<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
COMMISSION FILE NO. 0-22700
PROXIM, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0059429
(State of incorporation) (I.R.S. Employer Identification No.)
295 NORTH BERNARDO AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043
(415) 960-1630
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
--------------
Former name, former address and former fiscal year, if changed since last
report: Not Applicable.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Title of Class Outstanding as of March 31, 1997
-------------- --------------------------------
Common Stock, par value $.001 per share 9,908,908
<PAGE> 2
PROXIM, INC.
Index
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements:
Balance Sheet at March 31, 1997 and December 31, 1996................................ 3
Statement of Operations for the Three Months Ended
March 31, 1997 and 1996............................................................ 4
Statement of Cash Flows for the Three Months Ended
March 31, 1997 and 1996............................................................ 5
Notes to Financial Statement......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................................... 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................ 16
</TABLE>
2
<PAGE> 3
PROXIM, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash liabilities ........................................ $ 55,564 $ 54,232
Accounts receivable, net ......................................... 11,940 10,271
Inventories ...................................................... 9,554 10,479
Deferred tax assets .............................................. 1,116 1,116
Other current assets ............................................. 232 201
-------- --------
Total current assets .......................................... 78,406 76,299
Property and equipment, net ......................................... 4,045 4,002
Deferred taxes and other assets ..................................... 1,370 1,080
-------- --------
$ 83,821 $ 81,381
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 1,906 $ 1,833
Accrued liabilities .............................................. 4,118 3,907
-------- --------
Total current liabilities ..................................... 6,024 5,740
-------- --------
Stockholders' equity:
Common Stock, $.001 par value, 25,000 shares authorized;
9,909 and 9,787 shares issued and outstanding ................. 10 10
Additional paid-in capital ....................................... 78,673 78,128
Accumulated deficit .............................................. (886) (2,497)
-------- --------
Total stockholders' equity .................................... 77,797 75,641
-------- --------
$ 83,821 $ 81,381
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
PROXIM, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
-------- -------
<S> <C> <C>
Revenue ............................................ $ 12,493 $ 8,901
Cost of revenue .................................... 6,550 4,539
-------- -------
Gross profit ....................................... 5,943 4,362
-------- -------
Operating expenses:
Research and development ........................ 1,479 1,070
Selling, general and administrative ............. 2,705 2,127
-------- -------
Total operating expenses ..................... 4,184 3,197
-------- -------
Income from operations ............................. 1,759 1,165
Interest and other income, net ..................... 719 84
-------- -------
Income before income taxes ......................... 2,478 1,249
Provision for income taxes ......................... 867 337
-------- -------
Net income ......................................... $ 1,611 $ 912
======== =======
Net income per share ............................... $ 0.15 $ 0.11
======== =======
Weighted average common shares and equivalents ..... 10,568 8,268
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
PROXIM, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 1,611 $ 912
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization ................................... 389 160
Deferred tax assets ............................................. -- (44)
Changes in assets and liabilities:
Accounts receivable, net ..................................... (1,669) 460
Inventories .................................................. 925 (221)
Other assets ................................................. (321) (151)
Accounts payable ............................................. 73 (1,416)
Accrued liabilities .......................................... 211 109
-------- --------
Net cash provided by (used in) operating activities ........ 1,219 (191)
-------- --------
Cash flows used in investing activities for purchases of property
and equipment .................................................. (432) (629)
-------- --------
Cash flows provided by financing activities from issuance of
Common Stock ................................................... 545 163
-------- --------
Net increase (decrease) in cash and cash equivalents ............... 1,332 (657)
Cash and cash equivalents, beginning of period ..................... 54,232 6,247
-------- --------
Cash and cash equivalents, end of period ........................... $ 55,564 $ 5,590
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
PROXIM, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying financial statements include all adjustments
(consisting only of normal recurring adjustments) which Proxim, Inc. (the
"Company") considers necessary for a fair presentation of the results of
operations for the interim periods covered and the financial condition of the
Company at the date of the balance sheets. The interim financial information is
unaudited. This Quarterly Report on Form 10-Q should be read in conjunction with
the Company's audited financial statements for the year ended December 31, 1996,
included in the 1996 Annual Report on Form 10-K. The results of operations for
the three months ended March 31, 1997 are not necessarily indicative of results
that may be expected for the entire year ending December 31, 1997.
INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials .............. $ 3,614 $ 3,978
Work-in-process ............ 5,940 6,501
------- -------
$ 9,554 $10,479
======= =======
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENT - NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings per
Share." This statement redefines net income per share under generally accepted
accounting principles. Under the new standard, primary net income per share is
replaced by basic net income per share and fully diluted net income per share is
replaced by diluted net income per share. The Company is required to adopt the
new standard in the fourth calendar quarter of 1997. The following table sets
forth primary net income per share as reported and unaudited pro forma basic and
diluted net income per share assuming FAS 128 had been applied during the
periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Primary net income per share as reported $ 0.15 $ 0.11
Pro forma basic net income per share ... 0.16 0.12
Pro forma diluted net income per share . 0.15 0.11
</TABLE>
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion and analysis below contain trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company
may from time to time make additional written and oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission and in its reports to stockholders. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed below under "Certain Factors That May
Affect Future Operating Results" and elsewhere in this report. The Company does
not undertake to update any forward-looking statement that may be made from time
to time by or on behalf of the Company. Readers should carefully review the risk
factors described in other documents the Company files from time to time with
the Securities and Exchange Commission.
The following discussion should be read in conjunction with the
Company's 1996 Financial Statements and Notes thereto.
The following table presents the percentages of total revenue
represented by certain line items from the Statement of Operations for the
periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------
1997 1996
----- -----
<S> <C> <C>
Revenue .............................. 100.0% 100.0%
Cost of revenue ...................... 52.4% 51.0%
----- -----
Gross profit ......................... 47.6% 49.0%
----- -----
Operating expenses:
Research and development .......... 11.8% 12.0%
Selling, general and administrative 21.7% 23.9%
----- -----
Total operating expenses ....... 33.5% 35.9%
----- -----
Income from operations ............... 14.1% 13.1%
Interest and other income, net ....... 5.7% .9%
----- -----
Income before income taxes ........... 19.8% 14.0%
Provision for income taxes ........... 6.9% 3.8%
----- -----
Net income ........................... 12.9% 10.2%
===== =====
</TABLE>
RESULTS OF OPERATIONS
REVENUE
Revenue increased 40% in the first quarter of 1997 compared to the
first quarter of 1996. The increase in revenue was primarily attributable to
increased unit sales of 2.4 GHz OEM products and RangeLAN2 branded products,
including increased revenue from shipments to international distributors and to
OEM customers that sell RangeLAN2-based 2.4 GHz product lines in North America,
Europe and Asia.
GROSS PROFIT
Gross profit as a percentage of revenue was 47.6% and 49.0% in the
first quarter of 1997 and 1996, respectively. Gross profit as a percentage of
revenue declined in the first quarter of 1997 compared to the first quarter of
1996 due to a change in the mix of revenue from higher gross margin 900 MHz
products to lower
7
<PAGE> 8
gross margin 2.4 GHz products, and higher costs related to initial manufacturing
of new products and increasing the manufacturing capacity for 2.4 GHz products.
Gross profit as a percentage of revenue may fluctuate in future periods
depending primarily on the mix of revenue between 900 MHz products and 2.4 GHz
products.
RESEARCH AND DEVELOPMENT
Research and development expenses increased in the first quarter of
1997 compared to the first quarter of 1996 primarily due to the increased number
of engineering employees, continued investment in integrating the Company's
technology and designs into ASICs, development of wireless protocols and network
software drivers, development of performance enhancements in the RangeLAN2
architecture, development of products based on the proposed IEEE 802.11
specification, research related to new technologies and products, and costs
related to both domestic and international product certifications. Research and
development expenses declined as percentage of revenue in the first quarter of
1997 compared to the first quarter of 1996 primarily due to increased revenue.
To date, all of the Company's research and development costs have been expensed
as incurred. The Company expects that research and development expenses will
continue to increase substantially in absolute dollars but may vary over time as
a percentage of revenue.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased in the first
quarter of 1997 compared to the first quarter of 1996 primarily due to the
hiring of additional marketing and sales personnel to support the Company's
growth, particularly its expansion in international markets, as well as
increased trade show and promotional expenses. Selling, general and
administrative expenses declined as a percentage of revenue in the first quarter
of 1997 compared to the first quarter of 1996 primarily due to increased
revenue. The Company currently does not anticipate further significant declines
in selling, general and administrative expenses as a percentage of revenue. The
Company expects that selling, general and administrative expenses will continue
to increases in absolute dollars but may vary over time as a percentage of
revenue.
