<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _________ to __________.
Commission File Number 0-19175
OPENROUTE NETWORKS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2531856
- ---------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
Nine Technology Drive, Westborough, MA 01581
--------------------------------------------
(Address of principal executive offices)
Registrant's telephone number (508) 898-2800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve 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 ninety days.
YES [ X ] NO [ ]
Indicate number of shares outstanding of each of the issuer's classes of common
stock as of March 27, 1999.
Common Stock, $0.01 par value 15,430,168
- ----------------------------- ------------------
(Title of each class) (Number of shares)
<PAGE> 2
OpenROUTE Networks, Inc.
Form 10-Q
Quarterly Report
March 27, 1999
Table of Contents
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 27, 1999 (unaudited)
and December 31, 1998.
Consolidated Statements of Operations for the three months
ended March 27, 1999 and March 28, 1998 (unaudited).
Consolidated Statement of Shareholders' Equity for the Three
Months Ended March 27, 1999 (unaudited).
Consolidated Statements of Cash Flows for the three months
ended March 27, 1999 and March 28, 1998 (unaudited).
Notes to the Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Part II. Other Information
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
OPENROUTE NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 27, December 31,
ASSETS 1999 1998
--------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,810 $ 2,024
Marketable securities 2,260 3,128
Accounts receivable, net 3,394 3,356
Inventories 7,422 8,546
Prepaids and other assets 345 509
-------- --------
Total current assets 15,231 17,563
Property and equipment, net 2,574 2,715
-------- --------
Total assets $ 17,805 $ 20,278
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 767 $ 1,449
Accrued compensation 253 353
Accrued expenses 2,185 2,743
Accrued warranty 583 582
-------- --------
Total current liabilities 3,788 5,127
-------- --------
Stockholders' equity
Preferred stock -- --
Common stock 159 157
Capital in excess of par value 49,560 49,418
Accumulated deficit (34,800) (33,526)
Cumulative translation adjustments 108 112
Less Treasury stock, at cost (1,010) (1,010)
-------- --------
Total stockholders' equity 14,017 15,151
-------- --------
Total liabilities and stockholders' equity $ 17,805 $ 20,278
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 4
OPENROUTE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 27, March 28,
1999 1998
-------- --------
<S> <C> <C>
Sales:
Product $ 3,073 $ 3,493
Service and other 488 695
-------- --------
3,561 4,188
-------- --------
Cost of sales:
Product 1,543 2,062
Service and other 446 511
-------- --------
1,989 2,573
-------- --------
Gross profit 1,572 1,615
-------- --------
Operating expenses:
Research and development 970 1,215
Selling and marketing 1,073 2,247
General and administrative 847 853
-------- --------
2,890 4,315
-------- --------
Loss from operations (1,318) (2,700)
Interest income, net 50 191
-------- --------
Loss before income taxes (1,268) (2,509)
Provision for income taxes 6 4
-------- --------
Net loss ($ 1,274) ($ 2,513)
======== ========
Per share data:
Basic and diluted loss per share ($ 0.08) ($ 0.16)
======== ========
Basic and diluted weighted average number
of common shares outstanding 15,417 15,286
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 5
OPENROUTE NETWORKS, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Capital in Other
Common Stock Excess of Accumulated Comprehensive
Shares Amount Par Value Deficit Income
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 15,740 $ 157 $49,418 $(33,526) $112
Issuance of common stock 81 2 142 -- --
Repurchase of stock as treasury stock -- -- -- -- --
Comprehensive income (loss)
Foreign currency translation -- -- -- -- (4)
Net Loss -- -- -- (1,274)
- ------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, March 27, 1999 15,821 $ 159 $49,560 $(34,800) $108
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total
Treasury Stock Stockholders'
Shares Amount Equity
-----------------------------------
<S> <C> <C> <C>
BALANCE, December 31, 1998 390 $ (1,010) $ 15,151
Issuance of common stock -- -- 144
Repurchase of stock as treasury stock -- --
Comprehensive income (loss)
Foreign currency translation -- -- (4)
Net loss -- -- (1,274)
- ----------------------------------------------------------------------------------
Total comprehensive loss (1,278)
- ----------------------------------------------------------------------------------
BALANCE, March 27, 1999 390 $ (1,010) $ 14,017
- ----------------------------------------------------------------------------------
</TABLE>
<PAGE> 6
OPENROUTE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
March 27, March 28,
1999 1998
------- -------
<S> <C> <C>
Cash flows provided by operating activities:
Net loss $(1,274) $(2,513)
Adjustments to reconcile net loss to cash
flows used by operating activities:
Bad debt provision 75 154
Depreciation and amortization 201 307
Loss (gain) on disposition of fixed assets (1) --
Changes in operating assets and liabilities:
Increase in accounts receivable (113) (118)
(Increase) decrease in inventories 1,124 (392)
Decrease in deposits and other assets 164 5
