<PAGE>
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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, 1997.
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
COMMISSION FILE NUMBER: 0-25356
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P-COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 77-0289371
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3175 S. WINCHESTER BOULEVARD, 95008
CAMPBELL, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 866-3666
----------------
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 [_]
As of November 3, 1997, there were 41,701,092 shares of the Registrant's
Common Stock outstanding, par value $0.0001.
This quarterly report on Form 10-Q Consists of 41 pages of which this is
page 1. The Exhibit Index appears on page 30.
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<PAGE>
P-COM, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
--------------------- ------
<C> <S> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30,
1997 and December 31, 1996................................. 3
Condensed Consolidated Statements of Operations for the
three and nine month periods ended September 30, 1997 and
1996....................................................... 4
Condensed Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1997 and 1996....... 5
Notes to Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 10
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.......................................... 27
Item 2. Changes in Securities...................................... 27
Item 3. Defaults Upon Senior Securities............................ 27
Item 4. Submission of Matters to a Vote of Security Holders........ 27
Item 5. Other Information.......................................... 27
Item 6. Exhibits and Reports on Form 8-K........................... 28
Signatures............................................................. 29
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 10,329 $ 42,025
Accounts receivable, net........................... 62,613 42,804
Inventory.......................................... 50,266 30,819
Prepaid expenses and other current assets.......... 10,512 8,065
-------- --------
Total current assets............................. 133,720 123,713
Property and equipment, net.......................... 23,356 19,955
Goodwill and other assets............................ 40,310 2,573
-------- --------
$197,386 $146,241
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 25,320 $ 23,961
Accrued employee benefits.......................... 2,892 1,378
Other accrued liabilities.......................... 3,950 5,160
Income taxes payable............................... 5,954 2,494
Borrowings under line of credit.................... 17,107 2,116
-------- --------
Total current liabilities........................ 55,223 35,109
-------- --------
Long-term debt....................................... 2,389 259
-------- --------
Minority interest.................................... 653 619
-------- --------
Stockholders' equity:
Common stock....................................... 4 4
Additional paid-in capital......................... 130,809 112,423
Retained earnings (deficit)........................ 8,811 (2,246)
Cumulative translation adjustment.................. (503) 73
-------- --------
Total stockholders' equity....................... 139,121 110,254
-------- --------
$197,386 $146,241
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Sales................................. $ 51,473 $ 27,016 $ 139,244 $ 67,689
Cost of sales......................... 29,169 15,997 80,799 40,606
--------- --------- --------- --------
Gross profit...................... 22,304 11,019 58,445 27,083
--------- --------- --------- --------
Operating expenses:
Research and development............ 7,081 5,464 20,906 13,857
Selling and marketing............... 3,870 1,667 10,468 4,604
General and administrative.......... 2,831 1,385 8,111 3,767
Goodwill amortization............... 693 111 1,748 185
--------- --------- --------- --------
Total operating expenses.......... 14,475 8,627 41,233 22,413
--------- --------- --------- --------
Income from operations................ 7,829 2,392 17,212 4,670
Interest and other income (expense),
net.................................. (112) 372 (181) 501
--------- --------- --------- --------
Income before income taxes............ 7,717 2,764 17,031 5,171
Provision for income taxes............ 2,621 240 5,974 597
--------- --------- --------- --------
Net income............................ $ 5,096 $ 2,524 $ 11,057 $ 4,574
========= ========= ========= ========
Net income per share.................. $ 0.12 $ 0.06 $ 0.26 $ 0.12
========= ========= ========= ========
Weighted average common and common
equivalent shares.................... 43,592 41,190 42,797 38,690
========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 11,057 $ 4,574
Adjustments to reconcile net income to net cash used in
operating activities, net of effect of acquisitions:
Depreciation and amortization......................... 4,645 3,285
Change in minority interest........................... 34 591
Change in assets and liabilities:
Accounts receivable................................. (17,105) (12,422)
Inventory........................................... (15,198) (10,623)
Prepaid expenses and other assets................... (1,118) 102
Accounts payable.................................... (4,608) (294)
Accrued employee benefits........................... 929 9
Income taxes payable................................ 3,460 --
Other accrued liabilities........................... (4,392) 809
Net cash used in operating activities............. (22,296) (13,969)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................... (6,286) (8,807)
Acquisitions, net of cash acquired...................... (10,855) (2,714)
Net cash used in investing activities............. (17,141) (11,521)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payment) under line of credit............. 4,431 (251)
Proceeds from stock issuances, net of expenses.......... 3,886 53,886
Net cash provided by financing activities......... 8,317 53,635
Effect of exchange rate changes on cash................. (576) 80
Net increase (decrease) in cash and cash equivalents.... (31,696) 28,225
Cash and cash equivalents at the beginning of the
period................................................. 42,025 8,186
Cash and cash equivalents at the end of the period...... $ 10,329 $ 36,411
Supplemental cash flow disclosures:
Cash paid for income taxes............................ $ 2,288 $ --
Stock issued in connection with the acquisition of
CSM.................................................. $ 14,500 $ --
Cash paid for interest................................ $ 501 $ 187
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. On May 29, 1997, the Company acquired
Control Resources Corporation ("CRC") in a stock-for-stock merger. This
transaction has been accounted for based on the pooling-of-interests method of
accounting. As a result, prior period amounts have been restated to present
the effect as if the two companies had been combined for all periods
presented. On September 26, 1997, the Company effected a 2-for-1 stock split
in the form of a 100% stock dividend. All shares and per share amounts have
been adjusted retroactively to reflect the stock split. In the opinion of
management, the accompanying unaudited Condensed Consolidated Financial
Statements reflect all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation of P-Com, Inc.'s
(referred to herein, together with its wholly-owned and partially-owned
subsidiaries, as "P-Com" or the "Company") financial condition as of September
30, 1997, and the results of its operations for the three and nine month
periods ended September 30, 1997 and 1996 and its cash flows for the nine
months ended September 30, 1997 and 1996. These financial statements should be
read in conjunction with the Company's audited 1996 financial statements,
including the notes thereto, and the other information set forth therein,
included in the Company's Annual Report on Form 10-K (File No. 0-25356).
Operating results for the three and nine month periods ended September 30,
1997 are not necessarily indicative of the operating results that may be
expected for the year ending December 31, 1997. This Quarterly Report on Form
10-Q contains forward-looking statements that involve numerous risks and
uncertainties. The statements contained in this Quarterly Report on Form 10-Q
that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended, including without
limitation statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
factors affecting operating results contained in this Quarterly Report on Form
10-Q.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). SFAS 128, which is effective for the Company's fiscal year
ending December 31, 1997, redefines earnings per share under generally
accepted accounting principles. Under the new standard, primary earnings per
share is replaced by basic earnings per share, and fully diluted earnings per
share is replaced by diluted earnings per share. If the Company had adopted
this Statement for the three and nine month periods ended September 30, 1997
and September 30, 1996, the Company's earnings per share would have been as
follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Earnings per share:
Basic....................................... $ 0.12 $ 0.06 $ 0.27 $ 0.12
Diluted..................................... $ 0.12 $ 0.06 $ 0.26 $ 0.12
</TABLE>
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income".
SFAS 130 establishes standards for reporting comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. Comprehensive income as defined includes all
changes in equity (net assets) during a period from nonowner sources. Examples
of items to be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments and unrealized
6
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
gain/loss on available-for-sale securities. The disclosure prescribed by SFAS
130 must be made beginning with the first quarter of 1998.
In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
disclosures prescribed by SFAS 131 are effective in 1998.
3. MERGERS AND ACQUISITIONS
On May 29, 1997, the Company acquired all of the outstanding shares of
capital stock of Control Resources Corporation ("CRC") a provider of
integrated network access devices to network service providers, in exchange
for 1,502,956 shares of P-Com Common Stock that were issued or are issuable to
former CRC securityholders in a stock-for-stock merger. CRC, located in Fair
Lawn, New Jersey, manufactures products used by the communications industry to
connect end user sites to a range of communications services. CRC's NetPath
product line enables network service providers to offer their customers a
migration path from entry-level data services to cost-effective integrated
delivery of voice, video and Internet access. The NetPath product line also
supports the network service provider's introduction of new technologies
including asynchronous transfer mode and frame relay.
The unaudited combined sales and net income (loss) shown below combine the
historical sales and net income (loss) of P-Com and CRC for the three and nine
months ended September 30, 1996 in each case as if the merger had occurred at
the beginning of the earliest period presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------------- -------------------------
P-COM CRC COMBINED P-COM CRC COMBINED
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales.................... $26,432 $ 584 $27,016 $63,772 $ 3,917 $67,689
Net income (loss)........ $ 4,149 $(1,625) $ 2,524 $ 7,891 $(3,317) $ 4,574
</TABLE>
On February 24, 1997, the Company acquired 100% of the outstanding stock of
Technosystem S.p.A. ("Technosystem"), a Rome, Italy-based company, with
additional operations in Poland, for aggregate proceeds of $3.3 million and
the assumption of long-term debt of approximately $12.7 million in addition to
other liabilities. The Company has made a cash payment of $2.6 million and an
additional payment of $0.7 million will be due on March 31, 1998, subject to
certain indemnification obligations of the former Technosystem
securityholders, as set forth in the securities purchase agreement.