INTEREST AND OTHER INCOME, NET
Interest and other income, net increased in the first quarter of 1997
compared to the first quarter of 1996 primarily due to the July 1996 follow-on
public offering which increased cash balances.
INCOME TAXES
The Company's estimated effective income tax rate was 35% and 27% for
the first quarter of 1997 and 1996, respectively. The 1997 estimated effective
income tax rate is less than the combined federal and state statutory rates
based on the expected utilization of available net operating loss carryforwards
and tax credits.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1997, $1,219,000 of cash and cash equivalents
was provided by operating activities, primarily by net income and a decrease in
inventories, partially offset by cash used to fund an increase in accounts
receivable. In the first quarter of 1996, $191,000 of cash was used in operating
activities primarily to fund an increase in inventories and a decrease in
accounts payable, partially offset by net income for the period and cash
provided by a decrease in accounts receivable.
In the first quarter of 1997 and 1996, the Company purchased $432,000
and $629,000, respectively, of property and equipment. Capital expenditures in
the first quarter of 1997 and 1996 were primarily for manufacturing and
engineering test equipment, office furniture and leasehold improvements related
to the Company's facilities expansion.
8
<PAGE> 9
At March 31, 1997, the Company had cash and cash equivalents of
$55,564,000. The Company believes that its working capital and cash generated
from operations, if any, will be sufficient to finance cash acquisitions which
the Company may consider and provide adequate working capital for the
foreseeable future. However, to the extent that additional funds may be required
in the future to address working capital needs and to provide funding for
capital expenditures, expansion of the business or acquisitions, the Company
will consider raising additional financing. There can be no assurance that such
financing will be available on terms acceptable to the Company, if at all.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition to the other information in this Form 10-Q, the following
are important factors that should be considered carefully in evaluating the
Company and its business.
Potential Fluctuations in Future Operating Results. The Company has
experienced, and may in the future continue to experience, significant annual
and quarterly fluctuations in revenue, gross margins and operating results due
to numerous factors, some of which are outside the Company's control. These
factors include fluctuating market demand for, and declines in the average
selling prices of, the Company's products, the timing of and delays or
cancellations of significant orders from OEM customers, the cost, availability
and quality of components from the Company's suppliers, the cost, availability,
and quality of assemblies from subcontractors, the lengthy sales and design-in
cycles for OEM products, delays in the introduction of the Company's new
products, competitive product introductions, market adoption of new technologies
and standards, the mix of products sold, the effectiveness of the Company's
distribution channels, the failure to anticipate changing customer product
requirements, seasonality in demand, manufacturing capacity and efficiency,
changes in the regulatory environment and general economic conditions.
Historically, the Company has not operated with a significant order backlog and
a substantial portion of the Company's revenue in any quarter has been derived
from orders booked and shipped in that quarter. Accordingly, the Company's
revenue expectations are based almost entirely on its internal estimates of
future demand and not on firm customer orders. Planned expense levels are
relatively fixed in the short term and are based in large part on these
estimates, and if orders and revenue do not meet expectations, the Company's
operating results could be materially adversely affected. In this regard, in the
third quarter of 1994, the Company experienced a decrease in revenue and an
operating loss as a result of lower than expected orders in connection with the
transition of several OEM customers from 900 MHz products to 2.4 GHz RangeLAN2
products. There can be no assurance that the Company will not experience future
quarter to quarter decreases in revenue and gross margins or quarterly operating
losses. In addition, due to the timing of orders from OEM customers, the Company
has often recognized a substantial portion of its revenue in the last month of a
quarter. As a result, minor fluctuations in the timing of orders and the
shipment of products have caused, and may in the future cause, operating results
to vary significantly from quarter to quarter. It is possible that due to such
fluctuations or other factors, the Company's future operating results could be
below the expectations of securities analysts and investors. In such an event,
or in the event that adverse market conditions prevail or are perceived to
prevail generally or with respect to the Company's business, the price of the
Company's Common Stock would likely be materially adversely affected.