Decrease in accounts payable and accrued expenses (1,339) (372)
------- -------
Net cash used by operating activities (1,163) (2,929)
------- -------
Cash flows provided by investing activities:
Proceeds from the sale of fixed assets 1 --
Capital expenditures (60) (106)
Marketable securities sales and maturities 868 3,460
Marketable securities purchases
-- (685)
------- -------
Net cash provided by investing activities 809 2,669
------- -------
Cash flows provided by financing activities:
Proceeds from the issuance of common stock 144 34
------- -------
Net cash provided by financing activities 144 34
------- -------
Effect of exchange rate changes on cash (4) (22)
------- -------
Net decrease in cash and cash equivalents (214) (248)
Cash and cash equivalents at beginning of period 2,024 5,317
------- -------
Cash and cash equivalents at end of period 1,810 5,069
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 7
OpenROUTE Networks, Inc.
Notes to Consolidated Financial Statements, unaudited
The accompanying condensed consolidated financial statements include the
accounts of OpenROUTE Network, Inc. and its subsidiaries (collectively, "the
Company" or OpenROUTE). The condensed consolidated financial statements for the
Company for the three months ended March 27, 1999 and March 28, 1998 have been
prepared without an audit pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC").
The condensed consolidated financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Certain information and footnote disclosures
normally included in the Company's annual financial statements have been
condensed or omitted. The interim financial statements, in the opinion of
management, reflect all adjustments (including normal recurring accruals)
necessary for a fair statement of the results for the interim periods ended
March 27, 1999 and March 28, 1998. Operating results for the three months ended
March 27, 1999 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 1999.
These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1998, which are
contained in the Company's 1998 Annual Report to its shareholders and in its
Form 10-K filed with the SEC.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying financial statements were prepared by the Company in conformity
with generally accepted accounting principles which require management 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 reported period. The Company reviews all significant estimates
affecting the financial statements on a recurring basis and records the effect
of any necessary adjustments prior to their issuance. Actual results could
differ from those estimates.The Articles of Organization of the Company were
amended on June 10, 1998 to change the Company's name to OpenROUTE Networks,
Inc. from its former name of Proteon, Inc.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(in thousands) March 27, 1999 December 31, 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Raw Materials $2,170 $2,270
Work In Process $326 $15
Finished goods $4,926 $6,261
- -----------------------------------------------------------------------------------------
Total Inventories $7,422 $8,546
- -----------------------------------------------------------------------------------------
</TABLE>
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
The Company follows SFAS No. 128 "Earnings per Share." Under SFAS No. 128, Basic
Earnings Per Share (EPS) excludes the effect of any dilutive options, warrants
or convertible securities and is computed by dividing the net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common shares were
exercised. Diluted EPS is computed by dividing the net income (loss) available
to common stockholders by the sum of the weighted average number of common
shares and common share equivalents computed using the average market price for
the period under the treasury stock method.
<PAGE> 8
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE (CONTINUED)
The following table presents the numerator and the denominator of the basic and
diluted EPS computations shown on the consolidated statements of operations:
<TABLE>
<CAPTION>
Three Months ended March 27, 1999 March 28, 1998
----------------------------------------------------------------------------------------------
Basic and diluted EPS (in thousands, except per share data)
<S> <C> <C>
Computation:
Numerator:
Net loss $ (1,274) $ (2,513)
Denominator:
Weighted average common
shares outstanding 15,417 15,286
---------------------------------------------------------------------------------------------
Basic and diluted EPS $ (0.08) $ (0.16)
=============================================================================================
</TABLE>
Outstanding stock options of 2,157,200 with an average exercise price of $1.44
as of March 27, 1999 and outstanding stock options of 1,731,230 with an average
exercise price of $2.06 as of March 28, 1998 were not included in the diluted
EPS computation because their effect would be antidilutive.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," which requires that all components of
comprehensive income and total comprehensive income be reported and that changes
be shown in a financial statement displayed with the same prominence as other
financial statements. The Company has elected to disclose this information in
its statement of stockholders' equity.