Technosystem designs, manufactures and markets equipment for transmitters and
transponders for television and radio broadcasting. The range of products
include audio/video modulators, converters, amplifiers, transponders,
transmitters and microwave links.
On March 7, 1997, the Company acquired substantially all of the assets of
Columbia Spectrum Management, L.P. ("CSM"), a Vienna, Virginia-based company,
for $8.0 million in cash and 796,612 net shares of Common Stock valued at
approximately $14.5 million. CSM provides turnkey relocation services for
microwave paths over spectrum allocated by the Federal Communications
Commission for Personal Communications Services and other emerging
technologies.
The Company accounted for its acquisitions of Technosystem and CSM based on
the purchase method of accounting. The results of these acquired entities are
included from the date of acquisition and were not material to the Company's
results of operations. The Company accounted for its acquisition of CRC as a
pooling of interests and, therefore, all prior period financial statements
presented, and the financial statements as of September 30, 1997 and for the
three and nine months then ended, were restated as if the merger took place at
the beginning of such periods.
7
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The total purchase price of the acquisitions of CSM and Technosystem is as
follows (in thousands):
<TABLE>
<CAPTION>
TECHNOSYSTEM CSM TOTAL
------------ ------- -------
<S> <C> <C> <C>
Cash payment.................................... $2,600 $ 8,000 $10,600
Contingent consideration........................ 700 -- 700
Issuance of common stock........................ -- 14,500 14,500
Expenses........................................ 471 128 599
------ ------- -------
Total......................................... $3,771 $22,628 $26,399
====== ======= =======
</TABLE>
The allocation of the purchase price of the acquisitions of CSM and
Technosystem is as follows (in thousands):
<TABLE>
<CAPTION>
TECHNOSYSTEM CSM TOTAL
------------ ------- --------
<S> <C> <C> <C>
Cash and cash equivalents.................... $ 14 $ 330 $ 344
Accounts receivable.......................... 2,704 -- 2,704
Inventory.................................... 4,196 53 4,249
Other current assets......................... 1,870 -- 1,870
Property and equipment....................... 597 222 819
Non-current assets........................... 129 5 134
Intangible assets............................ 15,775 22,228 38,003
Current liabilities assumed.................. (8,824) (210) (9,034)
Long-term debt............................... (12,690) -- (12,690)
-------- ------- --------
Total...................................... $ 3,771 $22,628 $ 26,399
======== ======= ========
</TABLE>
4. BORROWING ARRANGEMENTS
The Company entered into a new revolving line of credit agreement on March
3, 1997 (as amended on May 7, 1997, September 17, 1997 and October 31, 1997)
that provides for borrowings of up to $25,000,000. The line of credit expires
on March 31, 1998. Borrowings under the line are unsecured and bear interest
at either a base interest rate or a variable interest rate. The agreement
requires the Company to comply with certain financial covenants including the
maintenance of specified minimum ratios.
5. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
1997 1996
----------- --------
(UNAUDITED)
<S> <C> <C>
Raw materials........................................... $ 9,642 $ 7,948
Work-in-process......................................... 26,026 15,834
Finished goods.......................................... 14,598 7,037
------- -------
$50,266 $30,819
======= =======
</TABLE>
8
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
1997 1996
----------- --------
(UNAUDITED)
<S> <C> <C>
Tooling and test equipment............................. $ 23,654 $20,044
Computer equipment..................................... 4,202 2,482
Furniture and fixtures................................. 3,671 2,056
Land and buildings..................................... 1,411 1,204
Construction-in-progress............................... 1,770 1,817
-------- -------
34,708 27,603
Less--accumulated depreciation and amortization........ (11,352) (7,648)
-------- -------
$ 23,356 $19,955
======== =======
</TABLE>
STOCKHOLDER RIGHTS AGREEMENT
On September 26, 1997, the Board of Directors of the Company adopted a
Stockholder Rights Agreement (the "Agreement"). Pursuant to the Agreement,
rights (the "Rights") will be distributed as a dividend at the rate of one
preferred share purchase right on each outstanding share of its Common Stock
held by stockholders of record as of the close of business on November 3,
1997. Each Right will entitle stockholders to buy one-hundredth of one share
of Series A Preferred at an exercise price of $125.00 upon the occurrence of
certain events. The Rights will expire ten (10) years from the date the
Agreement is executed by the Company and BankBoston, N.A., the Rights agent.
The Rights will be exercisable only if a person or group acquires 15% or
more of the Company's Common Stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 15% of
more of the Company's Common Stock. If, after the Rights become exercisable,
P-Com is acquired in a merger or other business combination transaction, or
sells 50% or more of its assets or earning power, each unexercised Right will
entitle its holder to purchase, at the Right's then-current exercise price, a
number of the acquiring company's common shares having a market value at the
time of twice the Right's exercise price. In addition, if a person or group
acquires 15% or more of the Company's outstanding Common Stock, each Right
will entitle its holder (other than such person or members of such group) to
purchase, at the Right's then-current exercise price, a number of shares of
the Company's Common Stock (or cash, other securities or property, at the
discretion of the Board of Directors) having a market value of twice the
Right's exercise price. At any time within ten days after the public
announcement that a person or group has acquired beneficial ownership of 15%
or more of the Company's Common Stock, the Board, in its sole discretion, may
redeem the Rights for $0.0001 per Right.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth items from the Consolidated Condensed Income
Statements as a percentage of sales for the periods indicated. In addition,
this Quarterly Report on Form 10-Q contains forward-looking statements that
involve numerous risks and uncertainties. The statements contained in this
Quarterly Report on Form 10-Q that are not purely historical are forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth in the factors affecting operating results contained in this
Quarterly Report on Form 10-Q.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed in the Company's 1996 Annual Report on Form
10-K and other documents filed by the Company with the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 56.7 59.2 58.0 60.0
------ ------ ------ ------
Gross profit margin.......................... 43.3 40.8 42.0 40.0
------ ------ ------ ------
Operating expenses
Research and development................... 13.8 20.2 15.0 20.5
Selling and marketing...................... 7.5 6.2 7.5 6.8
General and administrative................. 5.5 5.1 5.8 5.5
Goodwill amortization...................... 1.3 0.4 1.3 0.3
------ ------ ------ ------
Total operating expenses..................... 28.1 31.9 29.6 33.1
------ ------ ------ ------
Income from operations....................... 15.2 8.9 12.4 6.9
Interest and other income (expense), net..... (0.2) 1.3 (0.2) 0.8
------ ------ ------ ------
Income before income taxes................... 15.0 10.2 12.2 7.6
Provision for income taxes................... 5.1 0.9 4.3 0.9
------ ------ ------ ------
Net income................................... 9.9% 9.3% 7.9% 6.8%
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
AND 1996
Sales. Sales consist of revenues from radio systems and related software
tools and service offerings. Sales for the three months ended September 30,
1997 and 1996 were approximately $51.5 million and $27.0 million,
respectively. Sales for the nine months ended September 30, 1997 and 1996 were
approximately $139.2 million and $67.7 million, respectively. The increases in
sales during 1997 compared to the corresponding three and nine month periods
in 1996 were primarily due to increased unit sales of 38 GHz and 23 GHz radio
systems to new and existing customers and sales from companies recently
acquired. For the nine months ended September 30, 1997, seven customers
accounted for 59% of the sales of the Company. For the nine months ended
September 30, 1996, six customers accounted for 69% of the sales of the
Company.
Gross Profit. The Company's cost of sales consists primarily of costs
related to materials, labor and overhead. For the three months ended September
30, 1997 and 1996, gross profit was approximately $22.3 million, or 43.3% of
sales, and approximately $11.0 million, or 40.8% of sales, respectively. For
the nine months ended September 30, 1997 and 1996, gross profit was
approximately $58.4 million or 42.0% of sales, and approximately $27.1
million, or 40.0% of sales, respectively. The improvement in gross profit in
1997 compared to the corresponding periods in 1996 was primarily due to
product design improvements and economies of scale. There can be no assurance
that gross margins will remain at this level or continue to improve.