Dependence on a Limited Number of OEM Customers. Historically, a substantial
portion of the Company's revenue has been derived from a limited number of
customers, most of which are OEM customers. Approximately 59%, 60% and 79% of
the Company's sales during the first quarter of 1997 and during fiscal 1996 and
1995, respectively, were to OEM customers. In addition, sales to three customers
represented approximately 28%, 28% and 11%, of the Company's total revenue
during the first quarter of 1997. Sales to three customers represented
approximately 22%, 22% and 12%, of the Company's total revenue during 1996. The
Company expects that sales to a limited number of OEM customers will continue to
account for a substantial portion of its revenue for the foreseeable future. The
Company also has experienced quarter to
9
<PAGE> 10
quarter variability in sales to each of its major OEM customers and expects this
pattern to continue in the future. The loss of one or more of the Company's
major OEM customers could have a material adverse effect on the Company's
results of operations.
Sales of many of the Company's wireless networking products depend in
significant part upon the decision of a prospective OEM customer to develop and
market wireless solutions which incorporate the Company's wireless technology.
OEM customers' orders are affected by a variety of factors such as new product
introductions, regulatory approvals, end user demand for OEM customers'
products, product life cycles, inventory levels, manufacturing strategy,
contract awards, competitive conditions and general economic conditions. Sales
of the Company's products generally involve a significant commitment of capital
and other resources by its customers, with the attendant delays associated with
such customers' internal procedures to approve such commitment. For these and
other reasons, the design-in cycle associated with the purchase of the Company's
wireless products by OEM customers is quite lengthy, generally ranging from six
months to two years, and is subject to a number of significant risks, including
customers' budgeting constraints and internal acceptance reviews, that are
beyond the Company's control. Because of the lengthy sales cycle, the Company
typically plans its production and inventory levels based on internal forecasts
of OEM customer demand, which is highly unpredictable and can fluctuate
substantially. In addition, the Company's agreements with OEM customers
typically do not require minimum purchase quantities and a significant
reduction, delay or cancellation of orders from any of these customers could
have a material adverse effect on the Company's results of operations. If
revenue forecasted from a specific customer for a particular quarter is not
realized in that quarter, the Company's operating results for that quarter could
be materially adversely affected. In addition, there can be no assurance that
the Company will become a qualified supplier for new OEM customers or that the
Company will remain a qualified supplier for existing OEM customers.
Sole or Limited Sources of Supply. Certain parts and components used in the
Company's products, including the Company's proprietary application specific
integrated circuits ("ASICs"), monolithic microwave integrated circuits
("MMICs") and assembled circuit boards, are only available from single sources,
and certain other parts and components are only available from a limited number
of sources. The Company's reliance on these sole source or limited source
suppliers involves certain risks and uncertainties, including the possibility of
a shortage or discontinuation of certain key components and reduced control over
delivery schedules, manufacturing capability, quality and costs. Any reduced
availability of such parts or components when required could materially impair
the Company's ability to manufacture and deliver its products on a timely basis
and result in the cancellation of orders, which could have a material adverse
effect on the Company's operating results. In addition, the purchase of certain
key components involves long lead times and, in the event of unanticipated
increases in demand for the Company's products, the Company has in the past
been, and may in the future be, unable to manufacture certain products in a
quantity sufficient to meet its customers' demand in any particular period. The
Company has no guaranteed supply arrangements with its sole or limited source
suppliers, does not maintain an extensive inventory of parts or components, and
customarily purchases sole or limited source parts and components pursuant to
purchase orders placed from time to time in the ordinary course of business.
Business disruptions, production shortfalls or financial difficulties of a sole
or limited source supplier could materially and adversely impact the Company by
increasing product costs, or reducing or eliminating the availability of such
parts or components. In such event, the inability of the Company to develop
alternative sources of supply quickly and on a cost-effective basis could
materially impair the Company's ability to manufacture and deliver its products
on a timely basis and could have a material adverse effect on its operating
results.
