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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, 1998
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 ____________.
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, 1998
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
OPENROUTE NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2531856
(State or other jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or organization)
Nine Technology Drive, Westborough, MA 01581
(Address of principal executive offices) (Zip Code)
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
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
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such filing requirements for the past 90 days. Yes [X] No [ ].
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 10-K. [X]
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant as of March 16, 1999: $36,726,027 (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
common stock as of the latest practicable date. Shares of Common Stock
outstanding as of March 16, 1999: 15,421,906.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the Company's
fiscal year ended December 31, 1998 (the "1998 Annual Report") are incorporated
by reference into Parts II and IV of this Report and portions of the
Registrant's Proxy Statement for its 1999 Annual Meeting of Shareholders to be
held on May 26, 1999 (the "1999 Proxy Statement") are incorporated by reference
into Part III of this Report. With the exception of those portions of the 1998
Annual Report and 1999 Proxy Statement expressly incorporated in this Report by
reference, such documents shall not be deemed filed as part of this Report.
The Registrant's Report on Form 8-K filed January 20, 1999 and the Registrant's
Report on Form 8-K/A filed February 24, 1999 are incorporated by reference into
Part II, Item 9 of this Report.
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PART I
ITEM 1. GENERAL BUSINESS
COMPANY OVERVIEW
OpenROUTE Networks, Inc. ("OpenROUTE" or "the Company") is a pioneer in the data
communications 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 the
Company 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. The Company
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.
The Company was incorporated in Massachusetts in January 1974 as Proteon
Associates, Inc. The Company changed its name to Proteon, Inc. in July 1983. In
January 1997, the Company announced the formation of a new wholly owned
subsidiary named OpenROUTE Networks, Inc. (OpenROUTE Networks). This new
subsidiary was incorporated in the state of Delaware. In June of 1998, the
Company known as Proteon, Inc. formally recognized its Internet focus by
changing the Company's name from Proteon, Inc. to OpenROUTE Networks, Inc. In
conjunction with this change, OpenROUTE Networks changed its name to Proteon,
Inc. OpenROUTE continues the tradition of innovation and engineering in an
effort to open new opportunities for business on the Internet. OpenROUTE's
executive offices are located at Nine Technology Drive, Westborough,
Massachusetts, 01581, and the Company's telephone number at that location is
(508) 898-2800. The Company's testing and final-assembly facilities are located
at the same address.
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.
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SIGNIFICANT EXECUTIVE APPOINTMENTS AND CHANGES
During the second half of 1998, the Company initiated a program to significantly
strengthen its senior management staff. The Company believes this series of
appointments will enhance its position in the marketplace, allow for better
management of the Company's financial operations and further strengthen its
sales and marketing operations.
Mr. Bryan R. Holley was appointed President and Chief Executive Officer on July
7, 1998. Prior to joining the Company, Holley was President and Chief Executive
Officer of ITK Telecommunications Inc. from 1997 to 1998. He previously held
several key executive positions including President of Riverbend Press from 1995
to 1997 and Senior Vice President of Summagraphics Corporation from 1993 to
1995. Prior roles include executive roles at Telebit Corporation, Interlan Inc.
and Tandy Corporation.
Mr. Steven T. Shedd is Vice President, Finance, Chief Financial Officer,
Treasurer and Clerk, appointed in July 1997. Prior to joining OpenROUTE, Shedd
served as the Vice President and Chief Financial Officer of Zoom Telephonics
beginning in 1996. In 1995, Mr. Shedd was the Vice President and Chief Financial
Officer for Versyss, Inc. From 1992 to 1995 Shedd served as Vice President and
Chief Financial Officer of TSI Corporation.
Mr. Robert A. Koch is Vice President, Engineering, Product Planning and
Management for the Company, a position he has held since October 1997. Koch
joined the Company in August 1993 as Product Marketing Director and held that
position until April 1997. From April 1997 until October 1997, Koch served as
Vice President of Product Planning for the Company.
Mr. Thomas Aucella was appointed as Vice President of Sales, Asia/Pacific in
October of 1998, to direct and manage the Company's Asia Pacific Operations.
Prior to joining the Company, Aucella held the position of Vice President of
Asia/Pacific sales for Software.com from 1996 to 1998. From 1991 until 1996,
Aucella directed international business development for Bay Networks. Aucella
has established operations in Asia for a number of leading companies including
Microcom and Motorola.