10
<PAGE>
Research and Development. Research and development expenses consist
primarily of costs associated with personnel and equipment. The Company's
research and development activities include the development of additional
frequencies and varying operating features and related software tools. In
accordance with Financial Accounting Standards Board Statement No. 86, the
Company's policy is to capitalize internal software development costs incurred
on a project from the time when the technological feasibility of such project
has been achieved until the time the related product is made available to
customers. The Company's software development costs subject to capitalization
have not been significant to date and, as a result, have been expensed during
the periods incurred. The Company intends to continue to invest significant
resources to continue the development of new systems and enhancements
(including additional frequencies and varying operating features and related
software tools) and expects that research and development expenses will
increase significantly in absolute dollars during the remainder of 1997 and in
1998 will continue to increase significantly in absolute dollars as compared
to 1997. Research and development expenses totalled approximately $7.1 million
for the three months ended September 30, 1997, compared to $5.5 million for
the three months ended September 30, 1996. The increase in absolute dollars
for the three months ended September 30, 1997 as compared to the corresponding
period in 1996 was due primarily to expenses associated with increased
staffing, costs associated with new product development by CRC and the
acquisitions of Technosystem and CSM in the first quarter of 1997. As a
percentage of sales, research and development expenses decreased to 13.8% in
the three months ended September 30, 1997 from 20.2% in the corresponding
period in 1996. The decrease as a percentage of sales was primarily due to a
higher level of sales in the three months ended September 30, 1997, as
compared to the corresponding period in 1996.
Research and development expenses for the nine months ended September 30,
1997 and 1996 were approximately $20.9 million and $13.9 million,
respectively. The increase in research and development during the nine months
ended September 30, 1997, as compared to the corresponding period in 1996 was
due primarily to increased staffing, new product development by CRC and recent
acquisitions. As a percentage of sales, research and development expenses
decreased from 20.5% in the nine months ended September 30, 1996 to 15.0% in
the corresponding period in 1997. The decrease in research and development
expenses as a percentage of sales during the nine months ended September 30,
1997 as compared to the corresponding period in 1996 was primarily due to a
higher level of sales in the nine months ended September 30, 1997. The Company
expects that research and development expenses will continue to increase
significantly in absolute dollars during the remainder of 1997.
Selling and Marketing. Selling and marketing expenses consist of salaries of
certain personnel, investments in international operations, sales commissions,
travel expenses, customer service and support expenses and costs related to
advertising and trade shows. The Company expects that such expenses will
increase significantly in absolute dollars during the remainder of 1997 and in
1998 will continue to increase significantly in absolute dollars as compared
to 1997. Selling and marketing expenses for the three months ended September
30, 1997 and 1996 were $3.9 million and $1.7 million, respectively. The
increase in selling and marketing expenses in the three months ended September
30, 1997, as compared to the corresponding period in 1996, was primarily due
to increased staffing, expenses related to recent acquisitions and increased
expenses relating to the Company's expansion of its international sales and
marketing organization. As a percentage of sales, selling and marketing
expenses were 7.5% during the three month period ended September 30, 1997 as
compared to 6.2% in the corresponding period in 1996. This increase was due
primarily to the expansion of the Company's international sales in the three
months ended September 30, 1997 as compared to the corresponding period in
1996.
Selling and marketing expenses for the nine months ended September 30, 1997
and 1996 were approximately $10.5 million and $4.6 million, respectively. The
increase in selling and marketing during the nine months ended September 30,
1997 as compared to the corresponding period in 1996 was due primarily to
increased staffing, recent acquisitions, and increased expenses relating to
the Company's expansion of its international sales and marketing organization.
As a percentage of sales, selling and marketing expenses increased from 6.8%
in the nine months ended September 30, 1996 to 7.5% in the corresponding
period in 1997.
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The increase in selling and marketing expenses as a percentage of sales during
the nine months ended September 30, 1997 as compared to the corresponding
period in 1996 was primarily due to the expansion of the Company's
international sales. The Company expects that selling and marketing expenses
will continue to increase significantly in absolute dollars during the
remainder of 1997.
General and Administrative. General and administrative expenses consist
primarily of salaries and other expenses for management, finance, accounting,
legal and other professional services. General and administrative expenses for
the three months ended September 30, 1997 and 1996 were $2.8 million and $1.4
million, respectively. The increase in general and administrative expenses in
the three months ended September 30, 1997 as compared to the corresponding
period in 1996 was principally due to increased staffing and other costs
resulting from the Company's acquisitions of Geritel, S.p.A. ("Geritel") ACS,
Technosystem and CSM. As a percentage of sales, general and administrative
expenses were 5.5% in the three months ended September 30, 1997, as compared
to 5.1% in the corresponding period in 1996. This increase in general and
administrative expenses as a percentage of sales was due primarily to the
expansion of the Company's operations during the three months ended September
30, 1997 including costs associated with completing the merger with CRC. The
Company also has incurred and expects to continue to incur additional
significant ongoing expenses as a publicly owned company related to legal,
accounting and other administrative services and expenses.
General and administrative expenses for the nine months ended September 30,
1997 and 1996 were approximately $8.1 million and $3.8 million, respectively.
This increase was due primarily to increased staffing and other costs
resulting from the Company's expansion of its operations. As a percentage of
sales, general and administrative expenses increased from 5.5% in the nine
months ended September 30, 1996 to 5.8% in the corresponding period in 1997.
The increase in general and administrative expenses as a percentage of sales
during the nine months ended September 30, 1997 as compared to the
corresponding period in 1996 was primarily due to the expansion of Company's
operations including costs associated with completing the merger with CRC. The
Company expects that general and administrative expenses will continue to
increase significantly in absolute dollars during the remainder of 1997.
Goodwill Amortization. Goodwill amortization consists of the charge to
income that results from the allocation over the estimated useful life of the
component of the cost of the Company's acquisitions accounted for by the
purchase method which is greater than the fair value of the net assets
acquired. Goodwill amortization for the three months ended September 30, 1997
and 1996 were $0.7 million and $0.1 million, respectively. The increase in
goodwill amortization in the three and nine month periods ended September 30,
1997 as compared to the corresponding periods in 1996 was due to the
acquisitions of Technosystem in February 1997 and CSM in March 1997.
Interest and Other Income (Expense), Net. The Company incurred net interest
and other expense of $112,000 during the three months ended September 30,
1997, as compared to $372,000 of net interest and other income during the
corresponding period in 1996. The Company incurred net interest and other
expense of $181,000 during the nine months ended September 30, 1997, as
compared to $501,000 of net interest and other income during the corresponding
period in 1996. The increase in net interest and other expense was primarily
due to interest expense incurred on borrowings under the Company's bank line
of credit, partially offset by exchange rate gains generated by collections of
foreign accounts.
LIQUIDITY AND CAPITAL RESOURCES
The Company used approximately $22.3 million in operating activities during
the nine months ended September 30, 1997, primarily due to an increase in
accounts receivable, prepaid expenses and inventory of $17.1 million, $1.1
million and $15.2 million, respectively, and a decrease in accounts payable
and other accrued liabilities of $4.6 million and $4.4 million, respectively.
These uses of cash were partially offset by net income of $11.1 million,
depreciation and amortization expense of $4.6 million and increases in accrued
employee benefits and income taxes payable of $0.9 million and $3.5 million,
respectively.
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The Company used approximately $17.1 million in investing activities during
the nine months ended September 30, 1997 consisting of approximately $3.1
million to purchase Technosystem and $7.8 million to purchase CSM, and $6.3
million to acquire capital equipment.
The Company generated approximately $8.3 million in financing its activities
during the nine months ended September 30, 1997. The Company received
approximately $4.4 million from net borrowings under its bank line of credit,
and approximately $3.9 million from the issuance of the Company's Common Stock
pursuant to the Company's stock option and employee stock purchase plans.
At September 30, 1997 and December 31, 1996, net accounts receivable totaled
was approximately $62.6 million and $42.8 million, respectively. Of the $19.8
million increase that occurred in the nine months ended September 30, 1997,
$2.7 million was due to the acquisition of accounts receivable from both
Technosystem and CSM. At September 30, 1997 and December 31, 1996, inventory
was approximately $50.3 million and $30.8 million, respectively. Of the $19.5
million increase that occurred in the nine months ended September 30, 1997,
$4.2 million was due to the acquisition of inventory from Technosystem and
CSM, a portion of which was written off in the quarters ended June 30, 1997
and September 30, 1997. At September 30, 1997 and December 31, 1996,
borrowings under the line of credit were approximately $17.1 million and $2.1
million, respectively. Of the $15.0 million increase that occurred in the nine
months ended September 30, 1997, $16.8 million was due to net borrowings under
the Company's bank line of credit.
At September 30, 1997, the Company had working capital of approximately
$78.5 million. In recent quarters, most of the Company's sales have been
realized near the end of each quarter, resulting in a significant investment
in accounts receivable at the end of the quarter. In addition, the Company
expects that its investments in accounts receivable and inventories will
continue to be significant and will continue to represent a significant
portion of working capital. Significant investments in accounts receivable and
inventories will subject the Company to increased risks that could materially
adversely affect the Company's business, prospects, financial condition and
results of operations.
The Company's principal sources of liquidity as of September 30, 1997
consisted of approximately $10.3 million of cash and cash equivalents. In
addition, the Company as of September 30, 1997 had a $20.0 million line of
credit facility with Union Bank of California which expires in March 1998.
