<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, 2000
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.)
510 DEGUIGNE DRIVE
SUNNYVALE, CALIFORNIA 94086
(408) 731-2700
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
--------------
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.
<TABLE>
<CAPTION>
Title of Class Outstanding as of September 30, 2000
-------------- ------------------------------------
<S> <C>
Common Stock, par value $.001 per share 26,219,986
</TABLE>
<PAGE> 2
PROXIM, INC.
Index
<TABLE>
<CAPTION>
PART 1 -- FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements:
Balance Sheets at September 30, 2000 and December 31, 1999..................... 3
Statements of Operations for the Three Months Ended and
Nine Months Ended September 30, 2000 and 1999................................ 4
Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999.................................................. 5
Condensed 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...........................................23
</TABLE>
2
<PAGE> 3
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 30,212 $ 46,924
Marketable securities .......................................... 12,581 21,341
Accounts receivable, net ....................................... 26,876 15,819
Inventories .................................................... 30,337 14,862
Deferred tax assets ............................................ 3,390 3,390
Other current assets ........................................... 1,422 670
--------- ---------
Total current assets ....................................... 104,818 103,006
Property and equipment, net ........................................ 9,019 7,157
Goodwill and other intangibles ..................................... 43,461 13,637
Marketable securities, long-term ................................... 19,482 19,868
Equity investment .................................................. 7,900 3,000
Deferred tax assets ................................................ 1,200 1,200
--------- ---------
$ 185,880 $ 147,868
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 4,689 $ 3,199
Other current liabilities ...................................... 6,699 9,003
--------- ---------
Total current liabilities ................................. 11,388 12,202
Long-term debt ..................................................... 542 542
Deferred tax liabilities ........................................... 4,827 1,758
--------- ---------
Total liabilities .......................................... 16,757 14,502
--------- ---------
Commitments
Stockholders' equity:
Common Stock, $.001 par value, 100,000 shares authorized; 26,220
and 24,644 shares issued and outstanding .................... 26 25
Additional paid-in capital ..................................... 163,314 127,649
Unrealized losses on investments ............................... (113) (379)
Retained earnings .............................................. 5,896 6,071
--------- ---------
Total stockholders' equity ................................. 169,123 133,366
--------- ---------
$ 185,880 $ 147,868
========= =========
</TABLE>
The accompanying condensed notes are an
integral part of these financial statements.
3
<PAGE> 4
PROXIM, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue ................................................. $ 29,297 $ 18,229 $ 73,871 $ 49,689
Cost of revenue, including amortization of intangible
assets of $699 and $1,367 in the three and nine months
ended September 30, 2000 ............................. 16,485 9,658 42,962 26,194
-------- -------- -------- --------
Gross profit ............................................ 12,812 8,571 30,909 23,495
-------- -------- -------- --------
Operating expenses:
Research and development ............................. 3,070 2,605 8,775 7,028
Purchased in-process research and development ........ 8,040 -- 8,531 2,000
Selling, general and administrative .................. 6,721 3,619 14,987 9,855
Amortization of goodwill ............................ 1,096 -- 2,228 --
-------- -------- -------- --------
Total operating expenses .......................... 18,927 6,224 34,521 18,883
-------- -------- -------- --------
Income (loss) from operations ........................... (6,115) 2,347 (3,612) 4,612
Interest and other income, net .......................... 892 1,184 3,214 3,035
-------- -------- -------- --------
Income (loss) before income taxes ....................... (5,223) 3,531 (398) 7,647
Provision (benefit) for income taxes .................... (2,563) 1,231 (223) 3,373
-------- -------- -------- --------
Net income (loss) ....................................... $ (2,660) $ 2,300 $ (175) $ 4,274
======== ======== ======== ========
Basic net income (loss) per share ....................... $ (0.10) $ 0.10 $ (0.01) $ 0.19
======== ======== ======== ========
Weighted average common shares .......................... 25,657 23,646 25,316 22,548
======== ======== ======== ========
Diluted net income (loss) per share ..................... $ (0.10) $ 0.09 $ (0.01) $ 0.17
======== ======== ======== ========
Weighted average common shares and equivalents .......... 25,657 26,664 25,316 25,444
======== ======== ======== ========
</TABLE>
The accompanying condensed notes are an
integral part of these financial statements.
4
<PAGE> 5
PROXIM, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ (175) $ 4,274
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Charge for equity investment .................................. 1,100 --
In-process research and development ........................... 8,531 2,000
Depreciation .................................................. 2,184 1,354
Amortization .................................................. 3,595 --
Changes in assets and liabilities, net of acquisition effect:
Accounts receivable ......................................... (8,839) (1,792)
Inventories ................................................. (14,686) (1,380)
Other assets ................................................ (356) (95)
Accounts payable ............................................ (2,522) 354
Other liabilities ........................................... (6,650) 1,493
-------- --------
Net cash provided by (used in) operating activities ..... (17,818) 6,208
-------- --------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment .......................... (3,550) (4,522)
Marketable securities ....................................... 9,412 (17,989)
Equity investments .......................................... (6,000) (4,000)
Cash paid for acquisition of Farallon Communications, Inc. .. (3,172) --
-------- --------
Net cash used in investing activities ................... (3,310) (26,511)
-------- --------
Cash flows provided by financing activities from issuance
of Common Stock, net .......................................... 4,416 25,113
-------- --------
Net increase (decrease) in cash and cash equivalents ............ (16,712) 4,810
Cash and cash equivalents, beginning of period .................. 46,924 39,117
-------- --------
Cash and cash equivalents, end of period ........................ $ 30,212 $ 43,927
======== ========
Supplemental disclosures of non cash investing activities:
Issuance of common stock to acquire Farallon ................ $ 10,000 --
Issuance of common stock to acquire Siemens Development
Group ..................................................... $ 21,250 --
</TABLE>
The accompanying condensed notes are an
integral part of these financial statements.
5
<PAGE> 6
PROXIM, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying financial statements include all adjustments (consisting
only of normal recurring adjustments) which the company considers necessary for
a fair presentation of the results of operations for the interim periods covered
and the financial condition at the date of the balance sheets. All historical
financial information and analysis have been restated to reflect the acquisition
of Micrilor, Inc. in January 2000, which was accounted for as a pooling of
interests. The interim financial information is unaudited. This Quarterly Report
on Form 10-Q should be read in conjunction with our audited financial statements
for the year ended December 31, 1999, included in the 1999 Annual Report on Form
10-K. The results of operations for the three and nine months ended September
30, 2000 are not necessarily indicative of results that may be expected for the
entire year ended December 31, 2000.