Mr. Richard E. Sterry was appointed in September 1998 as Vice President,
Marketing. Prior to joining the Company, Sterry held executive marketing
positions with networking and communications companies including Netaccess from
1996 to 1998, Computervision Corporation in 1995 and Intelligence At Large in
1994. Sterry has also held executive positions at Extension Technology, Avatar,
Microcom and Prime Computer.
Mr. Bruce MacAloney was appointed in January 1998 as Vice President, Sales,
America's and Europe. Prior to joining the Company, MacAloney served as Vice
President, Sales for GigaNet, Inc. beginning in 1996. He held a senior executive
position with Racor from 1994 until 1996. MacAloney has also held executive
positions with a number of key companies in the industry including Standard
Microsystems, Artel Communications and Interlan.
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NETWORKING INDUSTRY & THE INTERNET
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. 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. In addition the Internet
Protocol (IP) and Web interface have been adopted by corporations and have
resulted in wide-scale deployment of intranets, Virtual Private Networks (VPNs)
and e-commerce solutions. This revolution has been the platform for wide-scale
capital investments across infrastructure, systems, applications and services
spectrum, and has increased data traffic by 300% annually. The Internet is not
new at OpenROUTE - it has long been the Company's focus. One of the Internet's
original architects currently serves on the Company's Board of Directors along
with other recognized networking pioneers. OpenROUTE's combination of proven
innovation, expertise and Internet focus works to position the Company as a
leader in providing Internet solutions.
1998 OPENING THE INTERNET FOR BUSINESS
During 1998, the Company continued to develop and market solutions designed to
open the Internet for business. Specifically, the Company has continued to be a
pioneer in the Internet Access arena. Focusing exclusively on the customer
premise equipment (CPE) "edge" of the Internet, OpenROUTE has continued to raise
the price/performance bar. The Company's flagship GTX1000 modular router
continues to hold a competitive edge in configuration flexibility, performance,
protocol support, ease of use and cost of ownership. In December 1998, the ISP
UUNET/Worldcom began utilizing the GTX1000 in its mission critical services. In
the critical area of networking security, business with OpenROUTE's partner
PSINet grew with its continued rollout of the Company's GT60 series Internet
routers using OpenROUTE's firewall support. In December 1998, PSINet selected
OpenROUTE to introduce a new high speed (HSSI) service for their clients. During
1998, the Company introduced the GT900 and GTX1500, a new class of router that
the Company believes is an industry stand out. The GTX1500 redefines
price/performance leadership in the secure networking area providing
hardware-based authentication, encryption and full data compression while
running at full wire speed with multiple T1/E1 links. This feature rich, high
performing router is competitively priced. The Company will continue its
innovative development in its next generation of hardware and software solutions
to address the evolving needs of business Internet users into the next
millennium.
OPEN STANDARDS
OpenROUTE has long been committed to open, standards-based, product offerings.
The Company believes that developing products that offer multi-vendor
interoperability achieved through leadership in, and adherence to, open
networking standards will continue to expand market opportunities in the future.
OpenROUTE believes that the Company contributes significant technical expertise
to the development, promulgation and adoption of key industry standards.
From a historical perspective, the Company co-authored both the Simple Network
Management Protocol (SNMP) network management standard and the Open Shortest
Path First (OSPF) internetwork routing standard. The Company has also developed
and shipped an extension to OSPF known as Multicast. OpenROUTE continues to be
an active member of the OSPF Interoperability Group, an industry consortium
formed to ensure interoperability and further the acceptance of this
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important standard. The Company has also continued to execute another high-level
standards activity as it has aggressively marketed its Data Link Switching
(DLSw) technology. DLSw technology, an industry standard, allows the Company's
routers to encapsulate System Network Architecture (SNA) traffic in IP, thus
eliminating the need to have separate backbone networks for SNA and LAN traffic.
The implementation of DLSw technology in its routing products continues to give
the Company opportunities in larger, headquarters site operations.
INTERNETWORKING SOFTWARE LICENSING WITH OPENROUTE
OpenROUTE's world class internetworking software suite is the foundation of the
Company's high performance internetworking solutions. All of OpenROUTE's
internetworking products ship with this software technology. The Company has
been developing this software suite for approximately 13 years. In the later
half of 1994, OpenROUTE began licensing this software. At that time, the Company
completed two major internetworking software-licensing agreements. These
agreements were reached with IBM and Digital Equipment Corporation, two of the
world's largest information technology providers. The Company has also licensed
its OpenROUTE software to Motorola's Information Systems Group (ISG) and TELDAT,
S.A., a leading European networking product vendor headquartered in Madrid,
Spain. In late 1997, the Company announced that it had licensed a subset of
OpenROUTE software to Ascend Communications.