Borrowings under the line are unsecured and bear interest at either a base
interest rate or a variable interest rate. The agreement requires the Company
to comply with certain financial covenants including the maintenance of
specified minimum ratios. As of September 30, 1997, the Company was in
compliance with such covenants and had total borrowings of approximately $16.8
million in cash and approximately $2.6 million outstanding in the form of
stand-by letters of credit, and had $0.6 million available for additional
borrowings. In October 1997, the Company's borrowing limit under the line-of-
credit agreement was increased to $25.0 million.
As discussed in Note 3 to the Condensed Consolidated Financial Statements,
the Company completed three acquisitions during the first nine months of 1997.
Note 3 discusses the acquisition of 100% of the equity of Technosystem on
February 24, 1997, the acquisition of substantially all of the assets of CSM
on March 7, 1997 and the acquisition of all of the outstanding shares of
capital stock of CRC on May 29, 1997.
At present, the Company does not have any material commitments for capital
equipment purchases. However, the Company's future capital requirements will
depend upon many factors, including the development of new radio systems and
related software tools, potential acquisitions, the extent and timing of
acceptance of the Company's radio systems in the market, requirements to
maintain adequate manufacturing facilities, working capital requirements for
Geritel, Atlantic Communication Sciences, Inc. ("ACS"), Technosystem, CRC and
CSM, the progress of the Company's research and development efforts, expansion
of the Company's marketing and sales efforts, the Company's results of
operations and the status of competitive products. The Company believes that
cash and cash equivalents on hand, anticipated cash flow from operations, if
any, funds available
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from the Company's bank line of credit, and the anticipated proceeds from the
Company's $100 million offering of convertible notes announced on October 16,
1997, will be adequate to fund its ordinary operations for at least the next
twelve months. There can be no assurance, however, that the Company will not
require additional financing prior to such date to fund its operations. For a
discussion of risk factors associated with the Company's future capital
requirements, please see "Certain Factors Affecting Operating Results--Future
Capital Requirements" and "Acquisitions".
On October 14, 1997, the Company, through its U.K. Subsidiary P-COM Services
(UK) Limited, executed a definitive agreement to acquire R T Masts Limited,
("R T Masts"), an English company located in Wellingborough,
Northhamptonshire, U.K., for Common Stock of the Company valued at
approximately $15.0 million. The acquisition is expected to close in late
November 1997 and is subject to standard closing conditions, including that
there be no material adverse affect on the Company's business between October
14, 1997 and the closing and receipt of opinions as to the accounting
treatment for such transaction. R T Masts supplies, installs and maintains
telecommunications systems and structures, including antennae covering high
frequency, medium frequency and microwave systems. R T Masts also manages the
construction of radio system sites, as well as construction of towers and the
installation of radios and antennae at systems sites. The Company intends to
account for the acquisition based on the pooling of interests method of
accounting. As a pooling of interests, P-Com's results will be restated to
include the financial statements of R T Masts for all previous periods.
CERTAIN FACTORS AFFECTING OPERATING RESULTS
Significant Fluctuations in Results of Operations
The Company has experienced and will in the future continue to experience
significant fluctuations in sales, gross margins and operating results. The
procurement process for most of the Company's current and potential customers
is complex and lengthy, and the timing and amount of sales is difficult to
predict reliably. The sale and implementation of the Company's products and
services generally involves a significant commitment of the Company's senior
management, sales force and other resources. The sales cycle for the Company's
products and services typically involves a significant technical evaluation
and commitment of cash and other resources, with the attendant delays
frequently associated with, among other things: (i) existing and potential
customers' seasonal purchasing and budgetary cycles; (ii) educating customers
as to the potential applications of, and product-life cost savings associated
with, using the Company's products and services; (iii) complying with
customers' internal procedures for approving large expenditures and evaluating
and accepting new technologies that affect key operations; (iv) complying with
governmental or other regulatory standards; (v) difficulties associated with
each customer's ability to secure financing; and (vi) negotiating purchase and
service terms for each sale. Orders for the Company's products have typically
been strongest towards the end of the calendar year, with a reduction in
shipments occurring during the summer months, as evidenced in the third
quarter of fiscal year 1997, due primarily to the inactivity of the European
market, the Company's major current customer base, at such time. To the extent
such seasonality continues, the Company's results of operations will fluctuate
from quarter to quarter.
In addition, a single customer's order scheduled for shipment in a quarter
can represent a significant portion of the Company's potential sales for such
quarter. There can be no assurance that the Company will be able to obtain
such large orders from single customers in the future. The Company has at
times failed to receive expected orders, and delivery schedules have been
deferred as a result of changes in customer requirements and commitments,
among other factors. As a result, the Company's operating results for a
particular period have in the past been and will in the future be materially
adversely affected by a delay, rescheduling or cancellation of even one
purchase order. Much of the anticipated growth in telecommunications
infrastructure, if any, is expected to result from the entrance of new service
providers, many of which do not have the financial resources of existing
service providers. To the extent these new service providers are unable to
adequately finance their operations, they may cancel orders. Moreover,
purchase orders are often received and accepted substantially in advance of
shipment, and the failure to reduce actual costs to the extent anticipated or
an increase in anticipated costs before shipment could materially adversely
affect the gross margins for such orders, and as a result, the Company's
results of operations. Moreover, most of the Company's backlog scheduled for
shipment in the twelve months subsequent to September 30, 1997 can be canceled
since orders are often made substantially in
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advance of shipment, and the Company's contracts typically provide that orders
may be canceled with limited or no penalties. As a result, backlog is not
necessarily indicative of future sales for any particular period. In addition,
the Company's customers have increasingly been requiring shipment of products
at the time of ordering rather than submitting purchase orders far in advance
of expected dates of product shipment. Furthermore, most of the Company's
sales in recent quarters have been realized near the end of each quarter.
Accordingly, a delay in a shipment near the end of a particular quarter, as
the Company has been experiencing recently, due to, for example, an
unanticipated shipment rescheduling, a cancellation or deferral by a customer,
competitive or economic factors, unexpected manufacturing or other
difficulties, delays in deliveries of components, subassemblies or services by
suppliers, or the failure to receive an anticipated order, may cause sales in
a particular quarter to fall significantly below the Company's expectations
and may materially adversely affect the Company's operating results for such
quarter.
In connection with its efforts to ramp-up production of products and
services, the Company expects to continue to make substantial capital
investments in equipment and inventory, recruit and train additional personnel
and possibly invest in additional manufacturing facilities. The Company
anticipates that these expenditures will be made in advance of, and in
anticipation of, increased sales and, therefore, that its gross margins will
be adversely affected from time-to-time due to short-term inefficiencies
associated with the addition of equipment and inventory, personnel or
facilities, and that each cost category may increase as a percentage of
revenues from time-to-time on a periodic basis. In addition, as the Company's
customers increasingly require shipment of products at the time of ordering,
the Company must forecast demand for each quarter and build up inventory
accordingly. Such increases in inventory could materially adversely affect the
Company's operation, if such inventory were not utilized or becomes obsolete.
A large portion of the Company's expenses are fixed and difficult to reduce
should revenues not meet the Company's expectations, thus magnifying the
material adverse effect of any revenue shortfall. Furthermore, announcements
by the Company or its competitors of new products, services and technologies
could cause customers to defer or cancel purchases of the Company's systems
and services, which would materially adversely affect the Company's business,
financial condition and results of operations. Additional factors that have
caused and will continue to cause the Company's sales, gross margins and
results of operations to vary significantly from period to period include: new
product introductions and enhancements, including related costs; the Company's
ability to manufacture and produce sufficient volumes of systems and meet
customer requirements; manufacturing capacity, efficiencies and costs; mix of
sales through direct efforts or through distributors or other third parties;
mix of systems and related software tools sold and services provided;
operating and new product development expenses; product discounts; accounts
receivable collection, in particular those acquired in recent acquisitions,
especially outside of the United States; changes in pricing by the Company,
its customers or suppliers; inventory writeoffs, as the Company recently
experienced in the second and third quarters for a relatively immaterial
amount in each such quarter, which the Company may experience again in the
future; inventory obsolescence; natural disasters; market acceptance by the
Company's customers and the timing of availability of new products and
services by the Company or its competitors; acquisitions, including costs and
expenses; usage of different distribution and sales channels; fluctuations in
foreign currency exchange rates; delays or changes in regulatory approval of
its systems and services; warranty and customer support expenses;
customization of systems; and general economic and political conditions. In
addition, the Company's results of operations have been and will continue to
be influenced significantly by competitive factors, including the pricing and
availability of, and demand for, competitive products and services. All of the
above factors are difficult for the Company to forecast, and these or other
factors could materially adversely affect the Company's business, financial
condition and results of operations. As a result, the Company believes that
period-to-period comparisons are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to all of the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock may be
materially adversely affected.