INVENTORIES (IN THOUSANDS):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Raw materials .................. $17,912 $ 8,047
Work-in-process ................ 10,971 6,542
Finished goods ................. 1,454 273
------- -------
$30,337 $14,862
======= =======
</TABLE>
NET INCOME (LOSS) PER SHARE:
The net income (loss) per share and number of shares used in the
computation have been retroactively restated for all periods presented to
reflect the two-for-one stock split that was effective on August 21, 2000.
The following table is a reconciliation of the numerators and denominators
of the basic and diluted net income per share calculations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------------------- ---------------------
<S> <C> <C> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE:
Net income (loss) available to Common
Stockholders ............................... $ (2,660) $ 2,300 $ (175) $ 4,274
======== ======== ======= =======
Weighted average common shares ............... 25,657 23,646 25,316 22,548
======== ======== ======= =======
Basic net income (loss) per share ............ $ (.10) $ .10 $ (.01) $ .19
======== ======== ======= =======
DILUTED NET INCOME (LOSS) PER SHARE:
Net income (loss) available to Common
Stockholders .............................. $ (2,660) $ 2,300 $ (175) $ 4,274
======== ======== ======= =======
Weighted average common shares ............... 25,657 23,646 25,316 22,548
Dilutive common stock equivalents ............ -- 3,018 -- 2,896
-------- -------- ------- -------
Weighted average common shares and
equivalents ................................. 25,657 26,664 25,316 25,444
======== ======== ======= =======
Diluted net income (loss) per share .......... $ (.10) $ .09 $ (.01) $ .17
======== ======== ======= =======
</TABLE>
6
<PAGE> 7
For the three and nine month periods ended September 30, 2000 options to
purchase 4,986,812 shares of common stock at an average exercise price of $15.63
per share and warrants to purchase 363,428 shares of common stock at an average
exercise price of $23.68 per share have not been included in the computation of
diluted net loss per share as their effect would have been antidilutive. Options
to purchase 65,000 shares of common stock at an average exercise price of $23.41
per share were outstanding at September 30, 1999 and were antidilutive and
excluded from the dilutive net income per share calculation nine months ended
September 30, 1999 because the options' exercise prices were greater than the
average market price of the common shares. Warrants to purchase 171,428 and
363,428 shares of common stock at average exercise prices of $25.00 per share
and $23.68 per share were outstanding at September 30, 1999 and were
antidilutive and excluded from the dilutive net income per share calculation
three months ended September 30, 1999 and nine months ended September 30, 1999
because the warrants' exercise prices were greater than the average market price
of the common shares.
BUSINESS COMBINATIONS:
MERGER WITH MICRILOR:
In January 2000, the company acquired privately-held Micrilor, Inc. for
292,000 shares of our common stock. The merger was accounted for as a pooling
transaction, and all historical financial information contained herein has been
revised to reflect the acquisition. The company recorded $217,000 of acquisition
costs as a result of the merger in the first quarter of 2000.
PURCHASE TRANSACTIONS:
ACQUISITION OF WAVESPAN:
In December 1999, the company acquired Wavespan Corporation, a
privately-held California corporation, for 340,000 shares of our common stock
and $2.2 million of cash. The total purchase price was $12.9 million, including
acquisition costs of $900,000, and the acquisition was accounted for as a
purchase. The results of operations of Wavespan and the estimated fair value of
the assets acquired and liabilities assumed are included in financial statements
from the date of acquisition. In accounting for the acquisition of Wavespan
Corporation, the company recorded approximately $13.9 million in goodwill and
other intangible assets, which are being amortized on a straight-line basis over
one to five years. Approximately $5.9 million of the purchase price represents
acquired in-process technology that has not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
immediately charged to expense upon consummation of the acquisition.
The allocation of the purchase price is as follows (in thousands):
<TABLE>
<S> <C>
Current assets .............................. $ 788
Property, plant and equipment ............... 343
Core technology ............................. 4,030
Developed technology ........................ 151
Acquired workforce .......................... 300
Long term deferred tax assets ............... 1,200
Liabilities assumed ......................... (5,102)
Long-term deferred tax liabilities .......... (4,146)
Acquired in-process research and
development ............................... 5,883
Goodwill .................................... 9,453
--------
$ 12,900
========
</TABLE>
7
<PAGE> 8
ACQUISITION OF FARALLON:
In June 2000, the company acquired Farallon Communications, Inc., a
privately-held corporation located in California for 243,310 shares of our
common stock and $4 million of cash. The total purchase price was $14.9 million,
including acquisition costs of $900,000, and the acquisition was accounted for
as a purchase. The results of operations of Farallon and the estimated fair
value of the assets acquired and liabilities assumed are included in financial
statements from the date of acquisition. Intangible assets arising from the
acquisition are being amortized on a straight-line basis over one to five years.
Approximately $491,000 of the purchase price represents acquired in-process
technology that had not yet reached technological feasibility and has no
alternative future use. Accordingly, this amount was immediately charged to
expense upon consummation of the acquisition.
The allocation of the purchase price is as follows (in thousands):
<TABLE>
<S> <C>
Current assets ............................................... $ 4,232
Property, plant and equipment ................................ 145
OEM relationships ............................................ 2,718
Core technology .............................................. 1,483
Developed technology ......................................... 1,291
Acquired workforce ........................................... 782
Tradename .................................................... 908
Long-term deferred tax assets ................................ (3,069)
Liabilities assumed .......................................... (6,808)
Acquired in-process research and development ................. 491
Goodwill ..................................................... 12,727
------
$ 14,900
========
</TABLE>
ACQUISITION OF SIEMENS DEVELOPMENT GROUP:
In September 2000, the company entered into a cross-licensing and
technology exchange and purchase agreement with Siemens Aktiengesellschaft, a
German corporation, and Siemens Information and Communication Mobile LLC, a
Delaware limited liability company in which we acquired certain technology under
development, intellectual property rights, engineering resources and other
assets in exchange for certain technology rights and 500,000 shares of our
common stock. The total purchase price was $21.8 million, including acquisition
costs of $525,000, and the acquisition was accounted for as a purchase. The
results of operations of Siemens Development Group and the estimated fair value
of the assets acquired and liabilities assumed are included in the financial
statements from the date of acquisition. Intangible assets arising from the
acquisition are being amortized on a straight-line basis over one to five years.
