1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ___________ to ____________.
Commission File Number 0-19175
PROTEON, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2531856
(State or other jurisdiction of incorporation (IRS Employer Identification Number)
or organization)
Nine Technology Drive, Westborough, MA 01581
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 898-2800
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
- -------------------------------- -----------------------------------
YES X NO
- -------------------------------- -----------------------------------
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock as of August 1, 1997
Common Stock, $0.01 par value 15,307,089
(Title of each class) (Number of shares)
2
PROTEON, INC.
Form 10-Q
QUARTERLY REPORT
June 28, 1997
Table of Contents
Part I Financial Information
Item 1. Consolidated Balance Sheets
as of June 28, 1997 and December 31, 1996
Consolidated Statements of Operations for the
three and six months ended June 28, 1997 and June 29, 1996
Consolidated Statements of Cash Flows for the
six months ended June 28, 1997 and June 29, 1996
Notes to the Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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
3
Proteon, Inc.
Consolidated Balance Sheets
(in thousands)
ASSETS
June 28, December 31,
1997 1996
(unaudited)
----------- ------------
Current assets:
Cash and cash equivalents $ 10,546 $ 16,612
Marketable securities 8,189 6,918
Accounts receivable, net 10,521 7,625
Inventories 6,014 8,737
Deposits and other assets 1,113 1,085
-------- --------
Total current assets 36,383 40,977
Property and equipment, net 3,987 4,594
-------- --------
Total assets $ 40,370 $ 45,571
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,465 $ 3,010
Accrued compensation 593 1,075
Accrued expenses 2,487 3,560
Accrued restructuring cost 552 1,661
Accrued warranty 957 1,074
-------- --------
Total current liabilities 7,054 10,380
Stockholders' equity:
Preferred stock - -
Common stock 156 156
Capital in excess of par value 49,295 49,292
Accumulated deficit (15,265) (13,819)
Accumulated translation adjustments 129 177
Less treasury stock, at cost (999) (615)
-------- --------
Total stockholders' equity 33,316 35,191
-------- --------
Total liabilities and stockholders' equity $ 40,370 $ 45,571
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
Proteon, Inc.
Consolidated Statements of Operations
for the three and six months ended
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
-------- -------- -------- --------
Sales:
Product $ 6,442 $ 7,759 $14,034 $18,056
Software licensing 248 1,499 756 3,682
Service and other 1,058 1,388 2,083 2,926
------- ------- ------- -------
Net sales 7,748 10,646 16,873 24,664
Cost of sales:
Product 3,414 4,599 7,696 10,284
Software licensing - 14 - 94
Service and other 586 1,101 1,173 2,123
------- ------- ------- -------
Cost of sales 4,000 5,714 8,869 12,501
Gross profit 3,748 4,932 8,004 12,163
Operating expenses:
Research and development 1,469 2,361 3,046 5,030
Selling and marketing 2,881 4,093 5,468 7,857
General and administrative 794 1,102 1,378 2,218
------- ------- ------- -------
Total operating expenses 5,144 7,556 9,892 15,105
------- ------- ------- -------
(Loss) from operations (1,396) (2,624) (1,888) (2,942)
Interest income, net 268 279 519 738
------- ------- ------- -------
(Loss) before income taxes (1,128) (2,345) (1,369) (2,204)
Provision for income taxes 5 - 77 -
------- ------- ------- -------
Net loss $(1,133) $(2,345) $(1,446) $(2,204)
======= ======= ======= =======
Net loss per common
and common equivalent share $ (0.07) $ (0.15) $ (0.09) $ (0.14)
======= ======= ======= =======
Weighted average number of
common and common equivalent
shares outstanding 15,267 15,515 15,355 15,514
======= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
5
Proteon, Inc.
