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 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period
_________ to __________.
Commission File Number 0-19175
OpenROUTE Networks, Inc.
(Formerly Proteon, Inc.)
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2531856
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation)
Nine Technology Drive, Westborough, MA 01581
(Address of principal executive offices)
Registrant's telephone number (508) 898-2800
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
YES [ X ] NO [ ]
Indicate number of shares outstanding of each of the Issuer's classes of common
stock as of June 27, 1998
Common Stock, $0.01 par value 15,296,857
----------------------------- ----------
(Title of each class) (Number of shares)
OpenROUTE Networks, Inc.
Form 10-Q
Quarterly Report
June 27, 1998
Table of Contents
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 27, 1998 and December
31, 1997.
Consolidated Statements of Operations for the three and six
months ended June 27, 1998 and June 28, 1997.
Consolidated Statements of Cash Flows for the six months ended
June 27, 1998 and June 28, 1997.
Notes to the Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Part II. Other Information
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
Part I. Financial Information
Item 1. Financial Statements
OpenROUTE Networks, Inc.
Consolidated Balance Sheets
(in thousands)
Assets
June 27, December 31,
1998 1997
(unaudited)
----------------- -----------------
Current assets:
Cash and cash equivalents $ 4,526 $ 5,317
Marketable securities 7,058 12,443
Accounts receivable, net 4,614 6,224
Inventories 7,042 5,710
Deposits and other assets 499 437
-------- --------
Total current assets 23,739 30,131
Property and equipment, net 2,877 3,272
-------- --------
Total assets $ 26,616 $ 33,403
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,483 $ 2,292
Accrued compensation 508 765
Accrued expenses 3,409 2,779
Accrued warranty 676 675
-------- --------
Total current liabilities 6,076 6,511
Stockholders' equity:
Preferred stock - -
Common stock 157 157
Capital in excess of par value 49,381 49,347
Accumulated deficit (28,055) (21,666)
Accumulated translation adjustments 113 110
Less treasury stock, at cost (1,056) (1,056)
-------- --------
Total stockholders' equity 20,540 26,892
-------- --------
Total liabilities and stockholders' equity $ 26,616 $ 33,403
-------- --------
-------- --------
The accompanying notes are an integral part of the consolidated financial statements.
OpenROUTE Networks, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
---------- ---------- -------- --------
Sales:
Product $2,526 $6,442 $6,019 $14,034
Software licensing 1,663 248 1,663 756
Service and other 636 1,058 1,331 2,083
------- ------- ------- -------
Net sales 4,825 7,748 9,013 16,873
Cost of sales:
Product 2,167 3,414 4,264 7,696
Service and other 565 586 1,041 1,173
------- ------- ------- -------
Cost of sales 2,732 4,000 5,305 8,869
Gross profit 2,093 3,748 3,708 8,004
Operating expenses:
Research and development 1,175 1,469 2,390 3,046
Selling and marketing 2,692 2,881 4,939 5,468
General and administrative 2,110 794 2,963 1,378
------- ------- ------- -------
Total operating expenses 5,977 5,144 10,292 9,892
------- ------- ------- -------
Loss from operations (3,884) (1,396) (6,584) (1,888)
Interest income, net 162 268 353 519
------- ------- ------- -------
Loss before income taxes (3,722) (1,128) (6,231) (1,369)
Provision for income taxes 154 5 158 77
------- ------- ------- -------
Net loss ($3,876) ($1,133) ($6,389) ($1,446)
------- ------- ------- -------
------- ------- ------- -------
Per share data:
Basic and diluted loss per share ($0.25) ($0.07) ($0.42) ($0.09)
------- ------- ------- -------
------- ------- ------- -------
Basic and diluted weighted average number
of common shares outstanding 15,297 15,267 15,291 15,355
The accompanying notes are an integral part of the consolidated financial statements.
OpenROUTE Networks, Inc.