Approximately $8,040,000 of the purchase price represents acquired in-process
technology that had not yet reached technological feasibility and has no
alternative future use. Accordingly, this amount was immediately charged to
expense upon consummation of the acquisition.
The allocation of the purchase price is as follows (in thousands):
<TABLE>
<S> <C>
Property, plant and equipment ................................. $ 350
Acquired workforce ............................................ 694
Liabilities assumed ........................................... (125)
Acquired in-process research and development .................. 8,040
Goodwill ...................................................... 12,816
------
$ 21,775
========
</TABLE>
8
<PAGE> 9
PRO FORMA FINANCIAL INFORMATION:
The following table represents unaudited pro forma financial information
for the nine months ended September 30, 2000 and 1999 had Proxim, Farallon,
Wavespan, Micrilor and Siemens Development Group been combined as of January 1,
1999. The pro forma financial information are presented for illustrative
purposes only and are not necessarily indicative of the combined financial
position or results of operations of future periods or the results that actually
would have resulted had Proxim, Farallon, Wavespan, Micrilor and Siemens
Development Group been a combined company during the specified periods. The pro
forma results include the effects of the amortization of acquired intangible
assets and goodwill and adjustments to the income tax provision or benefits. The
pro forma combined results exclude the $491,000, $5,883,000 and $8,040,000
charges for acquired in-process technology from Farallon, Wavespan and Siemens
Development Group acquisitions.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2000 1999 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue ...................... $ 84,059 $ 68,011 $ 94,372
Net loss ..................... (1,505) (6,827) (8,434)
Basic net loss per share ... $ (.06) $ (.30) $ (.35)
========== ========== ==========
Diluted net loss per share.. $ (.06) $ (.30) $ (.35)
========== ========== ==========
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
established new standards of accounting and reporting for derivative instruments
and hedging activities. SFAS 133 requires that all derivatives be recognized at
fair value in the statement of financial position, and that the corresponding
gains or loses be reported either in the income statement or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
In July 1999, the Financial Accounting Standard Board deferred the effective
date of SFAS 133 until the first quarter for fiscal years beginning after June
15, 2000. In June 2000, the Financial Accounting Standards Board issued SFAS No.
138, "Accounting for Derivative Instruments and Hedging Activities -- An
Amendment of FASB Statement No. 133." SFAS 138 amends the accounting and
reporting standards for certain derivatives and hedging activities such as net
settlement contracts, foreign currency transactions and inter company
derivatives. We will adopt SFAS 133 in the quarter ended March 31, 2001. We do
not currently hold derivative instruments or engage in hedging activities. We
are continuing to evaluate the impact of the requirements of SFAS 133 and SFAS
138 will have on our financial statements and related disclosures.
In December 1999, the SEC issued Staff accounting Bulletin No. 101, or SAB
101, "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. In June 2000, the SEC issued SAB
101B to defer the effective date of implementation of SAB 101 until the fourth
quarter of fiscal 2000. We do not expect that the adoption of SAB 101 will have
a material effect on our operations or financial position.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, or FIN 44, Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB 25. This Interpretation clarifies
(a) the definition of employee for purposes of applying APB 25, (b) the criteria
for determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
however certain conclusions in this Interpretation cover specific events that
occur after either December 15, 1998, or January 12, 2000. To the extent that
this Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are
9
<PAGE> 10
recognized on a prospective basis from July 1, 2000. We do not expect that the
adoption of FIN 44 will have a significant effect on our results of operations
or our financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All historical financial information and analysis has been restated to
reflect the acquisition of Micrilor, Inc. in January 2000, which was accounted
for as a pooling of interests.
The following table presents the percentages of total revenue represented
by certain line items from the Income Statement for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, SEPTEMBER 30,
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue .......................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue .................................. 56.3% 53.0% 58.2% 52.7%
----- ----- ----- -----
Gross profit ..................................... 43.7% 47.0% 41.8% 47.3%
----- ----- ----- -----
Operating expenses:
Research and development .................... 10.5% 14.3% 11.9% 14.2%
Purchased in-process research and
development ................................ 27.5% -- 11.5% 4.0%
Selling, general and administrative ......... 22.9% 19.8% 20.3% 19.8%
Amortization of goodwill .................... 3.7% -- 3.0% --
----- ----- ----- -----
Total operating expenses ................... 64.6% 34.1% 46.7% 38.0%
----- ----- ----- -----
Income (loss) from operations .................... (20.9%) 12.9% (4.9%) 9.3%
Interest and other income, net ................... 3.1% 6.5% 4.4% 6.1%
----- ----- ----- -----
Income (loss) before income taxes ................ (17.8%) 19.4% (0.5%) 15.4%
Provision (benefit) for income taxes ............. (8.7%) 6.8% (0.3%) 6.8%
----- ----- ----- -----
Net income (loss) ................................ (9.1%) 12.6% (0.2%) 8.6%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
REVENUE
Revenue increased by 61% from $18.2 million in the third quarter of 1999 to
$29.3 million in the third quarter of 2000. Revenue increased by 49% from $49.7
million in the first nine months of 1999 to $73.9 million in the first nine
months of 2000. Revenue increased primarily due to increased unit shipments to
distributors and OEM customers that sell RangeLAN2-based 2.4 GHz product lines
in North America, Europe and Japan and, to a lesser extent, shipments of
Symphony, SWAP-based Symphony and 5 GHz Stratum products. The increases were
partially offset by declining average selling prices for RangeLAN2 and Symphony
products, decreased revenue from 900 MHz products and completion of
non-recurring engineering contracts recognized by Micrilor, Inc. in 1999.
10
<PAGE> 11
GROSS PROFIT
Gross profit as a percentage of revenue was 43.7% in the third quarter of
2000 compared to 47.0% in the third quarter of 1999. Gross profit as a
percentage of revenue was 41.8% in the first nine months of 2000 compared to
47.3% in the first nine months of 1999. Included in cost of revenue in the third
quarter of 2000 was a charge of $699,000 for amortization of intangible assets
related to acquisitions. Excluding the amortization, gross profit as a
percentage of revenue was 46.1% in the third quarter of 2000. Excluding the
amortization, Gross profit as a percentage of revenue decreased in the third
quarter of 2000 compared to the third quarter of 1999 due primarily to declining
average selling prices for RangeLAN2 and Symphony products, an increase in
revenue from lower margin Symphony and 5 GHz Stratum products and a decrease in
revenue from higher gross margin 900 MHz products. Included in cost of revenue
in the first nine months of 2000 was a charge of $1,367,000 for amortization of
intangible assets related to acquisitions and a charge of $1,859,000 related to
first generation IEEE 802.11 inventories. Excluding the amortization and the
charge, gross profit as a percentage of revenue was 46.2% in the first nine
months of 2000. Excluding the amortization and the charge, gross profit as a
percentage of revenue decreased in the first nine months of 2000 compared to the
first nine months of 1999 due primarily to declining average selling prices for
RangeLAN2 and Symphony products, an increase in revenue from lower margin
Symphony and 5 GHz Stratum products and a decrease in revenue from higher gross
margin 900 MHz products. We expect gross profit as a percentage of revenue to
fluctuate in future periods depending primarily on the mix of revenue between
existing 2.4 GHz, 5 GHz and 900 MHz products, and potential manufacturing and
technology license arrangements.