NEWLY ISSUED ACCOUNTING STANDARDS
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement, which supersedes Statement
No. 14 "Financial Reporting for Segments of a Business Enterprise," changed the
way public companies report information about segments. The Statement, which is
based on the management approach to segment reporting, includes requirements to
report segment information quarterly and entity-wide disclosures about products
and services, major customers and the material countries in which the entity
holds assets and reports revenues.
The Company is engaged principally in one business segment having two lines of
business: (i) Internet Access and (ii) local area network access. During the
three months ended March 27, 1999 and March 28, 1998, net sales to one customer
accounted for approximately 13% and 15% of the Company's total net sales,
respectively. A second significant customer accounted for approximately 9%, and
11% of total net sales during the three months ended March 27, 1999 and March
28, 1998, respectively.
<PAGE> 9
The Company did not have sales to an individual foreign country that contributed
10% or more of the total operating data presented below. The geographic
distribution of the Company's operating data is summarized as follows:
<TABLE>
<CAPTION>
United Asia Europe
States Pacific and Other Total
-----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Quarter ended March 27, 1999
Net sales $ 2,574 $ 237 $ 750 $ 3,561
Loss from operations (967) (137) (214) (1,318)
Long-lived assets 2,433 119 22 2,574
Capital expenditures 60 - - 60
Depreciation and amortization 191 7 3 201
Quarter ended March 28, 1998
Net sales $ 2,767 $ 821 $ 600 $ 4,188
Loss from operations (2,499) (188) (13) (2,700)
Long-lived assets 2,567 131 17 2,715
Capital expenditures 102 2 2 106
Depreciation and amortization 291 10 6 307
</TABLE>
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This quarterly report on Form 10-Q contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "estimates," "will," "should," "plans" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. These forward-looking statements are
based on numerous assumptions about future conditions that could prove not to be
accurate. Actual events, transactions and results may materially differ from the
anticipated events, transactions or results described in such statements.
Investors are cautioned that forward-looking statements involve risks and
uncertainties 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 product introductions; acceptance of products
in the marketplace; increased competition; changes in manufacturing costs;
changes in the mix of product sales; and changes in world economic conditions.
No assurance can be given that these are all of the factors that could cause
actual results to vary materially from the forward-looking statements. The
following discussion of the financial condition and performance of the Company
should be read in conjunction with the consolidated financial statements and
related notes and other detailed information regarding the Company included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998 and other reports filed by the Company with the SEC.
SUMMARY
OpenROUTE is a pioneer in the datacommunications industry. OpenROUTE has
distinguished itself as a leader in networking and in particular, in developing
networking connectivity solutions that focus exclusively on the Internet's edge.
For more than 18 years OpenROUTE has shipped network connectivity products that
have helped companies grow and prosper through deploying network-centric
computing. Historically, the Company's local area networking ("LAN") products
have provided connectivity solutions in more than 70 percent of the Fortune 100
companies. Leveraging this expertise in mission-critical network solutions,
OpenROUTE aggressively delivers this same quality of product and service for
Internet connectivity. OpenROUTE is committed to providing solutions that make
the Internet a more cost-effective, secure and comfortable place to grow a
business. The Company's comprehensive line of products and solutions is designed
to meet the needs of Internet Service Providers ("ISPs") and corporate
enterprises.
OpenROUTE's data networking products and services combine cost effectiveness
with ease of operation, interoperability, network security, reliability and
performance. The Company's customers include Global 1000 multinationals, ISPs
as well as corporations looking to the Internet to grow their business.
Specifically, OpenROUTE provides solutions that complement and optimize the
edge of the network.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 27, 1999 COMPARED TO THREE MONTHS ENDED MARCH 28, 1998
NET SALES
Net sales for the quarter ended March 27, 1999 were $3,561,000, as compared with
$4,188,000 for the quarter ended March 28, 1998, a decrease of $627,000 or
15.0%.
