<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 SEPTEMBER 30, 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
(650) 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 September 30, 1998
-------------- ------------------------------------
Common Stock, par value $.001 per share 10,326,396
<PAGE> 2
PROXIM, INC.
Index
PART 1 - FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Balance Sheet at September 30, 1998 and December 31, 1997.............3
Statement of Operations for the Three Months and Nine Months
Ended September 30, 1998 and 1997..................................4
Statement of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997........................................5
Notes to Financial Statements.........................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.....................................7
PART II - OTHER INFORMATION
Item 6. Reports on Form 8-K..............................................18
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PROXIM, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 35,622 $ 62,296
Marketable securities ........................... 28,358 --
Accounts receivable, net ........................ 7,622 6,879
Inventories ..................................... 11,843 12,309
Deferred tax assets ............................. 1,625 1,625
Other current assets ............................ 361 346
-------- --------
Total current assets ................... 85,431 83,455
Property and equipment, net .............................. 3,409 3,786
Deferred tax assets ...................................... 1,818 1,818
-------- --------
$ 90,658 $ 89,059
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 1,768 $ 1,354
Other current liabilities ....................... 5,666 9,030
-------- --------
Total current liabilities .............. 7,434 10,384
-------- --------
Stockholders' equity:
Common Stock, $.001 par value, 25,000 shares
authorized; 10,326 and 10,194 shares issued
and outstanding ............................... 10 10
Additional paid-in capital ...................... 81,926 81,068
Retained earnings (accumulated deficit) ......... 1,288 (2,403)
-------- --------
Total stockholders' equity ............. 83,224 78,675
-------- --------
$ 90,658 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue ...................................... $ 13,302 $ 8,101 $ 35,052 $ 33,694
Cost of revenue .............................. 6,892 4,204 18,136 17,558
-------- -------- -------- --------
Gross profit ................................. 6,410 3,897 16,916 16,136
-------- -------- -------- --------
Operating expenses:
Research and development .................. 1,916 1,606 5,703 4,611
Selling, general and administrative ....... 2,989 2,861 8,430 8,340
-------- -------- -------- --------
Total operating expenses ... 4,905 4,467 14,133 12,951
-------- -------- -------- --------
Income (loss) from operations ............... 1,505 (570) 2,783 3,185
Interest and other income, net ............... 873 797 2,488 2,256
-------- -------- -------- --------
Income before income taxes ................... 2,378 227 5,271 5,441
Provision for income taxes ................... 713 79 1,580 1,904
-------- -------- -------- --------
Net income ................................... $ 1,665 $ 148 $ 3,691 $ 3,537
======== ======== ======== ========
Basic net income per share ................... $ 0.16 $ 0.01 $ 0.36 $ 0.35
======== ======== ======== ========
Weighted average common shares ............... 10,311 10,123 10,285 10,005
======== ======== ======== ========
Diluted net income per share ................. $ 0.15 $ 0.01 $ 0.34 $ 0.34
======== ======== ======== ========
Weighted average common shares and equivalents 11,152 10,641 11,016 10,549
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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PROXIM, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 3,691 $ 3,537
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ....................................... 1,442 1,218
Changes in assets and liabilities:
Accounts receivable, net ........................................ (743) 1,213
Inventories ..................................................... 466 (1,540)
Other assets .................................................... (15) (477)
Accounts payable ................................................ 414 (355)
Other current liabilities ....................................... (3,364) 1,107
-------- --------
Net cash provided by operating activities .................. 1,891 4,703
-------- --------
Cash flows used in investing activities:
Purchases of property and equipment ................................. (897) (1,210)
Available-for-sale securities, net .................................. (28,526) --
-------- --------
Net cash used in investing activities ...................... (29,423) (1,210)
-------- --------
Cash flows provided by financing activities from issuance of
Common Stock .......................................................... 858 1,641
-------- --------
Net increase (decrease) in cash and cash equivalents ..................... (26,674) 5,134
Cash and cash equivalents, beginning of period ........................... 62,296 54,232
-------- --------
Cash and cash equivalents, end of period ................................. $ 35,622 $ 59,366
======== ========
</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 nine months ended September 30, 1998 are not necessarily indicative of
results that may be expected for the entire year ending December 31, 1998.
INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Raw materials ............ $ 5,240 $ 6,032
Work-in-process .......... 5,957 5,831
Finished goods ........... 646 446
------- -------
$11,843 $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. 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
stockholders' equity prior to the adoption of SFAS 130; however, the adoption of
SFAS 130 had no material impact on the Company's net income or stockholders'
equity.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue ...................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue .............................. 51.8% 51.9% 51.8% 52.1%
------ ------ ------ ------
Gross profit ................................. 48.2% 48.1% 48.3% 47.9%
------ ------ ------ ------
Operating expenses:
Research and development ............ 14.4% 19.8% 16.3% 13.7%
Selling, general and administrative.. 22.5% 35.3% 24.1% 24.7%
------ ------ ------ ------
Total operating expenses.. 36.9% 55.1% 40.4% 38.4%
------ ------ ------ ------
Income from operations ....................... 11.3% (7.0%) 7.9% 9.5%
Interest and other income, net ............... 6.6% 9.8% 7.1% 6.7%
------ ------ ------ ------
Income (loss) before income taxes ............ 17.9% 2.8% 15.0% 16.2%
Provision for income taxes ................... 5.4% 1.0% 4.5% 5.7%
------ ------ ------ ------
Net income ................................... 12.5% 1.8% 10.5% 10.5%
====== ====== ====== ======
</TABLE>
RESULTS OF OPERATIONS
REVENUE
Revenue increased 64% in the third quarter of 1998 compared to the
third quarter of 1997 and 4% in the first nine months of 1998 compared to the
first nine months of 1997. The increase in revenue in the third quarter of 1998
compared to the third quarter of 1997 was primarily attributable to shipments to
distributors and OEM customers that sell RangeLAN2-based 2.4 GHz product lines
in North America, Europe and Japan. The increase in revenue in the first nine
months of 1998 compared to the first nine months of 1997 was primarily
attributable to shipments to distributors and OEM customers that sell
RangeLAN2-based 2.4 GHz product lines in North America and Europe, partially
offset by a significant decrease in orders from NTT-IT, and to a lessor extent,
lower revenue from 900 MHz products.
7
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GROSS PROFIT
Gross profit as a percentage of revenue was 48.2% and 48.1% in the
third quarters of 1998 and 1997, respectively, and 48.3% and 47.9% in the first
nine months of 1998 and 1997, respectively. Gross profit as a percentage of
revenue increased in the interim periods of 1998 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. Gross profit as a percentage of revenue may fluctuate in
future periods depending primarily on the mix of revenue between existing 2.4
GHz products and 900 MHz products, and recently announced 2.4 GHz products.
RESEARCH AND DEVELOPMENT
Research and development expenses increased in absolute dollars during
the interim periods of 1998 compared to the interim periods 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 product performance enhancements, development of
cost-reduced 2.4 GHz products, 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 decreased
as percentage of revenue in the third quarter of 1998 compared to the third
quarter of 1997 primarily due to the increase 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 increased in absolute
dollars during the interim periods of 1998 compared to the interim periods of
1997 primarily due to the hiring of additional marketing and sales personnel, as
well as increased trade show and promotional expenses. Selling, general and
administrative expenses decreased as a percentage of revenue in the interim
periods of 1998 compared to the interim periods of 1997 primarily due to a
increase 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 interim periods of 1998
compared to the interim periods of 1997 primarily due to higher yields on cash
balances.
INCOME TAXES
The Company's estimated effective income tax rate was 30% and 35% for
the interim periods of 1998 and 1997, respectively. The 1998 estimated effective
income tax rate is less than the combined federal and state statutory rates
based primarily on tax credits.
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of 1998, $1,891,000 of cash and cash
equivalents were provided by operating activities, primarily by net income, a
decrease in inventory and an increase in accounts payable, partially offset by
cash used to fund an increase in accounts receivable and a decrease in other
current liabilities. In the first nine months of 1997, $4,703,000 of cash and
cash equivalents was provided by operating activities, primarily by net
8
<PAGE> 9
income, a decrease in accounts receivable and an increase in accrued
liabilities, partially offset by an increase in inventory.