RESEARCH AND DEVELOPMENT
Research and development expenses increased by 18% from $2.6 million in the
third quarter of 1999 to $3.1 million in the third quarter of 2000. Research and
development expenses increased by 25% from $7.0 million in the first nine months
of 1999 to $8.8 million in the first nine months of 2000. Research and
development expenses increased primarily due to the increased number of
engineering employees, including employees added as a result of the Wavespan
acquisition, continued investment in integrating our technology into application
specific integrated circuits, or ASICs, development of wireless protocols and
network software drivers, costs related to product performance enhancements,
cost reductions in the RangeLAN2 architecture, costs related to both domestic
and international product certifications, development of Symphony and SWAP-based
Symphony products, development of HomeRF wideband frequency-hopping products
based on the recent FCC decision and development of 5 GHz high-speed wireless
LAN technology. Research and development expenses as a percentage of revenue
decreased in the interim periods of 2000 compared to the interim periods of 1999
primarily due to increases in revenue, partially offset by additional personnel
costs and development program expenses. To date, all of our research and
development costs have been expensed as incurred. We expect that research and
development expenses will continue to increase in absolute dollars but may vary
over time as a percentage of revenue.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
The amount expensed to purchased in-process research and development in the
third quarter of 2000 relates to HomeRF technology acquired with the Siemens
Development Group transaction and was calculated by estimating fair value of
technology currently under development using the income approach, which
discounts expected future cash flows to present value. The discount rate used in
the present value calculation was 30%. The amount expensed to purchased
in-process research and development in the first nine months of 2000 related to
in-process technology acquired with the Farallon and Siemens Development Group
purchase transactions. The amount expensed to purchased in-process research and
development in the first nine months of 1999 related to a minority interest
investment in a startup company developing ultra-broadband wireless technology.
11
<PAGE> 12
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by 86% from $3.6
million in the third quarter of 1999 to $6.7 million in the third quarter of
2000. Selling, general and administrative expenses increased by 52% from $9.9
million in the first nine months of 1999 to $15.0 million in the first nine
months of 2000. Selling, general and administrative expenses increased primarily
due to the hiring of additional marketing and sales personnel to support our
growth, particularly our expansion into international and consumer markets,
employees added as a result of the Wavespan and Farallon acquisitions, as well
as increased trade show and promotional expenses, $217,000 of issuance costs
related to the acquisition of Micrilor, and a $1,100,000 charge related to an
investment in a startup internet service provider, or ISP, in the third quarter
of 2000. Selling, general and administrative expenses increased as a percentage
of revenue in the interim periods of 2000 compared to the interim periods of
1999 primarily due to higher personnel and promotional expenses, the charge and
acquisition costs, partially offset by an increase in revenue. We expect 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 decreased in the third quarter of 2000
compared to the third quarter of 1999 primarily due to lower invested cash
balances. Interest and other income, net increased in the first nine months
ended 2000 compared to the first nine months ended 1999 primarily due to higher
invested cash balances.
INCOME TAXES
We recognized a benefit for income taxes of $2,563,000 and $223,000 in the
three and nine months ended September 30, 2000. We recognized a provision for
income taxes of $1,231,000 and $3,373,000 in three and nine months ended
September 30, 1999. The effective tax rate for income tax benefit in the three
and nine months ended September 30, 2000 was 49% and 56%. The effective tax rate
for income tax provision in the three and nine months ended September 30, 2000
was 35% and 44%. The effective rate was higher than the federal statutory rate
of 35% plus the state statutory tax rate of 6%, net of federal benefits,
primarily due to expenses related to the cost of acquisitions and equity
investments that were not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of 2000, $17,818,000 of cash and cash equivalents
were used in operating activities, primarily to fund increases in inventories
and accounts receivable and a decrease in accounts payable and other current
liabilities, partially offset by net income after the effect of non cash
charges. In the first nine months of 1999, $6,208,000 of cash and cash
equivalents were provided by operating activities, primarily by net income after
the effect of non cash charges. Cash was also provided by an increase in other
current liabilities, partially offset by cash used to fund an increase in
inventories and accounts receivable.
In the first nine months of 2000 and 1999, we purchased $3,550,000 and
$4,522,000 of property and equipment. Capital expenditures in the first nine
months of 2000 and 1999 were primarily for manufacturing and engineering test
equipment, purchased software and leasehold improvements for our new facility.
In the first nine months of 2000, we made equity investments of $6,000,000
in a company developing broadband gateway solutions and a startup ISP company of
which $1,100,000 was recorded to selling, general and administrative expense.
The remaining $4,900,000 was recorded as an equity investment. In the first nine
months of 1999, we made equity investments of $4,000,000 in a wireless service
company and a start-up company developing ultra-broadband wireless products of
which $2,000,000 was recorded as purchased in-process research and development.
The remaining $2,000,000 was recorded as an equity investment.
In the first nine months of 2000, we generated $4,416,000 from issuance of
common stock for the exercise of employee stock options and employee stock
purchase plan purchases. In the first nine months of 1999, we
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generated $25,113,000 from issuance of common stock for equity investments and
the exercise of employee stock options and employee stock purchase plan
purchases.
At September 30, 2000, we had working capital of $93,430,000, including
$30,212,000 in cash and cash equivalents and $12,581,000 in marketable
securities. We believe that our working capital and cash generated from
operations, if any, will be sufficient to finance cash acquisitions which we may
consider and to 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, we will consider raising additional
financing. There can be no assurance that such financing will be available on
terms acceptable to us, if at all.
RISK FACTORS
This Form 10-Q also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this Form
10-Q. OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY FAIL
TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, CAUSING
OUR STOCK PRICE TO DECLINE.
