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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, 1998
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, 1998
-------------- --------------------------------
Common Stock, par value $.001 per share 10,278,177
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PROXIM, INC.
Index
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION Page
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<S> <C>
Item 1. Financial Statements:
Balance Sheet at March 31, 1998 and December 31, 1997................3
Statement of Operations for the Three Months Ended
March 31, 1998 and 1997............................................4
Statement of Cash Flows for the Three Months Ended
March 31, 1998 and 1997............................................5
Notes to Financial Statements........................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................17
</TABLE>
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PROXIM, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 38,984 $ 62,296
Marketable securities .................................... 22,638 --
Accounts receivable, net ................................. 7,344 6,879
Inventories .............................................. 11,868 12,309
Deferred tax assets ...................................... 1,625 1,625
Other current assets ..................................... 303 346
-------- --------
Total current assets .................................. 82,762 83,455
Property and equipment, net .................................. 3,518 3,786
Deferred tax assets .......................................... 1,818 1,818
-------- --------
$ 88,098 $ 89,059
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 1,202 $ 1,354
Other current liabilities ................................ 6,900 9,030
-------- --------
Total current liabilities ............................. 8,102 10,384
-------- --------
Stockholders' equity:
Common Stock, $.001 par value, 25,000 shares authorized;
10,278 and 10,194 shares issued and outstanding .......... 10 10
Additional paid-in capital ................................ 81,523 81,068
Accumulated deficit ....................................... (1,537) (2,403)
-------- --------
Total stockholders' equity ............................ 79,996 78,675
-------- --------
$ 88,098 $ 89,059
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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PROXIM, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
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<S> <C> <C>
Revenue ............................................ $10,250 $12,493
Cost of revenue .................................... 5,299 6,550
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Gross profit ....................................... 4,951 5,943
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Operating expenses:
Research and development ....................... 1,811 1,479
Selling, general and administrative ............ 2,698 2,705
------- -------
Total operating expenses .................... 4,509 4,184
------- -------
Income from operations ............................. 442 1,759
Interest and other income, net ..................... 795 719
------- -------
Income before income taxes ......................... 1,237 2,478
Provision for income taxes ......................... 371 867
------- -------
Net income ......................................... $ 866 $ 1,611
======= =======
Basic net income per share ......................... $ 0.08 $ 0.16
======= =======
Weighted average common shares ..................... 10,251 9,860
======= =======
Diluted net income per share ....................... $ 0.08 $ 0.15
======= =======
Weighted average common shares and equivalents ..... 10,875 10,568
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PROXIM, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................. $ 866 $ 1,611
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization .............................................. 428 389
Changes in assets and liabilities:
Accounts receivable, net ................................................ (465) (1,669)
Inventories .......................................................... 441 925
Other assets ............................................................ 43 (321)
Accounts payable ........................................................ (152) 73
Other current liabilities ............................................... (2,130) 211
-------- --------
Net cash provided by (used in) operating activities .................. (969) 1,219
-------- --------
Cash flows used in investing activities:
Purchases of property and equipment ...................................... (160) (432)
Purchase of marketable securities ........................................ (22,638) --
------- -------
Net cash used in investing activities ................................ (22,798) (432)
------- -------
Cash flows provided by financing activities from issuance of Common Stock ...... 455 545
-------- --------
Net increase (decrease) in cash and cash equivalents ........................... (23,312) 1,332
Cash and cash equivalents, beginning of period ................................. 62,296 54,232
-------- --------
Cash and cash equivalents, end of period ....................................... $ 38,984 $ 55,564
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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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, 1997,
included in the 1997 Annual Report on Form 10-K. The results of operations for
the three months ended March 31, 1998 are not necessarily indicative of results
that may be expected for the entire year ending December 31, 1998.
INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Raw materials ........ $ 5,789 $ 6,032
Work-in-process ...... 5,573 5,831
Finished goods ....... 506 446
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$11,868 $12,309
======= =======
</TABLE>
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS
130 establishes new rules for the reporting of comprehensive income and its
components; however, the adoption of SFAS 130 had no impact on the Company's net
income or shareholders' equity. SFAS 130 requires unrealized gains or losses on
the Company's available-for-sale securities and foreign currency translation
adjustments to be included in other comprehensive income. Such items were
reported in shareholders' equity prior to the adoption of SFAS 130.
NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures
About Segments of an Enterprise and Related Information." SFAS 131 is effective
for annual reports for fiscal years beginning after December 15, 1997, and
applicable to interim financial statements beginning in the second year of
application, along with comparative information for interim periods in the
initial year of application.
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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 1997 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,
-----------------------
1998 1997
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<S> <C> <C>
Revenue ..................................... 100.0% 100.0%
Cost of revenue ............................. 51.7% 52.4%
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Gross profit ................................ 48.3% 47.6%
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Operating expenses:
Research and development ................ 17.7% 11.8%
Selling, general and administrative ..... 26.3% 21.7%
------ ------
Total operating expenses ............. 44.0% 33.5%
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Income from operations ...................... 4.3% 14.1%
Interest and other income, net .............. 7.7% 5.7%
------ ------
Income before income taxes .................. 12.0% 19.8%
Provision for income taxes .................. 3.6% 6.9%
------ ------
Net income .................................. 8.4% 12.9%
====== ======
</TABLE>
RESULTS OF OPERATIONS
REVENUE
Revenue decreased 18% in the first quarter of 1998 compared to the
first quarter of 1997. The decrease in revenue in the first quarter of 1998
compared to the first quarter of 1997 was primarily attributable to a
significant decrease in orders from NTT-IT, one of the Company's major
customers, and lower revenue from 900 MHz products, partially offset by
increased revenue from shipments to distributors and OEM customers that sell
RangeLAN2-based 2.4 GHz product lines in North America and Europe.
GROSS PROFIT
Gross profit as a percentage of revenue was 48.3% and 47.6% in the
first quarter of 1998 and 1997, respectively. Gross profit as a percentage of
revenue increased in the first quarter of 1998 compared to the first
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quarter of 1997 due to engineering cost reductions on 2.4 GHz products,
partially offset by declining average selling prices on 2.4 GHz products and a
decrease in revenue from higher gross margin 900 MHz products.
RESEARCH AND DEVELOPMENT
Research and development expenses increased in the first quarter of
1998 compared to the first quarter of 1997 primarily due to the increased number
of engineering employees, continued investment in integrating the Company's
technology into application specific integrated circuits ("ASICs"), development
of wireless protocols and network software drivers, costs related to performance
enhancements, cost reductions in the RangeLAN2 architecture, costs related to
both domestic and international product certifications, development of products
based on Institute of Electrical and Electronics Engineers ("IEEE") 802.11
standard and development of 5 GHz high-speed wireless LAN technology. Research
and development expenses increased as percentage of revenue in the first quarter
of 1998 compared to the first quarter of 1997 primarily due to a decrease in
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 were flat in the first
quarter of 1998 compared to the first quarter of 1997. Selling, general and
administrative expenses increased as a percentage of revenue in the first
quarter of 1998 compared to the first quarter of 1997 primarily due to a
decrease in revenue. The Company expects that selling, general and
administrative expenses will vary over time as a percentage of revenue.
INTEREST AND OTHER INCOME, NET
Interest and other income, net increased in the first quarter of 1998
compared to the first quarter of 1997 primarily due to higher average cash
balances.
INCOME TAXES
The Company's estimated effective income tax rate was 30% and 35% for
the first quarter of 1998 and 1997, respectively. The 1998 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 1998, $969,000 of cash was used in operating
activities primarily to fund an increase in accounts receivable and a decrease
in other current liabilities and accounts payable, partially offset by net
income for the period and cash provided by a decrease in inventory. In the first
quarter of 1997, $1,219,000 of cash was provided by operating activities,
primarily by net income and a decrease in inventory, partially offset by cash
used to fund an increase in accounts receivable.
In the first quarter of 1998 and 1997, the Company purchased $160,000
and $432,000, respectively, of property and equipment. Capital expenditures in
the first quarter of 1998 were primarily for manufacturing and engineering test
equipment. Capital expenditures in the first quarter of 1997 were primarily for
manufacturing and engineering test equipment, leasehold improvements and office
furniture related to the Company's facilities expansion.
At March 31, 1998, the Company had working capital of $74,660,000,
including $38,984,000 in cash and cash equivalents and $22,638,000 in marketable
securities. The Company believes that its working capital and
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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 major customers, loss of one or more of
the Company's major 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, market adoption of
standards-based products (such as those compliant with the recently approved
IEEE 802.11 standard), 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, product health and safety
concerns, Year 2000 issues 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
1997, the Company experienced a decrease in revenue and an operating loss as a
result of a significant decrease in orders from two of the Company's major
customers. There can be no assurance that the Company will not experience future
quarter to quarter decreases in revenue 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. For
example, in the third quarter of 1997 the Company announced that revenue and
operating results were expected to be significantly below expectations of
securities analysts and investors, resulting in a decrease in the market price
of the Company's Common Stock.
