wesborough, MA 01581-1799
508 / 898-2800
March 11, 1996
Mr. William T. Greer
53 South Street
Upton, MA 01568
Dear Tim:
It is my pleasure to offer you the position of Vice President Sales for North,
South and Latin America, reporting directly to me.
The terms of our agreement will be as follows:
- - BASE SALARY: You will receive an initial minimum annual base salary of
$95,000, which will be reviewed annually, plus incentive and bonus
compensation as described below.
- - INCENTIVE COMPENSATION: You will be eligible for $67,000, Incentive
Compensation, without a cap, based on Sales Revenue performance.
- - BONUS: You will be eligible for an additional annual MIP bonus compensation
of 40% of Base salary. ($38,000 annualized target on base salary of
$95,000, for example). Payment of this bonus is based upon Proteon's
Management Incentive Program.
- - STOCK: A recommendation will be made to the Compensation Committee that you
receive an option to purchase 25,000 shares of stock which vest over a 4
year period.
Tim, I look forward to the contributions you will make in your new role at
Proteon, and wish you great success. Please indicate your acceptance of this
offer by signing below. Please return one copy of the signed offer letter.
It is understood that the contents herein are confidential to both yourself and
Proteon.
Sincerely,
/s/ Daniel J. Capone, Jr.
Daniel J. Capone, Jr.
President and C.E.O.
Accepted by: Start date:
-------------------------------- -----------------------
William T. Greer
<PAGE> 1
Exhibit 10.28
SEVERANCE COMPENSATION AGREEMENT
SEVERANCE COMPENSATION AGREEMENT dated as of March 11, 1996 by and between
PROTEON, INC. (the "Company"), a Massachusetts corporation with its principal
offices at Nine Technology Drive, Westboro, Massachusetts 01581, and William T.
Greer (the "Executive"), residing at 52 South Street, Upton, MA 01568.
WHEREAS, the Company's Board of Directors has recognized that the
possibility of a change in control of the Company may cause uncertainty among
the Company's senior management and may result in the departure or distraction
of its senior management to the detriment of the Company and its stockholders;
WHEREAS, the Company's Board of Directors has determined that it is
appropriate to reinforce and encourage the continued attention and dedication of
members of the Company's senior management, including the Executive, to their
duties without distraction arising from the possibility of a change in control
of the Company;
WHEREAS, the Executive desires assurance as to his compensation and
benefits in the event of any change in control of the company;
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and the Executive agree
as follows:
1. TERM. This Agreement shall terminate, except to the extent that any
obligation of the Company hereunder remains unpaid as such time, upon the
earliest to occur of:
(a) two (2) years from the date hereof;
(b) the termination of the Executive's employment with the Company based on
(i) the death of the Executive, (ii) the Disability of the Executive, (iii)
termination by the Company for Cause, or (iv) termination by the Executive other
than for Good Reason; and
(c) one year after the date of a Change in Control. As used in this
Agreement the term "Term" shall mean the period beginning on the date hereof and
ending upon the earliest to occur of events specified above.
<PAGE> 2
2. CHANGE IN CONTROL. No compensation shall be payable under this Agreement
unless and until there shall have been a Change in Control. As used in this
Agreement, the term "Change in Control" means that any of the following events
has occurred:
(i) any person (as defined in Section 3(a) (9) of the Securities Exchange
Act of 1934, as amended (the "1934 Act") (or any successor provision),
becomes the beneficial owner (determined in accordance with Rule 13d-3
under the 1934 Act, or any successor provision), directly or
indirectly, of more than fifty percent (50%) of the outstanding Common
Stock of the Company, or otherwise becomes entitled to vote more than
fifty percent (50%) of the voting power entitled to be cast at
elections for directors ("Voting Power") of the Company;
(ii) there shall have been consummated any consolidation or merger of the
Company (A) in which the Company is not the continuing or surviving
corporation unless such merger is with a corporation at least eighty
percent (80%) of the Voting Power of which is held by the Company, or
(B) pursuant to which the holders of the Company's shares of Common
Stock immediately prior to such merger or consolidation are not the
holders immediately after such merger or consolidation of at least a
majority of the Voting Power of the entity resulting from such
consolidation or merger;
iii) there shall have been consummated any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of
all or substantially all of the assets of the Company; or
(iv) during any period of two consecutive years, individuals who at the
beginning of such period were members of the Board of Directors of the
Company ceased for any reason to constitute a majority thereof, unless
the election, or the nomination for election by the Company's
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors still in office at the time of such
election or nomination who were directors at the beginning of such
Period.
As used in this definition of Change in Control, "Common Stock" means the
Common Stock, or if changed, the capital stock of the Company as it shall be
constituted from time to time entitling the holders thereof to share generally
in the distribution of all assets available for distribution to the Company's
stockholders
<PAGE> 3
after the distribution to any holders of capital stock with preferential rights.
3. TERMINATION FOLLOWING CHANGE IN CONTROL. The Executive shall be entitled to
the compensation provided in Section 4 hereof upon the termination of the
Executive's employment with the Company during the Term of this Agreement and
after a Change in Control unless such termination is as a result of (i) the
Executive's death, (ii) the Executive's Disability, (iii) termination by the
Company for Cause, or (iv) termination by the Executive other than for Good
Reason. As used in this Agreement, the following terms shall have the following
meanings:
(a) the term "Disability" shall mean that as a result of the Executive's
incapacity due to physical or mental illness or physical injury
(excluding illness or injury which was caused by repeated substance
abuse by the Executive), the Executive shall have been absent from his
duties with the Company on a full-time basis (i) for a period of sixty
(60) consecutive days or (ii) an aggregate of ninety (90) days during
any period of twelve (12) consecutive months;
(b) the term "Cause" shall mean any of (i) the willful and continued
failure by the Executive to perform his duties with the Company, other
than any such willful or continued failure resulting from his
incapacity due to physical or mental illness or physical injury
(provided that if such willful and continued failure resulted from
illness or injury which was caused by repeated substance abuse by the
Executive, then the foregoing exception for physical or mental
illness or physical injury shall not be applicable), (ii) the willful
or knowingly reckless engaging by the Executive in misconduct which is
materially injurious to the Company, financially or otherwise,
including, without limitation, willful breach by the Executive of any
employment or other agreement between the Executive and the Company,
or (iii) the conviction of the Executive of a felony by a court of
competent jurisdiction. For purposes of the foregoing, (x) the failure
of the Company to achieve desired or projected results shall not
constitute Cause, but Cause shall only mean and include acts and/or
omissions by the Executive which are specified in clauses (i), (ii)
and (iii) of the immediately preceding sentence, and (y) no act or
failure to act on the part of the Executive shall be considered
"willful" unless done or admitted to be done by him not in good faith
and without reasonable belief that his action or omission was in the
best interests
<PAGE> 4
of the Company. Notwithstanding the first sentence of this
subparagraph (b), the Executive's employment shall not be deemed to
have been terminated for Cause unless (A) reasonable notice shall have
been given to him setting forth in detail the reasons for the
Company's intention to terminate for Cause and, if such
termination is pursuant to clause (i) or (ii) above, only if the
Executive has been provided a period of five (5) business days from
receipt of such notice to cease the actions or inactions, and if he
has not done so (B) an opportunity shall have been provided for the
Executive, together with his counsel, to be heard before the Board of
Directors of the Company, and (C), if such termination is pursuant to
clause (i) or (ii) above, delivery shall have been made to the
Executive of a Notice of Termination from the Board of Directors
stating that in the good faith opinion of a majority of the Board of
Directors (excluding the Executive) he was guilty of conduct set forth
in clause (i) or (ii) above and specifying the particulars thereof in
detail;
(c) the term "Good Reason" shall mean any of the following (without the
Executive's express written consent):
(i) after a Change in Control, the assignment to the Executive by the
Company of duties inconsistent with the Executive's position,
duties, responsibilities and status with the Company immediately
prior to such Change in Control, or a change in the Executive's
titles or offices as in effect immediately prior to such Change
in Control, or any removal of the Executive from or any failure
to reelect the Executive to any of such positions, except in
connection with the termination of his employment for Disability,
for Cause, as a result of the Executive's death or by the
Executive other than for Good Reason:
(ii) after a Change in Control, a reduction by the Company in the
Executive's base salary as in effect on the date hereof or as the
same may be increased from time to time during the Term of this
Agreement, or the Company's failure after a Change in Control to
increase (within 12 months of the Executive's last increase in
base salary) the Executive's base salary by an amount which, on a
percentage basis, is not more than two percentage points below
the average percentage increase in base salary effected in the
preceding 12 months
<PAGE> 5
for all officers of the Company having severance compensation
agreements similar to this Agreement;
(iii) after a Change in Control, any failure by the Company to continue
in effect any benefit plan or arrangement (including, without
limitation, the Company's group life insurance plan, and medical,
dental, accident and disability plans) in which the Executive is
participating at the time of a Change in Control (or any other
substitute plans providing the Executive with substantially
similar benefits) (hereinafter referred to as "Benefit Plans"),
or the taking of any action by the Company which would adversely
affect the Executive's participation in or materially reduce the
Executive's benefits under any such Benefit Plan or deprive the
Executive of any material fringe benefit enjoyed by the Executive
at the time of a Change in Control;
(iv) after a Change in Control, any failure by the Company to continue
in effect any incentive plan or arrangement (including, without
limitation, the Company's Management Incentive Plan, and the
right to receive performance awards and similar incentive
compensation benefits) in which the Executive is participating at
the time of a Change in Control (or any other substitute plans or
arrangements providing him with substantially similar benefits)
(hereinafter referred to as "Incentive Plans") or the taking of
any action by the Company which would adversely affect the
Executive's participation in any such Incentive Plan or reduce
the Executive's benefits under any such Incentive Plan, expressed
as a percentage of his base salary, by more than 10 percentage
points in any fiscal year as compared to the immediately
preceding fiscal year;
(v) after a Change in Control, any failure by the Company to continue
in effect any plan or arrangement to receive securities of the
Company (including, without limitation, the Company's 1991
Restated Stock Option Plan and any other plan or arrangement to
receive and exercise stock options, stock appreciation rights,
restricted stock or grants thereof) in which the Executive is
participating at the time of a Change in Control of the Company
(or substitute plans or arrangements providing him with
substantially
<PAGE> 6
similar benefits) (hereinafter referred to as "Securities Plans")
or the taking of any action by the Company which would adversely
affect the Executive's participation in or materially reduce the
Executive's benefits under any such Securities Plans;
(vi) after a Change in Control, requirement by the Company of the
Executive's relocation to any place other than the location at
which the Executive performed the Executive's duties prior to a
Change in Control, except for required travel by the Executive on
the Company's business to an extent substantially consistent with
the Executive's business travel obligations at the time of a
Change in Control;
(vii)after a Change in Control, any failure by the Company to provide
the Executive with the number of paid vacation days to which the
Executive is entitled at the time of a Change in Control;
(viii)any material breach by the Company of any provision of this
Agreement;
(xi) any failure by the Company to obtain the assumption of this
Agreement by any successor or assign of the Company in accordance
with Section 7 hereof: or
(x) any purported termination of the Executive's employment which is
not effected pursuant to a Notice of Termination, and for
purposes of this Agreement, no such purported termination shall
be effective.
(d) The term "Notice of Termination" shall mean a written notice which
shall indicate those specific termination provisions in this Agreement
relied upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated. For purposes
of this Agreement, no such purported termination by the Company shall
be effective without such Notice of Termination.
(e) the term "Date of Termination" shall mean (i) if the Executive's
employment is terminated by the Company for Disability, 30 days after
Notice of Termination is
<PAGE> 7
given to the Executive (provided that the Executive shall not have
returned to the performance of the Executive's duties on a full-time
basis during such 30-day period) or (b) if the Executive's employment
is terminated by the Company for any other reason, the date on which a
Notice Of Termination is given; PROVIDED that if within 30 days after
any Notice of Termination is given to the Executive by the Company
the Executive notifies the Company that a dispute exists concerning
the Termination, the Date of Termination shall be the date the dispute
is finally determined, whether by mutual agreement by the parties or
upon final judgment, order or decree of a court of Competent
jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected).
4. Severance Compensation
----------------------
(a) Subject to the provisions of section 4 (b) below, and subject to the
Executive's continuing compliance with the provisions of Section 6 hereof and
the Agreement Regarding Confidential Information and Intellectual Property
attached hereto as EXHIBIT A. the compensation and benefits payable to the
Executive pursuant to this Agreement shall be the following (collectively the
"Severance Benefits"):
(i} The Company shall pay to the Executive in cash an amount equal to the
Executive's aggregate compensation from the Company for the twelve
(12) months ending upon the Change in Control. Such amount shall be
payable by, the Company in twelve (12) equal monthly installments
payable on the first day of each month commencing with the month
following the Executive's Date of Termination. For purposes of this
Section 4(a) (1), the Executive's "compensation" preceding a Change
in Control shall include the Executive's base salary and any amounts
paid or accrued pursuant to any Incentive Plans, but shall not include
any amounts or benefits paid or accrued pursuant to any Benefit Plans
or any Securities Plan nor shall it include the value of any other
fringe benefits,
(ii} Within thirty (30) days following the Date of Termination, the Company
shall pay to the Executive, in a lump sum in cash, any accrued but
unpaid salary, vacation and awards under any Incentive Plans earned
but not paid as of the Date of Termination;
<PAGE> 8
(iii) Effective not later than the Date of Termination, the Company shall
(notwithstanding any contrary provision in any Securities Plan or any
employment agreement) accelerate and make immediately exercisable in
full all unvested options and other rights which the Executive holds
under any Securities Plans as of the Date of Termination, and all such
options and rights shall be exercisable for an exercise period of 60
days following the Date of Termination; and
(iv) The Company at its own expense shall maintain in full force and effect
for the Executive's continued benefit until the earlier of (i) two (2)
years after the Date of Termination or (ii) the Executive's
commencement of full-time employment with a new employer, medical and
dental (but not life insurance or disability) plans, programs or
arrangements in which the Executive was entitled to participate
immediately prior to the Date of Termination, provided that his
continued participation is possible under the general terms and
provisions of such plans and programs. In the event that his
participation in any such plan or program is barred, the Company shall
arrange to provide the Executive with benefits substantially similar
to those to which he was entitled to receive under such plans and
programs.