In the first nine months of 1998 and 1997, the Company purchased
$897,000 and $1,210,000, respectively, of property and equipment. Capital
expenditures in the first nine months of 1998 were primarily for manufacturing
and engineering test equipment and marketing trade show equipment. Capital
expenditures in the first nine months of 1997 were primarily for manufacturing
and engineering test equipment, leasehold improvements and office furniture
related to the Company's facilities expansion.
At September 30, 1998, the Company had working capital of $77,997,000,
including $35,622,000 in cash and cash equivalents and $28,358,000 in marketable
securities. 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 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 subcontract manufacturers, 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
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<PAGE> 10
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 revenue during the first nine months of 1998, and calendar year
1997 and 1996, respectively, were to OEM customers. In addition, sales to one
customer represented approximately 40% of the Company's revenue in the first
nine months 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 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. Due to the
nature of these entities and their operations, there can be no assurance that
these investments will be realizable or will result in marketable and/or
successful products. 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
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<PAGE> 11
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
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.
The Company has in the past 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
six 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
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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 and the first nine months of 1998 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.
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's IEEE 802.11 compliant products or the IEEE 802.11 standard
will have a meaningful commercial impact. Any delay in the broad 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 has substantially increased 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 this investment will result in marketable and/or
successful products. Additionally, 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 greater resources, 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 offer, or 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
12
<PAGE> 13
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 by the end of 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 numerous other companies. 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.
Historically, a substantial portion of the Company's revenue has been derived
from a limited number of customers, most of which are OEM customers. The
Company's future growth depends, in part, on its ability to successfully
penetrate and expand its revenues in new markets, including consumer products,
as well as increased revenue from a limited number of OEM customers. There can
be no assurance that penetration and expansion into new and existing markets can
be profitably achieved.
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 16%, 26% and 31% of total revenue
during the first nine months of 1998, and calendar year 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, or geographical region, leading to a reduction in sales or
profitability in that country or geographic region. 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 and throughout 1998, capital
markets in Asia were highly volatile resulting in fluctuations in Asian
currencies and other economic instabilities. These instabilities may
13
<PAGE> 14
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 six months 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 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
14
<PAGE> 15
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.
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
15
<PAGE> 16
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. Although the Company has entered change of control
severance agreements with each of Mr. King and Mr. Grau, 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 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 permit ongoing improvements as business needs are identified, the
basic operational systems are not expected to be substantially completed until
mid 1999 at a total estimated expenditure of approximately $2 million.
16
<PAGE> 17
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
make inquiries of other parties (principally of its suppliers and other
providers), 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.
17
<PAGE> 18
ITEM 6. REPORTS ON FORM 8-K
A. Reports on Form 8-K:
None.
18
<PAGE> 19
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 November, 1998.
PROXIM, INC.
By: /s/ Keith E. Glover
------------------------------------------
Keith E. Glover,
Vice President of Finance and Administration
and Chief Financial Officer
Dated: November 13, 1998
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 35,622
<SECURITIES> 28,358
<RECEIVABLES> 8,022
<ALLOWANCES> 400
<INVENTORY> 11,843
<CURRENT-ASSETS> 85,431
<PP&E> 9,574
<DEPRECIATION> 6,165
<TOTAL-ASSETS> 90,658
<CURRENT-LIABILITIES> 7,434
<BONDS> 0
0
0
<COMMON> 81,936
<OTHER-SE> 1,288
<TOTAL-LIABILITY-AND-EQUITY> 90,658
<SALES> 13,302
<TOTAL-REVENUES> 13,302
<CGS> 6,892
<TOTAL-COSTS> 6,892
<OTHER-EXPENSES> 4,905
<LOSS-PROVISION> 1,505
<INTEREST-EXPENSE> 873
<INCOME-PRETAX> 2,378
<INCOME-TAX> 713
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,665
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
</TABLE>