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 62%, 62% and
60% of the Company's sales during the first quarter of 1998, 1997 and 1996,
respectively, were to OEM customers. In addition, sales to one customer
represented approximately 42% of the Company's revenue in the first quarter of
1998. Sales to three customers represented approximately 28%, 17% and 10% of the
Company's revenue during 1997. 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
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Company also has experienced quarter to quarter variability in sales to each of
its major OEM customers and expects this pattern to continue in the future.
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 wireless LAN products generally involve significant commitments of capital
and other resources by the Company and its customers, with the attendant delays
associated with procedures to approve such commitments. In this regard, in the
fourth quarter of 1997, the Company took a one-time charge of $2,400,000 to
selling, general and administrative expense related to two investments: one in a
startup wireless services company utilizing wireless LAN technology and the
other in a developer of mobile thin-client computing technology. 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. The loss of one or more of, or a significant
reduction in orders from, the Company's major OEM customers could have a
material adverse effect on the Company's results of operations. For example, in
the third quarter of 1997, the Company experienced a significant decrease in
orders from two of the Company's major customers resulting in a decrease in
revenue, an operating loss and higher inventory levels. 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 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.
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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
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 eighteen 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's research and development efforts are focused on implementing
enhancements to existing products, investigating new technologies and developing
new products. Since 1994 the Company's research and development efforts have
been concentrated on enhancing features and performance and reducing the cost of
the RangeLAN2-based products. These efforts include developing and integrating
the Company's technology into ASICs/MMICs, development of wireless protocols and
network software drivers, performance enhancements and cost reductions to
wireless adapter and access point products and efforts related to both domestic
and international product certification. In 1997 the Company substantially
increased its research and development efforts in developing IEEE 802.11
standard based products and 5 GHz high-speed wireless LAN technology.
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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 or retain qualified engineers to develop such
technologies and products, its future operating results would be materially and
adversely affected. In particular, the Company has expended substantial
resources in developing products that are designed to conform to the IEEE 802.11
standard that received final approval in June 1997. There can be no assurance
that the Company will introduce IEEE 802.11 compliant products in a timely
manner or that this standard will have a meaningful commercial impact. Any delay
in the commercial availability of the Company's IEEE 802.11 compliant products
could have a material adverse effect on the Company's results of operations,
particularly if its competitors are able to develop and introduce competitive
products which conform to this standard more rapidly than the Company.
The Company expects to substantially increase its research and development
expenses to develop new technologies related to 5 GHz high-speed wireless LAN
products. In this regard, in the fourth quarter of 1997, the Company took a
one-time pre-tax charge of $2,500,000 to research and development expense for
the purchase of in-process technology related to developing 5 GHz high-speed
wireless LAN products. 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.
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 have announced their intention to offer competitive 2.4
GHz products and solutions. Certain of these competitors have developed or
announced their intention to develop IEEE 802.11 standard-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. For example, in March 1998, an industry consortium known as
the Home Radio Frequency Working Group (HRFWG) was formed. The HRFWG expects to
publish in 1998 an open specification for home wireless communications, called
the Shared Wireless Access Protocol (SWAP). The HRFWG is led by core members
Compaq Computer Corporation, Ericsson Enterprise Networks, Hewlett-Packard, IBM,
Intel, Microsoft, Motorola, Philips Consumer Communications L.P., Proxim and
Symbionics, and supported by Butterfly Communications, Harris Semiconductor,
Intellon, National Semiconductor, Rockwell Semiconductor Systems and Samsung
Electronics
12
<PAGE> 13
America, Inc. There can be no assurance that the Company will introduce SWAP
compliant products in a timely manner or that this open specification will have
a meaningful commercial impact. Any delay in the commercial availability of the
Company's SWAP compliant products could have a material adverse effect on the
Company's results of operations, particularly if its competitors are able to
develop and introduce competitive products which conform to this open
specification more rapidly than the Company.