Consolidated Statements of Cash Flows
for the six months ended
(in thousands, unaudited)
June 28, June 29,
1997 1996
-------- --------
Cash flows from operating activities:
Cash received from customers $ 13,977 $ 30,185
Cash paid to suppliers and employees (18,564) (35,483)
Interest received 486 745
Interest paid - (7)
Income taxes paid (21) (317)
-------- --------
Net cash (consumed) by operating activities (4,122) (4,877)
Cash flows from investing activities:
Proceeds from the sale of fixed assets 48 114
Capital expenditures (291) (1,127)
Marketable security sales 5,411 7,863
Marketable security purchases (6,683) (8,621)
-------- --------
Net cash (used in) provided by investing activities (1,515) (1,771)
Cash flows from financing activities:
Proceeds from the issuance of common stock 3 79
Purchase of treasury stock (385) -
-------- --------
Net cash (used in) financing activities (382) 79
Effects of exchange rate changes on cash (47) 23
-------- --------
Net decrease in cash and cash equivalents (6,066) (6,546)
Cash and cash equivalents at the beginning of year 16,612 25,829
-------- --------
Cash and cash equivalents at the end of the period $ 10,546 $ 19,283
======== ========
Reconciliation of net income to net cash (consumed)
by operating activities:
Net (loss) income $ (1,446) $ (2,204)
-------- --------
Adjustments to reconcile net loss to net cash
(consumed) by operating activities:
Depreciation and amortization 878 1,680
gain on disposition of assets (27) (105)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (2,896) 5,522
Decrease (increase) in inventories 2,723 (7,166)
(Increase) in deposits and other assets (28) (480)
(Decrease) increase in payables and accrued expenses (3,326) (2,124)
-------- --------
Total adjustments (2,676) (2,673)
-------- --------
Net cash (consumed) generated by operating activities $ (4,122) $ (4,877)
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
PROTEON, INC.
Notes to Consolidated Financial Statements, unaudited
Management's Opinion:
In the opinion of the management of Proteon, Inc. (the "Company"), the Company's
consolidated financial position as of June 28, 1997 and the results of its
consolidated operations and consolidated cash flows for the interim periods
ended June 28, 1997 and June 29, 1996, reflect all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the results for
the interim periods presented. It is suggested that these statements be read in
conjunction with the Company's consolidated financial statements and notes
thereto for the year ended December 31, 1996, included in the Company's 1996
Annual Report to Shareholders.
Inventories:
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method.
- ---------------------------------------------------------------------------
(in thousands) June 28, 1997 December 31, 1996
- ---------------------------------------------------------------------------
Raw materials $ 983 $1,373
Work in progress 546 718
Finished goods 4,485 6,646
- ---------------------------------------------------------------------------
Total Inventories $6,014 $8,737
- ---------------------------------------------------------------------------
Net Income (Loss) Per Common and Common Equivalent Share:
Net income (loss) per share is computed based on the weighted average number of
common share and common share equivalents outstanding during the period. Common
share equivalents are determined under the assumption that outstanding stock
options are exercised and the proceeds are used to purchase treasury stock.
No common share equivalents are included in the 1997 and 1996 calculations as
their effect would be antidilutive.
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 modifies the way
in which earnings per share is calculated and disclosed. FAS 128 requires a
presentation of basic and diluted earnings per share for all years presented in
the Income Statement.
The FASB recently issued Statement No. 130 ("SFAS 130") "Reporting
Comprehensive Income." This Statement requires changes in comprehensive income
to be shown in a financial statement that is displayed with the same prominence
as other financial statements. While not mandating a specific financial
statement format, the Statement requires that an amount representing total
comprehensive income be reported. The Statement will become effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods is required for comparative purposes. The
Company does not believe that the adoption of SFAS 130 will have a material
impact on result of operations.
The FASB also issued Statement No. 131 ("SFAS 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," changes 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
Statement is effective for periods beginning after December 15, 1997.
Restatement for earlier years is required for comparative purposes unless
impracticable. In addition, SFAS 131 need not be applied to interim periods in
the initial year; however, in subsequent years, interim period information
must be presented on a comparative basis. The Company is currently evaluating
this Statement and its effect on financial statement disclosures.
7
PROTEON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net Sales
Net sales for the quarter ended June 28, 1997, were $7,748,000 as compared with
$10,646,000 for the quarter ended June 29, 1996, a decrease of $2,898,000, or
27.2%. For the first six months of 1997, net sales were $16,873,000 as compared
with $24,664,000 for the same period in 1996, a decrease of $7,791,000, or
31.6%.
Product sales for the quarter ended June 28, 1997, were $6,442,000 as compared
with $7,759,000 for the quarter ended June 29, 1996, a decrease of $1,317,000,
or 17.0%. For the first six months of 1997 product sales were $14,034,000 as
compared with $18,056,000 for the same period in 1996, a decrease of $4,022,000
or 22.3%. The Company's product sales are categorized as either Remote Access
or Local Area Network (LAN).