(b) Notwithstanding the foregoing, any Severance Benefits otherwise payable to
the Executive hereunder shall be limited as follows:
(I) No Severance Benefits shall be payable to the Executive under this
Agreement to the extent that the total of such Severance Benefits and
any payments otherwise payable to the Executive by the Company on or
after a Change in Control, which would be deemed under Section 280(of
the Internal Revenue Code of 1986 as amended (the "Code"), to
constitute "parachute payments" without regard to Section 280G(b) (2)
(A) (ii), would equal or exceed in their present value (as determined
under Section 280G(d) (4) of the Code and any regulations thereunder)
300% of the Executive's base amount (as defined in Section 280G (b)
(3) of the Code and regulations thereunder). In the event that the
present value of such payments equals or exceeds such amount, the
provisions set forth below will apply, and Severance Benefits payable
to the Executive under this Agreement will be made only in accordance
with this Section 4(b) notwithstanding any other provision to the
contrary in this Agreement.
<PAGE> 9
(ii) Not later than thirty (30) days after the Date of Termination, the
Company will provide the Executive with a schedule specifying the
present value of such Severance Benefits payable to the Executive
under this Agreement (specifying the Section hereof under which each
such payment is to be made) and any other payments otherwise payable
to the Executive by the Company on or after the Change in Control
which, in the Company's opinion, could constitute parachute payments
under Section 280G. No payments under this Agreement shall be made
until after thirty (30) days from the receipt of such schedule by the
Executive. At any time prior to the expiration of said 30-day period,
the Executive shall have the right to select from all or part of any
category of payment to be made under this Agreement those payments to
be made to the Executive in an amount the present value of which (when
combined with the present value of any other payments otherwise
payable to the Executive by the Company that may be deemed to be
parachute payments) the Company determines is less than 300% of the
Executive's base amount. If the Executive fails to exercise his right
to make a selection, the selection shall be made by the Company.
(iii)At any time prior to exercising the right to make a selection under
paragraph (ii) of this Section 4(b), the Executive shall have the
right to request that the Company obtain a ruling from the Internal
Revenue Service ("Service") as to whether any or all payments listed
on the schedule provided hereunder are, in the view of the Service,
parachute payments under section 280G. Such ruling shall be sought
made at the Company's expense unless, in the written opinion of
independent counsel for the Company, there is no reasonable likelihood
of obtaining a favorable ruling, in which event such expense shall be
borne by the Executive. If a ruling is sought pursuant to such
request, no Severance Benefit under this Agreement shall be paid to
the Executive until after thirty (30) days from the date the Company
provides the Executive with a copy of such ruling, and the period
during which the Executive may exercise his right to make a selection
under paragraph (ii) hereof shall be extended to a date thirty (30)
days from such date. For purposes of this Section 4(b), the Executive
and the Company hereby agree to be bound by the Service's ruling as to
whether payments constitute parachute payments under Section 280G. If
the Service declines, for any reason, to provide the ruling requested,
the Company's
<PAGE> 10
determination with respect to what payments constitute parachute
payments shall control, and the period during which the Executive may
exercise his right to make a selection under paragraph (ii) hereof
shall be extended to a date thirty (30) days from the date of the
Service's notice indicating that no ruling will be forthcoming.
(iv) The references to Section 280G herein are specific references to
Section 280G as amended to date. If Section 280G is amended prior to
the expiration or termination of this Agreement, or replaced by a
successor statute, the limitations imposed by this Section 4(b) upon
payments to be made to the Executive under this Agreement shall be
deemed modified without further action of the parties so as to provide
only for such limitations that are consistent with such amendment(s)
or successor statute(s), as the case may be. In the event that Section
280G, or any successor statute, is repealed, this Section 4(b) shall
cease to be effective on the date of such repeal. The parties to this
Agreement recognize that final Treasury Regulations under Section 280G
may affect the amounts that may be paid hereunder and agree that, upon
issuance of such final Regulations, this Agreement may be modified as
in good faith deemed necessary in light of the provisions of such
Regulations to achieve the purposes hereof, and that consent to such
modification(s) shall not be unreasonably withheld
5. No Obligation To Mitigate Damages; No Effect on Other Contractual Rights.
------------------------------------------------------------------------
(a) The Executive shall not be required to mitigate damages or the amount of any
payment provided for under this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment provided for under this Agreement
be reduced by any compensation earned by the Executive as the result of
employment by another employer after the Date of Termination, or otherwise.
(b) The provisions of this Agreement, and any payment provided for hereunder,
shall not reduce any amounts otherwise payable, or in any way diminish the
Executive's existing rights, or rights which would accrue solely as a result of
the passage of time, under any Benefit Plan, Incentive Plan or Securities Plan,
employment agreement or other contract, plan or arrangement.
<PAGE> 11
6. Non-Competition; Confidentiality.
--------------------------------
(a) The Executive covenants and agrees that if the Executive shall become
entitled to compensation hereunder as provided in Section 3 hereof, then for a
period of twelve (12) months following the Date of Termination, the Executive
shall not, without the Company's prior written consent, engage, directly or
indirectly, in any work or other activity which is in competition with the
business of the Company in the local area network or internetworking field in
any geographical area in which the Company conducts or is then actively planning
to conduct business at the Date of Termination. By way of example only of the
types of activities prohibited hereby, the Executive shall not: solicit or
accept (or assist any person or entity in soliciting or accepting) any business
in the local area network or internetworking field from any person or entity who
or which was an active account of the Company at the Date of Termination
(b) Contemporaneously with the execution and delivery of this Agreement, the
Executive and the Company shall enter into an Agreement Regarding Confidential
Information and Intellectual Property in the Company's standard form, a copy of
which is attached hereto as EXHIBIT A.
7. Successors.
----------
(a) The Company will require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to the Executive, expressly, absolutely and
unconditionally to assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform it if no
such succession or assignment had taken place. Any failure of the Company to
obtain such agreement prior to the effectiveness of any such succession or
assignment shall be a material breach of this Agreement and shall entitle the
Executive to terminate the Executive's employment for Good Reason. As used in
this Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor or assign to its business and/or assets as aforesaid which executes
and delivers the agreement provided for in this Section 7 or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law. If at any time during the Term of this Agreement the Executive is employed
by any corporation a majority of the Voting Power of which is then owned by the
Company, directly or indirectly, "Company" as used in Sections 3,4 and 12 hereof
shall in addition include such employer. In such event, the Company agrees that
it shall pay or shall cause
<PAGE> 12
such employer to pay any amounts owed to the Executive pursuant to Section 4
hereof
(b) This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amounts are still payable to him hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee, or other designee or, if
there be no such designee, to the Executive's estate.
8. NOTICE. For purposes of this Agreement, notices and all other communications
provided for in the Agreement shall be in writing and shall be deemed to have
been duly given when delivered in person (including by any commercial courier
service) or three (3) days after mailing by United States certified or
registered mail, return receipt requested, postage prepaid, to a party at his or
its address set forth at the beginning of this Agreement or such other address
as either party may have furnished to the other in writing in accordance
herewith, except that notices of change of address shall be effective only upon
receipt.
9. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts (without regard to conflicts of
laws rules).
10. VALIDITY. The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect
11. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
<PAGE> 13
12. LEGAL FEES AND EXPENSES. The Company shall pay all legal fees and expenses
which the Executive may incur as a result of the Company's contesting the
validity, enforceability or the Executive's interpretation of, or determinations
under, this Agreement.
13. FURTHER ASSURANCES. The Company shall do, make, execute and deliver all such
additional and further acts, things, assurances and instruments as the Executive
may reasonably request in order to assure to the Executive his rights hereunder
and to carry into effect the provisions and intent of this Agreement. Without
limiting the generality of the foregoing, the Company shall, upon request of
the Executive, convert any options under any Securities Plan which are
"incentive stock options" into "non-qualified options" and amend outstanding
option agreements in a manner not inconsistent with such Securities Plans
IN WITNESS WHEREOF, the parties have executed this Severance Compensation
Agreement as of the date first above written.
PROTEON, INC.
By: V.P. Sales
-----------------------------
Title:
/s/ William T. Greer
----------------------------------
Executive
/s/ Daniel J. Capone, Jr. 3/11/96
<PAGE> 14
EXHIBIT A
---------
AGREEMENT REGARDING CONFIDENTIAL AND
INTELLECTUAL PROPERTY
[to be attached]
<PAGE> 1
Exhibit 10.29
proteon Proteon. Inc
- ------- Nine Technology Drive
Westborough, MA 01581-1799
508 / 898-2800
October 16, 1996
Mr. Robert Connaughton
102 Den Quarry Road
Lynn, MA 01904
Dear Bob:
It is my pleasure to offer you the position of Vice President, Finance/Chief
Financial Officer, Treasurer, General Counsel and Clerk reporting directly to
me. As agreed, each of us reserves the right to make a final determination as
to whether you continue in this capacity or continue in the position of Vice
President, General Counsel and Clerk for Proteon. This discussion will take
place no later than March 31, 1997. If the decision is made that you will not
retain the duties of Chief Financial Officer and Treasurer, such action will
not constitute constructive termination under this offer or the severance
compensation agreement but thereafter will.
The terms of our agreement will be as follows:
- - BASE SALARY: You will receive an initial minimum annual base salary of
$120,000, which will be reviewed annually. If you become Vice President,
General Counsel and Clerk, salary will not be adjusted downward.
- - BONUS: You will be eligible for an additional annual MIP bonus compensation
of 40% of Base salary. ($48,000 annualized target on base salary of
$120,000, for example). Payment of this bonus is based upon Proteon's
Management Incentive Program.
- - STOCK: A recommendation will be made to the Compensation Committee that you
receive an option to purchase 25,000 shares of stock which vest over a 4
year period.
- - SEVERANCE BENEFIT: A severance benefit of twelve (12) months salary and
benefits, then current (base) continuation for you, should your position be
involuntarily eliminated for any reason other than for cause, (as defined
in the Severance Compensation Agreement), will be granted. Should you
become employed at any time during payment of the severance year, such
severance payments shall terminate except to the extent that base salary in
your new employment is less than the installment position amount. In such
event Proteon shall only be obligated to pay the amount equal to the
difference of the balance of the severance period. If you are paid salary
benefits under Section 4(a)(1) of the severance compensation agreement
described below, you will not be entitled to receive the severance benefit
described in this paragraph.
<PAGE> 2
Upon acceptance of this offer, Proteon and you will execute a severance
compensation and indemnification agreements in the respective forms upon which
we agreed.
Bob, I look forward to the contributions you will make in your new role at
Proteon, and wish you great success. Please indicate your acceptance of this
offer by signing below. Please return one copy of the signed offer letter.
It is understood that the contents herein are confidential to both yourself and
Proteon.
Sincerely,
/s/ Daniel J. Capone, Jr.
- ----------------------------
Daniel J. Capone, Jr.
President and C.E.O.
Accepted by: /s/ Robert J. Connaughton, Jr.
------------------------------
Robert Connaughton
proteon
- -------
<PAGE> 1
EXHIBIT 10.30
SEVERANCE COMPENSATION AGREEMENT
SEVERANCE COMPENSATION AGREEMENT dated as of October 21, 1996 and between
PROTEON, INC. (the "Company"), a Massachusetts corporation with its principal
offices at Nine Technology Drive Westborough, Massachusetts 01581, and Robert J.
Connaughton, Jr. (the "Executive"), residing at 102 Den Quarry Road, Lynn
Massachusetts 01904.
WHEREAS, the Company's Board of Directors has recognized that the
possibility of a change in control of the Company may cause uncertainty among
the Company's senior management and may result in the departure or distraction
of its senior management to the detriment of the Company and its stockholders;
WHEREAS, the Company's Board of Directors has determined that it is
appropriate to reinforce and encourage the continued attention and dedication of
members of the Company's senior management, including the Executive, to their
duties without distraction arising from the possibility of a change in control
of the Company;
WHEREAS, the Executive desires assurance as to his compensation and
benefits in the event of any change in control of the company;
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and the Executive agree
as follows:
1. TERM. This Agreement shall terminate, except to the extent that any
obligation of the Company hereunder remains unpaid as such time, upon the
earliest to occur of:
(a) two (2) years from the date hereof;
(b) the termination of the Executive's employment with the Company
based on (i) the death of the Executive, (ii) the Disability of the Executive,
(iii) termination by the Company for Cause, or (iv) termination by the Executive
other than for Good Reason; and
(c) one year after the date of a Change in Control. As used in this
Agreement the term "Term" shall mean the period beginning on the date hereof and
ending upon the earliest to occur of events specified above.
<PAGE> 2
2. CHANGE IN CONTROL. No compensation shall be payable under this Agreement
unless and until there shall have been a Change in Control. As used in this
Agreement, the term "Change in Control" means that any of the following events
has occurred:
(i) any person (as defined in Section 3(a)(9) of the Securities Exchange
Act of 1934, as amended (the "1934 Act")) (or any successor
provision), becomes the beneficial owner (determined in accordance
with Rule 13d-3 under the 1934 Act, or any successor provision)
directly or indirectly, of more than fifty percent (50%) of the
outstanding Common Stock of the Company or otherwise becomes entitled
to vote more than fifty percent (50%) of the voting power entitled
to be cast at elections for directors ("Voting Power") of the Company;
(ii) there shall have been consummated any consolidation merger of the
Company (A) in which the Company is not the continuing or
surviving corporation unless such merger is with a corporation at
least eighty percent (80%) of the Voting Power of which is held by the
Company, or (B) pursuant to which the holders of the Company's shares
of Common Stock immediately prior to such merger or consolidation are
not the holders immediately after such merger or consolidation of at
least a majority of the Voting Power of the entity resulting from such
consolidation or merger;
(iii) there shall have been consummated any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of
all or substantially all of the assets of the Company; or
(iv) during any period of two consecutive years, individuals who at the
beginning of such period were members of the Board of Directors of the
Company ceased for any reason to constitute a majority thereof, unless
the election, or the nomination for election by the Company's
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors still in office at the time of such
election or nomination who were directors at the beginning of such
Period.
As used in this definition of Change in Control, "Common Stock" means the Common
Stock, or if changed, the capital stock of the Company as it shall be
constituted from time to time entitling the holders thereof to share generally
in the distribution of all assets available for distribution to the Company's
stockholders
2
<PAGE> 3
after the distribution to any holders of capital stock with preferential rights.