Our operating results have fluctuated in the past and are likely to
continue to fluctuate in the future on an annual and quarterly basis, due to
numerous factors, many of which are outside of our control. Some of the factors
that may cause these fluctuations include:
- changing market demand for, and declines in the average selling prices
of, our products;
- the timing of and delays or cancellations of significant orders from
major customers;
- the loss of one or more of our major customers;
- the cost, availability and quality of components from our suppliers;
- the cost, availability, and quality of assemblies from contract and
subcontract manufacturers;
- the lengthy sales and design-in cycles for original equipment
manufacturer, or OEM, products;
- delays in the introduction of our new products;
- competitive product announcements and introductions;
- market adoption of new technologies;
- market adoption of radio frequency, or RF, standards-based products
(such as those compliant with the IEEE 802.11b or the Home RF SWAP
specifications);
- the mix of products sold;
- the effectiveness of our distribution channels and our success in
maintaining our current distribution channels and developing new
distribution channels;
- the sell-through rate of our Symphony and SWAP-based Symphony products
through consumer retail channels;
- management of retail channel inventories;
- excess and obsolete inventories related to evolving product
technologies and industry standards;
- 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; and
- general economic conditions.
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Historically, we have not operated with a significant order backlog and a
substantial portion of our revenue in any quarter has been derived from orders
booked and shipped in that quarter. Accordingly, our revenue expectations are
based almost entirely on internal estimates of future demand and not on firm
customer orders. Planned operating expense levels are relatively fixed in the
short term and are based in large part on these estimates. If orders and revenue
do not meet expectations, our operating results could be materially adversely
affected. In this regard, in the third quarter of 1997, we experienced a
decrease in revenue and an operating loss as a result of a significant decrease
in orders from two of our major customers. We can offer no assurance that we
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,
we have often recognized a substantial portion of our 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.
WE DEPEND SIGNIFICANTLY ON A LIMITED NUMBER OF OEM CUSTOMERS.
A substantial portion of our revenue has been derived from a limited number
of customers, most of which are OEM customers. Approximately 43%, 52% and 59% of
our sales during the first nine months of 2000, and calendar years 1999 and
1998, respectively, were to OEM customers. In addition, sales to one customer
represented approximately 13% of our revenue in the first nine months of 2000.
Sales to one customer represented approximately 30% of our revenue during 1999.
Sales to two customers represented approximately 41% and 11% of our revenue
during 1998. We expect that sales to a limited number of OEM customers will
continue to account for a substantial portion of our revenue for the foreseeable
future. We also have experienced quarter to quarter variability in sales to each
of our major OEM customers and expect this pattern to continue in the future.
Sales of many of our wireless networking products depend upon the decision
of a prospective OEM customer to develop and market wireless solutions, which
incorporate our wireless technology. OEM customers' orders are affected by a
variety of factors, including the following:
- new product introductions;
- regulatory approvals;
- end-user demand for OEM customers' products;
- product life cycles;
- inventory levels;
- manufacturing strategies;
- pricing;
- contract awards;
- competitive situations; and
- general economic conditions.
For these and other reasons, the design-in cycle associated with the
purchase of our 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 our control. Because of the lengthy sales cycle, we
typically plan our production and inventory levels based on internal forecasts
of OEM customer demand, which is highly unpredictable and can fluctuate
substantially. In addition, our 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 materially and
adversely affect our operating results. If revenue forecasted from a specific
customer for a particular quarter is not realized in that quarter, our operating
results for that quarter could be materially adversely affected. The loss of one
or more of, or a significant reduction in orders from, our major OEM customers
could materially and adversely affect our operating results. In addition, we can
offer no assurance that we will become a qualified supplier for new OEM
customers or that we will remain a qualified supplier for existing OEM
customers.
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WE PURCHASE SEVERAL KEY COMPONENTS USED IN THE MANUFACTURE OR INTEGRATION OF OUR
PRODUCTS FROM SOLE OR LIMITED SOURCES.
Certain parts and components used in our products, including our
proprietary application specific integrated circuits, or ASICs, monolithic
microwave integrated circuits, or 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. Our reliance on these sole source or
limited source suppliers involves risks and uncertainties, including the
following:
- the possibility of a shortage or discontinuation of key components;
and
- reduced control over delivery schedules, manufacturing capability,
quality, yields and costs.
Any reduced availability of these parts or components when required could
significantly impair our ability to manufacture and deliver our products on a
timely basis and result in the cancellation of orders, which could materially
adversely affect our operating results. In addition, the purchase of some key
components involves long lead times and, in the event of unanticipated increases
in demand for our products, we have in the past been, and may in the future be,
unable to manufacture some products in a quantity sufficient to meet our
customers' demand in any particular period. We have no guaranteed supply
arrangements with our sole or limited source suppliers, do not maintain an
extensive inventory of parts or components, and customarily purchase 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, production quality or financial difficulties of a sole or limited
source supplier could materially and adversely affect our business by increasing
product costs, or reducing or eliminating the availability of parts or
components. In an event like this, our inability to develop alternative sources
of supply quickly and on a cost-effective basis could significantly impair our
ability to manufacture and deliver our products on a timely basis and could
materially adversely affect our business and operating results.
WE NEED TO EXPAND OUR LIMITED MANUFACTURING CAPABILITY AND INCREASINGLY DEPEND
ON CONTRACT MANUFACTURERS FOR OUR MANUFACTURING REQUIREMENTS.
We currently have limited manufacturing capability and no experience in
large-scale or foreign manufacturing. If our customers were to concurrently
place orders for unexpectedly large product quantities, our present
manufacturing capacity might be inadequate to meet the demand. We can offer no
assurance that we will be able to develop or contract for additional
manufacturing capacity on acceptable terms on a timely basis. In addition, in
order to compete successfully, we will need to achieve significant product cost
reductions. Although we intend to achieve cost reductions through engineering
improvements, production economies, and manufacturing at lower cost locations
including outside the United States, we can offer no assurance that we will be
able to do so. In order to remain competitive, we also must continue to
introduce new products and processes into our manufacturing environment, and we
can offer no assurance that any such new products will not create obsolete
inventories related to older products. We currently conduct our manufacturing
operations for all of our products in our corporate headquarters in Sunnyvale,
California. In addition, we rely on contract and subcontract manufacturers for
turnkey manufacturing and circuit board assemblies which subjects us to
additional risks, including a potential inability to obtain an adequate supply
of finished assemblies and assembled circuit boards and reduced control over the
price, timely delivery and quality of such finished assemblies and assembled
circuit boards. If our Sunnyvale facility were to become incapable of operating,
even temporarily, or were unable to operate at or near our current or full
capacity for an extended period, our business and operating results could be
materially adversely affected. Changes in our manufacturing operations to
incorporate new products and processes, or to manufacture at lower cost
locations outside the United States, could cause disruptions, which, in turn,
could adversely affect customer relationships, cause a loss of market
opportunities and negatively affect our business and operating results.