Consolidated Statements of Cash Flows
for the six months ended
(in thousands)
(unaudited)
June 27, June 28,
1998 1997
-------------- ---------------
Cash flows provided by operating activities:
Net loss ($6,389) ($1,446)
Adjustments to reconcile net loss to cash
flows provided (used) by operating activities:
Bad debt provision 296 -
Depreciation and amortization 605 878
Loss (gain) on disposition of fixed assets 4 (27)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 1,314 (2,896)
(Increase) decrease in inventories (1,332) 2,723
Increase in deposits and other assets (62) (28)
Decrease in accounts payable and accrued expenses (435) (3,326)
------ ------
Net cash provided (used) by operating activities (5,999) (4,122)
------ ------
Cash flows generated (used) by investing activities:
Proceeds from the sale of fixed assets 1 48
Capital expenditures (215) (291)
Marketable securities sales and maturities 11,085 5,411
Marketable securities purchases (5,700) (6,683)
------ ------
Net cash generated (used) by investing activities 5,171 (1,515)
------ ------
Cash flows provided (used) by financing activities:
Proceeds from the issuance of common stock 34 3
Purchase of treasury stock - (385)
------ ------
Net cash provided (used) by financing activities 34 (382)
Effect of exchange rate changes on cash 3 (47)
------ ------
Net decrease in cash and cash equivalents (791) (6,066)
Cash and cash equivalents at beginning of period 5,317 16,612
------ ------
Cash and cash equivalents at end of period 4,526 10,546
------ ------
------ ------
The accompanying notes are an integral part of the consolidated financial statements.
OpenROUTE Networks, Inc.
Notes to Consolidated Financial Statements, unaudited
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited and
have been prepared by the Company in accordance with generally accepted
accounting principles.
Certain information and footnote disclosures normally included in the
Company's annual financial statements have been condensed or omitted. The
interim financial statements, in the opinion of management, reflect all
adjustments (including normal recurring accruals) necessary for a fair
statement of the results for the interim periods ended June 27, 1998 and June
28, 1997.
These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1997, which are
contained in the Company's 1997 Annual Report to its shareholders and in its
Form 10-K filed with the Securities and Exchange Commission.
The Articles of Organization of the Company were amended on June 10, 1998 to
change the Company's name to OpenROUTE Networks, Inc. from its former name of
Proteon, Inc.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method.
- --------------------------------------------------------------------
(in thousands) June 27, 1998 December 31, 1997
- --------------------------------------------------------------------
Raw materials $1,272 $1,043
Work in process 501 373
Finished goods 5,269 4,294
- --------------------------------------------------------------------
Total inventories $7,042 $5,710
- --------------------------------------------------------------------
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Basic EPS excludes the effect of any dilutive options, warrants or
convertible securities and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed by
dividing income available to common stockholders by the sum of the weighted
average number of common shares and common share equivalents computed using
the average market price for the period under the treasury stock method.
Outstanding options of 1,654,117 with an average exercise price of $1.96 as
of June 27, 1998 and outstanding options of 1,465,000 with an average
exercise price of $3.12 as of June 28, 1997 were not included in the diluted
EPS computation because their effect would be antidilutive. All earnings per
share amounts have been restated to conform to the SFAS 128 requirements.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which
requires that all components of comprehensive income and total comprehensive
income be reported and that changes be shown in a financial statement
displayed with the same prominence as other financial statements. The Company
has elected to disclose this information in its statement of stockholders'
equity. For the quarters ended June 27, 1998 and June 28, 1997 total
comprehensive loss was $3,901,000 and $1,149,000, respectively. Total
comprehensive loss for the quarter ended June 27, 1998 was comprised of net
loss of $3,876,000 and foreign currency translation adjustments of $25,000.
Total comprehensive loss for the quarter ended June 28, 1997 was comprised of
net loss of $1,133,000 and foreign currency translation adjustments of
$16,000. For the first six months ended June 27, 1998 and June 28, 1997 total
comprehensive loss was $6,436,000 and $1,525,000, respectively. Total
comprehensive loss for the first six months ended June 27, 1998 was comprised
of net loss of $6,389,000 and foreign currency translation adjustments of
$3,000. Total comprehensive loss for the first six months ended June 28, 1997
was
comprised of net loss of $1,446,000 and foreign currency translation adjustments
of $47,000.