Overall product sales results reflect Proteon's ongoing product transition from
LAN products to Remote Access products. Overall product revenue was down from a
year ago for the quarter and for the six months ended June 28, 1997, due to
anticipated decreases in both the LAN products and CNX Router categories. For
the quarter and for the six months ended June 28, 1997, the decreases in LAN
products net sales were due primarily to lower average selling prices and
declining unit volumes of Adapter Cards, Switches and Hubs. The reductions in
sales of CNX products were due to planned reductions in CNX backbone Router
units as the company shifts to remote access Routers. Although sales of units
in the Remote Access Product category increased 89.0% for the second quarter of
1997 as compared to the second quarter of 1996, and 94.3% for the first six
months of 1997 as compared to the first six months of 1996, primarily due to
increases in GlobeTrotter sales, these increased volumes were not enough to
offset the anticipated product revenue declines in the LAN products and
Corporate Enterprise categories.
Software licensing revenue for the quarter ended June 28, 1997, was $248,000
compared to $1,499,000 for the quarter ended June 29, 1996, a decrease of
$1,251,000, or 83.5%. For the first six months of 1997, software licensing
revenues were $756,000 as compared with $3,682,000 for the same period in 1996,
a decrease of $2,926,000 or 79.5%. This anticipated reduction in software
licensing revenue is a result of the completion of two major, multi-year
agreements
8
with IBM and Digital Equipment Corporation during 1996. The Company expects that
in future quarters software licensing revenue will continue to decrease in
total.
For the quarter ended June 28, 1997, service and other revenues decreased by
$330,000 or 23.8%, to $1,058,000, as compared to $1,388,000 for the quarter
ended June 29, 1996. For the first six months of 1997, service and other
revenues were $2,083,000 as compared with $2,926,000 for the same period in
1996, a decrease of $843,000 or 28.8%. These decreases were primarily due to the
reduction in upgrades revenue worldwide, which are included in CNX Router
revenues.
Gross Profit
Total gross profit increased as a percentage of net sales to 48.4% for the
quarter ended June 28, 1997, from 46.3% for the quarter ended June 29, 1996.
This change was the result of increased unit sales and gross margin in the
GlobeTrotter product line partially offset by the overall decline in software
licensing revenues. For the first six months of 1997, total gross profit
decreased as a percentage of net sales to 47.4% from 49.3% for the same period
in 1996. This decrease was the result of the overall decline in highly
profitable software licensing revenues partially offset by increased unit sales
and gross margin in the GlobeTrotter product line. The Company's product gross
profit for the quarter ended June 28, 1997 increased to 47.0% from 40.7% when
compared to the same period in the prior year, and for the six month period
ended June 28, 1997, product gross profit was 45.2%, an increase from 43.0% for
the same period in 1996. These increases were due primarily to increased unit
sales and gross margin in the GlobeTrotter product line as stated above. For the
quarter ended June 28, 1997, gross profit from service and other sales increased
to 44.6% from 20.7% a year ago and for the six months ended June 28, 1997, gross
profit from service and other sales increased to 43.7% from 27.4%. These
increases were mainly due to reduced fixed costs associated with these software
licensing revenues.
Research and Development
Research and development expenses were $1,469,000 or 19.0% of net sales for the
quarter ended June 28, 1997, compared to $2,361,000 or 22.2% of net sales for
the same period in the prior year. The decrease in expenses of $892,000 or 37.8%
was primarily due to lower personnel and personnel related costs. For the first
six months of 1997, research and development expenses were $3,046,000 or 18.1%
of net sales compared to $5,030,000 or 20.4% of net sales for the first half of
1996. The decrease of $1,984,000 or 39.4% was due primarily to the same factors
stated above. The Company considers investments in research and development to
be critical to future revenues and intends to focus these expenditures on Remote
Access products.
Selling and Marketing
Selling and marketing expenses were $2,881,000 or 37.2% of net sales for the
quarter ended June 28, 1997, compared to $4,093,000 or 38.4% of net sales for
the quarter ended June 29, 1996, a
9
decrease of $1,212,000, or 29.6%. This decrease was primarily the result of
lower personnel and personnel related costs partially offset by an increase in
marketing and promotional spending. For the first six months of 1997, selling
and marketing expenses were $5,468,000 or 32.4% of net sales, as compared to
$7,857,000 or 31.9% of net sales for the same period in the prior year. This
decrease in expenses of $2,389,000 or 30.4% also reflects the reduction in
personnel and personnel related costs partially offset by the increase in
marketing spending.