Product sales for the quarter ended March 27, 1999 were $3,073,000, as compared
with $3,493,000 for the quarter ended March 28,1998, a decrease of $420,000, or
12.0%. Revenue from the Company's Internet Access products increased by $400,000
or 16.5% for the quarter ended March 27, 1999, as compared to the same period in
1998. Revenues from the Company's Internet Access products equaled 92% of the
Company's total product sales. This reflects the Company's transition from (LAN)
to Internet Access products.
Although overall product sales for the quarter ended March 27, 1999, as compared
with the quarter ended March 28, 1998, have decreased, the total number of units
of Internet Access products sold by the Company increased by 88.4% as compared
to the same period in 1998. This increase reflects the Company's selling
strategy of focusing its efforts on the ISP and telephone company marketplace
and the growth in this marketplace for Internet Access products.
<PAGE> 11
The Company did not have any software licensing revenue for either the quarter
ended March 27, 1999 or the quarter ended March 28, 1998. The Company expects
future software licensing revenue to be at varying and uncertain levels.
Software licensing revenue is an ancillary component of the Company's core
revenue stream but strategic in its promotion of OpenROUTE's routing technology.
For the quarter ended March 27, 1999, service and other revenues decreased by
$207,000 or 29.8%, to $488,000, as compared with $695,000 for the same period in
1998. This decrease was primarily due to the reduction in service contracts
worldwide resulting from the Company's decision to focus on Internet Access
products, which require fewer support services.
GROSS PROFIT
The Company's total gross profit margin as a percentage of net sales increased
to 44.1% for the quarter ended March 27, 1999, as compared with 38.6% for the
same period in 1998. The Company's product gross profit increased from 41.0% for
the quarter ended March 28, 1998 to 49.8% for the quarter ended March 27, 1999.
The margin improvement is primarily due to increased sales of certain higher
margin Internet Access products and purchasing efficiencies.
RESEARCH AND DEVELOPMENT
Research and development expenses for the quarter ended March 27, 1999 were
$970,000, or 27.2% of net sales, as compared with $1,215,000, or 29.0% of net
sales, for the same period in the prior year. The decrease in expenses of
$245,000 or 20.2% was primarily due to the concentration of the Company's
development efforts on Internet Access products. The Company considers
investments in research and development to be critical to future revenues and
intends to focus these expenditures on Internet Access products.
SELLING AND MARKETING
Selling and marketing expenses were $1,073,000 or 30.1% of net sales for the
quarter ended March 27, 1999, as compared with $2,247,000 or 53.7% of net sales
for the quarter ended March 28, 1998, a decrease of $1,174,000 or 52.2%. This
decrease was mainly due to lower fixed personnel related costs in line with the
Company's selling strategy.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $847,000, or 23.8% of net sales, for
the quarter ended March 27, 1999, compared to $853,000, or 20.4% of net sales,
for the quarter March 28, 1998, a decrease of $6,000.
PROVISION FOR INCOME TAXES
For the quarter ended March 27, 1999, the Company booked an income tax provision
of $6,000 compared to $4,000 for the quarter ended March 28, 1998. The provision
represents state income taxes and estimated tax liabilities for the Company's
foreign subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of 1999, the Company's net cash used in operating
activities was $1,163,000 as compared with $2,929,000 for the first three months
of 1998. The net cash used in operating activities for the first three months of
1999 was primarily due to the net operating loss of $1,274,000 and decreases in
accounts payable and accrued expenses of $1,339,000, partially offset by a
decrease in inventory of $1,124,000 and depreciation of $201,000.
Investing activities for the three months ended March 27, 1999 generated net
proceeds of $809,000, principally from the sales of marketable securities.
The Company's management believes that if it achieves its twelve month operating
plan, the Company's current levels of cash, cash equivalents and marketable
securities will satisfy its expected working capital and capital expenditure
requirements through the next twelve months. If the operating plan is not
achieved, it is likely that the Company will need to secure alternative forms of
financing and there is no assurance that the financing would be available when
needed or, on terms favorable to the Company. The Company is in the process of
obtaining additional working capital financing to fund expected future growth.
TRENDS AND UNCERTAINTIES
The Company continues to face many risks and uncertainties in addition to those
set forth below, including without limitation, risks that apply to most
businesses, such as risks arising from competition and general and specific
market and economic risks.