3. TERMINATION FOLLOWING CHANGE IN CONTROL. The Executive shall be entitled to
the compensation provided in Section 4 hereof upon the termination of the
Executive's employment with the Company during the Term of this Agreement and
after a Change in Control unless such termination is as a result of (i) the
Executive's death, (ii) the Executive's Disability, (iii) termination by the
Company for Cause, or (iv) termination by the Executive other than for Good
Reason. As used in this Agreement, the following terms shall have the following
meanings:
(a) the term "Disability" shall mean that as a result the Executive's
incapacity due to physical or mental illness or physical injury
(excluding illness or injury which was caused by repeated substance
abuse by the Executive), the Executive shall have been absent from his
duties with the Company on a full-time basis (i] for a period of sixty
(60) consecutive days or (ii) for an aggregate of ninety (90) days
during any period of twelve (12) consecutive months;
(b) the term "Cause" shall mean any of (i) the willful and continued
failure by the Executive to perform his duties with the Company, other
than any such willful continued failure resulting from his incapacity
due to physical or mental illness or physical injury (provided that if
such willful and continued failure resulted from illness or injury
which was caused by repeated substance abuse by the Executive, then
the foregoing exception for physical or mental illness or physical
injury shall not be applicable), (ii) the willful or knowingly
reckless engaging by the Executive in misconduct which is materially
injurious to the Company, financially or otherwise, including, without
limitation, willful breach by the Executive of any employment or other
agreement between the Executive and the Company, or (iii) the
conviction of the Executive of a felony by a court of competent
jurisdiction. For the purposes of the foregoing, (x) the failure of
the Company to achieve desired or projected results shall not
constitute Cause, but Cause shall only mean and include acts and/or
omissions by the Executive which are specified in clauses (i), (ii)
and (iii) of the immediately preceding sentence, and (y) no act or
failure to act on the part of the Executive shall be considered
"willful" unless done or admitted to be done by him not in good
faith and without reasonable belief that his action or omission was
in the best interest
3
<PAGE> 4
of the Company. Notwithstanding the first sentence of this
subparagraph (b), the Executive's employment shall not be deemed to
have been terminated for Cause unless (A) reasonable notice shall
have been given to him setting forth in detail the reasons for the
Company's intention to terminate for Cause and, if such termination
is pursuant to clause (i) or (ii) above only if the Executive has
been provided a period of five (5) business days from receipt of
such notice to cease the actions or inactions, and if he has not
done so (B) an opportunity shall have been provided for Executive,
together with his counsel, to be heard before the Board of Directors
of the Company, and (C) if such termination is pursuant to clause (i)
or (ii) above, delivery shall have been made to the Executive of a
Notice of Termination from the Board of Directors stating that in
the good faith opinion of a majority of the Board of Directors
(excluding the Executive) he was guilty of conduct set forth in
clause (i) or (ii) above and specifying the particulars thereof in
detail;
(c) the term "Good Reason" shall mean any of the following (without the
Executive's express written consent):
(i) after a Change in Control, the assignment to the Executive by the
Company of duties inconsistent with the Executive's position,
duties, responsibilities and status with the Company immediately
prior to such Change in Control, or change in the Executive's
titles or offices as in effect immediately prior to such Change
in Control, or any removal of the Executive from or any failure
to reelect the Executive to any of such positions, except in
connection with the termination of his employment for Disability,
for Cause, as a result of the Executive's death or by the
Executive other than for Good Reason:
(ii) after a Change in Control, a reduction by the Company in the
Executive's base salary as in effect on the date hereof or as the
same may be increased from time to time during the Term of this
Agreement, or the Company's failure after a Change in Control to
increase (within 12 months of the Executive's last increase in
base salary) the Executive's base salary by an amount which, on
percentage basis, is not more than two percentage points below
the average percentage increase in base salary effected in the
preceding 12 months
4
<PAGE> 5
for all officers of the Company having severance compensation
agreements similar to this Agreement
(iii) after a Change in Control, any failure by the Company to continue
in effect any benefit plan or arrangement (including, without
limitation, the Company's group life insurance plan, and medical,
dental, accident and disability plans) in which the Executive is
participating at the time of a Change in Control (or any other
substitute plans providing the Executive with substantially
similar benefits) (hereinafter referred to as "Benefit Plans"),
or the taking of any action by the Company which would adversely
affect the Executive's participation in or materially reduce
the Executive's benefits under any such Benefit Plan or deprive
the Executive of any material fringe benefit enjoyed by the
Executive at the time of a Change in Control;
(iv) after a Change in Control, any failure by the Company to continue
in effect any incentive plan or arrangement (including, without
limitation, the Company's Management Incentive Plan, and the
right to receive performance awards and similar incentive
compensation benefits) in which the Executive is participating
at the time of a Change in Control (or any other substitute
plans or arrangements providing him with substantially similar
benefits) (hereinafter referred to as "Incentive Plans") or the
taking of any action by the Company which would adversely affect
the Executive's participation in any such Incentive Plan or
reduce the Executive's benefits under any such Incentive Plan,
expressed as a percentage of his base salary, by more than 10
percentage points in any fiscal year as compared to the
immediately preceding fiscal year;
(v) after a Change in Control, any failure by the Company to continue
in effect any plan or arrangement to receive securities of the
Company (including, without limitation, the Company's 199_
Restated Stock Option Plan and any other plan or arrangement to
receive and exercise stock options, stock appreciation rights,
restricted stock or grants thereof) in which the Executive is
participating at the time of a Change in Control of the Company
(or substitute plans or arrangements providing him with
substantially
5
<PAGE> 6
similar benefits) (hereinafter referred to as "Securities Plans")
or the taking of any action by the Company which would adversely
affect the Executive's participation in or materially reduce the
Executive's benefits under any such Securities Plans;
(vi) after a Change in Control, requirement by the Company of the
Executive's relocation to any place other than the location at
which the Executive performed the Executive's duties prior to a
Change in Control, except for required travel by the Executive on
the Company's business to an extent substantially consistent with
the Executive's business travel obligations at the time of a
Change in Control;
(vii) after a Change in Control, any failure by the Company to provide
the Executive with the number of paid vacation days to which the
Executive is entitled at the time of a Change in Control;
(viii) any material breach by the Company of any provision of this
Agreement;
(xi) any failure by the Company to obtain the assumption of this
Agreement by any successor assign of the Company in accordance
with Section 7 hereof: or
(x) any purported termination of the Executive's employment which is
not effected pursuant Notice of a Termination, and for purposes
of this Agreement, no such purported termination shall be
effective.
(d) The term "Notice of Termination" shall mean a written notice which
shall indicate those specific termination provisions in this Agreement
relied upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated. For purposes
of this Agreement, no such purported termination by the Company shall
be effective without such Notice of Termination.
(e) the term "Date of Termination" shall mean (i) if the Executive's
employment is terminated by the Company for Disability, 30 days after
Notice of Termination is
6
<PAGE> 7
given to the Executive (provided that the Executive shall not have
returned to the performance of the Executive's duties on a full-time
basis during such 30 day period) or (b) if the Executive's employment
is terminated by the Company for any other reason, the date on which a
Notice Of Termination is given; PROVIDED that if within 30 days after
any Notice of Termination is given to the Executive by the Company the
Executive notifies the Company that a dispute exists concerning the
Termination, the Date of Termination shall be the date the dispute is
finally determined, whether by mutual agreement by the parties or upon
final judgment, order or decree of a court of Competent jurisdiction
(the time for appeal therefrom having expired and no appeal having been
perfected)
4. Severance Compensation
----------------------
(a) Subject to the provisions of section 4 (b) below, and subject to the
Executive's continuing compliance with the provisions of Section 6 hereof and
the Agreement Regarding Confidential Information and Intellectual Property
attached hereto as EXHIBIT A, the compensation and benefits payable to the
Executive pursuant to this Agreement shall be the following (collectively the
"Severance Benefits"):
(i} The Company shall pay to the Executive in cash an amount equal to the
Executive's aggregate compensation from the Company for the twelve
(12) months ending upon the Change in Control. Such amount shall be
payable the Company in twelve (12) equal monthly installment payable
on the first day of each month commencing with the month following the
Executive's Date of Termination. For purposes of this Section 4(a)(1),
the Executive's "compensation" preceding a Change in Control shall
include the Executive's base salary an any amounts paid or accrued
pursuant to any Incentive Plans, but shall not include any amounts or
benefits paid or accrued pursuant to any Benefit Plans or any
Securities Plan nor shall it include the value of an other fringe
benefits,
(ii} Within thirty (30) days following the Date of Termination, the Company
shall pay to the Executive, in a lump sum in cash, any accrued but
unpaid salary, vacation and awards under any Incentive Plans earned
but not paid as of the Date of Termination;
7
<PAGE> 8
(iii) Effective not later than the Date of Termination, the Company shall
(notwithstanding any contrary provision in any Securities Plan or any
employment agreement) accelerate and make immediately exercisable in
full unvested options and other rights which the Executive holds under
any Securities Plans as of the Date of Termination, and all such
options and rights shall be exercisable for an exercise period of 60
days following the Date of Termination; and
(iv) The Company at its own expense shall maintain in full force and effect
for the Executive's continued benefit until the earlier of (i) two
(2) years after the Date of Termination or (ii) the Executive's
commencement of full-time employment with a new employer, medical
and dental (but not life insurance or disability) plans, programs or
arrangements in which the Executive was entitled to participate
immediately prior to the Date of Termination, provided that his
continued participation is possible under the general terms and
provisions of such plans and programs. In the event that his
participation in any such plan or program is barred, the Company
shall arrange to provide the Executive with benefits substantially
similar to those which he was entitled to receive under such plan and
programs.
(b) Notwithstanding the foregoing, any Severance Benefits otherwise payable to
the Executive hereunder shall be as limited follows:
(I) No Severance Benefits shall be payable to the Executive under this
Agreement to the extent that the total of such Severance Benefits and
any payments otherwise payable to the Executive by the Company on or
after a Change in Control, which would be deemed under Section 280(of
the Internal Revenue Code of 1986 as amendment (the "Code"), to
constitute "parachute payments" without regard to Section 280G(b) (2}
(A)(ii), would equal or exceed in their present value (as determined
under Section 280G(d)(4) of the Code and any regulations thereunder)
300% of the Executive's base amount (as defined in Section 280G (b)
(3) of the Code and regulations thereunder). In the event that the
present value of such payments equals or exceeds such amount, the
provisions set forth below will apply, and Severance Benefits payable
to the Executive under this Agreement will be made only in accordance
with this Section 4(b) notwithstanding any other provision to the
contrary in this Agreement.
8
<PAGE> 9
(ii) Not later than thirty (30) days after the Date of Termination, the
Company will provide the Executive with a schedule specifying the
present value of such Severance Benefits payable to the Executive
under this Agreement (specifying the Section hereof under which each
such payment is to be made) and any other payment otherwise payable
to the Executive by the Company on or after the Change in Control
which, in the Company's opinion, could constitute parachute payments
under Section 280G. No payments under this Agreement shall be made
until after thirty (30) days from the receipt of such schedule by the
Executive. At any time prior to the expiration of said 30-day period,
the Executive shall have the right to select from all or part of any
category of payment to be made under this Agreement those payments to
be made to the Executive in an amount the present value of which
(when combined with the present value of any other payments otherwise
payable to the Executive by the Company that may be deemed be
parachute payments) the Company determines is than 300% of the
Executive's base amount. If the Executive fails to exercise his
right to make a selection, the selection shall be made by the Company
(iii) At any time prior to exercising the right to make a selection under
paragraph (ii) of this Section 4(b), the Executive shall have the
right to request that the Company obtain a ruling from the Internal
Revenue Service ("Service") as to whether any or all payments listed
on the schedule provided hereunder are, in the view of the Service,
parachute payments under section 280G. Such ruling shall be sought
made at the Company expense unless, in the written opinion of
independent counsel for the Company, there is no reasonable
likelihood of obtaining a favorable ruling, in which event such
expense shall be borne by the Executive. If a ruling is sought
pursuant to such request, no Severance Benefit under this Agreement
shall be paid to the Executive until after thirty (30) days from the
date the Company provides the Executive with a copy of such ruling,
and the period during which the Executive may exercise his right to
make a selection under paragraph (ii) hereof shall be extended to a
date thirty (30) days from such date. For purposes of this Section
4(b), the Executive and the Company hereby agree to be bound by the
Service's ruling as to whether payments constitute parachute payments
under Section 280G. If the Service declines, for any reason, to
provide the ruling requested, the Company's
9
<PAGE> 10
determination with respect to what payments constitute parachute
payments shall control, and the period during which the Executive may
exercise his right to make selection under paragraph (ii) hereof shall
be extended to a date thirty (30) days from the date of the Service's
notice indicating that no ruling will be forthcoming.
(iv) The references to Section 280G herein are specific references to
Section 280G as amended to date. If Section 280G is amended prior to
the expiration or termination of this Agreement, or replaced by a
successor statute, the limitations imposed by this Section 4(b) upon
payments to be made to the Executive under this Agreement shall be
deemed modified without further action of the parties so as to
provide only for such limitations that are consistent with such
amendment(s) or successor statute(s), as the case may be. In the
event that Section 280G, or any successor statute, is repealed, this
Section 4(b) shall cease to be effective on the date of such repeal.
The parties to this Agreement recognize that final Treasury
Regulations under Section 280G may affect the amount that may be paid
hereunder and agree that, upon issuance of such final Regulations,
this Agreement may be modified as in good faith deemed necessary in
light of the provisions of such Regulations to achieve purposes
hereof, and that consent to such modification(s) shall not be
unreasonably withheld
5. No Obligation To Mitigate Damages; No Effect on Other Contractual Rights.
------------------------------------------------------------------------
(a) The Executive shall not be required to mitigate damages or the amount of
any payment provided for under this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment provided for under this
Agreement be reduced by any compensation earned by the Executive as the result
of employment by another employer after the Date of Termination, or otherwise
(b) The provisions of this Agreement, and any payment provided for hereunder,
shall not reduce any amounts otherwise payable, in any way diminish the
Executive's existing rights, or rights which would accrue solely as a result of
the passage of time, under any Benefit Plan, Incentive Plan or Securities Plan,
employment agreement or other contract, plan or arrangement; PROVIDED, HOWEVER,
IF THE EXECUTIVE ELECTS TO TAKE PAYMENT, AND IS PAID, UNDER SECTION 4(a)(i)
HEREOF, SUCH SEVERANCE PAYMENTS SHALL BE IN LIEU OF ANY OTHER SEVERANCE
PAYMENTS DUE FROM THE
10
<PAGE> 11
COMPANY UNDER ANY EMPLOYMENT AGREEMENT OR OTHER CONTRACT, PLAN OR ARRANGEMENT
WITH THE COMPANY.