NEWLY ISSUED ACCOUNTING STANDARDS
The FASB 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES
Net sales for the quarter ended June 27, 1998 were $4,825,000 as compared
with $7,748,000 for the quarter ended June 28, 1997, a decrease of $2,923,000
or 37.7%. For the first six months of 1998, net sales were $9,013,000 as
compared with $16,873,000 for the same period in 1997, a decrease of
$7,860,000 or 46.6%.
Product sales for the quarter ended June 27, 1998 were $2,526,000 as compared
with $6,442,000 for the quarter ended June 28, 1997, a decrease of
$3,916,000, or 60.8%. For the first six months of 1998, product sales were
$6,019,000 as compared with $14,034,000 for the same period in 1997, a
decrease of $8,015,000 or 57.1%.
Product sales results reflect the Company's ongoing product transition from
LAN to Internet Access products. Overall product revenue for the quarter and
for the six months ended June 27, 1998 is down when compared to the same
period of a year ago. This is due to anticipated decreases in the LAN and
Enterprise router product categories as well as from a decline in product
unit sales and the average selling prices of certain GlobeTrotter products.
It is also reflective of a change in the Company's selling strategy to focus
more of its efforts on the internet service provider and telephone company
marketplace, which has resulted in lower sales to traditional customers not
yet offset by increased sales into these markets.
Software licensing revenue for the quarter ended June 27, 1998 was $1,663,000
compared to $248,000 for the quarter ended June 28, 1997, an increase of
$1,415,000. For the first six months of 1998, software licensing revenue was
$1,663,000 as compared with $756,000 for the same period in 1997, an increase
of $907,000. The increase in software licensing revenue is primarily the
result of a software licensing agreement signed with a multinational foreign
corporation. The software licensing agreement will not provide recurring
software licensing revenue but could provide future royalty revenues based on
the multinational foreign corporation's unit sales of products containing the
licensed software. The Company expects that it will continue to have software
licensing revenue in the future, however at varying and uncertain levels.
Software licensing revenue is an ancillary component of the Company's core
revenue stream but strategic in its promotion of the OpenROUTE routing
technology in its markets.
For the quarter ended June 27, 1998 service and other revenues decreased by
$422,000 or 39.9%, to $636,000, as compared to $1,058,000 for the quarter
ended June 28, 1997. For the first six months of 1998, service and other
revenues were $1,331,000 as compared with $2,083,000 for the same period in
1997, a decrease of $752,000 or 36.1%. This decrease was primarily due to the
reduction in service contracts
worldwide resulting from the Company's decision to focus on Internet Access
products, which require fewer support services.
GROSS PROFIT
Total gross profit decreased as a percentage of net sales to 43.4% for the
quarter ended June 27, 1998 from 48.4% for the quarter ended June 28, 1997.
Total gross profit decreased as a percentage of net sales to 41.1% for the
first six months of 1998 from 47.4% for the six months ended June 28, 1997.
These decreases were primarily the result of a decline in overall product
unit sales as well as a reduction in the GlobeTrotter average selling price.
The Company's product gross profit for the quarter ended June 27, 1998
decreased to 14.2% from 47.0% when compared to the same period in the prior
year. Product gross profit for the six month period decreased to 29.2% from
45.2% for the same period in 1997. These decreases are primarily due to the
impact of certain fixed overheads on cost of sales as a result of lower
product volumes and an inventory write down during the second quarter.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1,175,000 or 24.4% of net sales for
the quarter ended June 27, 1998 compared to $1,469,000 or 19.0% of net sales
for the same period in the prior year. The decrease in expenses of $294,000
or 20.0% was primarily due to concentrating the Company's development efforts
on the Internet Access products as well as lower personnel and
personnel-related costs. For the first six months of 1998, research and
development costs were $2,390,000 or 26.5% of net sales compared to
$3,046,000 or 18.1% of net sales for the first half of 1997. The decrease of
$656,000 or 21.5% 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 Internet Access
products.