Manufacturing Risks. The Company currently has limited manufacturing
capability and has no experience in large scale manufacturing. If the Company's
customers were to place orders for unexpectedly large quantities of the
Company's products, the Company's present manufacturing capacity could be
inadequate to meet such demand. There can be no assurance that the Company will
be able to develop or contract for additional manufacturing capacity on
acceptable terms on a timely basis. In addition, in order to continue to compete
10
<PAGE> 11
successfully, the Company will need to achieve significant product cost
reductions. Although the Company intends to achieve cost reductions through
engineering improvements and production economies, there can be no assurance
that the Company will be able to do so. In order to remain competitive, the
Company must continue to introduce new products and processes into its
manufacturing environment. The Company currently conducts its manufacturing
operations for all of its products in a single facility in Mountain View,
California. In addition, the Company relies on certain outside contract
manufacturers for circuit board assemblies which subjects the Company to a
number of risks, including a potential inability to obtain an adequate supply of
assembled circuit boards as well as reduced control over the price, timely
delivery and quality of such assembled circuit boards. If the Company's Mountain
View facility or the facilities of the outside contract manufacturers were
incapable of operating, even temporarily, or were unable to operate at or near
current or full capacity for any extended period, the Company's business and
operating results could be materially adversely affected. Changes in the
manufacturing operations to incorporate new products and processes could cause
disruptions, which, in turn, could adversely affect customer relationships,
cause a loss of market opportunities and have a material adverse effect on the
Company's business and operating results.
During the second and third quarters of 1995, the Company experienced higher
than expected demand for its products. This resulted in delays in the delivery
of certain products due to temporary shortages of certain components,
particularly components with long lead times, and insufficient manufacturing
capacity. Although the Company has taken certain steps to minimize such delays
in the future by increasing its manufacturing capacity and stocking certain
critical and long lead time components, due to the complex nature of the
Company's products and manufacturing processes, the worldwide demand for certain
wireless technology components and other factors, there can be no assurance that
delays in the delivery of products will not occur in the future.
The Company intends to increase its manufacturing capacity during the next
twelve months and intends to seek additional space near its present facility in
Mountain View, California. There can be no assurance that the Company will be
able to locate sufficient space near its present facility at commercially
reasonable rates. Furthermore, this expansion and relocation could cause
disruption of operations and unexpected costs which could have a material
adverse effect on the Company's business and operating results.
Rapid Technological Change; Ongoing New Product Development Requirements;
Evolving Industry Standards. The wireless communications industry is
characterized by very rapid technological change, short product life cycles and
evolving industry standards. To remain competitive, the Company must develop or
gain access to new technologies in order to increase product performance and
functionality, reduce product size and maintain cost-effectiveness. The Company
has committed and expects that it will continue to devote substantial research
and development resources to enhance its RangeLAN2 architecture and develop new
RangeLAN2-based products. The Company also expects to substantially increase its
research and development expenses to develop new technologies and products in
the future. Given the emerging nature of the wireless LAN market, there can be
no assurance that the RangeLAN2 products and technology, or the Company's other
products or technology, will not be rendered obsolete by alternative
technologies.
The Company's success is also dependent on its ability to develop new
products for existing and emerging wireless communications markets, to introduce
such products in a timely manner and to have them designed into new products
developed by OEM customers. The development of new wireless networking products
is highly complex, and wireless LAN companies, including Proxim, from time to
time have experienced delays in developing and introducing new products. Due to
the intensely competitive nature of the Company's business, any delay in the
commercial availability of new products could have a material adverse effect on
the Company's operating results. If the Company is unable to develop or obtain
access to advanced wireless networking technologies as they become available, or
is unable to design, develop and introduce competitive new products on a timely
basis, or is unable to hire qualified engineers to develop such technologies and
products, its future operating results would be materially and adversely
affected. In particular, the Company
11
<PAGE> 12
intends to expend substantial resources in developing products that are designed
to conform to the proposed IEEE 802.11 specifications. There can be no assurance
that these specifications will be ultimately adopted or that such standards will
have a meaningful commercial impact. To the extent these standards or other
standards are adopted, the Company could be at a disadvantage if its competitors
are able to develop and introduce competitive products which conform to such
standards more rapidly than the Company.