6. Non-Competition; Confidentiality.
--------------------------------
(a) The Executive covenants and agrees that if the Executive shall become
entitled to compensation hereunder as provided in Section 3 hereof, then for a
period of twelve (12) months following the Date of Termination, the Executive
shall not, without the Company's prior written consent, engage, directly or
indirectly, in any work or other activity which is in competition with the
business of the Company in the local area network or internetworking field in
any geographical area in which the Company conducts or is then actively
planning to conduct business at the Date of Termination. By way of example only
of the type of activities prohibited hereby, the Executive shall not solicit or
accept (or assist any person or entity in soliciting or accepting) any business
in the local area network or internetworking field from any person or entity
who or which was an active account of the Company at the Date of Termination
(b) Contemporaneously with the execution and delivery of this Agreement, the
Executive and the Company shall enter into an Agreement Regarding Confidential
Information and Intellectual Property in the Company's standard form, a copy of
which is attached hereto as EXHIBIT A.
7. Successors.
----------
(a) The Company will require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to the Executive, expressly, absolutely and
unconditionally to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession or assignment had taken place. Any failure of the Company
to obtain such agreement prior to the effectiveness of any such succession or
assignment shall be a material breach of this Agreement and shall entitle the
Executive to terminate the Executive's employment for Good Reason. As used in
this Agreement, "Company" shall mean the Company as hereinbefore defined and
any successor or assign to its business and/or assets as aforesaid which
executes and delivers the agreement provided for in this Section 7 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law. If at any time during the Term of this Agreement the
Executive is employed by any corporation a majority of the Voting Power of
which is then owned by the
11
<PAGE> 12
Company, directly or indirectly, "Company" as used in Section 3,4 and 12 hereof
shall in addition include such employer. In such event, the Company agrees that
it shall pay or shall cause such employer to pay any amounts owed to the
Executive pursuant to Section 4 hereof
(b) This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amounts are still payable to him hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee, or other designee or, if
there be no such designee, to the Executive's estate.
8. NOTICE. For purposes of this Agreement, notices and all other communications
provided for in the Agreement shall be in writing and shall be deemed to have
been duly given when delivered in person (including by any commercial courier
service or three (3) days after mailing by United States certified or
registered mail, return receipt requested, postage prepaid, to a party at his or
its address set forth at the beginning of this Agreement or such other address
as either party may have furnished to the other in writing in accordance
herewith, except that notices of change of address shall be effective only upon
receipt.
9. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of a breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Massachusetts (without
regard to conflicts of laws rules).
10. VALIDITY. The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect
11. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but
12
<PAGE> 13
all of which together will constitute one and the same instrument.
12. LEGAL FEES AND EXPENSES. The Company shall pay all legal fees and expenses
which the Executive may incur as a result of the Company's contesting the
validity, enforceability or the Executive's interpretation of, or determinations
under, this Agreement.
13. FURTHER ASSURANCES. The Company shall do, make, execute and deliver all
such additional and further acts, things, assurances and instruments as the
Executive may reasonably request in order to assure to the Executive his rights
hereunder and to carry into effect the provisions and intent of this Agreement.
Without limiting the generality of the foregoing, the Company shall, upon
request of the Executive, convert any options under any Securities Plan which
are "incentive stock options" into "non-qualified options" and amend
outstanding option agreements in a manner not inconsistent with such Securities
Plans.
IN WITNESS WHEREOF, the parties have executed this Severance Compensation
Agreement as of the date first above written.
PROTEON, INC.
By: /s/ Daniel J. Capone, Jr.
--------------------------------------
Daniel J. Capone, Jr. President and
Officer
Chief Executive
/s/ Robert J. Connaughton, Jr.
--------------------------------------
Robert J. Connaughton, Jr.
13
<PAGE> 14
EXHIBIT A
---------
AGREEMENT REGARDING CONFIDENTIAL AND
INTELLECTUAL PROPERTY
[to be attached]
14
<PAGE> 15
RESOLUTION
PROTEON BOARD OF DIRECTOR'S MEETING
WEDNESDAY, OCTOBER 23, 1996
VOTED: The Directors hereby authorize and direct Daniel J. Jr., President and
Chief Executive Officer of the Company to execute in the name and on
behalf of the Company and deliver to the person named below a
severance compensation agreement in the form attached to these
minutes:
Robert J. Connaughton, Jr.
Vice President, Finance and Chief
Financial Officer
<PAGE> 1
EXHIBIT 11
<TABLE>
PROTEON, INC.
STATEMENT RE:
COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<CAPTION>
Twelve months ended
December 31, December 31, December 31,
1996 1995 1994
------------ -------------------- ------------
<S> <C> <C> <C>
Net (Loss) Income $(12,014) $ 8,220 $(1,339)
======== ======= =======
Primary:
Weighted average number of
common shares outstanding 15,630 15,416 14,808
Weighted average common
equivalent shares - 276 -
-------- ------- -------
Weighted average number of
common and common equivalent
shares outstanding used to
calculate per share data 15,630 15,692 14,808
======== ======= =======
Fully diluted:
Weighted average number of
common shares outstanding 15,630 15,416 14,808
Weighted average common
equivalent shares - 276 -
-------- ------- -------
Weighted average number of
common and common equivalent
shares outstanding used to
calculate per share data 15,630 15,692 14,808
======== ======= =======
Net (loss) income per share
Primary $ (0.77) $ 0.52 $ (0.09)
======== ======= =======
Fully diluted $ (0.77) $ 0.52 $ (0.09)
======== ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 13
PROTEON, INC 1996 Annual Report
Simplifying
the future of
[SYMBOL] Internet
Intranet * WORKING
for a new
generation
of network users
OpenROUTE(R) Networks, Inc.
<PAGE> 2
- --------------------
Financial Highlights
- --------------------
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
Years ended December 31,
(in thousands, except per share data) 1996 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net sales $ 45,296 $75,323 $93,912
Gross profit 19,626 38,659 45,764
Net (loss) income (12,014) 8,220 (1,339)
Per share data:
Net (loss) income (0.77) 0.52 (0.09)
Weighted average number of common and
common equivalent shares outstanding 15,630 15,692 14,808
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 30,597 $39,006 $27,550
Total assets 45,571 59,029 56,911
Stockholders' equity 35,191 47,323 37,679
</TABLE>
About Proteon, Inc. and its new subsidiary OpenROUTE(R) Networks, Inc.
Founded in 1972 as a communication firm, Proteon is now known around the
world as a true pioneer in the multi-billion dollar data communications
industry. As a publicly held company since 1991, (NASDAQ:PTON), Proteon now
distinguishes itself through its products as a leading provider of Remote Access
connectivity solutions. Proteon products allow workers that are in small to
medium sized businesses or remote offices of larger enterprises to connect
themselves to each other through public networks such as the Internet, or their
private corporate Intranet.
OpenROUTE Networks, Inc., a wholly owned subsidary of Proteon, founded in
January 1997, and headquarted in Westboro, Mass., focuses on Internet/Intranet
solutions to help customers connect to the Internet. For nearly two decades,
Proteon and now OpenROUTE Networks has shipped network connectivity products
that help customers expand their networks and grow their businesses.
Historically, products carrying the Proteon nameplate have been selected by
more than 70 percent of the Fortune 100 companies. With its new subsidiary
OpenROUTE Networks, Inc. Proteon is committed to providing best-in-class
connectivity products that make the Internet and corporate Intranets more
accessible, easier to use, and more secure for today's new generation of network
users.
<PAGE> 3
[Photo of Daniel J. Capone, Jr.
President and Chief Executive Officer]
TO OUR SHAREHOLDERS
As the year 1996 came to a close, Proteon accomplished several significant
business milestones. Chief among these was the formation of
OpenROUTERegistration Mark Networks, Inc., a new wholly owned subsidiary of
Proteon, Inc., headquartered along with its parent company in Westboro, Mass.
OpenROUTE Networks was formed to strengthen the company's focus on the rapidly
growing Internet and Intranet market and to develop and merchandise the
company's award-winning GlobeTrotter router products to that market. The name
OpenROUTE reflects the company's specific mission: to "Open Routes of access" to
the exploding multi-media world of Internet/Intranet information for a new
generation of business network users.
Another event in 1996 was the decision to allow business partners to
license intellectual property rights for local area networking products,
including trademarks, manufacturing licenses, and access to other Proteon
resources to develop products and services for the LAN marketplace. This is
intended to allow Proteon to better serve its loyal base of LAN customers and
give our new subsidiary, OpenROUTE Networks, a better opportunity to focus and
gain market share in the rapidly expanding Internet and Intranet marketplace.
We continued to expand our product line in the Internet/Intranet
market with the introduction of breakthrough technology in GTSecure, our
Firewall router. ISDN routers for Europe and Asia Pacific are another example of
products now available. Our access routers continued to earn industry accolades.
In a comprehensive industry test report released at the Networld+Interop trade
show, OpenROUTE Networks' GlobeTrotter 70 won top honors in two important
categories. Compared to more than 15 other products, the GlobeTrotter
demonstrated outstanding performance in 1) best overall throughput of compressed
data and 2) fastest ISDN call setup time. During the summer, the GlobeTrotter
line also won a 1996 Users' Choice Award from Communications News magazine.
These new product initiatives position Proteon and OpenROUTE Networks with
a broad array of network connectivity solutions for workgroups seeking shared
access to the Internet and corporate Intranets. Each is designed to deliver the
company's basic values of technology excellence, reliability, ease of use,
affordability, security, top performance and simplified network connections.
1996 FINANCIAL RESULTS
For the year ended December 31, 1996, Proteon reported a net loss of
$12,014,000, or $0.77 per share, compared with net income of $8,220,000, or
$0.52 per share, for the previous year. Net sales for 1996 were $45,296,000,
compared with $75,323,000 for 1995. These results reflect a $.21 per share
charge to accomplish the restructuring of our business, and the formation of
OpenROUTE Networks, Inc. Also, Remote Access routing products, although
increasing in unit shipments, typically have much lower average selling prices
than the corporate enterprise routers we previously sold. This shift in product
mix was underway throughout the year and contributed to these results. We
believe that as a result of the restructuring, we have now better aligned our
expenses with our anticipated revenues. We ended the year with a very strong
cash position of $23.5 million and no long-term debt. We are confident we have
the financial resources to execute our business plan.
<PAGE> 4
IMPORTANT BUSINESS PARTNERSHIPS
Throughout 1996, Proteon announced a number of business partnerships that
strengthen the company. We announced a prestigious partnership with NTT-AT
Corporation of Japan, in which OpenROUTE Networks and NTT-AT provided the
Japanese marketplace with a high-performance router that is already being
distributed. Around the world, the company continued to sign strategic reseller
agreements. Some of the names added to the list included SundayNET, EasyNET,
SkyWorld, United Arm, Vossnet, SingNET, Tokyo Internet, Global Internet, Asia On
Line, and ILK Internet. As 1997 unfolds, we expect to add to this list in
national and international markets.
THE INTERNET/INTRANET ACCESS COMPANY
As we move toward the next century, our ongoing mission is to continue to
make networks more accessible to a new generation of users. When I became
president of Proteon three years ago, the company was serving many markets. I am
happy to report to you that the company has dramatically narrowed its focus to a
market that we believe holds the most opportunity for long-term growth and
profitability. The achievements of 1996 are the latest of a list that include
restructuring the company, developing a new set of products for the
Internet/Intranet market, and establishing many new channel relationships.
I believe our Company is now positioned to leverage its competencies and
grow revenues in the exciting Internet/Intranet marketplace. In 1997, our most
important priorities will be to restore the company to profitability and
increase shareholder value by achieving product revenue momentum in the
GlobeTrotter line. We are moving in the right direction.
On behalf of our employees, I would like to thank all of our shareholders
that have kept their confidence in our efforts. We have many goals to achieve,
and your continued support is of the highest value to the Company. I look
forward to updating you throughout the year on what I'm confident will be many
successes.
Sincerely,
Daniel J. Capone, Jr.
President and Chief Executive Officer
March 21, 1997
[Symbol]
<PAGE> 5
Proteon/OpenROUTE(R) NETWORKS:
For The New Millennium
"By the year 2000, every 12-year-old in America
must be able to log on to the Internet....."
Bill Clinton, President of the United States
State of the Union Address
"Our mission is to open routes to the exploding
world of multimedia information for a new
generation of network users."
Dan Capone, President and CEO
Proteon, Inc. and OpenROUTE Networks, Inc.
Sales Meeting Address
The two men quoted above share a vision of technology that is fundamentally
changing the way the world communicates. It's called the Internet. And it's
still in its infancy.
When President Clinton delivered his State of the Union Address, he
emphasized the importance of technology and, in particular, the Internet. In
fact, President Clinton called for national educational standards that can be
achieved only if students across the country grasp the power of getting on line
and communicating through this powerful medium.
When Daniel J. Capone Jr., President and CEO of Proteon/OpenROUTE Networks,
Inc., addressed the company's
[SYMBOL]
<PAGE> 6
national sales meeting earlier this year, he also stressed the power of the
Internet, and took the opportunity to introduce technology that makes it
possible for students and businesses to tap into this vast information resource.
The formation of OpenROUTE Networks, Inc. is an important step in the
company's drive toward profitability and growth. The reference to "open"
identifies OpenROUTE Networks mission: "Simplifying the future of
Internet/Intranet WORKING for a new generation of network users by 'opening the
way' to a New World of multimedia information."
As the new year unfolds and technology companies position themselves for
the next millennium, OpenROUTE Networks is building on Proteon's tradition in
the networking business. Going forward, the Company will leverage its investment
in the OpenROUTE brand and create market awareness that OpenROUTE Networks
provides best-in-class products for traveling the many pathways of the Internet.