General and Administrative
General and administrative expenses were $794,000, or 10.2% of net sales for the
quarter ended June 28, 1997, compared to $1,102,000 or 10.4% of net sales for
the quarter ended June 29, 1996, a decrease of $308,000, or 28.0%. This decrease
was due primarily to lower personnel and personnel related costs. For the six
months ended June 28, 1997, general and administrative expenses were $1,378,000
or 8.2% of net sales, compared to $2,218,000 or 9.0% of sales for the same
period in 1996. The decrease of $840,000 or 37.9% was due to the same factors
stated above.
Provision for Income Taxes
For the quarter ended June 28, 1997, the Company increased its income tax
provision by $5,000, bringing the 1997 year to date provision to $77,000. This
is a result of anticipated state income taxes and tax liabilities in its foreign
subsidiaries.
Liquidity and Capital Resources
During the first six months of 1997, the Company consumed $4,122,000 of cash
from operating activities. This cash consumption was due to a decrease in
accounts payable and accrued expenses totaling $3,326,000, plus an increase in
accounts receivable of $2,896,000. These were partially offset by a reduction in
inventory of $2,723,000. During the quarter ended June 28, 1997, the cash impact
from the Company's 1996 restructuring was $320,000. For the six months ended
June 28, 1997, the cash impact from this restructuring has been $1,109,000. The
Company anticipates that the remaining accrual of $552,000 as of June 28, 1997,
will be paid during 1997.
Investing activities for the six months ended June 28, 1997, consumed $1,515,000
due principally to the net purchase of marketable securities. Financing
activities consumed $382,000 due principally to the repurchase of treasury
common stock.
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.
10
Safe Harbor for Forward-Looking Statements
This Form 10-Q filing contains forward-looking statements within the meaning
of the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995. These forward looking statements are based on management's current
expectations and involve a number of risks and uncertainties. The Company's
future results remain difficult to predict and may be affected by the factors
described below.
RISK FACTORS
Technological Change, New Products and Industry Standards
The data communications industry continues to undergo a fundamental shift away
from hierarchical single-vendor systems to open, peer-to-peer communications
networks and information management tools that provide users with greater
computing power and access to information. This evolution has fostered the
growth of two dynamic markets: workstations and networking. Workstations deliver
increasingly powerful, personal productivity tools, and data communications
networks provide the "highways" that distribute and share this processing power
throughout an organization, enabling users to more fully leverage and manage
information resources.
11
As the deployment of networks matures, four recent trends continue to develop:
networking of remote sites to the headquarters office via remote access routers;
reduction of network congestion with the implementation of local area networks
(LAN's); segmentation using various switching technologies; and the push by
businesses of all sizes and individuals to connect their systems and networks to
the Internet.
Proteon is positioning itself as a company focused on the network access market.
Proteon views the network access market as having two segments -- remote access
and local access. Its current strategy is based upon concentration on the remote
access market segment.
The market for the Company's products is characterized by rapidly changing
technology, new product introductions and a multiplicity of current and evolving
industry standards. Accordingly, the Company believes that its future success
will depend on its continuing ability to enhance and expand its existing
products and to develop or private label other manufacturer's technology and
introduce in a timely fashion new products which incorporate new technologies,
conform to standards and achieve market acceptance.
There can be no assurance that the Company's strategy is the correct one under
the circumstances; that the Company has correctly assessed trends in the
marketplace; that the Company will be able to develop, market or support, or
secure external supplies of, such products successfully; or that the Company
will be able to respond effectively to technological changes, new product
announcements by others or new industry standards.
Manufacturing and Supply; Dependence on Suppliers
The Company's manufacturing operations primarily consist of assembly, testing
and quality control of materials, components, subassemblies, and systems. SCI
Systems, a major subcontract manufacturer with access to cost-effective,
high volume manufacturing, distribution, and repair capability worldwide, and
others manufacture the majority of Proteon's board assemblies for its router,
hub, and adapter card product lines.
The Token Ring chipsets used in the Company's 4/16 Mbps and 4 Mbps adapters are
currently manufactured for external sale solely by Texas Instruments. The
Company has an agreement with Texas Instruments under which it believes it will
be able to obtain adequate supplies of these chipsets in a timely manner to meet
customer demand.
Certain logic semiconductors, signal processors, and subassembly components used
in the Company's products are also available only from limited sources. The
Company has not experienced any significant problems in obtaining required
supplies of such limited source components and believes that alternative sources
could be developed quickly, if necessary.