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We have in the past experienced higher than expected demand for our
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. Due to the complex nature
of our products and manufacturing processes, the worldwide demand for some
wireless technology components and other factors, we can offer no assurance that
delays in the delivery of products will not occur in the future.
WIRELESS COMMUNICATIONS AND NETWORKING MARKETS ARE SUBJECT TO RAPID
TECHNOLOGICAL CHANGE AND TO COMPETE, WE MUST CONTINUALLY INTRODUCE NEW
PRODUCTS THAT ACHIEVE BROAD MARKET ACCEPTANCE.
The wireless communications industry is characterized by rapid
technological change, short product life cycles and evolving industry standards.
To remain competitive, we must develop or gain access to new technologies in
order to increase product performance and functionality, reduce product size and
maintain cost-effectiveness.
Our success is also dependent on our 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, from time to time, we have experienced delays in
developing and introducing new products. Due to the intensely competitive nature
of our business, any delay in the commercial availability of new products could
materially and adversely affect our business, reputation and operating results.
In addition, if we are unable to develop or obtain access to advanced wireless
networking technologies as they become available, or are unable to design,
develop and introduce competitive new products on a timely basis, or are unable
to hire or retain qualified engineers to develop new technologies and products,
our future operating results would be materially and adversely affected. We have
expended substantial resources in developing products that are designed to
conform to the IEEE 802.11 standard that received final approval in June 1997.
We can offer no assurance, however, that our IEEE 802.11 compliant products or
the IEEE 802.11 standard will have a meaningful commercial impact. In this
regard, in the second quarter of 2000, we recorded a charge of $1,859,000 to
cost of sales related to first generation IEEE 802.11 inventories.
In 1999, the IEEE approved a new 2.4 GHz wireless LAN standard, designated
as 802.11b. Based on direct sequence spread spectrum technology, this new
standard increased the nominal data rate from 2 Mbps to 11 Mbps. We have not
developed products that comply with the IEEE 802.11b standard. While 802.11b
technology is available to develop or acquire in the market, there can be no
assurance that we will develop or acquire such technology, or that if we do
develop or acquire such technology, that our products will be competitive in the
market. In addition, we are developing higher-speed frequency hopping technology
based on the FCC Notice of Proposed Rulemaking, or NPRM, that will allow for
wider band hopping channels and increase the data rate from 1.6 Mbps to up to 10
Mbps. In August 2000 the FCC approved the NPRM that will enable the development
of wideband frequency-hopping systems operating in the unlicensed 2.4 GHz band.
There can be no assurance that we will be able to complete our development of
HomeRF wideband frequency-hopping products in a timely manner, or that any such
new products will compete effectively with IEEE 802.11b standard compliant
products.
The IEEE has approved a new 5 GHz wireless LAN standard designated as
802.11a. This new standard is based on Orthogonal Frequency Division
Multiplexing, or OFDM, technology with multiple data rates ranging from below 10
Mbps to approximately 50 Mbps. In 1999, the European Telecommunications
Standards Institute Project BRAN (Broadband Radio Access Networks) committee
approved a new 5 GHz wireless LAN standard designated as HiperLAN2, also based
on OFDM technology. While these two new 5 GHz standards apply to future
generations of technology, and no companies are currently shipping wireless LAN
products based on these technologies, the emergence of these standards may
diminish the competitiveness of our planned introduction of 5 GHz products based
on the HiperLAN1 standard. Furthermore, we are not currently developing products
based on either of these two new standards, and there can be no assurance that
we will develop or acquire technology compliant with these standards.
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In addition, we are a core member of the HomeRF WG, an industry consortium
that is establishing an open industry standard, called the SWAP specification,
for wireless digital communications between PCs and consumer electronic devices,
including a common interface specification that supports wireless data and voice
services in and around the home. We can offer no assurance that the HomeRF WG
SWAP specification, or the SWAP-based Symphony and HomeRF wideband
frequency-hopping products that we develop to comply with the specification will
have a meaningful commercial impact. Further, given the emerging nature of the
wireless LAN market, we can offer no assurance that our RangeLAN2 and Symphony
products and technology, or our other products or technology, will not be
rendered obsolete by alternative or competing technologies or standards.
If we are unable to enter a particular market in a timely manner with
internally developed products, we may license technology from other businesses
or acquire other businesses as an alternative to internal research and
development. In this regard, in the fourth quarter of 1997, we recorded a charge
of $2,500,000 to in-process research and development related to a license of
technology to be used in 5 GHz highspeed in-building wireless LAN products. In
1999, we recorded a total of $7,883,000 in charges related to the acquisition of
5 GHz ultra-broadband wireless building-to-building products. In second quarter
of 2000, we recorded a charge of $491,000 related to acquisition of products
that address home and small office networking requirements, as well as Apple
Macintosh computer connectivity. In third quarter of 2000, we recorded a charge
of $8,040,000 related to acquisition of HomeRF technology.
THE WIRELESS LOCAL AREA NETWORKING AND BUILDING TO BUILDING MARKETS ARE
INTENSELY COMPETITIVE AND SOME OF OUR COMPETITORS ARE LARGER AND BETTER
ESTABLISHED.
The wireless local area networking and building to building markets are
extremely competitive and we expect that competition will intensify in the
future. Increased competition could adversely affect our business and operating
results through pricing pressures, the loss of market share and other factors.
The principal competitive factors include the following:
- data throughput;
- effective RF coverage area;
- interference immunity;
- network scalability;
- price;
- integration with voice technology;
- wireless networking protocol sophistication;
- ability to support industry standards;
- roaming capability;
- power consumption;
- product miniaturization;
- product reliability;
- ease of use;
- product costs;
- product manufacturability;
- product features and applications;
- product time to market;
- product certifications;
- brand recognition;
- OEM partnerships;
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- marketing alliances;
- manufacturing capabilities and experience;
- effective distribution channels; and
- company reputation.