While OpenROUTE Networks is being unveiled as a new company, it has a
decade of leading edge technology innovation that gives it a clear advantage
over many other competitors. The open, standards-based code found in all
OpenROUTE Networks' products had its genesis more than a decade ago when Proteon
was recognized as one of the original companies to develop internetworking
software. Since that time, the Company has been enhancing the code and now
complies with more than 100 industry standard networking transport technologies.
When it comes to linking everyone to the Internet, this dependable connectivity
is a critical factor.
OpenROUTE software has been licensed and endorsed by many of the industry's
top providers including IBM, Digital, Motorola, AT&T and PSINet. Today,
companies worldwide are running more than 100,000 routers with
"OpenROUTERegistration Mark inside". This diverse customer base encompasses more
than a quarter million connected workgroups, serving millions of end users.
OpenROUTE Networks products carry the Proteon tradition of excellence into
the world of Internet access. The GlobeTrotter product line set the standard for
dependable connectivity, price/performance, security, and ease of use.
[PHOTO]
4
<PAGE> 7
[PICTURE]
"By the year 2000, every 12-year-old in America must be able
to log on to the Internet....."
Bill Clinton, President of the United States
State of the Union Address
<PAGE> 8
GLOBETROTTER Routers Help
INTERNET WORKING Make PSINet A Worldwide
Internet Service Provider
One of the company's most important business goals for 1996 was to expand
its presence as a leading supplier of Internet/Intranet connectivity products to
Internet Service Providers worldwide.
The first step toward this goal was realized early in the year when
GlobeTrotter routers were certified to connect business users to PSINet's
massive network. This certification was especially beneficial to OpenROUTE
Networks because it began PSINet's connection of business and corporate users to
the Internet, with GlobeTrotter routers.
PSINet, headquartered in Herndon, Virginia, USA, is a leading provider of
corporate Internet and Intranet connection services worldwide. Having helped
more than 18,000 companies find the Internet solution that's right for their
business, PSINet has played a critical role in redefining how today's new
generation of network users work. As testimony to its success in helping
businesses use their networks to grow and prosper, PSINet was the 1996 winner of
Network Computing magazine's "Well Connected" award for Best Internet Access
Provider.
The successful business partnership between OpenROUTE Networks and PSINet
is demonstrated by the way the two companies have worked together to make the
Internet a safe place to conduct business. One example was the introduction of
PSINet's "RouteWaller" network security service. Jointly developed by PSINet and
OpenROUTE Networks, PSINet's service with OpenROUTE's GTSecure Firewall Router
provides secure network access to business users. This capability is a critical
enabling factor in the continuing acceptance of the Internet as a viable means
of worldwide commerce.
William L. Schrader, PSINet Chairman, President and Chief Executive
Officer, explained his company's important relationship with OpenROUTE Networks:
"As we launched PSINet and started to experience rapid growth, we began
using connectivity
[PHOTO]
6
<PAGE> 9
products from a number of different vendors. One of the most critical pieces of
equipment in making the customer connection is the router. With this device, all
the users within the business being connected can equally share the power of the
Internet."
"With the explosive growth of our business, we needed to install equipment
that works the first time every time."
"From the first day we began testing, our engineers were impressed with the
quality and performance of OpenROUTE Networks' products. We are now deploying
GlobeTrotters at a rapid rate. The products are reliable and easy to install.
The cost, performance, and guaranteed connectivity are the best in the industry.
It's these products that have helped us provide our customers with the most
reliable Internet access in the world. As we move forward and expand Internet
connectivity to a whole new generation of users, we will continue to install
GlobeTrotter routers. OpenROUTE Networks will make connecting to the Internet
with PSINet as easy as plugging a phone into a wall jack."
Proteon/OpenROUTE Networks and
Internet*WORKING Racal Data Group:A Decade of
Cooperation in Making Networks Work
In the fast-paced, ever-changing world of global networking, these two
companies are a steady force in enabling networks to perform at peak efficiency
and help grow the businesses of customers who demand top performance and 100
percent reliability.
This long relationship began more than a decade ago when Proteon, Inc.
began supplying Token Ring networking products to Racal in the European
marketplace. It has expanded from a reseller relationship to one which includes
technology exchange and system/service integration. Most recently, Racal has
become a licensee of OpenROUTE software, joining other licensees IBM, Digital,
Motorola, and AT&T.
During the past five years, Proteon, and now OpenROUTE Networks, and Racal
Data Group have expanded their business relationship across North America and
around the
[PHOTO]
7
<PAGE> 10
world. Together, they have connected thousands of worldwide users.
Senior executives and sales personnel from both companies work diligently
to focus on capturing the rapidly growing market for remote access routers.
Products manufactured by Proteon/OpenROUTE Networks and installed and maintained
by Racal Data Network Integration Group are the glue that binds remote sites to
headquarters locations. Together, the two companies have been concentrating on
areas which currently represent the hottest segments of growth, Small and Medium
sized businesses, and Corporate Enterprise Remote Offices.
While each market has distinct needs, OpenROUTE Networks and Racal Data
Group have used their design and engineering skills and support services to meet
user needs head on. Paul G. Kozlowski, Racal Chairman and Chief Executive
Officer, commented on the various benefits of this long-standing cooperative
business relationship.
"The first thing that comes to mind about OpenROUTE Networks is the quality
of the products they offer. Our network integration business in the U.S. has
been installing OpenROUTE devices for more than 10 years and has continually
found them to be reliable and easy to install and maintain.
"In addition, OpenROUTE Networks' products are a cost and performance
leader in their class. And, their commitment to standards-based engineering
and conformance to industry standards in all their routers is world class."
"Racal often works as a network integrator, necessitating the mixing and
matching of products to our customers' existing networks. We have found that
OpenROUTE Networks' products integrate with other standards-based products
already installed."
"Working together, Racal Data Group and OpenROUTE Networks continue to be
successful in various areas of commercial business such as manufacturing,
retail, and banking. Recently, we have used OpenROUTE Networks' products for
applications in the state and local government marketplace. Racal has always
held strength in this sector, and as government networks have migrated out to
the remote and regional branch offices, we have remained committed to combining
our services with the highest quality products that will enable us to maintain
our position of strength."
[PHOTO]
8
<PAGE> 11
[PICTURE]
"Our mission is to open routes to the exploding world of multimedia information
for a new generation of network users."
Dan Capone, President and CEO Proteon, Inc. and OpenROUTE Networks, Inc.
Sales Meeting Address
[LOGO]
OPENROUTE
NETWORKS, INC.
<PAGE> 12
Corporate Volunteer Program Helps Students
Explore The Fascinating World Of The Internet
Proteon/OpenROUTE Networks participated in a number of ways in "Mass NetDay
'96" a state sponsored multi-faceted corporate volunteer program launched across
Massachusetts in 1996. President and CEO Daniel J. Capone. Jr. called upon
headquarters' employees to volunteer support in their respective school
districts. In fact Mr. Howard C. Salwen Proteon's Founder and Chairman has
volunteered on the Board of Mass Networks, a non-profit organization which
implemented "Mass Net Day' 96". The company donated time and equipment and
participated in a "NetDay Store" allowing qualified schools to purchase Internet
connectivity products at substantial savings helping thousands of young school
children explore the fascinating world of the Internet and the World Wide Web.
The company's involvement in the educational process began a decade ago
when Proteon, Inc. began connecting universities. The company has always been
interested in the education of the nation's students. For example,
Proteon/OpenROUTE Networks has installed a massive, 800-router network for the
Arkansas Public School Computer Network. This state-of-the-art network has been
praised by both President Bill Clinton and Sen. Edward M. Kennedy. As school
districts around the world accelerate their networking programs, OpenROUTE
Networks is ready to provide simple, cost-effective equipment that makes those
connections.
Mr. Capone took a leadership role in the program when he visited a number
of schools around the state. He met with school principals and headmasters,
discussed the enormous power of the Internet as an educational tool, and even
had the opportunity to install a number of networking hubs and routers.
"It was exciting to work with public, parochial, and charter schools in our
state. In one case we connected the town's library to the internet. Giving
something back to the community is an important part of the culture at OpenROUTE
Networks," said Mr. Capone.
<PAGE> 13
- -----------------
Financial Section
- -----------------
Selected Consolidated Financial Data 12
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Consolidated Balance Sheets 18
Consolidated Statements of Operations 19
Consolidated Statements of Stockholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22
Report of Independent Accountants 30
Quarterly Financial Data 31
Stock Price History 31
Corporate Officers 32
Board of Directors 32
Corporate Information 33
11
<PAGE> 14
- -------------------------------------
Selected Consolidated Financial Data
- -------------------------------------
Consolidated
Statement of
Operations Data
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Years ended December 31,
(in thousands, except per share data) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $45,296 $75,323 $93,912 $103,405 $120,294
Cost of sales 25,670 36,664 48,148 61,723 60,110
- --------------------------------------------------------------------------------------
Gross profit 19,626 38,659 45,764 41,682 60,184
Operating expenses:
Research and development 9,353 8,802 11,162 15,481 13,985
Selling and marketing 15,486 17,903 23,955 31,778 28,522
General and administrative 4,590 4,683 7,065 10,222 8,150
Restructure costs 3,312 - 6,330 7,711 -
- --------------------------------------------------------------------------------------
Total operating expenses 32,741 31,388 48,512 65,192 50,657
- --------------------------------------------------------------------------------------
(Loss) income from operations (13,115) 7,271 (2,748) (23,510) 9,527
Interest income (expense), net 1,261 1,437 455 330 655
Other income - - 1,205 - -
- --------------------------------------------------------------------------------------
(Loss) income before income taxes (11,854) 8,708 (1,088) (23,180) 10,182
Provision (benefit) for income taxes 160 488 251 (3,385) 3,686
- --------------------------------------------------------------------------------------
(Loss) income before cumulative effect of
accounting change (12,014) 8,220 (1,339) (19,795) 6,496
Cumulative effect of accounting change
for income taxes - - - 452 -
- --------------------------------------------------------------------------------------
Net (loss) income ($12,014) $8,220 ($1,339) ($19,343) $6,496
======================================================================================
(Loss) income per share before
cumulative effect of accounting change ($0.77) $0.52 ($0.09) ($1.36) $0.43
Cumulative effect per share - - - 0.03 -
======================================================================================
Net (loss) income per common and
common equivalent share ($0.77) $0.52 ($0.09) ($1.33) $0.43
======================================================================================
Weighted average number of common and
common equivalent share outstanding 15,630 15,692 14,808 14,527 15,148
======================================================================================
Consoliated
Balance
Sheet Data
Working capital $30,597 $39,006 $27,550 $20,698 $35,591
Total assets 45,571 59,029 56,911 56,767 71,970
Stockholders' equity 35,191 47,323 37,679 36,739 55,946
</TABLE>
12
<PAGE> 15
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- -------------------------------------------------------------------------------
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto.
Results of Operations
During 1996, the Company continued to shift its product focus from the LAN and
Corporate Enterprise business environments to that of Remote Access. The
Company's operating groups increased their efforts to implement the engineering,
product development, marketing and sales components of this strategic
redirection. Proteon was faced with the challenge of maintaining service to its
existing customers while striving to position itself in the rapidly growing
Remote Access market. The initial effect of this ongoing redefinition of the
Company was significant losses for 1996.
Net Sales
Product sales decreased by 37.9% to $32.2 million in 1996 from $51.8 million
in 1995. This decline was due to the Company's redirection of its business and
products. The Company experienced declining revenues in both its LAN products
and Corporate Enterprise product categories. The decrease in LAN products net
sales in 1996 was due primarily to continued lower average selling prices and
declining unit volumes of Adapter Cards, Switches and Hubs. The Corporate
Enterprise reduction was due to a planned reduction in CNX backbone routers as
the Company shifts to remote access routers. Although in 1996 total units in the
Remote Access category increased 63.3% from 1995 due primarily to GlobeTrotter
sales which are typically lower average per unit sales prices, this increase was
not enough to offset the decline in product revenues in the LAN and Corporate
Enterprise categories. Software licensing sales in 1996 decreased by 47.3% to
$7.5 million from $14.3 million in 1995. This anticipated reduction in software
licensing revenue was a result of the continued decline in remaining revenue
from the near completion of two major multi-year agreements with IBM and Digital
Equipment Corporation. The Company expects software licensing revenue from these
agreements to decrease quarterly as the contracts near completion. Service and
other sales in 1996 decreased by 39.4% to $5.6 million from $9.2 million in
1995. This decrease was primarily due to the reduction in service spares and
upgrades revenue worldwide as corporate enterprise sales decreased.
Product sales in 1995 decreased by 31.7% to $51.8 million from $75.8 million
in 1994. This decrease was due to continued competitive pressures in the
Company's LAN and Internetworking businesses. In addition, the Company believes
the transition of its product lines from an enterprise network supplier, with
higher average selling prices, to a remote access supplier, with lower average
selling prices, contributed to the decline in product revenue in 1995. In the
Company's LAN business, the decrease in product sales resulted from a
combination of a decline in unit volumes of its Token Ring adapters and low-end
hubs and price reductions of approximately 20% for the Company's Token Ring
adapters implemented in the first quarter of 1995. In the Company's
Internetworking business, product sales decreased in 1995 due to product mix
shifting from enterprise routers in 1994 to remote routers in 1995. Software
licensing sales in 1995 increased by 57.0% from 1994 due principally to the
achievement of certain milestones, and the consummation of three additional
licensing agreements during 1995. Service and other sales increased slightly in
1995 by 2.2% to $9.2 million from $9.0 million in 1994 due mainly to an increase
in maintenance agreements in the Asia-Pacific region.
International sales accounted for approximately 38.3%, 35.7% and 35.1% of net
sales in 1996,1995,and 1994, respectively.
13
<PAGE> 16
Gross Profit
Total gross profit margin decreased in 1996 to 43.3% from 51.3% in 1995.
Certain offsetting factors contributed to the decrease in gross profit in 1996.
Gross profit margin from the Company's software licensing and service and other
sales increased in 1996 to 63.1% from 60.5% in 1995 due primarily to the
decreased engineering efforts related to existing licensing agreements.
Gross profit on product sales decreased in 1996 to 35.3% from 47.2% in 1995 due
mainly to both declining margins and volume decreases in token ring adapter card
segment of the LAN product category. During the fourth quarter of 1996, the
Company recorded an additional inventory provision of $2.4 million to reflect
further inventory exposures as the Company transitioned from LAN to remote
products.