OPENROUTE DEVELOPMENT
The Company continues to invest heavily in its research and development
operation. Over the past year, resources were used to enhance OpenROUTE's
products in four key areas: advanced security, wide area connectivity modules,
GTX modular router and next generation platforms. The Company's primary product
line, the GT and GTX series, was significantly enhanced in the following areas:
(1) extension of Virtual Private Networking (VPNs) and secure network services
to include encryption and authentication for RSA Rivert Control Four
(RC4), Data Encryption Standard (DES), Triple-DES, Message Digest Five
(MD5) and Secure Hash Algorithm-One (SHA-1), simplified address management
and translation with the delivery of Double Network Address Translation
(NAT) and Dynamic Host Configuration Protocol (DHCP) services;
(2) the industry's first in class, integrated high performance security
accelerator to offload computer intensive activity associated with data
encryption, data compression and session authentication - dramatically
improving performance and maximizing wide area circuit utilization;
(3) a line of low cost, high performance trusted premise routers engineered to
address the needs of cable, wireless and xDSL service providers;
(4) an array of popular wide area networking service interface cards;
Considered revolutionary, these cards integrate services that have been
previously available only as separate external devices. These popular
network termination and circuit management cards include Digital Data
Services 56/64kb CSU/DSU, T1/E1 CSU/DSU with Fractional services, 56kbps
modem and multiple 10BaseT Ethernet interfaces; and
(5) a high capacity 45mb High Speed Serial Interface (HSSI) router for high
demand applications used by ISPs and Network Service Providers.
OpenROUTE's software suite was dramatically enhanced with the release of
OpenROUTE 3.1 and OpenROUTE 3.2. These new software versions consisted of key
solutions including:
(1) An Hyper Text Transfer Protocol (HTTP) server and Browser-based
configuration system that allows users to easily configure OpenROUTE
routers with either Microsoft Explorer or Netscape Navigator;
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(2) Network optimization features such as "packet tagging" were added to
OpenROUTE's Traffic Control Services (TCS) to better manage costly WAN
connections and increase traffic priority associated with Internet and
Intranet-based networks; and
(3) The ability to service IBM SNA customers by updating the Company's award
winning DLSw solutions.
In addition, during 1998 the Company entered into an agreement with Merlot
Communications, Inc. ("Merlot") This technology transfer agreement allows for
incorporation of both hardware and software into Merlot's converged solutions
for small to medium size businesses. The goal is to combine OpenROUTE's
expertise in secure Internet access with Merlot's innovative LAN and voice
technology, to assist Competitive Local Exchange Carriers (CLECs) to provide
truly integrated voice, video and data services from the edge of the carrier's
network to the desktop.
Development also continued during 1998 on the OpenROUTE router used by the
United States Navy to outfit certain aspects of its fleet and battle groups. The
OpenROUTE router provides entrusted high speed data communication service
between various mobile locations and ships in the fleet.
BUSINESS PARTNERING
The Company continues to focus on business partnerships with ISPs. The Company
believes that ISPs offer a solid path of wide-scale distribution for GT and GTX
products. As ISPs have evolved around the world, their equipment needs have
paralleled this process. In many cases where ISPs are connecting businesses to
the Internet or Intranet, the installation of an Internet access router is a
necessity. By solidifying its presence with ISPs on a global basis, the Company
believes it can expand its distribution and increase the potential to grow its
business. During 1998, the Company established a relationship with
UUNET/Worldcom and continued its relationship with PSINet. The Company's
strategy is to increase the number of ISPs that carry OpenROUTE's products.
During 1998, the Company signed premier Value Added Reseller (VAR) agreements
with Atrion Communications Resources, Inc., Westron Communications and Synergy
Networks, each of whom actively market GT and GTX products in domestic markets.
OpenROUTE is targeting major sales in markets such as government, financial
services, health care, education, publishing, manufacturing, insurance,
professional services, libraries and entertainment through its VAR partners.