<PAGE> 12
TECHNOLOGICAL CHANGE, NEW PRODUCTS AND INDUSTRY STANDARDS
OpenROUTE is positioning itself as a company focused on the edge of the
Internet. OpenROUTE views the network access market as having two lines of
business - Internet access and local access. Its current strategy is based upon
concentration on the Internet access market segment.
The market for the Company's products is characterized by rapidly changing
technology, new product introductions and multiplicity of current and evolving
industry standards. Accordingly, the Company believes that its future success
will depend on its continuing ability to enhance and expand its existing
products and to develop or private label other manufacturer's technology and
introduce in a timely fashion new products which incorporate new technologies,
conform to standards and achieve market acceptance.
There can be no assurance that the Company's strategy is the correct one under
the circumstances; that the Company has correctly assessed trends in the
marketplace; that the Company will be able to develop, market, support or secure
external supplies of, such products successfully; or that the Company will be
able to respond effectively to technological changes, new product announcements
by others or new industry standards.
MANUFACTURING AND SUPPLY; DEPENDENCE ON SUPPLIERS
The Company's manufacturing operations consist of systems level integration and
testing. The Company has strategic relationships with U.S. Assemblies of
Taunton, Massachusetts, a major subcontract manufacturer with access to
cost-effective, high volume manufacturing, distribution and repair capability
worldwide, and since October 1998 with Venture Manufacturing. U.S. Assemblies
manufactures the Company's board assemblies for its router, hub and adapter card
product lines and specific, turnkey manufacturing for a number of OpenROUTE
products. When fully operational in 1999, Venture Manufacturing will provide
OpenROUTE with services similar to U.S. Assemblies.
The Company believes that in the event of an interruption in manufacturing by
either of its subcontractors (U.S. Assemblies or Venture Manufacturing) it will
be able to shift its production needs to the unaffected facility as necessary
and continue to meet its expected demand. Both U.S. Assemblies and Venture
Manufacturing operate a number of other plants within the United States and
Asia.
OpenROUTE performs some final assembly and testing of its intelligent hubs and
routers at its Westborough, Massachusetts facility. A repair depot and logistics
operation is also located at its Westborough facility, coordinating global
service requirements for all products.
The Token Ring chipsets used in the Company's 4/16 Mbps adapters are currently
manufactured by Texas Instruments. The Company has an agreement with Texas
Instruments under which it believes it will be able to obtain adequate supplies
of these chipsets in a timely manner to meet customer demand. However, the
reduction or interruption in supply or a significant price increase could
adversely affect the Company's operating results. The RISC processor presently
used in the Company's CNX 600 and CNX 500 bridging routers is available solely
from AMD. The Company believes, however, that other available RISC processors
could be substituted for the AMD chip, if necessary, with some product
modifications. Certain logic semiconductors, signal processors and subassembly
components used in the Company's products are also available only from limited
sources. The Company has not experienced any significant problems in obtaining
required supplies of such limited source components and believes that
alternative sources could be developed quickly. However, such shortages could
result in production delays that might adversely affect the Company's business.
The Company's line of GTX and GT Business Series products incorporates
microprocessors supplied by Motorola. The Company is not aware of any shortages
of chips from Motorola, and believes that supplies will be adequate for the
coming year.
OpenROUTE continues to have OEM arrangements with manufacturers for some of its
Token Ring product offerings. The Company does not feel these arrangements
jeopardize the quality of the products the Company is shipping. In most cases,
if supply from one vendor was interrupted or made scarce, the Company could find
a comparable source for the affected product with limited delays in shipment.
The inability to obtain sufficient sole or limited source components as
required, or to develop alternative sources if and as required in the future,
could result in delays or reductions in product shipments which would adversely
affect the Company's operation results. There can be no assurance that, in the
event of interruptions in contract manufacturing, supplies of components from
sole or limited sources or supplies of units from OEM vendors or similar
occurrences, the Company could find and engage suitable alternatives in a timely
manner. Such interruptions or the inability of OpenROUTE to counteract them
successfully could have an adverse effect on the Company's business, operations
and finances.
<PAGE> 13
INTELLECTUAL PROPERTY
Currently, OpenROUTE 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 OpenROUTE in and to its intellectual property, by
allegations of infringement on the rights of other or for any other reason, the
Company's business, operations and finances could be adversely affected. Certain
technology used in the Company's products is licensed by the Company from third
parties. The termination of certain of these licenses would have a material
adverse effect on the Company's operations.