Significant Customer Concentration
In 1996, six customers accounted for 74% of the Company's sales, and as of
December 31, 1996, seven customers accounted for most of the Company's backlog
scheduled for shipment in the twelve months
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subsequent to December 31, 1996. During the first nine months of 1997, seven
customers accounted for 59% of the Company's sales, and as of September 30,
1997, five customers accounted for 53% of the Company's backlog scheduled for
shipment in the twelve months subsequent to September 30, 1997. The Company
anticipates that it will continue to sell its products and services to a
changing but still relatively small group of customers. Several of the
Company's subsidiaries are dependent on one or a few customers. Some companies
implementing new networks are at early stages of development and may require
additional capital to fully implement their planned networks. The Company's
ability to achieve sales in the future will depend in significant part upon
its ability to obtain and fulfill orders from, maintain relationships with and
provide support to existing and new customers, to manufacture systems in
volume on a timely and cost-effective basis and to meet stringent customer
performance and other requirements and shipment delivery dates, as well as the
condition, working capital availability and success of its customers. As a
result, any cancellation, reduction or delay in orders by or shipments to any
customer, as a result of manufacturing or supply difficulties or otherwise, or
the inability of any customer to finance its purchases of the Company's
products or services, as has been the case with certain customers
historically, may materially adversely affect the Company's business,
financial condition and results of operations. In addition, financial
difficulties of any existing or potential customers may limit the overall
demand for the Company's products and services (for example, certain potential
customers in the telecommunications industry have been reported to have
undergone financial difficulties and may therefore limit their future orders).
In addition, acquisitions in the communications industry are common, which
further concentrates the customer base and may cause orders to be delayed or
cancelled. There can be no assurance that the Company's sales will increase in
the future or that the Company will be able to support or attract customers.
Acquisitions
Since April 1996, the Company has acquired six complementary companies and
businesses with an additional acquisition pending as of the date hereof.
Integration of these companies into the Company's business is currently
ongoing, and no assurance may be made that the Company will be able to
successfully complete this process. Risks commonly encountered in such
transactions include the difficulty of assimilating the operations and
personnel of the combined companies, the potential disruption of the Company's
ongoing business, the inability to retain key technical and managerial
personnel, the inability of management to maximize the financial and strategic
position of the Company through the integration of acquired businesses,
additional expenses associated with amortization of acquired intangible
assets, dilution of existing stockholders, the maintenance of uniform
standards, controls, procedures, and policies, the impairment of relationships
with employees and customers as a result of any integration of new personnel,
risks of entering markets in which the Company has no or limited direct prior
experience, and operating companies in different geographical locations with
different cultures. All of the Company's acquisitions to date (the
"Acquisitions"), except CRC and the pending acquisition of R T Masts Limited
("R T Masts"), have been accounted for under the purchase method of
accounting, and as a result, a significant amount of goodwill is being
amortized as set forth in the Company's consolidated financial statements.
This amortization expense may have a significant effect on the Company's
financial results. There can be no assurance that the Company will be
successful in overcoming these risks or any other problems encountered in
connection with such acquisitions, or that such transactions will not
materially adversely affect the Company's business, financial condition, or
results of operations.
As part of its overall strategy, the Company plans to continue to acquire or
invest in complementary companies, products or technologies and to enter into
joint ventures and strategic alliances with other companies. The Company is
currently pursuing numerous acquisitions; however, except as set forth in this
Offering Memorandum, no material acquisition has become the subject of any
definitive agreement, letter of intent or agreement in principle. The Company
is unable to predict whether and when any prospective acquisition candidate
will become available or the likelihood that any acquisition will be
completed. The Company competes for acquisition and expansion opportunities
with many entities that have substantially greater resources than the Company.
There can be no assurance that the Company will be able to successfully
identify suitable acquisition candidates, complete acquisitions, or expand
into new markets. Once integrated, acquired businesses may not achieve
comparable levels of revenues, profitability, or productivity as the existing
business of the Company or
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otherwise perform as expected. In addition, as commonly occurs with mergers of
technology companies, during the pre-merger and integration phases, aggressive
competitors may undertake formal initiatives to attract customers and to
recruit key employees through various incentives. If the Company proceeds with
one or more significant acquisitions in which the consideration consists of
cash, a substantial portion of the Company's available cash, including
proceeds of this Offering, could be used to consummate the acquisitions. Many
business acquisitions must be accounted for as a purchase for financial
reporting purposes. Most of the businesses that might become attractive
acquisition candidates for the Company are likely to have significant goodwill
and intangible assets, and acquisition of these businesses, if accounted for
as a purchase, would typically result in substantial amortization of goodwill
charges to the Company. The occurrence of any of these events could have a
material adverse effect on the Company's workforce, business, financial
condition and results of operations.
Dependence on Contract Manufacturers; Reliance on Sole or Limited Sources of
Supply
The Company's internal manufacturing capacity is very limited. The Company
utilizes contract manufacturers such as Remec, Inc., Sanmina Corporation, SPC
Electronics Corp., GSS Array Technology, Celeritek, Inc. and Senior Systems
Technology, Inc. to produce its systems, components and subassemblies and
expects to rely increasingly on these and other manufacturers in the future.
The Company also relies on outside vendors to manufacture certain other
components and subassemblies. There can be no assurance that the Company's
internal manufacturing capacity and that of its contract manufacturers will be
sufficient to fulfill the Company's orders. Failure to manufacture, assemble
and ship systems and meet customer demands on a timely and cost-effective
basis could damage relationships with customers and have a material adverse
effect on the Company's business, financial condition and operating results.
Certain necessary components, subassemblies and services necessary for the
manufacture of the Company's systems are obtained from a sole supplier or a
limited group of suppliers. In particular, Eltel Engineering S.r.L. and
Associates, Milliwave, Scientific Atlanta and Xilinx, Inc. each are sole
source or limited source suppliers for critical components used in the
Company's radio systems.
The Company's reliance on contract manufacturers and on sole suppliers or a
limited group of suppliers and the Company's increasing reliance on contract
manufacturers and suppliers involves several risks, many of which the Company
has been experiencing, including an inability to obtain an adequate supply of
finished products and required components and subassemblies, and reduced
control over the price, timely delivery, reliability and quality of finished
products, components and subassemblies. The Company does not have long-term
supply agreements with most of its manufacturers or suppliers. Manufacture of
the Company's products and certain of these components and subassemblies is an
extremely complex process, and the Company has from time to time experienced
and may in the future continue to experience problems in the timely delivery
and quality of products and certain components and subassemblies from vendors.
Certain of the Company's suppliers have relatively limited financial and other
resources. Any inability to obtain timely deliveries of components and
subassemblies of acceptable quality or any other circumstance that would
require the Company to seek alternative sources of supply, or to manufacture
its finished products or such components and subassemblies internally, could
delay the Company's ability to ship its systems, which could damage
relationships with current or prospective customers and have a material
adverse effect on the Company's business, financial condition and results of
operations.
No Assurance of Successful Expansion of Operations; Management of Growth
Recently, the Company has significantly expanded the scale of its operations
to support increased sales and to address critical infrastructure and other
requirements. This expansion has included the leasing of additional space, the
opening of branch offices and subsidiaries in the United Kingdom, Germany and
Singapore, the opening of design centers and manufacturing operations
throughout the world, the acquisition of a significant amount of inventory
(the Company's inventory increased from $31 million at December 31, 1996 to
$50 million at September 30, 1997) and accounts receivable, recent
acquisitions, significant investments in research and development to support
product development and services, including the recently introduced products
and the development of point-to-multipoint systems, and the hiring of
additional personnel in all functional areas,
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including in sales and marketing, manufacturing and operations and finance,
and has resulted in significantly higher operating expenses. Currently, the
Company is devoting significant resources to the development of new products
and technologies and is conducting evaluations of these products and will
continue to invest significant additional resources in plant and equipment,
inventory, personnel and other costs, to begin production of these products
and to provide the marketing and administration, if any, required to service
and support these new products. Accordingly, there can be no assurance that
gross profit margin and inventory levels will not be adversely impacted in the
future by start-up costs associated with the initial production and
installation of these new products. These start-up costs include, but are not
limited to, additional manufacturing overhead, additional allowance for
doubtful accounts, inventory and warranty reserve requirements and the
creation of service and support organizations. In addition, the increases in
inventory on hand for new product development and customer service
requirements increase the risk of inventory write-offs. As a result, the
Company anticipates that its operating expenses will continue to increase
significantly. If the Company's sales do not correspondingly increase, the
Company's results of operations would be materially adversely affected. See
"--Limited Operating History."