We could be at a disadvantage to competitors, particularly Cisco Systems
and Lucent Technologies, that have broader distribution channels, brand
recognition, extensive patent portfolios and more diversified product lines.
We have several competitors in our commercial wireless business, including
without limitation Breezecom, Cisco Systems (which acquired Aironet Wireless
Communications), Intersil, Lucent Technologies, Nokia, Symbol Technologies,
Western Multiplex and 3COM. We also face competition from a variety of companies
that offer different technologies in the nascent home networking market,
including several companies developing competing wireless networking products.
Additionally, numerous companies have announced their intention to develop
competing products in both the commercial wireless and home networking markets.
In addition to competition from companies that offer or have announced their
intention to develop wireless LAN products, we could face future competition
from companies that offer products which replace network adapters or offer
alternative communications solutions, or from large computer companies, PC
peripheral companies, as well as other large networking equipment companies.
Furthermore, we could face competition from certain of our OEM customers, which
have, or could acquire, wireless engineering and product development
capabilities. We can offer no assurance that we will be able to compete
successfully against these competitors or those competitive pressures we face
will not adversely affect our business or operating results.
Many of our present and potential competitors have substantially greater
financial, marketing, technical and other resources with which to pursue
engineering, manufacturing, marketing, and distribution of their products. These
competitors may succeed in establishing technology standards or strategic
alliances in the wireless LAN and building to building markets, obtain more
rapid market acceptance for their products, or otherwise gain a competitive
advantage. We can offer no assurance that we will succeed in developing products
or technologies that are more effective than those developed by our competitors.
Furthermore, we compete with companies that have high volume manufacturing and
extensive marketing and distribution capabilities, areas in which we have only
limited experience. We can offer no assurance that we will be able to compete
successfully against existing and new competitors as the wireless LAN market
evolves and the level of competition increases.
WE DEPEND UPON INTERNATIONAL SALES AND OUR ABILITY TO SUSTAIN AND INCREASE
INTERNATIONAL SALES IS SUBJECT TO MANY RISKS, WHICH COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.
Revenue from shipments by us to customers outside the United States,
principally to a limited number of distributors and OEM customers, represented
14%, 21% and 17% of total revenue during the first nine months of 2000, and
calendar years 1999 and 1998, respectively. We expect that revenue from
shipments to international customers will vary as a percentage of total 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:
- changes in foreign government regulations and telecommunications
standards;
- export license and documentation requirements;
- tariffs, duties taxes and other trade barriers;
- fluctuations in currency exchange rates;
- longer payment cycles for international distributors;
- difficulty in collecting accounts receivable;
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- competition from local manufacturers with lower costs;
- difficulty in staffing and managing foreign operations; and
- potential political and economic instability.
While international sales are typically denominated in U.S. dollars and we
typically extend limited credit terms, fluctuations in currency exchange rates
could cause our products to become relatively more expensive to customers in a
particular country, leading to a reduction in sales or profitability in that
country. We can offer no assurance that foreign markets will continue to develop
or that we will receive additional orders to supply our products to foreign
customers. Our business and operating results could be materially and adversely
affected if foreign markets do not continue to develop or if we do not receive
additional orders to supply our 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. In this regard, in the third quarter of 1997 and continuing
through the second quarter of 1998, we experienced a significant decrease in
orders from NTT-IT, one of our major Japanese customers, resulting in a
significant decrease in quarterly revenue and an operating loss in the third
quarter of 1997.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS COULD ADVERSELY AFFECT
OUR ABILITY TO COMPETE EFFECTIVELY.
We rely on a combination of patents, trademarks, non-disclosure agreements,
invention assignment agreements and other security measures in order to
establish and protect our proprietary rights. We have been issued seven U.S.
patents, which were issued in 1991, 1993, 1995, 1998 and 1999, and are important
to our current business, and we have three patent applications pending in the
U.S., which relate to our core technologies and product designs. We can offer 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
our technology. In addition, we can offer no assurance that any patents issued
to us will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will adequately protect us. Since U.S. patent applications
are maintained in secrecy until patents issue, and since publication of
inventions in the technical or patent literature tends to lag behind such
inventions by several months, we cannot be certain that we first created the
inventions covered by our issued patents or pending patent applications or that
we were the first to file patent applications for such inventions or that we are
not infringing on the patents of others. In addition, we have filed, or reserved
our rights to file, a number of patent applications internationally. We can
offer no assurance that any international patent application will issue or that
the laws of foreign jurisdictions will protect our proprietary rights to the
same extent as the laws of the United States.
Although we intend to protect our rights vigorously, there can be no
assurance that the measures we have taken or may take to protect our proprietary
rights will be successful. Litigation may be necessary to enforce our patents,
trademarks or other intellectual property rights, to protect our trade secrets,
to determine the validity and scope of the proprietary rights of others, to
establish the validity of any technology licenses offered to patent infringers,
or to defend against claims of infringement. Litigation could result in
substantial costs and diversion of resources and could materially and adversely
affect our business and operating results. Moreover, we can offer no assurance
that in the future these rights will be upheld. Furthermore, there can be no
assurance that any of our issued patents will provide a competitive advantage or
will not be challenged by third parties or that the patents of others will not
adversely impact our ability to do business. As the number of products in the
wireless LAN market increases, and related features and functions overlap, we
may become increasingly subject to infringement claims. These claims also might
require us to enter into royalty or license agreements. Any such claims, with or
without merit, could cause costly litigation and could require significant
management time. There can be no assurance that, if required, we could obtain
such royalty or license agreements on terms acceptable to management. There can
be no assurance that the measures we have taken or may take in the future will
prevent misappropriation of our technology or that others will not independently
develop similar products, design around our proprietary or patented technology
or duplicate our products.
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WE NEED TO EFFECTIVELY MANAGE OUR GROWTH.
Our growth to date has caused, and will continue to cause, a significant
strain on our management, operational, financial and other resources. Our
ability to manage growth effectively will require us to improve our management,
operational and financial processes and controls as well as the related
information and communications systems. These demands will require the addition
of new management personnel and the development of additional expertise by
existing management. The failure of our management team to effectively manage
growth, should it occur, could materially and adversely affect our business and
operating results.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS IN MULTIPLE JURISDICTIONS WHERE WE SELL
OUR PRODUCTS IS DIFFICULT AND COSTLY.