SELLING AND MARKETING
Selling and marketing expenses were $2,692,000 or 55.8% of net sales for the
quarter ended June 27, 1998 compared to $2,881,000 or 37.2% of net sales for
the quarter ended June 28, 1997, a decrease of $189,000, or 6.6%. This
decrease was mainly due to reduced commissions as a result of the lower level
of revenue in the second quarter of 1998 and to reduced and refocused
marketing programs associated with the Company's new selling strategy. For
the first six months of 1998, selling and marketing expenses were $4,939,000
or 54.8% of net sales, as compared to $5,468,000 or 32.4% of net sales for
the same period in the prior year. This decrease in expenses of $529,000 or
9.7% was due primarily to the same factors stated above.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2,110,000, or 43.7% of net sales
for the quarter ended June 27, 1998, compared to $794,000 or 10.2% of net
sales for the quarter ended June 28, 1997, an increase of $1,316,000 or
165.7%. This increase was principally due to provisions recorded in the
second quarter of 1998 pertaining to office relocation costs, broker fees and
severance provisions. For the first six months of 1998, general and
administrative expenses were $2,963,000 or 32.9% of net sales compared to
$1,378,000 or 8.2% of net sales. The increase of $1,585,000 or 115.0% was due
primarily to the same factors stated above as well as provisions recorded in
the first quarter of 1998 pertaining to potential international bad debts and
additional professional service costs.
PROVISION FOR INCOME TAXES
For the quarter ended June 27, 1998, the Company booked an income tax
provision of $154,000, bringing the 1998 year to date provision to $158,000.
This is a result of foreign taxes withheld from software licensing fees
received from a foreign corporation as well as state income taxes and tax
liabilities in its foreign subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1998, the Company consumed $5,999,000 of cash
from operating activities. This was due primarily to the net operating loss
of $6,389,000 offset by depreciation of $605,000.
Investing activities for the six months ended June 27, 1998, generated net
proceeds of $5,171,000 principally from the sales of marketable securities.
The Company's management believes that its cash, cash equivalents and
marketable securities will satisfy its expected working capital and capital
expenditure requirements through the next twelve months.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
This Form 10-Q filing contains forward-looking statements within the meaning
of the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are based on management's
current expectations and involve a number of risks and uncertainties. The
Company's future results remain difficult to predict and may be affected by
the factors described below.
RISK FACTORS
TECHNOLOGICAL CHANGE, NEW PRODUCTS AND INDUSTRY STANDARDS
The data communications industry continues to undergo a fundamental shift
away from hierarchical single vendor systems to open, peer-to-peer
communications networks and information management tools that provide users
with greater computing power and access to information. This evolution has
fostered the growth of two dynamic markets: workstations and networking.
Workstations deliver increasingly powerful, personal productivity tools, and
data communications networks provide the "highways" that distribute and share
this processing power throughout an organization, enabling users to more
fully leverage and manage information resources.
As the deployment of networks matures, 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 (LANs); segmentation using various switching
technologies; and the push by businesses of all sizes and individuals to
connect their systems and networks to the Internet.
OpenROUTE Networks is positioning itself as a company focused on the network
access market. OpenROUTE Networks views the network access market as having
two segments: Internet access and local access. Its current strategy is based
upon concentration on the Internet access market segment.
Rapidly changing technology, new product introductions and a multiplicity of
current and evolving industry standards characterize the market for the
Company's products. 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.
U.S. Assemblies, a major subcontract manufacturer with access to cost
effective, high volume manufacturing, distribution, and repair capability
worldwide, and others manufacture the majority of OpenROUTE Networks' 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.
OpenROUTE Networks 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 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
OpenROUTE Networks to counteract them successfully could have an adverse
effect on the Company's business, operations and finances.
INTELLECTUAL PROPERTY
Currently, OpenROUTE Networks 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 Networks 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
IBM dominates the market for Token Ring network interface card products.