Expansion of the Company's operations and its acquisitions have caused and
are continuing to impose a significant strain on the Company's management,
financial, manufacturing and other resources and have disrupted the Company's
normal business operations. The Company's ability to manage the recent and any
possible future growth, should it occur, will depend upon a significant
expansion of its manufacturing, accounting and other internal management
systems and the implementation and subsequent improvement of a variety of
systems, procedures and controls, including improvements relating to inventory
control. For a number of reasons, the Company has not been able to fully
consolidate and integrate the operations of certain acquired businesses. This
inability may cause inefficiencies, additional operational complexities and
expenses and greater risks of billing delays, inventory write-offs and
financial reporting difficulties. The Company must establish and improve a
variety of systems, procedures and controls to more efficiently coordinate its
activities in its acquired (and to be acquired) companies and their facilities
in Rome and Milan, Italy, France, Poland, Great Britain, New Jersey, Florida,
Virginia and elsewhere. There can be no assurance that significant problems in
these areas will not re-occur. Any failure to expand these areas and implement
and improve such systems, procedures and controls, including improvements
relating to inventory control, in an efficient manner at a pace consistent
with the Company's business could have a material adverse effect on the
Company's business, financial condition and results of operations. In
particular, the Company must successfully manage the transition to higher
internal and external volume manufacturing, including the establishment of
adequate facilities, the control of overhead expenses and inventories, the
development, introduction, marketing and sales of new products, the management
and training of its employee base, the integration and coordination of a
geographically and ethnically diverse group of employees and the monitoring of
its third party manufacturers and suppliers. Although the Company has
substantially increased the number of its manufacturing personnel and
significantly expanded its internal and external manufacturing capacity, there
can be no assurance that the Company will not experience manufacturing or
other delays or problems that could materially adversely affect the Company's
business, financial condition or results of operations.
In this regard, any significant sales growth will be dependent in
significant part upon the Company's expansion of its marketing, sales,
manufacturing and customer support capabilities. This expansion will continue
to require significant expenditures to build the necessary infrastructure.
There can be no assurance that the Company's attempts to expand its marketing,
sales, manufacturing and customer support efforts will be successful or will
result in additional sales or profitability in any future period. As a result
of the expansion of its operations and the significant increase in its
operating expenses, as well as the difficulty in forecasting revenue levels,
the Company will continue to experience significant fluctuations in its
revenues, costs, and gross margins, and therefore its results of operations.
Limited Operating History
P-Com was founded in August 1991 and was in the development stage until
October 1993 when it began commercial shipments of its first product. All
financial information presented in this Offering Memorandum has
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been restated to include the operating results of Control Resources
Corporation, which was acquired in a pooling of interests transaction on May
29, 1997. From inception to the end of the third quarter of fiscal 1997, the
Company generated a cumulative net profit of approximately $8.8 million. From
October 1993 through September 30, 1997, the Company generated sales of
approximately $316.1 million, of which $241.1 million, or 76% of such amount,
was generated in the year ended December 31, 1996 and the first nine months of
1997. The Company does not believe recent growth rates are indicative of
future operating results. Due to the Company's limited operating history and
limited resources, among other factors, there can be no assurance that
profitability or significant revenues on a quarterly or annual basis will
occur in the future. During 1996 and the first nine months of 1997, both the
Company's sales and operating expenses increased more rapidly than the Company
had anticipated. There can be no assurance that the Company's revenues will
continue to remain at or increase from the levels experienced in 1996 or in
the first nine months of 1997 or that sales will not decline. The Company
intends to continue to invest significant amounts in its operations,
particularly to support product development and the marketing and sales of
recently introduced products, and operating expenses will continue to increase
significantly in absolute dollars. If the Company's sales do not
correspondingly increase, the Company's results of operations would be
materially adversely affected. Accordingly, there can be no assurance that the
Company will achieve profitability in future periods. The Company is subject
to all of the risks inherent in the operation of a new business enterprise,
and there can be no assurance that the Company will be able to successfully
address these risks.
Declining Average Selling Prices
The Company believes that average selling prices and gross margins for its
systems and services will decline in the long term as such systems mature, as
volume price discounts in existing and future contracts take effect and as
competition intensifies, among other factors. To offset declining average
selling prices, the Company believes that it must successfully introduce and
sell new systems on a timely basis, develop new products that incorporate
advanced software and other features that can be sold at higher average
selling prices and reduce the costs of its systems through contract
manufacturing, design improvements and component cost reduction, among other
actions. To the extent that new products are not developed in a timely manner,
do not achieve customer acceptance or do not generate higher average selling
prices, and the Company is unable to offset declining average selling prices,
the Company's gross margins will decline, and such decline will have a
material adverse effect on the Company's business, financial condition and
results of operations.
Trade Account Receivables
The Company is subject to credit risk in the form of trade account
receivables. The Company may in certain circumstances be unable to enforce a
policy of receiving payment within a limited number of days of issuing bills,
especially in the case of customers that are in the early phases of business
development. In addition, many of the Company's foreign customers are granted
longer terms than those typically existing in the United States. The Company
has experienced difficulties in the past in receiving payment in accordance
with the Company's policies, particularly from customers awaiting financing to
fund their expansion and from customers outside of the United States and the
days outstanding of receivables have generally increased recently. There can
be no assurance that such difficulties will not continue in the future, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company typically does not require
collateral or other security to support customer receivables.
No Assurance of Product Quality, Performance and Reliability
The Company has limited experience in producing and manufacturing its
systems and contracting for such manufacture. The Company's customers require
very demanding specifications for quality, performance and reliability. There
can be no assurance that problems will not occur in the future with respect to
the quality, performance and reliability of the Company's systems or related
software tools. If such problems occur, the Company could experience increased
costs, delays in or cancellations or reschedulings of orders or shipments,
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delays in collecting accounts receivable and product returns and discounts,
any of which would have a material adverse effect on the Company's business,
financial condition or results of operations. In addition, in order to
maintain its ISO 9001 registration, the Company periodically must undergo a
recertification assessment. Failure to maintain such registration could
materially adversely affect the Company's business, financial condition and
results of operations. The Company completed ISO 9001 registration for its
United Kingdom sales and customer support facility and its Geritel facility in
Italy in 1996, and other facilities will also be attempting ISO 9001
registration. There can be no assurance that such registration will be
achieved.
Uncertainty of Market Acceptance
The future operating results of the Company depend to a significant extent
upon the continued growth and increased availability and acceptance of
microcellular, PCN/PCS and wireless local loop access telecommunications
services in the United States and internationally. There can be no assurance
that the volume and variety of wireless telecommunications services or the
markets for and acceptance of such services will continue to grow, or that
such services will create a demand for the Company's systems. Because these
markets are relatively new, it is difficult to predict which segments of these
markets will develop and at what rate these markets will grow, if at all. If
the short-haul millimeter wave or spread spectrum microwave wireless radio
market and related services for the Company's systems fails to grow, or grows
more slowly than anticipated, the Company's business, financial condition and
results of operations would be materially adversely affected. In addition, the
Company has invested a significant amount of time and resources in the
development of point-to-multipoint radio systems. Should the point-to-
multipoint radio market fail to develop, or should the Company's products fail
to gain market acceptance, the Company's business, financial condition and
results of operations could be materially adversely affected. Certain sectors
of the communications market will require the development and deployment of an
extensive and expensive communications infrastructure. In particular, the
establishment of PCN/PCS networks will require very large capital
expenditures. There can be no assurance that communications providers have the
ability to or will make the necessary investment in such infrastructure or
that the creation of this infrastructure will occur in a timely manner.
Moreover, one potential application of the Company's technology, use of the
Company's systems in conjunction with the provision by wireless
telecommunications service providers of alternative wireless access in
competition with the existing wireline local exchange providers, is dependent
on the pricing of wireless telecommunications services at rates competitive
with those charged by wireline telephone companies. Rates for wireless access
are currently substantially higher than those charged by wireline companies,
and there can be no assurance that rates for wireless access will generally be
competitive with rates charged by wireline companies. If wireless access rates
are not competitive, consumer demand for wireless access will be materially
adversely affected. If the Company allocates its resources to any market
segment that does not grow, it may be unable to reallocate its resources to
other market segments in a timely manner, which may curtail or eliminate its
ability to enter such market segments.
Certain of the Company's current and prospective customers are currently
delivering products and technologies which utilize competing transmission
media such as fiber optic and copper cable, particularly in the local loop
access market. To successfully compete with existing products and
technologies, the Company must, among many actions, offer systems with
superior price/performance characteristics and extensive customer service and
support, supply such systems on a timely and cost-effective basis in
sufficient volume to satisfy such prospective customers' requirements and
otherwise overcome any reluctance on the part of such customers to transition
to new technologies. Any delay in the adoption of the Company's systems may
result in prospective customers utilizing alternative technologies in their
next generation of systems and networks, which would have a material adverse
effect on the Company's business, financial condition and results of
operations. There can be no assurance that prospective customers will design
their systems or networks to include the Company's systems, that existing
customers will continue to include the Company's systems in their products,
systems or networks in the future, or that the Company's technology will to
any significant extent replace existing technologies and achieve widespread
acceptance in the wireless telecommunications market. Failure to achieve or
sustain commercial acceptance of the Company's currently available radio
systems or to develop other commercially
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acceptable radio systems would materially adversely affect the Company's
business, financial condition and results of operations. In addition, there
can be no assurance that industry technical standards will remain the same or,
if emerging standards become established, that the Company will be able to
conform to these new standards in a timely and cost-effective manner.