Total gross profit increased in 1995 to 51.3% from 48.7% in 1994. Gross
profit from software licensing and service and other sales increased in 1995 to
60.5% from 38.4% in 1994 due mainly to an increased margin associated with
software licensing. Gross profit on product sales decreased in 1995 to 47.2%
from 51.2% in 1994 due primarily to price reductions of the Company's Token Ring
adapters and the transition in product mix to lower margin products associated
with Remote Access markets.
Research and Development
Research and development expenses were $9.4 million or 20.6%, $8.8 million or
11.7%, and $11.2 million or 11.9% of net sales in 1996, 1995 and 1994,
respectively. When comparing 1996 to 1995, the increase of $0.6 million in
research and development expenses was due to the reallocation of engineering
efforts from software licensing contracts to internally funded development.
The decrease in expenses of $2.4 million in 1995 from 1994 was due to more
research and development costs being allocated to cost of sales of Software
licensing revenues.
Major efforts in 1996 and 1995 included development of the GlobeTrotter
series of routers, the RBX remote router, the CSX 900ER routing and switching
product, the CSX 900E Ethernet switch/repeater, the CSX 901T Token Ring switch,
and the Token Ring PCI adapter single and dual port configurations.
The Company considers product development expenditures to be critical to
future revenues. These activities are closely related to product enhancement and
new product development. The Company's strategy also includes joint development
partnerships to bring new technologies and products to market. All of the
Company's research and development costs to date have been expensed as incurred.
Selling and Marketing
Selling and marketing expenses were $15.5 million or 34.2%, $17.9 million or
23.8%, and $24.0 million or 25.5% of net sales in 1996, 1995 and 1994,
respectively. In 1996 sales and marketing expenses decreased by $2.4 million
when compared to 1995. This decrease was due mainly to lower personnel and
personnel-related costs as well as a reduction in advertising expenses for 1996.
The decrease in expenses in 1995 from 1994 of $6.1 million was due
principally to the reorganization of the Company's sales and marketing
resources. During 1995 the Company reduced its sales and marketing personnel and
personnel-related expenses by approximately 25%, while implementing an
approximately $3.0 million end-user visibility campaign. This campaign included
advertisements in trade publications, direct mail programs, and reseller
literature.
14
<PAGE> 17
General and Administrative
General and administrative expenses were $4.6 million or 10.1%, $4.7 million or
6.2%, and $7.1 million or 7.5% of net sales in 1996, 1995 and 1994,
respectively. During 1996, general and administrative expenses decreased by $0.1
million when compared to 1995. This slight decrease was due to a lower level of
personnel and personnel-related costs for 1996.
When comparing 1995 to 1994, the decrease in general and administrative
expenses of $2.4 million was also due to a 28% reduction in personnel and
personnel-related costs.
Restructuring of Operations
The Company's management continually reviews methods to reduce its expense base
in response to decreased revenue streams. As a result of this review, the
Company has implemented a series of restructurings, the most recent of which
transpired in 1996. This restructuring of operations was necessary to
reestablish the strategic direction of the Company and better align its
operating expenses with anticipated revenues.
During the fourth quarter of 1996, the Company's management announced a
restructuring plan for the strategic redirection of the Company. The 1996
restructuring principally addressed the move toward the development of the
OpenROUTE Networks subsidiary. The strategies for this new subsidiary are
designed to allow the Company to aggressively focus its efforts on the rapidly
growing Internet/Intranet connectivity marketplace. The Company is attempting to
leverage its strengths in the OpenROUTE internetworking software and its
successful line of GlobeTrotter Remote Access routers. The Company is
concentrating its efforts on gaining more market share and increasing revenue.
As a result, the Company recorded a $3,312,000 charge for restructuring costs
in the fourth quarter of 1996. This included a reduction in the Company's work
force of approximately forty employees, or 22%, accounting for approximately
$140,000 of severance costs. The Company incurred a charge of approximately
$785,000 in connection with the substantial reduction in the Company's occupancy
requirements. In addition, the charge included approximately $1,922,000 for
disposal of fixed assets and approximately $195,000 of other costs.
In the second quarter of 1994, as a result of a significant strategic
redirection the Company recorded an $11,230,000 charge for restructuring of
operations. This included a reduction in the Company's workforce of ninety-two
employees, or approximately 25%, accounting for approximately $1,672,000 of
severance costs. The Company incurred a charge of approximately $6,215,000 for
lease payments in connection with the substantial reduction in the Company's
occupancy requirements. In addition, the charge included approximately
$3,072,000 for the disposal of fixed assets and approximately $271,000 of other
costs.
In the fourth quarter of 1994, the Company recorded a benefit of
approximately $4.9 million related to the reversal of certain previously accrued
restructuring costs. The $4.9 million benefit included approximately $3.3
million resulting from a new tenant assuming direct lease responsibility for the
Company's unused office space in its leased headquarters building. In addition,
the Company reversed inventory costs, provided for the in the December 1993
restructuring of operations, of approximately $1.6 million related to its hub
inventory. The reversal was due to better than expected sales of Series 90 hubs
as the Company increased its focus on the remote-site hub market.
During 1996, the cash impact from restructuring was immaterial.
The remaining accrual of $1.7 million will be paid during 1997. During 1995, the
cash impact from restructuring was approximately $1.9 million.
15
<PAGE> 18
Other Income
Other income of $1.2 million recorded in 1994 consisted of a one time refund of
license payments paid in 1993 and 1992. The refund related to the favorable
arbitration decision regarding the Company's claim that its Token Ring
networking products did not infringe on the widely-licensed "Soderblom patent."
The benefit of not having to accrue for these license payments has been
reflected in the cost of goods sold since the beginning of 1994.
Provision for Income Taxes
In 1996, the Company recorded an income tax provision of $160,000, or 1.3%,
primarily due to foreign taxes on income earned outside the United States. The
difference between the effective tax rate and the statutory tax rate is due
primarily to current year net operating losses whose future realization is
uncertain.
In 1995, the Company recorded an income tax provision of 5.6% principally
associated with alternative minimum tax, and state and foreign taxes. The
difference between the effective tax rate and the statutory tax rate in 1995 is
due primarily to the utilization of net operating loss carryforwards in 1995.
In 1994, the Company recorded an income tax provision of 23.1% related
primarily to foreign taxes as a result of the income earned outside of the
United States.
Newly Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (FAS) No. 128, "Earnings per Share" and No. 129,
"Disclosure of Information About Capital Structure." FAS 128 specifies the
computation, presentation and disclosure requirements for earnings per share and
is designed to improve earnings per share information by simplifying the
existing computational guidelines, revising the disclosure requirements, and
increasing the comparability of per share data on an international basis. FAS
129 requires the disclosure of certain information about an entity's capital
structure which would include a brief discussion of rights and privileges for
securities outstanding. These standards will be effective for financial
statements for periods ending after December 15, 1997. The Company is currently
reviewing the adoption and impact of these standards, but does not expect them
to have a material impact on the Company's results of operations or its
financial position.
16
<PAGE> 19
Liquidity and Capital Resources
During 1996, the Company's working capital decreased to $30.6 million from $39.0
million in 1995. Cash, cash equivalents and marketable securities constituted
$23.5 million of the $30.6 million in working capital at December 31, 1996.
Cash consumed by operating activities increased by $14.1 million in 1996 from
1995. This change was due mainly to the 1996 operating loss of $13.1 million
and an increase in inventory of $4.3 million, partially offset by a reduction in
accounts receivable of $4.5 million.
Cash used in investing activities decreased by $5.6 million in 1996 from
1995. This decrease was due primarily to the net sale of marketable securities
during 1996 of approximately $4.7 million.
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 annual report, including the President's Letter and Management's Discussion
and Analysis of Financial Condition and Results of Operations, 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 networking industry; timing of orders from, and shipments
to major customers; timing of new products 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 the required documents
including the Company's annual report on Form 10-K filed with the SEC.
17
<PAGE> 20
- ---------------------------
Consolidated Balance Sheets
- ---------------------------
As of December 31,
- -----------------------------------------------------------------------
(in thousands, except share data) 1996 1995
- -----------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $16,612 $25,829
Marketable securities 6,918 6,863
Accounts receivable less reserve for
doubtful accounts of $672 and $889 at
December 31, 1996 and 1995, respectively 7,625 12,138
Inventories 8,737 4,425
Deposits and other assets 1,085 1,457
- -----------------------------------------------------------------------
Total current assets 40,977 50,712
Property and equipment, net 4,594 8,317
- -----------------------------------------------------------------------
Total assets $45,571 $59,029
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,010 $4,064
Accrued compensation 1,075 1,375
Accrued expenses 3,560 4,249
Accrued restructuring costs 1,661 457
Accrued warranty 1,074 1,561
- -----------------------------------------------------------------------
Total current liabilities 10,380 11,706
Commitments (Note F) - -
Stockholders' equity:
Preferred stock, par value $.01 per share,
authorized 7,500,000 shares - -
Common stock, par value $.01 per share,
authorized 30,000,000 shares, issued
15,637,670 and 15,589,330 shares at
December 31, 1996 and 1995, respectively 156 156
Capital in excess of par value 49,292 49,141
Accumulated deficit (13,819) (1,805)
Cumulative translation adjustments 177 118
Less treasury stock, at cost, 210,685
and 80,685 shares at December 31, 1996
and 1995, respectively (615) (287)
- -----------------------------------------------------------------------
Total stockholders' equity 35,191 47,323
- -----------------------------------------------------------------------
Total liabilities and stockholders' equity $45,571 $59,029
=======================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE> 21
- -------------------------------------
Consolidated Statements of Operations
- -------------------------------------
For the years ended December 31,
- --------------------------------------------------------------------------------
(in thousands, except per share data) 1996 1995 1994
- --------------------------------------------------------------------------------
Sales:
Product $ 32,175 $ 51,810 $ 75,817
Software licensing 7,530 14,284 9,098
Service and other 5,591 9,229 8,997
- --------------------------------------------------------------------------------
Net sales 45,296 75,323 93,912
Cost of sales:
Product 20,825 27,373 36,996
Software licensing 538 2,656 2,300
Service and other 4,307 6,635 8,852
- --------------------------------------------------------------------------------
Cost of sales 25,670 36,664 48,148
- --------------------------------------------------------------------------------
Gross profit 19,626 38,659 45,764
Operating expenses:
Research and development 9,353 8,802 11,162
Selling and marketing 15,486 17,903 23,955
General and administrative 4,590 4,683 7,065
Restructure costs 3,312 -- 6,330
- --------------------------------------------------------------------------------
Total operating expenses 32,741 31,388 48,512
- --------------------------------------------------------------------------------
(Loss) income from operations (13,115) 7,271 (2,748)
Interest income 1,271 1,490 513
Interest expense (10) (53) (58)
Other income -- -- 1,205
- --------------------------------------------------------------------------------
(Loss) income before income taxes (11,854) 8,708 (1,088)
Provision for income taxes 160 488 251
- --------------------------------------------------------------------------------
Net (loss) income ($12,014) $ 8,220 ($ 1,339)
================================================================================
Net (loss) income per common and
common equivalent share ($ 0.77) $ 0.52 ($ 0.09)
================================================================================
Weighted average number of common
and common equivalent shares
outstanding 15,630 15,692 14,808
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE> 22
- -----------------------------------------------
Consolidated Statements of Stockholders' Equity
- -----------------------------------------------
<TABLE>
<CAPTION>
Common stock
-------------------------------
Capital in Cumulative Treasury stock Total
excess of Accumulated translation ----------------- stockholders'
(in thousands) Shares Amount par value deficit adjustment Shares Amount equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 14,684 $147 $45,504 ($ 8,686) ($208) 36 ($ 18) $36,739
Issuance of common stock 631 6 2,380 2,386
Conversion of treasury stock 45 (269) (269)
Currency translation 162 162
Net loss (1,339) (1,339)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 15,315 153 47,884 (10,025) (46) 81 (287) 37,679
Issuance of common stock 274 3 1,257 1,260
Currency translation 164 164
Net income 8,220 8,220
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 15,589 156 49,141 (1,805) 118 81 (287) 47,323
Issuance of common stock 48 151 151
Repurchase of stock as
treasury stock 130 (328) (328)
Currency translation 59 59
Net loss (12,014) (12,014)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 15,637 $156 $49,292 ($13,819) $177 211 ($615) $35,191
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE> 23
<TABLE>
<CAPTION>
- -------------------------------------
Consolidated Statements of Cash Flows
- -------------------------------------
For the years ended December 31,
- --------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers 49,810 $75,172 $94,360
Cash paid to suppliers and
employees (58,311) (69,724) (85,139)
Interest received 1,271 1,490 514
Interest paid (10) (53) (58)
Income taxes paid (321) (344) (206)
Other cash received - - 3,975
- --------------------------------------------------------------------------------
Net cash (consumed) generated by
operating activities (7,561) 6,541 13,446
Cash flows from investing activities:
Proceeds from the sale of fixed assets 117 82 163
Capital expenditures (1,600) (2,411) (3,159)
Marketable securities sales and
maturities 15,456 7,120 7,396
Marketable securities purchases (15,511) (11,883) (6,289)
- --------------------------------------------------------------------------------
Net cash used in investing activities (1,538) (7,092) (1,889)
Cash flows from financing activities:
Proceeds from the issuance of common stock 151 1,260 2,116
Purchase of treasury stock (328) - -
- --------------------------------------------------------------------------------
Net cash (used) provided by financing activities (177) 1,260 2,116
Effect of exchange rate changes on cash 59 164 162
- --------------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents (9,217) 873 13,835
Cash and cash equivalents at beginning of year 25,829 24,956 11,121
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $16,612 $25,829 $24,956
- --------------------------------------------------------------------------------
Reconciliation of net (loss) income to net cash
(consumed) generated by operating activities:
Net (loss) income ($12,014) $8,220 ($1,339)
- --------------------------------------------------------------------------------
Adjustments to reconcile net (loss) income
to net cash (consumed)
generated by operating activities:
Bad debt provision - - 348
Inventory provision 2,374 - -
Depreciation and amortization 3,401 4,185 5,824
Restructuring cost 1,922 - 1,958
(Gain) loss on disposition of fixed assets (117) (44) 3,085
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 4,513 (152) 447
(Increase) decrease in inventories (6,686) 598 4,536
Decrease in deposits and other assets 372 1,260 1,340
Decrease in accounts payable
and accrued expenses (1,326) (7,526) (2,753)
- --------------------------------------------------------------------------------
Total adjustments 4,453 (1,679) 14,785
- --------------------------------------------------------------------------------
Net cash (consumed) generated by
operating activities ($7,561) $6,541 $13,446
================================================================================
Noncash investing and financing activities:
Conversion of common stock to treasury stock - - ($269)
================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE> 24
- ------------------------------------------
Notes To Consolidated Financial Statements
- ------------------------------------------
A. Nature
of Operations
Nature of Operations
Proteon, Inc. and its subsidiaries including its new wholly owned subsidiary
OpenROUTE Networks, Inc. develops, markets, and supports a wide range of
networking products that encompass the Local Area Networking and Remote Access
components of the networking industry. The Company's principal markets include
North America, Europe and the Far East.