Competition. The wireless local area networking market is intensely
competitive. The principal competitive factors in this market include effective
RF coverage area, data throughput, wireless networking protocol sophistication,
network scalability, roaming capability, power consumption, product
miniaturization, product reliability, product time to market, product
certifications, price, effective distribution channels, ability to support new
industry standards and company reputation. Although the Company believes that it
currently competes favorably on the basis of these factors, the Company could be
at a disadvantage to companies that have broader distribution channels and offer
more diversified product lines.
Proxim has several current competitors which offer 2.4 GHz products,
including Lucent Technologies, Symbol Technologies and Telxon. In addition,
certain other companies, such as 3Com Corporation, have announced their
intention to offer competitive products. Some of these competitors have
announced their intention to develop IEEE 802.11 standards-based products or
other higher performance systems in the future. In addition to competition from
companies that offer or have announced their intention to develop wireless LAN
products, the Company could face future competition from companies that offer
products which replace network adapters or offer alternative wireless
communications solutions, or from large computer and network equipment
companies. Moreover, the Company could also face competition from certain of its
OEM customers which have, or could acquire, wireless engineering and product
development capabilities. There can be no assurance that the Company will be
able to compete successfully against these competitors or that competitive
pressures faced by the Company will not adversely affect its business or
operating results.
Many of the Company's present and potential competitors have substantially
greater financial, marketing, technical and other resources than the Company
with which to pursue engineering, manufacturing, marketing, and distribution of
their products and may succeed in establishing technology standards or strategic
alliances in the wireless LAN market, obtain more rapid market acceptance for
their products, or otherwise gain a competitive advantage. There can be no
assurance that the Company will succeed in developing products or technologies
that are more effective than those developed by its competitors. Furthermore,
the Company competes with companies with high volume manufacturing and extensive
marketing and distribution capabilities, areas in which the Company has limited
experience. Increased competition, direct and indirect, could adversely affect
the Company's revenue and profitability through pricing pressure and loss of
market share. There can be no assurance that the Company will be able to compete
successfully against existing and new competitors as the market evolves and the
level of competition increases.
International Sales. Revenue from shipments by the Company to customers
outside the United States, principally to a limited number of international
distributors and OEM customers, represented 36%, 31% and 24% of total revenue
during the first quarter of 1997 and during 1996 and 1995, respectively. The
Company expects that revenue from shipments to international customers will
continue to represent a substantial portion of total revenue for the foreseeable
future. Sales to international customers or to U.S. OEM customers who ship to
international locations are subject to a number of risks and uncertainties
including, but not limited to, changes in foreign government regulations and
telecommunications standards, export license requirements, tariffs and taxes,
other trade barriers, fluctuations in currency exchange rates, difficulty in
collecting accounts receivable, difficulty in staffing and managing foreign
operations, and potential political and economic instability. While
international sales are typically denominated in U.S. dollars and the Company
generally extends limited credit terms, fluctuations in currency exchange rates
could cause the Company's products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales or
profitability in that country. Additionally, payment cycles for international
customers are usually longer than
12
<PAGE> 13
for customers in the United States. There can be no assurance that foreign
markets will continue to develop or that the Company will receive additional
orders to supply its products to foreign customers. The Company's business and
operating results could be materially and adversely affected if foreign markets
do not continue to develop or the Company does not receive additional orders to
supply its products for use by foreign customers.
Protection of Proprietary Rights. The Company relies on a combination of
patents, trademarks and non-disclosure agreements in order to establish and
protect its proprietary rights. Proxim has been issued three U.S. patents which
are important to the current business of the Company, and has six patent
applications pending in the U.S. which relate to the Company's core technology.
There can be no assurance that patents will issue from any of these pending
applications or, if patents do issue, that the claims allowed will be
sufficiently broad to protect the Company's technology. In addition, there can
be no assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
proprietary protection to the Company. Since U.S. patent applications are
maintained in secrecy until patents issue, and since publication of inventions
in the technical or patent literature tend to lag behind such inventions by
several months, the Company cannot be certain that it was the first creator of
the inventions covered by its issued patents or pending patent applications or
that it was the first to file patent applications for such inventions or that
the Company is not infringing on the patents of others. In addition, the Company
has filed, or reserved its rights to file, a number of patent applications
internationally. There can be no assurance that any such international patent
applications will issue or that the laws of foreign jurisdictions will protect
the Company's proprietary rights to the same extent as the laws of the United
States.