MARKETING
The Company's marketing and distribution strategy is to continue to cultivate
relationships with ISPs, VARs and Original Equipment Manufacturers (OEMs). The
Company believes that its high performance, scalable architecture, and the
ability to support emerging access technologies along with proven
interoperability will contribute to continued success in these arenas.
Specifically, the Company's products combine performance with the encryption,
authentication and tunneling capabilities needed to design a cost-effective VPN.
These VPNs represent a "virtually" untapped market. The Company believes that it
has the expertise, products and pricing strategy needed for growth in this new
arena.
The Company's marketing programs throughout the second half of 1998 and going
forward in 1999 focus on ISP and corporate awareness through public relations,
electronic advertising mediums such as the Internet, limited print advertising,
cooperative direct mail campaigns and national industry trade shows. These
activities are intended to enhance awareness of the Company and its products and
generate sales leads for the Company's field sales force and the resellers. The
Company plans
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to launch a new web-site along with a coordinated series of collateral material
designed to educate as well as support their marketing efforts.
FIELD SALES FORCE
The Company's field sales force is primarily responsible for providing sales
support and training to the Company's systems integrators, OEMs, ISPs, VARs and
telecommunications carriers. The field sales force has a number of offices in
the United States and international offices in Lockington Derby, England,
Singapore, Toronto, Paris and Hong Kong. The Company also has strong
sales associations in Tokyo and Beijing.
SYSTEMS INTEGRATORS AND OEMs
OpenROUTE sells a large number of units through 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. In 1998,
the Company increased its shipments through telecommunications providers who
install CPE.
VARs
The Company also sells its complete product line through VARs, which include
Premier Access Partners and smaller regional VARs in markets around the world.
Many of these VARs are selected for their capability to sell to and service
small to medium-sized organizations, as well as for their expertise in vertical
industries or technologies. The Company's VARs also include a number of large
national and regional resellers including Atrion Communications Resources Inc.,
Westron Communications and Synergy Networks.
INTERNATIONAL SALES
The Company's products are currently marketed, sold and serviced internationally
by over 30 distributors, VARs and OEMs. These resellers generally have
non-exclusive agreements applying to a countrywide territory. International
sales accounted for approximately 30.9% percent of net sales in 1998.
BACKLOG
Because of the generally short cycle between order and shipment (typically less
than 45 days) and occasional customer-initiated changes in delivery schedules,
the Company does not believe its backlog as of any particular date is
necessarily indicative of future sales levels.
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. Users can contract
directly with the Company for service. Additionally, OpenROUTE offers multiple
maintenance contract options designed to match the servicing capabilities and
needs of the customer. 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.
In February 1999, the Company signed a support services alliance agreement with
Unisys
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Corporation. This strategic relationship allows OpenROUTE customers to choose
Unisys for on-site support of OpenROUTE products. The program is designed to
augment OpenROUTE's existing programs by providing world-class on-site service
according to defined Service Level Agreements (SLAs).
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,
enhance network security and ensure interoperability with other vendors'
standards-based products. The Company is also helping to define and support
emerging industry standards that underlay the use of new technological
capabilities. The Company is currently participating in a variety of Internet
Engineering Task Force working groups.
In 1998, 1997 and 1996, the Company's research and product development
expenditures were $4,610,000, $5,987,000 and $9,353,000, respectively. All of
the Company's expenditures for hardware and software research and development
costs have been expensed as incurred.
MANUFACTURING
The Company's manufacturing operations consist of systems level integration and
testing. The Company has strategic relationships with U.S. Assemblies of
Taunton, Massachusetts, ("U.S. Assemblies") a major subcontract manufacturer
with access to cost-effective, high volume manufacturing, distribution and
repair capability worldwide, and since October 1998, with Venture Manufacturing
Ltd. of Singapore ("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 Reduced Instruction Set
Computer ("RISC") processor presently used in the Company's CNX 600 and CNX 500
bridging routers is available solely from Advanced Micro Devices, Inc. ("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
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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.
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. 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
OpenROUTE.
INTERNET ACCESS MARKET COMPETITION
In its newer GTX and GT Business Series product lines, the Company manufactures
routers that connect users on the network edge. The Company believes that major
competitors in this market segment include Lucent, Nortel, Netopia Systems,
Cisco Systems, 3COM, Ascend Communications, Xyplex, ACC and Ramp Networks, among
others.
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. In September 1997 the
Company applied for a U.S. patent for its GTX modular Internet access router.