B. Summary
of Significant
Accounting Policies
Use 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 collectibility of accounts receivable. Actual results could differ
from the estimates and assumptions used by management.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries including its new wholly owned subsidiary OpenROUTE Networks,
Inc. All intercompany transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment of the product.
Revenue from service agreements is recognized ratably over the term of the
agreement. Revenue from software licensing is recognized upon performance of
milestones when collectibility is reasonably assured. Revenue from development
contracts is recognized under the percentage-of-completion method of accounting
as costs are incurred. Provisions for estimated losses on contracts are recorded
in the period when such losses are determined.
Significant Customers and Export Sales
In 1996, 1995 and 1994, net sales to one customer accounted for approximately
14%, 12% and 11%, respectively. A second customer accounted for approximately
14% and 10% of net sales in 1996 and 1995, respectively. The Company had
international sales of approximately $17,355,000, $26,884,000 and $32,985,000 in
1996, 1995 and 1994 respectively. The Company had export sales of approximately
$11,698,000, $18,548,000 and $28,572,000 in 1996, 1995 and 1994, respectively.
Of these export sales, sales into Europe were approximately $8,185,000,
$13,089,000 and $15,799,000 in 1996, 1995 and 1994, respectively. Export sales
do not include direct sales from the Company's foreign subsidiaries.
Translation of Foreign Currencies
The Company has designated the local currency as the functional currency for all
foreign locations. Accordingly, assets and liabilities of all foreign
subsidiaries are translated at year-end rates of exchange, and income statement
accounts are translated at average rates of exchange. The resulting translation
adjustments are excluded from net earnings, and accumulated as a separate
component of stockholder's equity.
Foreign currency transaction gains and losses are included in results of
operations in the periods in which they occur, and are immaterial for all
periods presented.
Cash, Cash Equivalents, and Marketable Securities
The Company considers all highly liquid instruments purchased with a maturity
of three months or less to be cash equivalents. Marketable securities consist
of highly liquid U.S. Government and commercial paper obligations with
maturities of more than three months when purchased. Investments are stated at
cost, plus accrued interest, which
22
<PAGE> 25
approximates fair market value. In addition, the Company classifies all
investments as available-for-sale securities. Realized gains and losses are
determined on the specific identification method and are included in interest
income or expense. The portfolio at December 31, 1996 matures at various dates
through December 31, 1997.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment are computed principally using the straight-line method
over the estimated useful lives of the assets as follows:
Machinery and equipment 1 - 5 years
Furniture and fixtures 7 years
Leasehold improvements shorter of lease term or estimated useful life
Maintenance and repairs are charged to expense as incurred. Upon retirement
or sale, the cost of the disposed assets and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
credited or charged to income.
Income Taxes
Deferred tax assets and liabilities reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A valuation
allowance is provided for the net deferred tax assets if, based on the weighted
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
Accrued Warranty
The Company provides an accrual for future warranty costs based upon the
relationship of prior years' sales to actual warranty costs which approximates
expected future warranty costs.
Research and Development
Cost incurred in the research and development of software products are expensed
as incurred until the technological feasibility of the product has been
established. After technological feasibility is established, any additional
costs would be capitalized. As the Company believes the current process for
developing software is essentially completed concurrently with the establishment
of technological feasibility, no costs have been capitalized to date.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentration of
credit risk, are principally cash and cash equivalents, marketable securities,
and accounts receivable. The Company places its investments in highly rated
financial institutions and, by policy, limits the amount of credit exposure to
any one financial institution.
Concentration of credit risk with respect to accounts receivable is limited
to certain customers with whom the Company makes substantial sales. Two
customers accounted for approximately 30% and 39% of the Company's outstanding
accounts receivable at December 31, 1996 and 1995, respectively. To reduce
credit risk, the Company performs ongoing credit evaluation, account monitoring
procedures and maintains reserves for potential losses. These losses have been
within management's expectations.
23
<PAGE> 26
Net Income (Loss) Per Common And Common Equivalent Share
Net income (loss) per share is computed based on the weighted average number of
common shares and common share equivalents outstanding during each year. Common
share equivalents are determined under the assumption that outstanding stock
options are exercised and the proceeds are used to purchase treasury stock. No
common share equivalents are included in the 1996 and 1994 calculations as they
would be anti-dilutive.
Newly Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (FAS) No. 128, "Earnings per Share" and No. 129,
"Disclosure of Information About Capital Structure." FAS 128 specifies the
computation, presentation and disclosure requirements for earnings per share and
is designed to improve earnings per share information by simplifying the
existing computational guidelines, revising the disclosure requirements, and
increasing the comparability of per share data on an international basis. FAS
129 requires the disclosure of certain information about an entity's capital
structure which would include a brief discussion of rights and privileges for
securities outstanding. These standards will be effective for financial
statements for periods ending after December 15, 1997. The Company is currently
reviewing the adoption and impact of these standards, but does not expect them
to have a material impact on the Company's results of operations or its
financial position.
C. Investments
Investments classified as current assets were as follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash equivalents:
U.S. Government securities $ - $160
Repurchase agreements 1,950 1,886
Mutual Funds 6,750 3,000
Commercial paper 2,448 16,509
- --------------------------------------------------------------------------------
Total cash equivalents $11,148 $21,555
================================================================================
Marketable securities:
U.S. Government securities $4,000 $ -
Commercial paper 2,918 6,863
- --------------------------------------------------------------------------------
Total marketable securities $6,918 $6,863
================================================================================
<CAPTION>
D. Inventories
Inventories consist of:
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $1,373 $134
Work in process 718 405
Finished goods 6,646 3,886
- --------------------------------------------------------------------------------
Total inventories $8,737 $4,425
================================================================================
</TABLE>
During the fourth quarter of 1996, the Company recorded an additional inventory
provision of $2.4 million to reflect further inventory exposures as the Company
transitioned from LAN to remote products.
24
<PAGE> 27
E. Property and Equipment
Property and equipment consist of:
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
Machinery and equipment $12,083 $27,894
Furniture and fixtures 572 1,755
Leasehold improvements 970 2,226
- --------------------------------------------------------------------------------
13,625 31,875
Less accumulated depreciation and amortization 9,031 23,558
- --------------------------------------------------------------------------------
Property and equipment, net $4,594 $8,317
================================================================================
F. Commitments
Letter of Credit
The Company has an outstanding letter of credit of approximately $288,000 at
December 31, 1996 and 1995. This letter of credit which matures on April 30,
2002, automatically renews annually on December 31. This letter of credit
collateralizes the Company's obligation to a third party for a certain lease
transaction. The fair value of this letter of credit is estimated to be the same
as the contract amount.
Operating Leases
The Company leases its office and manufacturing facilities under operating
leases expiring at various dates through 2002. Under certain leases the Company
is obligated to pay taxes, repairs, and other operating costs. The Company has
the option to extend the term of the lease of its primary office and
manufacturing facility for two five year periods commencing on May 1, 2002 and
May 1, 2007. Rental expense amounted to approximately $1,556,000, $1,666,000 and
$3,879,000 in 1996, 1995 and 1994, respectively. At December 31, 1996, future
rental commitments are as follows:
- --------------------------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------------------------
1997 $1,338
1998 1,177
1999 1,081
2000 1,048
2001 1,029
Thereafter 343
- --------------------------------------------------------------------------------
Total $6,016
================================================================================
G. Capital Stock
Common Stock
The Company has an Employee Stock Purchase Plan ("Purchase Plan") available to
most full time employees. Under this plan, 600,000 shares of common stock were
reserved for issuance. Eligible employees may designate not more than 5% of
their cash compensation to be deducted each pay period for the purchase of
common stock under the Purchase Plan. The purchase price of the shares under the
plan is at the lower of 85% of the fair market value per share, as defined by
the plan, as of the date the option is exercised. Typically, the exercise date
is six months after the date of the grant. The Company sold 41,628 shares and
30,140 shares to the employees in 1996 and 1995, respectively, under the plan.
At December 31, 1996, 320,834 shares remained unissued under the plan. The
weighted average fair value of the purchase right to a share of Company stock
under the plan was estimated to be $1.65 and $1.94 for 1996 and 1995,
respectively. No compensation cost has been recognized for shares purchased.
25
<PAGE> 28
The Company has an employee stock award plan to recognize contributions made
by employees of the Company. Under this plan, employees are granted shares of
the Company's common stock from the Company's treasury shares. The company has
reserved 25,000 shares of common stock for such issuance. The market value of
shares awarded under the plan has been recorded as stock grant compensation. No
such shares have been issued since 1993 and as of December 31, 1996 18,800
shares were available for award.
Preferred Stock
In 1991, the Shareholders approved the authorization of 7,500,000 shares of
preferred stock. The Board of Directors is authorized, subject to any
limitations prescribed by law, to issue from time to time such shares of
preferred stock in one or more series. Each such series of preferred stock will
have such number of shares, designations, preferences, voting power,
qualifications, and special or private rights or privileges as shall be
determined by the Board of Directors, which may include, among others, dividend
rights, voting rights, preemptive and sinking fund provisions, liquidation
preferences, conversion rights and preemptive rights. No such shares have been
issued to date.
Stock Options
The Company's stock option plans generally provide for the granting to employees
of incentive stock options to purchase shares of common stock at the fair market
value as defined by the plan on the date of grant of non-qualified stock options
at no less than 50% of the fair market value as defined by the plan on the date
of the grant. To date the Company has never issued non-qualified stock options
at an exercise price less than the fair market value on the date of the grant.
Generally, options become exercisable at the rate of 25% at the end of each of
the four years beginning on the first anniversary of the grant. Options issued
prior to June, 1991 generally expire five years from the date of grant, or
thirty days from the date of termination of employment. Options issued
subsequent to June 1991 generally expire ten years from the date of grant, or
ninety days from the date of termination of employment. As of December 31, 1996,
4,384,000 shares of common stock were reserved under the plans and 835,796
shares were available for grant.
In September 1996, the Compensation Committee of the Board of Directors,
pursuant to the authority granted under the Company's 1991 Restated Stock Option
Plan, voted to allow employees of the Company holding options with exercise
prices greater than $3.625 per share to exchange those options for substitute
options having an option exercise price of $3.625 per share. In October 1996,
707,154 options were surrendered by employees and exchanged for new options at
the new option exercise price and vesting schedule.
A summary of the status of the Company's stock plans as of December 31, 1996,
1995 and 1994, and changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the
beginning of the year 1,237,649 $5.52 1,446,597 $5.37 1,962,859 $5.49
Granted 1,245,726 4.11 404,700 6.76 . 1,069,725 5.17
Exercised (6,712) 4.01 (218,875) 4.72 (561,289) 3.74
Cancelled (1,204,654) 6.23 (394,773) 6.67 (1,024,698) 6.22
- -----------------------------------------------------------------------------------------------------------
Outstanding 1,272,009 $3.34 1,237,649 $5.52 1,446,597 $5.37
- -----------------------------------------------------------------------------------------------------------
Options exercisable
at year-end 522,604 $3.41 440,778 $5.44 480,709 $5.78
</TABLE>
26
<PAGE> 29
Weighted-average fair
value of options granted
during the year $2.78 $4.70
The exercise prices of the options outstanding as of December 31, 1996 ranged
from $2.64 to $3.63 and had a weighted average contractual life of 8 years
and 9 months.
Pro Forma Impact of SFAS 123
In October 1995 the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 is effective for periods beginning after December 15,
1995. SFAS 123 requires that companies either recognize compensation expense for
grants of stock, stock options, and other equity instruments based on fair
value, or provide pro forma disclosure of net income and earnings per share in
the notes to the financial statements. The Company adopted the disclosure
provisions of SFAS 123 in 1996 and has applied APB Opinion 25 and related
interpretations in accounting for its plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates as calculated in accordance with SFAS 123, the Company's net
income and earnings per share for the years ended December 31, 1996 and 1995
would have been reduced to the pro forma amounts indicated below:
1996 1995
(Loss) Earnings
Net (loss) Per Share Net Income Per Share
- --------------------------------------------------------------------------------
As Reported ($12,014) ($0.77) $8,220 $0.52
Pro Forma ($12,627) ($0.81) $8,011 $0.51
- --------------------------------------------------------------------------------
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 1995 and 1996: an expected life of six years, expected
volatility of 75%, and no dividends assumed. The weighted average assumptions
for the risk-free interest rates for 1996 and 1995 were 6.32% and 6.58%
respectively.
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.
27
<PAGE> 30
H. Restructuring
of Operations
During the fourth quarter of 1996, the Company's management announced a
restructuring plan for the strategic redirection of the Company. The
restructuring principally addressed the move toward the continued development of
the OpenROUTE Networks subsidiary. The strategies for this new subsidiary are
designed to allow the Company to aggressively focus its efforts on the rapidly
growing Internet/Intranet connectivity marketplace. The Company is attempting to
leverage its strengths in the OpenROUTE internetworking software and its
successful line of GlobeTrotter Remote Access routers. The Company is
concentrating its efforts on gaining more market share and increasing revenue.
As a result, the Company recorded a $3,312,000 charge for restructuring costs
in the fourth quarter of 1996. This included a reduction in the Company's work
force of approximately forty employees, or 22%, accounting for approximately
$410,000 of severance costs. The Company incurred a charge of approximately
$785,000 in connection with the substantial reduction in the Company's occupancy
requirements. In addition, the charge included approximately $1,922,000 for
disposal of fixed assets and approximately $195,000 of other costs.