In the United States, we are subject to various Federal Communications
Commission, or FCC, rules and regulations. Current FCC regulations permit
license-free operation in certain FCC-certified bands in the radio spectrum. Our
spread spectrum wireless products are certified for unlicensed operation in the
902 - 928 MHz, 2.4 - 2.4835 GHz, 5.15 - 5.35 GHz and 5.725 - 5.825 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 frequency. 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 our products experience excessive
interference from primary users, market acceptance of our products could be
adversely affected, which could materially and adversely affecting our business
and operating results. The FCC, however, has established certain standards that
create an irrefutable presumption of noninterference for Part 15 users and we
believe that our products comply with such requirements. We can offer no
assurance that the occurrence of regulatory changes, including changes in the
allocation of available frequency spectrum, changes in the use of allocated
frequency spectrum, or modification to the standards establishing an irrefutable
presumption for unlicensed Part 15 users, would not significantly affect our
operations by rendering current products obsolete, restricting the applications
and markets served by our products or increasing the opportunity for additional
competition.
Our products are also subject to regulatory requirements in international
markets and, therefore, we must monitor the development of spread spectrum and
other radio frequency regulations in certain countries that represent potential
markets for our products. While we can offer no assurance that we will be able
to comply with regulations in any particular country, we design our RangeLAN2,
Symphony and SWAP-based Symphony products to minimize the design modifications
required to meet various 2.4 GHz international spread spectrum regulations. In
addition, we will seek to obtain international certifications for the Symphony
and SWAP-based Symphony product line in countries where there is a substantial
market for home PCs and Internet connectivity. Changes in, or the failure by us
to comply with, applicable domestic and international regulations could
materially adversely affect our business and operating results. In addition,
with respect to those countries that do not follow FCC regulations, we may need
to modify our products to meet local rules and regulations.
Regulatory changes by the FCC or by regulatory agencies outside the United
States, including changes in the allocation or use of available frequency
spectrum, could significantly affect our operations by restricting our
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 in Part 15 Subpart E which regulates U-NII devices
operating in the 5.15 - 5.35 GHz and 5.725 - 5.825 GHz frequency bands. In
June 1999, the FCC issued a NPRM that proposed changing the way allocated
frequencies are utilized by Part 15 spread spectrum systems. These approved and
proposed changes in the allocation and use of available frequency spectrum could
create opportunities for other wireless networking products and services.
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There can be no assurance that new regulations will not be promulgated,
that could materially and adversely affect our business and operating results.
THERE MAY BE POTENTIAL HEALTH AND SAFETY RISKS RELATED TO OUR PRODUCTS WHICH
COULD NEGATIVELY AFFECT OUR BUSINESS AND PRODUCT SALES.
The intentional emission of electromagnetic radiation has been the subject
of recent public concern regarding possible health and safety risks, and though
our products, when installed in any of the intended configurations, are designed
not to exceed the maximum permissible exposure limits listed in Section 1.1311
of the FCC Regulations, we can offer no assurance that safety issues will not
arise in the future and materially and adversely affect our business and
operating results.
TO COMPETE EFFECTIVELY, WE MUST ESTABLISH AND EXPAND NEW DISTRIBUTION CHANNELS
FOR OUR HOME NETWORKING PRODUCTS.
To date, a substantial percentage of our revenue has been derived from OEM
customers through our direct sales force. We sell our branded RangeLAN2 products
through domestic and international distributors. We are also establishing new
distribution channels for our Symphony family of cordless home and small office
networking products. Symphony products are currently sold through national
retailers such as Best Buy, CompUSA, OfficeMax, Office Depot and Staples
computer retailers such as Fry's Electronics, J&R Computer World, BrandSmart,
Comp-u-Tech, DataVision, Nationwide, leading computer catalogs such as CDW,
MobilePlanet and PC Connection, and numerous on-line retail sites over the
Internet, including our e-commerce Web site at www.proxim.com. In general,
distributors and retailers offer products of several different companies,
including products that may compete with our products. Accordingly, they may
give higher priority to products of other suppliers, thus reducing their efforts
to sell our products. Agreements with distributors and retailers are generally
terminable at their option. Any reduction in sales efforts or termination of a
relationship may materially and adversely affect our business and operating
results. Use of distributors and retailers also entails the risk that they will
build up inventories in anticipation of substantial growth in sales. If such
growth does not occur as anticipated, they may substantially decrease the amount
of product ordered in subsequent quarters. Such fluctuations could contribute to
significant variations in our future operating results.
IF WE LOSE KEY PERSONNEL OR WE ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL
AS NECESSARY, WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR BUSINESS OR ACHIEVE
OUR OBJECTIVES.
We are highly dependent on the technical and management skills of our key
employees, in particular David C. King, Chairman, President and Chief Executive
Officer, and Juan Grau, Vice President of Engineering. We do not have employment
agreements with or life insurance on the life of, either person. In addition,
given the rapid technological change in this industry, we believe that the
technical expertise and creative skills of our engineers and other personnel are
crucial in determining our future success. The loss of the services of any key
employee could adversely affect our business and operating results. Our success
also depends in large part on a limited number of key marketing and sales
employees and on our 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, particularly
in Northern California where our headquarters are located. We can offer no
assurance that we will be successful in retaining our key employees or that we
can attract, assimilate or retain the additional skilled personnel as required.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE.
Recently, the price of our common stock has been volatile. We believe that
the price of our common stock may continue to fluctuate, perhaps substantially,
as a result of factors including:
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- announcements of developments relating to our business;
- fluctuations in our 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 us or our competitors;
- developments in patent, copyright or other intellectual property
rights; and
- developments in our relationships with customers, distributors and
suppliers.
In the third quarter of 1997, we announced revenue and operating results
below expectations of securities analysts and investors, resulting in a decrease
in the market price of our 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 our common stock will not experience
significant fluctuations in the future, including fluctuations that are
unrelated to our performance.
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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
<TABLE>
EXHIBIT # DESCRIPTION OF DOCUMENT
--------- -----------------------
<S> <C>
4.1 Proxim, Inc Registration Rights Agreement dated September 27, 2000.
27.1 Financial Data Schedule
</TABLE>
B. Reports on Form 8-K:
None.
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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 Sunnyvale, State of
California, on the 13th day of November 2000.
PROXIM, INC.
By: /s/ Keith E. Glover
------------------------------------
Keith E. Glover,
Dated: November 13, 2000
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
EXHIBIT # DESCRIPTION OF DOCUMENT
--------- -----------------------
<S> <C>
4.1 Proxim, Inc Registration Rights Agreement dated September 27, 2000.
27.1 Financial Data Schedule
</TABLE>