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 13%, 26% and 31% of total revenue
during the first quarter of 1998, 1997 and 1996, respectively. The Company
expects that revenue from shipments to international customers will vary over
time as a percentage of revenue. 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 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. In the latter part of 1997, capital markets in Asia were highly
volatile resulting in fluctuations in Asian currencies and other economic
instabilities. These instabilities may continue or worsen, either of which could
have a material adverse effect on the Company's results of operations. In this
regard, in the third and fourth quarter of 1997 and first quarter of 1998, the
Company experienced a significant decrease in orders from NTT-IT, one of the
Company's major Japanese customers, resulting in a significant decrease in
quarterly revenue and an operating loss in the third quarter of 1997.
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
13
<PAGE> 14
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 Federal Communication Commission ("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 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.
14
<PAGE> 15
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 over 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 and IEEE 802.11 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.
Emission of Electromagnetic Radiation. The intentional emission of
electromagnetic radiation has been the subject of recent public concern
regarding possible health and safety risks, and though the Company's products,
when installed in any of the intended configurations, will not exceed the
maximum permissible exposure limits listed in Section 1.1311 of the Federal
Communications Commission Regulations, there can be no assurance that such
safety issues will not arise in the future and will not have a materially
adverse effect on the Company's business.
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 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
15
<PAGE> 16
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 the
third quarter of 1997, the Company announced revenue and operating results below
expectations of securities analysts and investors, resulting in a decrease in
the market price of the Company's Common Stock. 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.
Year 2000 Impact. Customary computer programming practices, developed prior
to the upcoming change in the century becoming a concern, have used two digits
rather than four to identify the year in a date field. If not corrected, many
computer applications may fail to treat year dates intended to represent years
in the twenty-first century as such but instead treat them as still in the
twentieth century, potentially resulting in system failure or miscalculations
disruptive of business operations, including, among other things, an inability
to initiate, receive, process, invoice or otherwise complete normal business
activities. These Year 2000 issues affect virtually all companies and
organizations.
The Year 2000 issues affect the Company's internal operations. The Company
is working with outside contractors to develop and install a new corporate-wide
information system. The new system was identified as a strategic business
initiative independent of Year 2000 considerations. While the new information
system will be a dynamic one permitting ongoing improvements as business needs
are identified, the basic operational systems are expected to be substantially
completed during early 1999 at a total estimated expenditure of approximately $2
million. Those time and cost targets are management's current best estimates
based on presently available information and numerous assumptions. Given the
uncertainties and complexities inherent in any new system installation, there
can be no assurance that the project will be completed within the estimated time
and cost parameters. The portions of the Company's existing information system
which would require correction for Year 2000 issues will be superseded as part
of this larger, new system implementation, which is being designed to be Year
2000 compliant.
The impact of Year 2000 issues on the Company will also be affected by the
Year 2000 readiness of its customers as well as of its suppliers of raw
materials, components and software, outside contract manufacturers, and its
providers of facilities, equipment and services and any failure on their part to
achieve readiness in their own operations or with respect to the items they
supply or otherwise provide to the Company. While the Company is beginning to
consider what inquiries might be appropriate to make of such other parties
(principally of its suppliers and other providers) in these regards, there can
be no assurance that the Year 2000 issues confronting such other parties and any
failure on their part to timely address them will not have a material adverse
effect on the Company.
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
None.
B. Reports on Form 8-K:
None.
17
<PAGE> 18
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, 1998.
PROXIM, INC.
By: /s/ Keith E. Glover
---------------------------------------------
Keith E. Glover,
Vice President of Finance and Administration
and Chief Financial Officer
Dated: May 13, 1998
18
<PAGE> 19
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 38,984
<SECURITIES> 22,638
<RECEIVABLES> 7,844
<ALLOWANCES> 500
<INVENTORY> 11,868
<CURRENT-ASSETS> 82,762
<PP&E> 8,836
<DEPRECIATION> 5,318
<TOTAL-ASSETS> 88,098
<CURRENT-LIABILITIES> 8,102
<BONDS> 0
0
0
<COMMON> 81,533
<OTHER-SE> (1,537)
<TOTAL-LIABILITY-AND-EQUITY> 88,098
<SALES> 10,250
<TOTAL-REVENUES> 10,250
<CGS> 5,299
<TOTAL-COSTS> 5,299
<OTHER-EXPENSES> 4,509
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 795
<INCOME-PRETAX> 1,237
<INCOME-TAX> 371
<INCOME-CONTINUING> 866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 866
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