PRODUCT COMPATIBILITY AND COMPETITION
INTERNET ACCESS (ROUTERS)
OpenROUTE expects to participate significantly in the market segment of Internet
access routing by focusing exclusively on the Internet's edge. Specifically, the
Company provides best-of-class edge solutions that complement with the core and
maximize the edge. The Company has enhanced its Internet access capabilities
with the introduction of new products that and expanded its presence in the
Integrated Services Digital Network (ISDN) marketplace.
INTERNETWORKING SOFTWARE
OpenROUTE(TM), OpenROUTE's internetworking software suite, is the foundation of
the Company's high performance Internet access products. All of OpenROUTE's
internetworking products ship with this software technology installed. Also,
OpenROUTE licenses this software to other providers of internetworking products.
As routing technology progresses, the Company may be required to modify its
routing and bridging software to maintain compatibility of its products with
various standards and interoperability with other manufacturers router products.
Failure by the Company to maintain such compatibility, interoperability and
technical competencies could adversely affect the Company's business, operations
and finances.
NETWORK INTERFACE CARD PRODUCTS
The market for Token Ring network interface card products is dominated by IBM,
MADGE and Olicom. While Token Ring networking is an industry standard, OpenROUTE
believes that its ability to address successfully the market for Token Ring
network products is dependent upon the compatibility and interoperability of the
Company's products with products offered by these vendors and upon maintaining
compatibility with the Token Ring standard as it continues to evolve.
LAN ACCESS
The Company continues to sell Token Ring Switches; intelligent hubs that provide
connectivity and management of different network cabling schemes and LAN
topologies; Ethernet hubs, the ProNET/E series, for the workgroup market
segment; Token Ring hubs, the Serial 75 Stackable Hub family for building
networked and extended workgroups; Token Ring adapters for physical connectivity
and Token Ring signaling between a PC or workstation and LAN cabling; a muliport
cards intended to provide a full range of solution for the client/server
marketplace. The Company also seeks opportunities to leverage technology through
licensing arrangements.
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, OpenROUTE
believes one of the keys to success will be making networks more accessible to a
broader base of customers. OpenROUTE is committed to open, standards based
products, innovative solutions to customer requirements for reliable and high
performance networks, a favorable price/performance ratio, ease of installation
and ease of use.
<PAGE> 14
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 communication networks.
The Company is developing new products to improve price/performance ratios,
enhance its network management capabilities, simplify ease of use and ensure
interoperability with other vendors' standards based products.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's quarterly operating results may vary significantly depending upon
factors such as the timing of new product announcements and releases by the
Company and its competitors, the timing of significant orders, the mix of
products sold and the mix of distribution channels through which the products
are sold. In addition, substantially all of the Company's sales in each quarter
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 of future sales. If sales levels are below
expectations, operating results may be adversely affected. Also, quarterly
results can be materially affected by the existence and/or the timing of
software licensing revenues.
METHOD OF DISTRIBUTION
The Company sells its products to end users worldwide primarily through an
indirect sales channel comprised of ISPs, OEMs, and VARs. 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 accounted for approximately 12%,
11% and 14%, of the Company's total net sales in 1998, 1997 and 1996,
respectively, and a second reseller accounted for approximately 10%, 8%, and 14%
of the Company's total net sales in 1998, 1997, and 1996, 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.
LIQUIDITY
Failure of the Company to create and maintain adequate working capital and
liquidity, by sales of equity, obtaining lines of credit or otherwise, could
adversely impact the Company's business, operations and finances.
INTERNATIONAL SALES, REGULATORY STANDARDS AND CURRENCY EXCHANGE
International sales accounted for 30.9%, 35.4% and 38.3% in 1998, 1997 and 1996,
respectively, of the Company's net sales. The decrease in the international
sales as a percentage of the Company's net sales was primarily the result of the
economic crisis in the Asia Pacific region. The Company expects that
international sales to continue to be a significant portion of the Company's
business. Foreign regulatory bodies continue to establish standards different
from those in the United States, and the Company's products are designed
generally to meet those standards. The inability of the Company to design
products in compliance with such foreign standards could have an adverse effect
on the Company's operating results. The Company's international business may be
affected by changes in demand resulting from fluctuation in currency exchange
rates and tariffs and difficulties in obtaining export licenses.