While Token Ring networking is an industry standard, OpenROUTE Networks
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.
INTERNET ACCESS (ROUTERS)
OpenROUTE Networks expects to participate significantly in the market segment
of Internet access routing specifically addressing the needs of users to
connect to the Internet or build corporate intranets. The Company has
enhanced its Internet access capabilities with the introduction of new
products and expanded its presence in the Integrated Services Digital
Networks (ISDN) marketplace.
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 Series 75 Stackable Hub family for building
networked and extended workgroups; Token Ring adapters for physical
connectivity and Token Ring signaling between a PC or workstation and LAN
cabling; a 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), OpenROUTE Networks' internetworking software suite, is the
foundation of the Company's high performance Internet access and
internetworking products. All of OpenROUTE Networks' internetworking products
ship with this software technology installed. Also, OpenROUTE Networks
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, OpenROUTE Networks believes one of the keys to success will be
making networks more accessible to a broader base of customers. OpenROUTE
Networks 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 competitive pressures will not adversely affect
the Company's business.
RESEARCH AND PRODUCT DEVELOPMENT
Management believes the Company's future success depends in large part upon
timely enhancement of existing products and the development of new products
that not only maintain technological excellence, but also improve the
capabilities, efficiency, and cost effectiveness of the end users' data
communications networks. The Company is developing new products to improve
price/performance ratios, enhance its network management capabilities,
simplify ease of use, and ensure interoperability with other vendors'
standards based products.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's quarterly operating results may vary significantly depending
upon factors such as the timing of new product announcements and releases by
the Company and its competitors, the timing of significant orders, the mix of
products sold and the mix of distribution channels through which the products
are sold. In addition, substantially all of the Company's sales in each
quarter result from orders booked in that quarter. Consequently, if sales do
not close in any quarter as anticipated the Company's results of operations
for that quarter would be adversely affected. Further, the Company's expense
levels are based, in part, on its expectations as to future sales. If sales
levels are below expectations, operating results may be adversely affected.
Also, quarterly results can be materially affected by timing of software
licensing revenues, if any.
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 11%, 11% and 12%, of the Company's sales
in 1997, 1996 and 1995, respectively, and a second reseller accounted for
approximately 8%, 14% and 10% of the Company's sales in 1997, 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 OpenROUTE Networks' products have typically been organizations
with critical applications requiring connectivity integrating their
headquarters and wide area computing environments. OpenROUTE Networks'
marketing and distribution strategy is to reach these end users primarily
through an indirect sales channel comprised of ISPs, OEMs, VARs, and
distributors with experience in network integration and reputation for
excellent service. In addition, the Company's strategy includes increased
presence of OpenROUTE Networks' sales force in end user sites.
There can be no assurance that the Company has correctly formulated its end
user profile or selected appropriate methods of marketing and selling its
products. Failure to do so could result in an adverse impact on the Company's
business, operations and finances.
LIQUIDITY
Failure of the Company to create and maintain adequate working capital and
liquidity, by sales of equity, obtaining lines of credit or otherwise, could
adversely impact the Company's business, operations and finances.
INTERNATIONAL SALES, REGULATORY STANDARDS AND CURRENCY EXCHANGE
International sales accounted for 35.4%, 38.3% and 35.7% in 1997, 1996 and
1995, respectively, of the Company's net sales and the Company expects that
international sales will continue to be a significant portion of the
Company's business. Foreign regulatory bodies 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 15,296,857 outstanding shares of Common Stock as of June 27,
1998 are now freely tradable or eligible for sale on the open market. In
addition, options to acquire an aggregate of 583,643 shares of Common Stock
were vested as of June 27, 1998, 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 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.