Currently, OpenROUTE 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
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royalties 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 into the
Company's bridging router products, which provide a significant portion of the
Company's revenues.
RISK FACTORS
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
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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.
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.
13
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 personal computer ("PC") or workstation and
LAN cabling; and 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.
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, operations and finances.
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
14
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.
15
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, the Company's product line, and of third party suppliers and
vendors. The program consists of: (i) inventory of products and suppliers to
determine systems which may encounter date processing problems; (ii) assessment
of 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
16
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 completed the installation of these systems in January
1999 and successfully closed the fiscal months of January and February 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.
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 $175,000 in 1999 related to
Year 2000 equipment purchases and leases, including consulting fees, license
agreements and lease payments.
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 purposes.
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.
The above description contains "forward-looking" statements addressing
uncertainties and future events relating to the Company's Year 2000 issues.
These statements are based on assumptions and predictions which are difficult to
verify and may change over time. The Company expects that future events and
information, if known by the Company, may affect assessment of the Year 2000
issues potentially affecting the Company.
EMPLOYEES
As of December 31, 1998, the Company employed a total of 86 persons, including
38 in sales,
17
marketing and customer support, 24 in engineering and product development, 9 in
manufacturing and 15 in finance and administration. None of the Company's
employees is represented by a labor union. The Company has experienced no work
stoppages and believes its employee relations are good.
REGISTERED TRADEMARKS
Proteon, OpenROUTE, TokenVIEW and ProNET are registered trademarks and
JitterBuster, CNX 600, CNX 500, CNX 400, DNX 350, RapiDriver, OneVIEW and
OverVIEW are trademarks of OpenROUTE. 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.
18
ITEM 2. PROPERTIES
The Company's principal administrative, marketing, manufacturing and product
development facilities are located in one building in Westborough, Massachusetts
and occupied a total of approximately 44,000 square feet as of December 31,
1998. The Company occupies these facilities under a lease agreement that expires
in April 2002. The Company has the option to extend the term of the lease for
two five-year periods commencing on May 1, 2002 and May 1, 2007. In addition,
the Company leases four 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
OpenROUTE filed a civil complaint against Digital Equipment Corporation and
Cabletron Systems, Inc. (the Defendants) on April 1, 1998 in the Middlesex
Superior Court located in Cambridge, Massachusetts. Docket # 98-01533-F is
assigned to this matter.
In its complaint (as amended), OpenROUTE alleges that Digital Equipment
Corporation breached two separate existing agreements by and between OpenROUTE
and Digital Equipment Corporation, the Source Code Licensing Agreement and the
Hardware and Software Development and Software Distribution Agreement for
Networks Routers, by assigning its rights under both agreements to Cabletron
Systems, Inc. without the required consent of OpenROUTE. In addition, OpenROUTE
alleges unfair and deceptive practices in violation of Massachusetts General
Laws and, as against Cabletron, unjust enrichment for unauthorized receipt and
use of OpenROUTE technology. OpenROUTE seeks monetary damages against Digital
Equipment Corporation.
Digital Equipment Corporation counter-claimed that it had the right to assign
its rights without OpenROUTE's consent, and therefore, the suit should be
dismissed. Cabletron Systems, Inc. cited that it was a good faith purchaser for
value, and as such, the claim against it should also be dismissed.
Court hearings have been held to narrow the issues in the case. To date, the
court has found a breach of contract by Digital Equipment Corporation to exist
as a matter of law. The court has found that Cabletron Systems, Inc. was a good
faith purchaser for value and dismissed the claim against Cabletron Systems,
Inc., however, the court specifically reserved the right for OpenROUTE to amend
its complaint if it discovers any unlawful transfer of intellectual property
apart from the issue of improper assignment of rights under the two agreements.
The case has now proceeded to discovery along with Motions for Reconsideration
being filed by both sides.
It is anticipated that discovery in this matter will take place over the next
six to twelve month period, along with further review by the court taking place
as the case proceeds.
Neither the Company nor any of its subsidiaries is a party to any other material
legal proceedings nor is any property of the Company the subject of any 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, 1998.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The section entitled "Stock Price History" in the Company's 1998 Annual Report
is incorporated herein by reference and filed as an Exhibit to this Annual
Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The table entitled "Selected Consolidated Financial Data" contained in the 1998
Annual Report is incorporated herein by reference. The information set forth in
the table is not necessarily indicative of the results of future operation and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and related notes thereto and other financial information appearing
elsewhere in the 1998 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 in the 1998 Annual Report is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently, the Company is not exposed to any market risks arising from changes
in interest rates or other market risk sensitive instruments. The current
exposure to market risks arising from changes to foreign currency rate is not
material. 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.