<PAGE> 15
SHARES ELIGIBLE FOR FUTURE SALE
Approximately 15,430,000 outstanding shares of Common Stock as of March 27, 1999
are now freely tradable or eligible for sale on the open market. In addition,
options to acquire an aggregate of 387,546 shares of Common Stock were vested as
of March 27, 1999 and the shares issuable upon exercise of any such option will
be freely tradable or eligible for sale in the public market. Additional shares
will become eligible for resale in the public market at subsequent dates. Sales
of substantial numbers of such shares in the public market could adversely
affect the market price of the Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
The Company believes factors such as announcements of new products by the
Company or its competitors and quarterly variations in financial results could
cause the market price of the Company's 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 could discourage 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.
YEAR 2000
The "Year 2000 Issue" is the result of computer programs that were written using
two digits rather than four to define the applicable year. If computer programs
with date sensitive functions are not Year 2000 compliant, they may recognize a
date using "00" as the Year 1900 rather than the Year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in similar normal business activities.
The Company has initiated a program to review the Year 2000 readiness of its
internal systems, product line and third party suppliers and vendors. The
program consists of: (i) preparing an inventory of the Company's products and
suppliers to determine which systems, if any, may encounter date processing
problems; (ii) assessing the Year 2000 issues presented; (iii) remediation, if
necessary, of products owned or manufactured by the Company; (iv) testing of
systems; and (v) contingency plans. The program's implementation varies
depending upon the problems or issues encountered, and their resolution.
PRODUCTS MANUFACTURED BY THE COMPANY. The Company's main business since its
formation has consisted primarily of the manufacture and sale of: (i) Remote
Access Routers used to access the Internet; (ii) LAN equipment used to link
together computers and peripheral devices; and (iii) Network Interface Cards
(NIC), which connect computer workstations to a network. The Company has
installed its own proprietary software in all of its manufactured Remote Access
Routers and LANs, and at times has licensed this software to third parties. The
Company's installed proprietary software and the products manufactured and sold
by the Company, do not track or report dates, are not date dependent and are
Year 2000 compliant. The Company's manufactured NIC cards do not contain any
date-dependent functions, and thus also are Year 2000 compliant. Therefore, the
Company does not expect that Year 2000 processing problems will occur in
products sold by the Company, or that Year 2000 product problems would have a
material effect on the Company's business, financial condition or the results of
operations.
INTERNAL BUSINESS SOFTWARE AND SYSTEMS. The Company in 1998 conducted an
inventory of its internal business systems to determine whether any Year 2000
processing problems existed in critical equipment or systems. As a result, and
as part of a corporate program intended to reduce cycle time and improve
efficiency, the Company purchased new business operations systems which operate
the Company's financial, administrative, business, manufacturing and customer
service functions. The software vendor has indicated these systems are Year 2000
compliant. The Company successfully completed the installation of this system in
January 1999. The Company has a one year limited warranty on these systems
commencing from the date of delivery, which warranty would expire before January
1, 2000.
<PAGE> 16
The Company also has installed a new telephone system under a long-term lease
which the Company believes to be Year 2000 compliant. However, if testing
demonstrates unexpected Year 2000 problems in these new systems, there would be
no assurance that the Year 2000 problems would not have a material impact on the
Company's internal operations and would not materially impact the Company's
business, financial condition or results of operations.
The Company expended $340,000 in Year 2000 system costs in 1998. Some of these
costs have been capitalized under generally accepted accounting practices. The
Company expects to incur additional expenditures of approximately $175,000 in
1999 related to Year 2000 equipment purchases and leases, including consulting
fees, license agreements and lease payments. The Company expended $51,034 in
Year 2000 system costs in the first three months of 1999.
READINESS OF THIRD PARTY SUPPLIERS AND VENDORS. The Company relies on third
party suppliers, service providers and contractors for critical services,
including utility power and telephone, parts and supplies. In addition, the
Company sells its products to customers, including ISPs and others, which are
highly dependent on computers, and which could be adversely affected by their
own or their suppliers' lack of Year 2000 readiness. The Company has conducted
an inventory of its critical suppliers, service providers and contractors to
determine the extent to which the Company's operations could be affected by
those third parties' failure to remedy their own Year 2000 issues. This exercise
was substantially completed in March 1999. Most of the Company's critical
suppliers, service providers and contractors are also in the high technology
field, thus year 2000 compliance has received intense attention throughout the
vendors' base. OpenROUTE's major contract manufacturer, U.S. Assemblies, has
recently completed implementation of the Year 2000 compliant version of MAPICS
for their material resource planning (MRP) efforts..