Intensely Competitive Industry
The wireless communications market is intensely competitive. The Company's
wireless-based radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media, including
copper and fiber optic cable. The Company has experienced increasingly intense
competition worldwide from a number of leading telecommunications companies
that offer a variety of competitive products and services and broader
telecommunications product lines, including Adtran, Inc., Alcatel Network
Systems, California Microwave, Inc., Cylink Corporation, Digital Microwave
Corporation, Ericsson Limited, Harris Corporation-Farinon Division, Innova
International Corp., Larus Corporation, Nokia Telecommunications, Philips
T.R.T. and Western Multiplex Corporation, many of which have substantially
greater installed bases, financial resources and production, marketing,
manufacturing, engineering and other capabilities than the Company. The
Company faces actual and potential competition not only from these established
companies, but also from start-up companies that are developing and marketing
new commercial products and services. The Company may also face competition in
the future from new market entrants offering competing technologies. In
addition, the Company's current and prospective customers and partners,
certain of which have access to the Company's technology or under some
circumstances are granted the right to use the technology for purposes of
manufacturing, have developed, are currently developing or could develop the
capability to manufacture products competitive with those that have been or
may be developed or manufactured by the Company. The Company's results of
operations may depend in part upon the extent to which these customers elect
to purchase from outside sources rather than develop and manufacture their own
radio systems. There can be no assurance that such customers will rely on or
expand their reliance on the Company as an external source of supply for their
radio systems. The principal elements of competition in the Company's market
and the basis upon which customers may select the Company's systems include
price, performance, software functionality, ability to meet delivery
requirements and customer service and support. Recently, certain of the
Company's competitors have announced the introduction of competitive products,
including related software tools and services, and the acquisition of other
competitors and competitive technologies. The Company expects its competitors
to continue to improve the performance and lower the price of their current
products and services and to introduce new products and services or new
technologies that provide added functionality and other features. New product
and service offerings and enhancements by the Company's competitors could
cause a significant decline in sales or loss of market acceptance of the
Company's systems, or make the Company's systems, services or technologies
obsolete or noncompetitive. The Company has experienced significant price
competition, and expects such competition to intensify, which may materially
adversely affect its gross margins and its business, financial condition and
results of operations. The Company believes that to be competitive, it will
continue to be required to expend significant resources on, among other items,
new product development and enhancements. In marketing its systems and
services, the Company will face competition from vendors employing other
technologies and services that may extend the capabilities of their
competitive products beyond their current limits, increase their productivity
or add other features. There can be no assurance that the Company will be able
to compete successfully in the future.
Requirement for Response to Rapid Technological Change and Requirement for
Frequent New Product Introductions
The communications market is subject to rapid technological change, frequent
new product introductions and enhancements, product obsolescence, changes in
end-user requirements and evolving industry standards. The Company's ability
to be competitive in this market will depend in significant part upon its
ability to successfully develop, introduce and sell new systems and
enhancements and related software tools, including its point-to-multipoint
systems currently under development, on a timely and cost-effective basis that
respond to changing
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customer requirements. Recently, the Company has been developing point-to-
multipoint radio systems. Any success of the Company in developing new and
enhanced systems, including its point-to-multipoint systems currently under
development, and related software tools will depend upon a variety of factors,
including new product selection, integration of the various elements of its
complex technology, timely and efficient completion of system design, timely
and efficient implementation of manufacturing and assembly processes and its
cost reduction program, development and completion of related software tools,
system performance, quality and reliability of its systems and development and
introduction of competitive systems by competitors. The Company has
experienced and is continuing to experience delays from time to time in
completing development and introduction of new systems and related software
tools, including products acquired in the acquisitions. Moreover, there can be
no assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new systems or enhancements or related software
tools. There can be no assurance that errors will not be found in the
Company's systems after commencement of commercial shipments, which could
result in the loss of or delay in market acceptance, as well as significant
expenses associated with re-work of previously delivered equipment. The
inability of the Company to introduce in a timely manner new systems or
enhancements or related software tools that contribute to sales could have a
material adverse effect on the Company's business, financial condition and
results of operations.
International Operations; Risks of Doing Business in Developing Countries
Most of the Company's sales to date have been made to customers located
outside of the United States. In addition, to date, the Company has acquired
two Italy-based companies and a United Kingdom-based company and the
acquisition of a second United Kingdom-based company is pending. These
companies currently sell their products and services primarily to customers in
Europe, the Middle East and Africa. The Company anticipates that international
sales will continue to account for a majority of its sales for the foreseeable
future. Historically the Company's international sales have been denominated
in British pounds sterling or United States currencies. With recent
acquisitions of foreign companies, certain of the Company's international
sales may be denominated in other foreign currencies. A decrease in the value
of foreign currencies relative to the United States dollar could result in
losses from transactions denominated in foreign currencies. With respect to
the Company's international sales that are United States dollar-denominated,
such a decrease could make the Company's systems less price-competitive and
could have a material adverse effect upon the Company's business, financial
condition and results of operations. The Company has in the past mitigated its
currency exposure to the British pound sterling through hedging measures.
However, any future hedging measures may be limited in their effectiveness
with respect to the British pound sterling and other foreign currencies.
Additional risks inherent in the Company's international business activities
include changes in regulatory requirements, costs and risks of localizing
systems in foreign countries, delays in receiving components and materials,
availability of suitable export financing, timing and availability of export
licenses, tariffs and other trade barriers, political and economic
instability, difficulties in staffing and managing foreign operations,
branches and subsidiaries, difficulties in managing distributors, potentially
adverse tax consequences, foreign currency exchange fluctuations, the burden
of complying with a wide variety of complex foreign laws and treaties and the
difficulty in accounts receivable collections. Many of the Company's customer
purchase and other agreements are governed by foreign laws, which may differ
significantly from U.S. laws. Therefore, the Company may be limited in its
ability to enforce its rights under such agreements and to collect damages, if
awarded. There can be no assurance that any of these factors will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
International telephone companies are in many cases owned or strictly
regulated by local regulatory authorities. Access to such markets is often
difficult due to the established relationships between a government owned or
controlled telephone company and its traditional indigenous suppliers of
telecommunications equipment. The successful expansion of the Company's
international operations in certain markets will depend on its ability to
locate, form and maintain strong relationships with established companies
providing communication services and equipment in targeted regions. The
failure to establish regional or local relationships or to successfully market
or sell its products in international markets could significantly limit the
Company's
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ability to expand its operations and would materially adversely affect the
Company's business, financial condition and results of operations. The
Company's inability to identify suitable parties for such relationships, or
even if such parties are identified, to form and maintain strong relationships
with such parties could prevent the Company from generating sales of its
products and services in targeted markets or industries. Moreover, even if
such relationships are established, there can be no assurance that the Company
will be able to increase sales of its products and services through such
relationships.
Some of the Company's potential markets consist of developing countries that
may deploy wireless communications networks as an alternative to the
construction of a limited wired infrastructure. These countries may decline to
construct wireless telecommunications systems or construction of such systems
may be delayed for a variety of reasons, in which event any demand for the
Company's systems in those countries will be similarly limited or delayed. In
doing business in developing markets, the Company may also face economic,
political and foreign currency fluctuations that are more volatile than those
commonly experienced in the United States and other areas.
Extensive Government Regulation
Radio communications are subject to extensive regulation by the United
States and foreign laws and international treaties. The Company's systems must
conform to a variety of domestic and international requirements established
to, among other things, avoid interference among users of radio frequencies
and to permit interconnection of equipment. Each country has a different
regulatory process. Historically, in many developed countries, the
unavailability of frequency spectrum has inhibited the growth of wireless
telecommunications networks. In order for the Company to operate in a
jurisdiction, it must obtain regulatory approval for its systems and comply
with different regulations in each jurisdiction. Regulatory bodies worldwide
are continuing the process of adopting new standards for wireless
communications products. The delays inherent in this governmental approval
process may cause the cancellation, postponement or rescheduling of the
installation of communications systems by the Company and its customers, which
in turn may have a material adverse effect on the sale of systems by the
Company to such customers. The failure to comply with current or future
regulations or changes in the interpretation of existing regulations could
result in the suspension or cessation of operations. Such regulations or such
changes in interpretation could require the Company to modify its products and
services and incur substantial costs to comply with such time-consuming
regulations and changes. In addition, the Company is also affected to the
extent that domestic and international authorities regulate the allocation and
auction of the radio frequency spectrum. Equipment to support new services can
be marketed only if permitted by suitable frequency allocations, auctions and
regulations, and the process of establishing new regulations is complex and
lengthy. To the extent PCS operators and others are delayed in deploying these
systems, the Company could experience delays in orders. Failure by the
regulatory authorities to allocate suitable frequency spectrum could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, delays in the radio frequency spectrum
auction process in the United States could delay the Company's ability to
develop and market equipment to support new services. These delays could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The regulatory environment in which the Company operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly impact the Company's
operations by restricting development efforts by the Company and its
customers, making current systems obsolete or increasing the opportunity for
additional competition. Any such regulatory changes, including changes in the
allocation of available spectrum, could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
might deem it necessary or advisable to modify its systems and services to
operate in compliance with such regulations. Such modifications could be
extremely expensive and time-consuming.