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,"
"Quarterly Financial Data" and "Report of Independent Accountants" contained in
the 1998 Annual Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On January 13, 1999, BDO Seidman, LLP replaced PriceWaterhouse Coopers, LLP as
the Company's independent auditors. The Company filed a Current Report on Form
8-K and a Current Report on Form 8-K/A on January 1, 1999 and February 24, 1999,
respectfully, reporting the Company's change of its independent accounting firm.
The Form 8-K and Form 8-K/A are herein incorporated by reference and filed as
exhibits to this Annual Report on Form 10-K.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF OPENROUTE
The sections entitled "Information Concerning the Board of Directors and the
Executive Officers," "Proposal 1: Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" contained in the Company's 1999 Proxy
Statement which the Company intends to file with the Securities and Exchange
Commission on or about April 21, 1999 are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections entitled "Executive Compensation," "Directors' Compensation,"
"Compensation Committee Report on Executive Compensation" and "Performance
Graph" contained in the Company's 1999 Proxy Statement are incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Principal Shareholders" contained in the 1999 Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
The financial statements, the schedules and the exhibits listed below are
filed as part of this Report:
1. Financial statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Reports of Independent Accountants
2. Financial Statement Schedule:
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.
3. Exhibits: See Index to Exhibits on page 26. Each of the following
exhibits described on the index to exhibits is a management contract or
compensatory plan or arrangement: 10.4, 10.5, 10.6, 10.7, 10.8, 10.9,
10.10, 10.11, 10.12, 10.14, 10.15, 10.16, 10.17, 10.19.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on January 1, 1999, reporting the
Company's change of its independent accounting firm. The Company amended the
Form 8-K by filing a Current Report on Form 8-K/A on February 24, 1999. The Form
8-K and the Form 8-K/A are herein incorporated by reference and filed as
exhibits to this Annual Report on Form 10-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, 1998.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, OpenROUTE Networks, 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 31, 1999.
OPENROUTE NETWORKS, INC.
(Registrant)
March 31, 1999 By: /s/ Bryan R. Holley
Bryan R. Holley
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 31, 1999 /s/ Steven T. Shedd
Steven T. Shedd
Vice President, Finance and Chief Financial
Officer Treasurer and Clerk
(principal financial officer)
March 31, 1999 /s/ Sally KH Teo
Sally KH Teo
Corporate Controller
(principal accounting officer)
March 31, 1999 /s/ David Clark
David Clark, Director
March 31, 1999 /s/ Robert M. Glorioso
Robert Glorioso, Director
March 31, 1999 /s/ Howard C. Salwen
Howard C. Salwen, Director
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of OpenROUTE Networks, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated February 11, 1998, except as to the segment information for the years
ended December 31, 1997 and 1996 presented in Note 8, for which the date is
March 26, 1999, appearing in the 1998 Annual Report to Shareholders of OpenROUTE
Networks, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also includes an
audit of the financial statement schedules listed in Item 14(a)(2) of this Form
10-K. In our opinion, these financial statement schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 11, 1998
24
3. EXHIBIT INDEX
Exhibit
Number Description
(3.1) Restated Articles of Organization, as amended*(c) (filed as Exhibit
3.1)
(3.2) Articles of Amendment dated June 12, 1998 on the change of name of
the corporation to OpenROUTE Networks, Inc. from Proteon, Inc.
(filed as Exhibit 3.2 to this Form 10-K)
(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*(c) (See Exhibit
3.1)
(4.2) Form of Common Stock Certificate*(b) (filed as Exhibit 4.2)
(10.1) Manufacturing Services Agreement, dated August 1, 1989 between the
Registrant and Texas Instruments, Inc.*(a) (filed as Exhibit 10.3)
(10.2) Purchase Agreement, dated December 1, 1990 between the Registrant
and Texas Instruments, Inc.*(a) (filed as Exhibit 10.4)
(10.3) Software License Agreement, dated January 1, 1990 between the
Registrant and Noel Chiappa*(a) (filed as Exhibit 10.5)(+)
(10.4) 1991 Restated Stock Option Plan*(d) (filed as Exhibit 19.1)
(10.5) 1988 Nonqualified Stock Option Plan*(a) (filed as Exhibit 10.7)
(10.6) Restated Employee Stock Award Plan*(a) (filed as Exhibit 10.8)
(10.7) Consulting Agreement, dated August 31, 1989 between the Registrant
and David Clark*(a) (filed as Exhibit 10.11)
(10.8) Form of Indemnification Agreement. An Indemnification Agreement was
entered into by and between the Registrant and each of: David Allen,
Steven J. Bielagus, Daniel Capone, Jr., David Clark, Howard C.