In view of the rapid technological change in this industry, Proxim believes
that the technical expertise and creative skills of its engineers and other
personnel are crucial in determining the Company's future success. The Company's
ability to compete in the marketplace may be enhanced by its ability to protect
its proprietary information through the ownership of patents, registrations, and
trademarks. The Company attempts to protect its trade secrets and other
proprietary information through agreements with customers and suppliers,
proprietary information agreements with employees and other security measures.
Although the Company intends to protect its rights vigorously, there can be no
assurance that these measures will be successful. Litigation may be necessary to
enforce the Company's patents, trademarks or other intellectual property rights,
to protect the Company's trade secrets, to determine the validity and scope of
the proprietary rights of others or to defend against claims of infringement.
Such litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business and operating
results. No intellectual property of the Company has been invalidated or
declared unenforceable. However, there can be no assurance that in the future
such rights will be upheld. Furthermore, there can be no assurance that any
issued patents will provide the Company with a competitive advantage or will not
be challenged by third parties or that the patents of others will not have an
adverse effect on the Company's ability to do business. There can be no
assurance that the measures taken by the Company will prevent misappropriation
of its technology. In addition, there can be no assurance that others will not
independently develop similar products, design around the Company's proprietary
technology or duplicate the Company's products.
Management of Growth. The Company's growth to date has caused, and will
continue to cause, a significant strain on its management, operational,
financial and other resources. The Company's ability to manage its growth
effectively will require it to improve its operational and financial systems.
These demands will require the addition of new management personnel and the
development of additional expertise by existing management. The failure of the
Company's management team to effectively manage growth, should it occur, could
have a material adverse impact on the Company's results of operations.
Uncertain Government Regulation. In the United States, the Company is
subject to various FCC rules and regulations. Current FCC regulations permit
license-free operation in certain FCC-certified bands in the radio spectrum.
Proxim's spread spectrum wireless products are certified for unlicensed
operation in the 902-928 MHz and 2.4-2.4835 GHz frequency bands. Operation in
these frequency bands is governed by rules set forth in
13
<PAGE> 14
Part 15 of the FCC regulations. The Part 15 rules are designed to minimize the
probability of interference to other users of the spectrum and, thus, accord
Part 15 systems secondary status. In the event that there is interference
between a primary user and a Part 15 user, a higher priority user can require
the Part 15 user to curtail transmissions that create interference. In this
regard, if users of the Company's products experience excessive interference
from primary users, market acceptance of the Company's products could be
adversely affected, thereby materially and adversely affecting the Company's
business and results of operations. The FCC, however, has established certain
standards which create an irrebuttable presumption of noninterference for Part
15 users and the Company believes that its products comply with such
requirements. There can be no assurance that the occurrence of regulatory
changes, including changes in the allocation of available frequency spectrum or
modification to the standards establishing an irrebuttable presumption for
unlicensed Part 15 users, would not significantly impact the Company's
operations by rendering current products obsolete, restricting the applications
and markets served by the Company's products or increasing the opportunity for
additional competition.
The Company's products are also subject to regulatory requirements in
international markets and, therefore, the Company has been monitoring the
development of spread spectrum regulations in certain countries that represent
potential markets for its products. The Company has limited experience in
gaining regulatory approval outside of the United States. Several foreign
countries, such as Canada, have regulations that closely follow those of the
FCC. To date, Proxim or its distribution partners have obtained certifications
for the Company's products in 24 countries as well as approval for use in over
20 additional countries which rely on or reference certification requirements of
regulatory bodies such as the FCC and the European Telecommunications Standards
Institute ("ETSI"). Each new Proxim product or OEM customer product must be
certified or otherwise qualified for use in each country. The Company has an
ongoing program to obtain certifications for its products and to assist certain
OEM customers in obtaining certification for their products in all available
markets. While there can be no assurance that the Company will be able to comply
with regulations in any particular country, the Company has designed its
RangeLAN2 products to minimize the design modifications required to meet various
2.4 GHz international spread spectrum regulations. Changes in, or the failure by
the Company to comply with, applicable domestic and international regulations
could have a material adverse effect on the Company's business and operating
results. In addition, with respect to those countries that do not follow FCC
regulations, Proxim may need to modify its products to meet local rules and
regulations.