Proteon continues to have OEM arrangements with manufacturers for some of its
Ethernet product offerings. In most cases, if supplies from one vendor were
interrupted or reduced, the
12
Company could find a comparable source for the affected product with limited
delays in shipment.
The inability to obtain sufficient sole or limited source components as
required, or to develop alternative sources if and as required in the future,
could result in delays or reductions in product shipments which would adversely
affect the Company's operating results. There can be no assurance that, in the
event of interruptions in contract manufacturing, supplies of components from
sole or limited sources or supplies of units from OEM vendors or similar
occurrences, the Company could find and engage suitable alternatives in a timely
manner. Such interruptions or the inability of Proteon to counteract them
successfully could have an adverse effect on the Company's business, operations
and finances.
Intellectual Property
Currently, Proteon relies principally upon a combination of contractual rights,
trade secrets, and copyright laws to establish and protect proprietary aspects
of its products. The Company believes that, because of the rapid pace of
technological change in the data communications and computer industries, legal
protection for its products is a less significant factor in the Company's
success than the knowledge, ability, and experience of the Company's employees,
the frequency of product enhancements and the timeliness and quality of support
services provided by the Company. However, should a successful challenge be
mounted against the rights of Proteon in and to its intellectual property, by
allegations of infringement on the rights of others or for any other reason, the
Company's business, operations and finances could be adversely affected. Certain
technology used in the Company's products is licensed by the Company from third
parties. The termination of certain of these licenses would have a material
adverse effect on the Company's operations.
Product Compatibility and Competition
Network Interface Card Products
The market for Token Ring network interface card products is dominated by IBM.
While Token Ring networking is an industry standard, Proteon believes that its
ability to address successfully the market for Token Ring network products is
dependent upon the compatibility and interoperability of the Company's products
with products offered by IBM and upon maintaining compatibility with the Token
Ring standard as it continues to evolve.
Remote Access (Routers)
Proteon expects to participate significantly in the market segment of remote
access routing specifically addressing the needs of users to connect to the
Internet or build corporate intranets. The Company has enhanced its remote
access capabilities with the introduction of new products and expanded its
presence in the Integrated Services Digital Networks (ISDN) marketplace.
13
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
multiport Token Ring PCI network adapter card; and a line of Ethernet network
adapter cards intended to provide a full range of solutions for the
client/server marketplace. The Company also seeks opportunities to leverage
technology through licensing arrangements.
Internetworking Software
OpenROUTE(TM), Proteon's internetworking software suite, is the foundation of
the Company's high performance remote access internetworking products. All of
Proteon's internetworking products ship with this software technology installed.
Also, Proteon licenses this software to other providers of internetworking
products.
As routing technology progresses, the Company may be required to modify its
routing and bridging software to maintain compatibility of its products with
various standards and interoperability with other manufacturers router products.
Failure by the Company to maintain such compatibility, interoperability, and
technical competencies could adversely affect the Company's business, operations
and finances.
Competition
The data communications, networking and computer industries are highly
competitive and characterized by rapidly changing technology and evolving
industry standards. These advances result in frequent new product introductions,
increased capabilities and improvements in the relative price/performance of
networking products. As a competitor in the networking industry, Proteon
believes one of the keys to success will be making networks more accessible to a
broader base of customers. Proteon is committed to open, standards-based
products, innovative solutions to customer requirements for reliable and high
performance networks, a favorable price/performance redo, ease of installation
and ease of use.
The Company competes with several companies having greater research and
development, marketing and financial resources, manufacturing capability,
customer support organizations, and name recognition than those of the Company.
There can be no assurance that the Company will be able to compete successfully
in the future or that competitive pressures will not adversely affect the
Company's business.
Research and Product Development
Management believes the Company's future success depends in large part upon
timely enhancement of existing products and the development of new products that
not only maintain
14
technological excellence, but also improve the capabilities, efficiency, and
cost-effectiveness of the end users' data communications networks. The Company
is developing new products to improve price/performance ratios, enhance its
network management capabilities, simplify ease of use, and ensure
interoperability with other vendors' standards based products.