Salwen and certain other former directors and executives. Although
the agreements were executed on various dates, each is the same as
the Form of Indemnification Agreement in all material respects and
details, and therefore the individual agreements are not filed
herewith.*(a) (filed as Exhibit 10.17)
(10.9) Executive Compensation Arrangement Not Set Forth in a Formal
Document*(e) (filed as Exhibit 10.26)
(10.10) Consulting Agreement, dated August 25, 1993, between the Registrant
and Howard Salwen*(f) (filed as Exhibit 10.1)
(10.11) Employment Agreement, dated March 18, 1994, between the Registrant
and Steven J. Bielagus*(g) (filed as Exhibit 10.3)
(10.12) Employment Agreement, dated June 27, 1994 between the Registrant and
Daniel J. Capone, Jr.*(h) (filed as Exhibit 10.4)
(10.13) Lease Agreement dated December 19, 1994 between the Registrant and
WCB Twenty Limited Partnership*(i) (filed as Exhibit 10.31)
(10.14) Severance Compensation Agreement dated March 11, 1996 between the
Registrant and William T. Greer* (j) (filed as Exhibit 10.28)
(10.15) Employment Agreement, dated October 16, 1996 between the Registrant
and Robert J. Connaughton, Jr.*(j) (filed as Exhibit 10.29)
(10.16) Severance Compensation Agreement dated October 21, 1996 between the
Registrant and Robert J. Connaughton, Jr.*(j) (filed as Exhibit
10.30)
(10.17) Form of Severance Compensation Agreement. A Severance Compensation
Agreement was entered into by and between the Registrant and each
of: Robert Koch, Steven T. Shedd, Richard J. Arena, Eugene Y.
Chang, Daniel J. Capone, Jr., Steven J. Bielagus, Kenneth Holvaldt
and Jack A. Ritter. Although the agreements were executed on various
dates, each is the same as
25
the Form of Severance Compensation Agreement in all material
respects and details, and therefore the individual agreements are
not filed herewith.*(k) (filed as Exhibit 10.17)
(10.18) Amendment to Lease Agreement dated December 19, 1994 between
Registrant and WCB Twenty Limited Partnership, dated May 23,
1997*(l) (filed as Exhibit 10.18)
(10.19) Form of Severance Compensation Agreement. A Severance Compensation
Agreement was entered into by and between the Registrant and each
of: Richard E. Sterry and Byran Holley. Although the agreements were
executed September 16, 1998 and July 6, 1998 respectively, each is
the same as the Form of Severance Compensation Agreement in all
material respects and details, and therefore the individual
agreements are not filed herewith. (filed as Exhibit 10.19 to this
Form 10-K)
3. Exhibits (continued)
Exhibit
Number Description
(13) The Annual Report to Stockholders of the Company for the fiscal year
ended December 31, 1998 (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)
(16) Letter re change in certifying accountants*(m) (filed as Exhibit
16.)
(16) Letter re change in certifying accountants*(n) (filed as Exhibit 16)
(21) Subsidiaries of the Registrant (filed as Exhibit 21 to this Form
10-K)
(23) Consent of PricewaterhouseCoopers, LLP (filed as Exhibit 23 to this
Form 10-K)
(27) Financial Data Schedule(filed as Exhibit 27 to this Form 10-K)
(99) Current Report on Form 8-K dated January 20, 1999 (m), as amended by
Current Report on Form 8-K/A dated February 24, 1999 (n).
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.
(f) Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 2, 1993.
(g) Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 2, 1994.
(h) Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 2, 1994.
26
(i) Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(j) Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996
(k) Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
(l) Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
(m) Registrant's Current Report on Form 8-K dated January 20, 1999.
(n) Registrant's Current Report on Form 8-K/A dated February 24, 1999.
All exhibit descriptions followed by a (+) indicate documents with respect to
which confidential treatment has been granted.