Following completion of its inventory and assessment of third party readiness,
the Company will determine whether testing, verification or contingency plan
procedures are necessary. The most reasonably likely worst case scenario if
suppliers or customers were not Year 2000 compliant would be interruption in the
Company's ability to manufacture or deliver its products through loss of power,
supply shortages or disruption of delivery systems, or a material decrease in
the sale of products if customers lose substantial business or divert
substantial resources to uncorrected Internet Year 2000 problems. The Year 2000
readiness of outside suppliers or customers is outside the Company's control.
There can be no assurance that the failure of third party suppliers or the
Company's customers to effectively remedy Year 2000 defects would not have a
material adverse impact on the Company's business, results of operations or
financial condition.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Currently, the Company is not exposed to any market risks arising from changes
in interest rates, foreign currency rates or other market risk sensitive
instruments. Under its current policy, the Company places its investments in
highly rated financial institutions and, by policy, limits the amount of credit
exposure to any one financial institution. Financial instruments, which
potentially subject the Company to concentration of credit risk, are principally
cash and cash equivalents, marketable securities and accounts receivable.
<PAGE> 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
Not applicable.
Item 2. Changes in Securities:
Not applicable.
Item 3. Defaults Upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
Not applicable.
Item 5. Other Information:
Not applicable.
Item 6. Exhibits and Reports on Form 8 - K:
(a) Exhibits: See Exhibits Index (b) Reports on Form 8 - K:
The Company did not file any report on Form 8-K with the SEC
during the quarter ended March 27, 1999.
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OpenROUTE Networks, Inc.
May 4, 1999 By: /s/ Bryan R. Holley
-------------------------------------
Bryan R. Holley
President & Chief Executive Officer
(principal executive officer)
By: /s/ Steven T. Shedd
-------------------------------------
Steven T. Shedd
Chief Financial Officer, Vice President
Treasurer and Clerk
(principal financial officer)
By: /s/ Sally Teo
-------------------------------------
Sally Teo
Corporate Controller
(principal accounting officer)
<PAGE> 19
Item 6 Exhibits and Reports on Form 8-K
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
(3.1) Restated Articles of Organization as Amended * ( a )(filed as Exhibit 3.1)
(3.3) By-Laws, as amended and restated, of the Registrant * ( b ) (filed as Exhibit 3.3)
(4.1) Article 4 of the Restated Article of Organization, (See 3.1 above)
(4.2) Form of Common Stock Certificate * ( c ) (filed as Exhibit 4.2)
(27) Financial Data Schedule
</TABLE>
All exhibit descriptions followed by an asterisk and a letter in parentheses
were previously filed with the SEC as Exhibits to, and are hereby incorporated
by reference from, the document to which the letter in parentheses corresponds,
as set forth below:
( a ) Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
( b ) Registrant's Registration Statement on Form S-1 Registration No. 33-40073.
( c ) Amendment No. 1 on Form 8 to the Registrant's Registration Statement on
Form 8-A, File No. 0-19175.
Where documents are incorporated by reference from previous filings, the Exhibit
number of the document in that previous filing is indicated in parentheses after
the incorporation by reference code.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF OPENROUTE NETWORKS, INC. AS OF MARCH 27, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-27-1999
<EXCHANGE-RATE> 1
<CASH> 1,810
<SECURITIES> 2,260
<RECEIVABLES> 3,394
<ALLOWANCES> 0
<INVENTORY> 7,422
<CURRENT-ASSETS> 15,231
<PP&E> 13,286
<DEPRECIATION> 10,712
<TOTAL-ASSETS> 17,805
<CURRENT-LIABILITIES> 3,788
<BONDS> 0
0
0
<COMMON> 49,719
<OTHER-SE> (1,010)
<TOTAL-LIABILITY-AND-EQUITY> 14,017
<SALES> 3,073
<TOTAL-REVENUES> 3,561
<CGS> 1,543
<TOTAL-COSTS> 1,989
<OTHER-EXPENSES> 2,890
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,268)
<INCOME-TAX> 6
<INCOME-CONTINUING> (1,274)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,274)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