In the second quarter of 1994, as a result of a significant strategic
redirection, the Company recorded an $11,230,000 charge for restructuring of
operations. This included a reduction in the Company's work force of ninety-two
employees, or approximately 25%, accounting for approximately $1,672,000 of
severance costs. The Company incurred a charge of approximately $6,215,000 for
lease payments in connection with the substantial reduction in the Company's
occupancy requirements. In addition, the charge included approximately
$3,072,000 for the disposal of fixed assets and approximately $271,000 of other
costs.
In the fourth quarter of 1994, the Company recorded a benefit of
approximately $4,900,000 related to the reversal of certain previously accrued
restructuring costs. The $4,900,000 benefit included approximately $3,300,000
resulting from a new tenant assuming direct lease responsibility for all the
Company's unused office space in its leased headquarters building. In addition,
the Company reversed inventory costs, provided for the in the December 1993
restructuring of operations, of approximately $1,600,000 related to its hub
inventory. The reversal was due to better than expected sales of Series 90 hubs
as the Company increased its focus on the remote-site hub market.
During 1996, the cash impact from restructuring restructuring was immaterial.
The remaining accrual of $1.7 million as of December 31, 1996 will be paid
during 1997. During 1995, the cash impact from restructuring was approximately
$1.9 million.
I. Income Taxes
The provision for income taxes consists of the following:
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Federal - current ($ 65) $319 $ 0
State - current 10 57 50
Foreign - current 215 112 201
- --------------------------------------------------------------------------------
Total $ 160 $488 $251
================================================================================
28
<PAGE> 31
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate is as follows:
- --------------------------------------------------------------------------------
December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
U.S. statutory rate (34.0%) 34.0% (34.0%)
Foreign tax rate differential .1 (2.8) 4.2
Change in valuation allowance 35.2 (26.1) 49.8
State income taxes, net of U.S.
Federal income tax effect -- .5 3.1
- --------------------------------------------------------------------------------
Effective tax rate 1.3% 5.6% 23.1%
================================================================================
A valuation allowance of $9,112,000 and $4,934,000 for 1996 and 1995,
respectively has been recorded to offset the related net deferred tax assets due
to the uncertainty of realizing the benefit of these assets. The following is a
summary of the significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1995:
- --------------------------------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Restructuring charge $ 644 $ 177
Inventory reserves 884 983
Product warranty 417 606
Federal tax benefit of net
operating loss carryforwards 3,878 --
State tax benefit of net
operating loss carryforwards 1,286 720
Tax credit carryforwards 912 912
Alternative minimum tax credit 542 699
Other items 919 1,146
- --------------------------------------------------------------------------------
Total deferred tax assets 9,482 5,243
Valuation allowance for deferred tax assets (9,112) (4,934)
- --------------------------------------------------------------------------------
Net deferred tax asset 370 309
Deferred tax liability:
Depreciation 370 309
- --------------------------------------------------------------------------------
Net deferred tax asset $ 0 $ 0
================================================================================
As of December 31, 1996 the Company had net operating loss carryforwards of
approximately $10,000,000 and $22,000,000 for federal and state income tax
purposes respectively. The federal net operating losses begin to expire in 2010
and state net operating losses begin to expire in 1998. Similarly, research and
experimentation credit carryforwards of approximately $912,000 were available at
December 31, 1996, expiring at various dates through 2005.
J. Retirement
Savings Plan
The Company has a retirement savings plan for its employees, which has been
qualified under Section 401(k) of the Code. Eligible employees are permitted to
contribute to the 401(k) Plan through payroll deductions within statutory
limitations and subject to any limitations included in the 401(k) Plan. The Plan
provides for the matching contribution by the Company in an annual amount not to
exceed 2% of a participant's compensation. The Company contributed approximately
$185,000, $165,000, and $236,000 to the plan in 1996, 1995, and 1994,
respectively.
29
<PAGE> 32
---------------------------------
Report of Independent Accountants
---------------------------------
To the Board of Directors
and Stockholders of Proteon, Inc.:
We have audited the accompanying consolidated balance sheets of Proteon, Inc.
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Proteon, Inc.
as of December 31, 1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.P.P.
Boston, Massachusetts
February 11, 1997
30
<PAGE> 33
- -------------------------
QUARTERLY FINANCIAL DATA (unaudited)
- -------------------------
<TABLE>
Selected quarterly financial data for the years ended December 31, 1996 and
1995 is as follows:
<CAPTION>
- -----------------------------------------------------------------------------------------
Net income
Net Gross Net income (loss)
(in thousands, except per share amounts) sales profit (loss) per share
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
First Quarter $14,018 $ 7,231 $ 141 $ 0.01
Second Quarter 10,646 4,932 (2,345) (0.15)
Third Quarter 10,589 5,119 (1,763) (0.11)
Fourth Quarter 10,043 2,344 (8,047) (0.52)
- -----------------------------------------------------------------------------------------
Year to Date $45,296 $19,626 $(12,014) $(0.77)
=========================================================================================
1995
First Quarter $22,145 $11,788 $ 3,281 $ 0.21
Second Quarter 19,510 9,720 1,810 0.12
Third Quarter 16,440 8,463 1,558 0.10
Fourth Quarter 17,228 8,688 1,571 0.10
- -----------------------------------------------------------------------------------------
Year to Date $75,323 $38,659 $ 8,220 $ 0.52
=========================================================================================
</TABLE>
- -------------------
STOCK PRICE HISTORY
- -------------------
<TABLE>
The following table sets forth the high and low sales prices of the Company's
Common Stock as reported on the NASDAQ Stock Market from January 1, 1995 to
December 31, 1996. As of December 31, 1996, the Company had approximately 530
stockholders of record. The Company has paid no dividends on its Common Stock
and anticipates it will continue to reinvest earnings to finance future growth.
<CAPTION>
For the year ended December 31, 1996 High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
First Quarter 7 1/2 4 3/4
Second Quarter 6 1/2 3 5/8
Third Quarter 4 1/4 2 3/8
Fourth Quarter 4 1/4 2 1/16
<CAPTION>
For the year ended December 31, 1995 High Low
- --------------------------------------------------------------------------------
First Quarter 8 1/8 5 3/8
Second Quarter 6 1/2 5 5/8
Third Quarter 9 7/8 5 7/8
Fourth Quarter 9 6 1/4
</TABLE>
31
<PAGE> 34
- ------------------
CORPORATE OFFICERS
- ------------------
Daniel J. Capone, Jr.
President and Chief Executive Officer
Steven J. Bielagus
Vice President, Engineering
Robert J. Connaughton, Jr.
Vice President, Finance,
Chief Financial Officer,
Treasurer, and Clerk
William T. Greer
Vice President,
Sales Operations
- ------------------
BOARD OF DIRECTORS
- ------------------
Daniel J. Capone, Jr.
President and Chief Executive Officer
Proteon, Inc., and OpenROUTE Networks, Inc.
David Clark, PhD.
Senior Research Scientist
Massachusetts Institute of Technology
Laboratory of Computer Science
Robert M. Glorioso
President and Chief Executive Officer
Marathon Technologies Corporation
Howard C. Salwen
Chairman of the Board
L.J. Sevin
General Partner
Sevin, Rosen, Bayless, Borovoy
A Venture Capital Firm
32
<PAGE> 35
- ----------------------
CORPORATE INFORMATION
- ----------------------
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Boston, Massachusetts
TRANSFER AGENT & REGISTRAR
The First National Bank of Boston
Boston EquiServe
Boston, Massachusetts
LEGAL COUNSEL
Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo, P.C.
Boston, Massachusetts
SEC FORM 10-K AND SHAREHOLDER INQUIRIES
A copy of the Company's most recent Form 10-K, filed with the Securities and
Exchange Commission, is available upon written request, free of charge from the
Company. These requests, as well as inquiries relating to the Company, its
activities or its securities should be addressed to:
INVESTOR RELATIONS
Proteon, Inc.
Nine Technology Drive
Westborough, MA 01581
Tel: (508) 898-2800
Fax: (508) 898-2147
Internet: [email protected]
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders will take place at 10:00 a.m. on Wednesday,
May 21, 1997 at the First National Bank of Boston, Blue Hills Office Park, 150
Royall Street, Canton, MA 02021
Proteon and ProNET are registered trademarks and CNX 600, CNX 500, CNX 400,
DNX 350, DNX 300, OpenROUTE and OneVIEW are trademarks of Proteon, Inc. Other
brand, company and product names are trademarks or registered trademarks of
their respective holders.
CORPORATE HEADQUARTERS
Proteon, Inc.
Nine Technology Drive
Westborough, MA 01581
DOMESTIC SALES OFFICES
Irvine, CA
Pleasanton, CA
Atlanta, GA
Hoffman Estates, IL
New York, NY
Dallas, TX
Reston, VA
Baltimore, MD
EUROPEAN HEADQUARTERS
Proteon International Ltd
Lockington Hall
Lockington
Derby DE74 2RH
England
ASIA PACIFIC HEADQUARTERS
Proteon Networks PTE. Ltd.
30 Bideford, #02-02
Thongsia Building
Singapore 229922
INTERNATIONAL SALES OFFICES
North Sydney, Australia
Toronto, Canada
Hong Kong, China
Paris, France
Kelkheim, Germany
Tokyo, Japan
ANNOUNCING A NEW INFORMATIONSERVICE FOR PROTEON SHAREHOLDERS
Now there is a faster, easier way to obtain information about Proteon, Inc., 24
hours a day, every day of the year. It's called Shareholder Direct, our new free
telephone information service.
By dialing this new toll-free number 888-OPEN-RTE (888-6736-783)current and
prospective Proteon shareholders can find out about the most current earnings
releases, hear the most recent news releases and a corporate profile, speak with
a shareholder services representative, or ask to receive a variety of printed
financial information by fax or mail. With the implementation of this free
service, there is no longer the need to wait for a scheduled mailing, when some
of the information may be outdated. With the immediacy of Shareholder Direct,
the company will no longer mail quarterly reports. Replacing the mass mailings
with an information-upon-request service allows the Company to save on printing
and postage costs while expanding the menu available to shareholders. Using
Shareholder Direct is easy. After dialing 1-888-OPEN-RTE, press or say "one" to
be connected with the main menu. Callers using a rotary phone should wait for
the announcement of the complete menu before hearing the earnings information.
Proteon is pleased to offer this new free service. We believe Shareholder Direct
will provide increased and more timely information about the Company's
continuing efforts to enhance the investment of our shareholders.
For your convenience, listed below, are tentative dates for issuing our
quarterly earnings results:
1st Quarter -- Thursday, April 24, 1997
2nd Quarter -- Thursday, July 24, 1997
3rd Quarter -- Thursday, October 23, 1997
Shareholder information is also available on Proteon's World Wide Web site at:
http://www.proteon.com, or, http://www.openroute.com.
Design and images: Copy Rights 1997 Bomzer Communications, Inc.
<PAGE> 36
OpenROUTE(R) Networks, Inc.
A wholly owned subsidiary of
Proteon, Inc.
Nine Technology Drive
Westborough, MA 01581
#1062-AR97
[LOGO]Proteon network with the pro(TM)
[LOGO] OpenROUTE(R) Networks, Inc.
<PAGE> 1
Proteon, Inc. EXHIBIT 21
Subsidiaries of the registrant:
I. Proteon International Ltd.
Lockington Hall
Derby DE74 2RH
England
Organized under the laws of England
II. Proteon International SARL
2000 route des Lucioles
Les Algorithmes
Bat Aristote A-BP 29
Sophia Antipolis 06901
France
Organized under the laws of France
III. Proteon International GMBH
Falkensteiner Strasse 11
Kelkheim D 65779
Germany
Incorporated under the laws of Germany
IV. Proteon Networks PTE Ltd.
30 Bideford Road #02-02
Thongsia Building
Singapore 229922
Organized under the laws of Singapore
V. OpenROUTE Networks, Inc.
Nine Technology Drive
Westborough, Massachusetts 01581-1799
USA
Incorporated in the Commonwealth of Massachusetts
VI. Proteon Securities Corporation
Nine Technology Drive
Westborough, Massachusetts 01581-1799
USA
Incorporated into the Commonwealth of Massachusetts
VII. Proteon Federal Systems, Inc. (Inactive)
Nine Techology Drive
Westborough, Massachusetts 01581-1799
USA
Incorporated in the Commonwealth of Massachusetts
VIII. Proteon FSC, Inc.
55-11 Curaco Gade
Charlotte Amalie
Virgin Islands 00803
Incorporated in the U.S. Virgin Islands
IX. Proteon Australia PTY
80 Mount Street
Level 8
North Sydney NSW 2060
Australia
Organized under the laws of Australia
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Proteon, Inc. on Form S-8 (File No. 33-85524) of our reports dated February 11,
1997, on our audits of the consolidated financial statements and financial
statement schedule of Proteon, Inc. as of December 31, 1996 and 1995, and for
the three years ended December 31, 1996, which reports are included or
incorporated by reference in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1994 JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1994 DEC-31-1995 DEC-31-1996
<EXCHANGE-RATE> 1 1 1
<CASH> 24,956 25,829 16,612
<SECURITIES> 2,100 6,863 6,918
<RECEIVABLES> 11,986 12,138 7,625
<ALLOWANCES> 0 0 0
<INVENTORY> 5,023 4,425 8,737
<CURRENT-ASSETS> 46,782 50,712 40,977
<PP&E> 31,089 31,875 13,625
<DEPRECIATION> 20,960 23,558 9,031
<TOTAL-ASSETS> 56,911 59,029 45,571
<CURRENT-LIABILITIES> 19,232 11,706 10,380
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 47,884 49,141 49,292
<OTHER-SE> (10,205) (1,818) (14,101)
<TOTAL-LIABILITY-AND-EQUITY> 56,991 59,029 45,571
<SALES> 75,817 51,810 32,175
<TOTAL-REVENUES> 93,912 75,323 45,296
<CGS> 36,996 27,373 20,825
<TOTAL-COSTS> 48,148 36,664 25,670
<OTHER-EXPENSES> 48,512 31,388 32,741
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (455) (1,437) (1,261)
<INCOME-PRETAX> (1,088) 8,708 (11,854)
<INCOME-TAX> 251 488 160
<INCOME-CONTINUING> (1,339) 8,220 (12,014)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,339) 8,220 (12,014)
<EPS-PRIMARY> (0.09) 0.52 (0.77)
<EPS-DILUTED> (0.09) 0.52 (0.77)
</TABLE>