Regulatory changes, including changes in the allocation of available
frequency spectrum, could significantly impact the Company's operations by
restricting the Company's development efforts, rendering current products
obsolete or increasing the opportunity for additional competition. In September
1993 and in February 1995, the FCC allocated additional spectrum for personal
communications services. In January 1997, the FCC authorized 300 MHz of
additional unlicensed frequencies in the 5 GHz frequency range. These changes in
the allocation of available frequency spectrum could create opportunities for
other wireless networking products and services. There can be no assurance that
new regulations will not be promulgated which could have a material adverse
effect on the Company's business and results of operations.
Expanded Distribution Required for Branded Products. To date, a substantial
percentage of Proxim's revenue has been derived from OEM customers through the
Company's direct sales force. The Company sells its branded RangeLAN2 products
through domestic and international distributors. In general, distributors offer
products of several different companies, including products that may compete
with the Company's products. Accordingly, these distributors may give higher
priority to products of other suppliers, thus reducing their efforts to sell the
Company's products. Agreements with distributors are generally terminable at the
distributor's option. A reduction in sales efforts or termination of a
distributor's relationship with the Company may have a material adverse effect
on the Company's future operating results. Use of distributors also entails the
risk that distributors will build up inventories in anticipation of substantial
growth in sales. If such growth does not
14
<PAGE> 15
occur as anticipated, these distributors may substantially decrease the amount
of product ordered in subsequent quarters. Such fluctuations could contribute to
significant variations in the Company's future operating results.
Dependence on Key Employees. The Company is highly dependent on the
technical and management skills of its key employees, in particular David C.
King, Chairman, President and Chief Executive Officer, and Juan Grau, Vice
President of Engineering. The Company does not have employment agreements with,
or life insurance on the life of, either person. The loss of the services of any
key employee could adversely affect the Company's business and operating
results. The Company's success also depends in large part on a limited number of
key technical, marketing and sales employees and on the Company's ability to
continue to attract, assimilate and retain additional highly talented personnel.
Competition for qualified personnel in the wireless data communications and
networking industries is intense. There can be no assurance that the Company
will be successful in retaining its key employees or that it can attract,
assimilate or retain the additional skilled personnel as required.
Volatility of Stock Price. Recently, the price of the Company's Common Stock
has been volatile. The Company believes that the price of its Common Stock may
continue to fluctuate, perhaps substantially, as a result of factors such as
announcements of developments relating to the Company's business, fluctuations
in the Company's operating results, general conditions in the wireless
communications industry or the worldwide economy, a shortfall in revenue or
earnings from securities analysts' expectations or other changes in financial
estimates by securities analysts, announcements of technological innovations or
new products or enhancements by the Company or its competitors, developments in
patent, copyrights or other intellectual property rights and developments in the
Company's relationships with its customers, distributors and suppliers. In
addition, in recent years the stock market in general, and the market for shares
of high technology stocks in particular, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. There can be no assurance that the market price of the
Company's Common Stock will not experience significant fluctuations in the
future, including fluctuations that are unrelated to the Company's performance.
15
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K:
None.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Mountain View, State of
California, on the 13th day of May, 1997.
PROXIM, INC.
By: /s/ Keith E. Glover
--------------------------------------------
Keith E. Glover,
Vice President of Finance and Administration
and Chief Financial Officer
Dated: May 13, 1997
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 55,564
<SECURITIES> 0
<RECEIVABLES> 12,040
<ALLOWANCES> 100
<INVENTORY> 9,554
<CURRENT-ASSETS> 78,406
<PP&E> 7,684
<DEPRECIATION> 3,639
<TOTAL-ASSETS> 83,821
<CURRENT-LIABILITIES> 6,024
<BONDS> 0
0
0
<COMMON> 78,683
<OTHER-SE> (886)
<TOTAL-LIABILITY-AND-EQUITY> 83,821
<SALES> 12,493
<TOTAL-REVENUES> 12,493
<CGS> 6,550
<TOTAL-COSTS> 6,550
<OTHER-EXPENSES> 4,184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (719)
<INCOME-PRETAX> 2,478
<INCOME-TAX> 867
<INCOME-CONTINUING> 1,611
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,611
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