Variability of Quarterly Operating Results
The Company's quarterly operating results may vary significantly depending upon
factors such as the timing of new product announcements and releases by the
Company and its competitors, the timing of significant orders, the mix of
products sold and the mix of distribution channels through which the products
are sold. In addition, substantially all of the Company's sales in each quarter
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 Internet Service Providers ("ISPs"),
Original Equipment Manufacturers ("OEMs"), Value Added Resellers ("VARs") and
distributors. These resellers also represent other lines of products which are,
in some cases, identical or complementary to, or which compete with, those of
the Company. While the Company attempts to encourage these resellers to focus on
its products through marketing and support programs, there is a risk that these
resellers may give higher priority to products of other suppliers, thereby
reducing their efforts devoted to selling the Company's products. One reseller
accounted for approximately 14%, 12% and 11%, of the Company's sales in 1994,
1995 and 1996, respectively, and a second reseller 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 Proteon's products have typically been organizations with critical
applications requiring connectivity integrating their headquarters and wide area
computing environments. Proteon's marketing and distribution strategy is to
reach these end users primarily through an indirect sales channel comprised of
ISPs, OEMs, VARs, and distributors with experience in
15
network integration and reputation for excellent service. In addition, the
Company's strategy includes increased presence of Proteon's sales force in end
user sites.
Proteon's markets encompass the fast growing local access switching and remote
access internetworking segments of the network access market. Proteon's
customers include both the Global 1000 multinationals, as well as those small to
medium-sized enterprises requiring connection to the Internet and to suppliers,
customers, and business products.
There can be no assurance that the Company has correctly formulated its
end-user profile or selected appropriate methods of marketing and selling its
products. Failure to do so could result in an adverse impact on the Company's
business, operations and finances.
Liquidity
Failure of the Company to create and maintain adequate working capital and
liquidity, by sales of equity, obtaining lines of credit or otherwise, could
adversely impact the Company's business, operations and finances.
International Sales, Regulatory Standards and Currency Exchange
International sales accounted for 38.3%, 35.7% and 35.1% in 1994, 1995 and 1996,
respectively, of the Company's net sales and the Company expects that
international sales will continue to be a significant portion of the Company's
business. Foreign regulatory bodies continue to establish standards different
from those in the United States, and the Company's products are designed
generally to meet those standards. The inability of the Company to design
products in compliance with such foreign standards could have an adverse effect
on the Company's operating results. The Company's international business may be
affected by changes in demand resulting from fluctuation in currency exchange
rates and tariffs and difficulties in obtaining export licenses.
Shares Eligible for Future Sale
Approximately 15,307,089 outstanding shares of Common Stock as of August 1,
1997 are freely tradable or eligible for sale on the open market. In addition,
options to acquire an aggregate of 522,604 shares of Common Stock were vested
as of December 31, 1996, 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 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
16
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.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
Not applicable.
Item 2. Changes in Securities:
Not applicable.
Item 3. Defaults upon senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
At the Company's Annual Meeting of Shareholders held on May 21, 1997,
the following matter was voted upon:
The following persons were elected as Directors: Daniel J. Capone,
Jr. with 14,240,426 shares voting for election and votes of 477,185
shares withheld; Howard C. Salwen with 14,309,888 shares voting for
election and votes of 407,723 shares withheld; Dr. David Clark with
14,304,088 shares voting for election and votes of 413,523 shares
withheld; Robert M. Glorioso with 14,292,438 shares voting for
election and votes of 425,173 shares withheld; and William R. Johnson
with 14,292,338 shares voting for election and votes of 425,273
shares withheld.
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 filed no reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended June 28, 1997.
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROTEON, INC.
August 12, 1997 By: /s/ Daniel J. Capone, Jr.
----------------------------------------
Daniel J. Capone, Jr.
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/ James M. Roller
----------------------------------------
James M. Roller
Corporate Controller
(principal accounting officer)
19
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
(3.1) Restated Articles of Organization as Amended *(a)
(filed as Exhibit 3.1 to registration statement)
(3.3) By-Laws, as amended and restated, of the Registrant *(b)
(filed as Exhibit 3.3 to 1991 Form-K)
(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 to Form 10-Q)
(11) Computation of Primary and Fully Diluted (Loss) per Share
(27) Financial Data Schedule
All exhibit descriptions followed by an asterisk and a letter in parentheses
were previously filed with the Securities and Exchange Commission as Exhibits
to, and are hereby incorporated by reference from, the document to which the
letter in parentheses corresponds, as set forth below:
(a) Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
(b) Registrant's Registration Statement on Form S-1 Registration No. 33-40073.
(c) Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 29, 1996.
Where documents are incorporated by reference from previous filings, the Exhibit
number of the document in that previous filing is indicated in parentheses after
the incorporation by reference code.