YEAR 2000
The Company has given careful consideration to all systems and equipment that
might be affected by the Year 2000 issue. Management is in the process of
developing an action plan that provides for the repair or replacement of all
systems with exposure to Year 2000 problems by the end of 1998, the cost of
which is not expected to have a material financial impact on the Company. The
plan calls for a combination of internal and external resources. The
commitment of internal resources is not expected to have a significant impact
on the Company's future sales and operating results. To date, the Company is
not aware of any situations of noncompliance that would materially adversely
affect its operations or financial condition. There can be no assurance,
however, that instances of noncompliance which could have a material adverse
effect on the Company's operations or financial condition will not be
identified, that the systems of other companies with which the Company
transacts business will be corrected on a timely basis, or that a failure by
such entities to correct a Year 2000 problem or a correction which is
incompatible with the Company's information systems would not have a material
adverse effect on the Company's operations or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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 June 10, 1998, The following matters were voted
upon:
The following persons were elected as Directors:
Daniel J. Capone, Jr. with 13,980,882 shares voting
for election and votes of 606,912 shares withheld;
Howard C. Salwen with 13,988,931 shares voting for
election and votes of 598,863 shares withheld; Dr.
David Clark with 14,004,111 shares voting for
election and votes of 583,683 shares withheld; and
Dr. Robert M. Glorioso with 13,995,511 shares voting
for election and votes of 592,283 shares withheld.
The Company's 1991 Restated Stock Option Plan
increased by 500,000 the number of shares reserved
for issuance upon exercise of options granted under
the Plan with 13,164,160 shares voting for the
increase, 1,283,238 shares voting against the
increase and 140,396 shares abstaining.
The Company's Restated Articles of Organization were
amended to change the name of the Company from
Proteon, Inc. to OpenROUTE Networks, Inc. with
13,238,841 shares voting for the name change,
1,231,870 shares voting against the name change and
117,083 shares abstaining.
Item 5. Other Information:
To be considered for inclusion in the proxy statement
relating to the Annual Meeting of stockholders to be
held in 1999, stockholder proposals must be received
no later than December 18, 1998. To be considered for
presentation at the Annual Meeting, although not
included in the proxy statement, proposals must be
received no later than April 12, 1999. All
stockholder proposals should be marked for the
attention of Mr. Steven T. Shedd, Vice President,
Finance, Chief Financial Officer, Treasurer and
Clerk, OpenROUTE Networks, Inc., Nine Technology
Drive, Westborough, Massachusetts 01581.
Item 6. Exhibits and Reports on Form 8 - K:
(a) Exhibits: See Exhibits Index
(b) Reports on Form 8 - K:
The Company filed a Form 8 - K with the Securities
and Exchange Commission on each of June 16, 1998 and
July 10, 1998 reporting under Item 5. OTHER EVENTS in
connection with the amendment of the Company's
Restated Articles of Organization to change the name
of the Registrant from Proteon, Inc. to OpenROUTE
Networks, Inc, and the announcement of the
appointment of Bryan R. Holley as Chief Executive
Officer and as a member of the Board of Directors of
the Company.
Signatures
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
OpenROUTE Networks, Inc.
August 7, 1998 By: /s/ Bryan R. Holley.
-------------------
Bryan R. Holley
President & Chief Executive Officer
(principal executive officer)
By: /s/ Steven T. Shedd
-------------------
Steven T. Shedd
Chief Financial Officer, Vice President
Treasurer and Clerk
(principal financial officer)
By: /s/ James M. Roller
-------------------
James M. Roller
Corporate Controller
(principal accounting officer)
Exhibit Index
Exhibit
Number Description
(3.1) Restated Articles of Organization as Amended * ( a )
(filed as Exhibit 3.1)
(3.3) By-Laws, as amended and restated, of the Registrant * ( b )
(filed as Exhibit 3.3)
(4.1) Article 4 of the Restated Article of Organization,
(See 3.1 above)
(4.2) Form of Common Stock Certificate * ( c )
(filed as Exhibit 4.2)
(27) Financial Data Schedule
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 ) Amendment No. 1 on Form 8 to the Registrant's Registration Statement on
Form 8-A, File No. 0-19175.
Where documents are incorporated by reference from previous filings, the
Exhibit number of the document in that previous filing is indicated in
parentheses after the incorporation by reference code.