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Future Capital Requirements
The Company's future capital requirements will depend upon many factors,
including the development of new products and related software tools,
potential acquisitions, requirements to maintain adequate manufacturing
facilities and contract manufacturing agreements, the progress of the
Company's research and development efforts, expansion of the Company's
marketing and sales efforts, and the status of competitive products. There can
be no assurance that additional financing will be available to the Company on
acceptable terms, or at all. As a result of the Offering and issuance of the
Notes (as defined below), the Company may be limited in its ability to raise
additional debt financing. If additional funds are raised by issuing equity
securities, further dilution to the existing stockholders will result. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate its research and development, acquisition or manufacturing
programs or obtain funds through arrangements with partners or others that may
require the Company to relinquish rights to certain of its technologies or
potential products or other assets. Accordingly, the inability to obtain such
financing could have a material adverse effect on the Company's business,
financial condition and results of operations.
Uncertainty Regarding Protection of Proprietary Rights
The Company relies on a combination of patents, trademarks, trade secrets,
copyrights and a variety of other measures to protect its intellectual
property rights. The Company generally enters into confidentiality and
nondisclosure agreements with its service providers, customers and others, and
attempts to limit access to and distribution of its proprietary rights. The
Company also enters into software license agreements with its customers and
others. However, there can be no assurance that such measures will provide
adequate protection for the Company's trade secrets or other proprietary
information, that disputes with respect to the ownership of its intellectual
property rights will not arise, that the Company's trade secrets or
proprietary technology will not otherwise become known or be independently
developed by competitors or that the Company can otherwise meaningfully
protect its intellectual property rights. There can be no assurance that any
patent owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future
patent applications will be issued with the scope of the claims sought by the
Company, if at all. Furthermore, there can be no assurance that others will
not develop similar products or software, duplicate the Company's products or
software or design around the patents owned by the Company or that third
parties will not assert intellectual property infringement claims against the
Company. In addition, there can be no assurance that foreign intellectual
property laws will adequately protect the Company's intellectual property
rights abroad. The failure of the Company to protect its proprietary rights
could have a material adverse effect on its business, financial condition and
results of operations.
Litigation may be necessary to enforce the Company's patents, copyrights and
other intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that infringement,
invalidity, right to use or ownership claims by third parties or claims for
indemnification resulting from infringement claims will not be asserted in the
future or that such assertions will not materially adversely affect the
Company's business, financial condition and results of operations. If any
claims or actions are asserted against the Company, the Company may seek to
obtain a license under a third party's intellectual property rights. There can
be no assurance, however, that a license will be available under reasonable
terms or at all. In addition, should the Company decide to litigate such
claims, such litigation could be extremely expensive and time consuming and
could materially adversely affect the Company's business, financial condition
and results of operations, regardless of the outcome of the litigation.
Dependence on Key Personnel
The Company's future operating results depend in significant part upon the
continued contributions of its key technical and senior management personnel,
many of whom would be difficult to replace. The Company's
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future operating results also depend in significant part upon its ability to
attract and retain qualified management, manufacturing, quality assurance,
engineering, marketing, sales and support personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting or retaining such personnel. There may be only a
limited number of persons with the requisite skills to serve in these
positions and it may be increasingly difficult for the Company to hire such
personnel over time. The loss of any key employee, the failure of any key
employee to perform in his or her current position, the Company's inability to
attract and retain skilled employees as needed or the inability of the
officers and key employees of the Company to expand, train and manage the
Company's employee base could materially adversely affect the Company's
business, financial condition and results of operations.
The Company has experienced and may continue to experience employee turnover
due to several factors, including an expanding economy within the geographic
area in which the Company maintains its principal business offices, making it
more difficult for the Company to retain its employees. Due to this and other
factors, the Company has experienced and may continue to experience high
levels of employee turnover, which could adversely impact the Company's
business, financial condition and results of operations. The Company is
presently addressing these issues and will pursue solutions designed to retain
its employees and to provide performance incentives.
Substantial Leverage
Following issuance of the $100,000,000 aggregate principal amount of the
notes due 2002 (the "Notes"), the Company will be highly leveraged. As of
September 30, 1997, after giving pro forma effect to the application of the
estimated net proceeds from this offering of the notes, the Company's total
indebtedness and stockholders' equity would have been $100.0 million and
$139.1 million, respectively. On the same pro forma basis, the Company's
earnings would have been sufficient to cover its fixed charges by $5.5 million
and $13.8 million for the year ended December 31, 1996 and the nine months
ended September 30, 1997, respectively. The Company's ability to make
scheduled payments of the principal of, or interest on, its indebtedness will
depend on its future performance, which is subject to economic, financial,
competitive and other factors beyond its control.
Discretionary Use of Offering Proceeds
The principal purposes of the offering of the Notes are to increase the
Company's capital base and financial flexibility. The Company expects to use
the net proceeds principally to fund acquisitions, to pay down and terminate
the Company's line-of-credit as well as other debt (which together amounted to
$19.5 million as of September 30, 1997), and for working capital, capital
expenditures and other general corporate purposes. As of November 4, 1997,
there was an aggregate of $24.2 million of amounts outstanding under the line-
of-credit and other debt that will be paid down out of the proceeds of the
Offering. However, the Company has no current specific plans for use of a
majority of the net proceeds of the Offering of the Notes. As a consequence,
the Company's management will have the ability to allocate the net proceeds of
the Offering of the Notes at its discretion. There can be no assurance that
the proceeds will be utilized in a manner that the security holder deem
optimal or that the proceeds can or will be invested to yield a significant
return upon the completion of the offering of the Notes. Upon completion of
the offering of the Notes, the Company will have approximately $102 million of
cash, cash equivalents and short-term investments (based on balances at
September 30, 1997, giving effect to the exercise of the initial purchasers'
over-allotment option to purchase another $15,000,000 of the Notes and after
deducting the discounts and commissions to the initial purchasers and
estimated offering expenses payable by the Company) in connection with the
Offering, substantially all of which will be invested in short-term, interest
bearing, investment grade obligations for an indefinite period of time.
Limitations on Dividends
Since its incorporation in 1991, the Company has not declared or paid cash
dividends on its Common Stock, and the Company anticipates that any future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends.
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Volatility of Stock Price
The Company believes that factors such as announcements of developments
related to the Company's business, announcements of technological innovations
or new products or enhancements by the Company or its competitors, sales by
competitors, including sales to the Company's customers, sales of the
Company's Common Stock into the public market, including by members of
management, developments in the Company's relationships with its customers,
partners, lenders, distributors and suppliers, shortfalls or changes in
revenues, gross margins, earnings or losses or other financial results that
differ from analysts' expectations (as recently experienced upon announcement
of third quarter results), regulatory developments, fluctuations in results of
operations and general conditions in the Company's market or the markets
served by the Company's customers or the economy, could cause the price of the
Company's Common Stock to fluctuate, perhaps substantially. In recent years
the stock market in general, and the market for shares of small capitalization
and technology stocks in particular, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. Many companies in the telecommunications industry,
including the Company, have recently experienced historic highs in the market
price of their Common Stock. There can be no assurance that the market price
of the Company's Common Stock will not decline substantially from its historic
highs, or otherwise continue to experience significant fluctuations in the
future, including fluctuations that are unrelated to the Company's
performance. Such fluctuations could materially adversely affect the market
price of the Company's Common Stock.
Control by Existing Stockholders; Effects of Certain Anti-Takeover Provisions
Members of the Board of Directors and the executive officers of the Company,
together with members of their families and entities that may be deemed
affiliates of or related to such persons or entities, beneficially own
approximately 5% of the outstanding shares of Common Stock of the Company.
Accordingly, these stockholders are able to influence the election of the
members of the Company's Board of Directors and influence the outcome of
corporate actions requiring stockholder approval, such as mergers and
acquisitions. This level of ownership, together with the Company's stockholder
rights agreement, certificate of incorporation, equity incentive plans, bylaws
and Delaware law, may have a significant effect in delaying, deferring or
preventing a change in control of the Company and may adversely affect the
voting and other rights of other holders of Common Stock. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. Although the Company has no present plans to
issue shares of preferred stock, the Board of Directors has preapproved the
terms of a Series A Junior Participating Preferred Stock that may be issued
pursuant to the stockholder rights agreement upon the occurrence of certain
triggering events. In general, the stockholder rights agreement provides a
mechanism by which the Board of Directors and stockholders may act to
substantially dilute the share position of any takeover bidder that acquires
15% or more of the Common Stock.
Possible Adverse Effect on Market Price for Common Stock of Shares Eligible
for Future Sale After the Offering
Sales of the Company's Common Stock into the market could materially
adversely affect the market price of the Company's Common Stock. Shares of
Common Stock sold in the initial public offering in March 1995 and follow-on
offerings in August 1995 and May 1996, 2,134,590 shares registered on a shelf
registration statement on Form S-3 effective in July 1997 covering shares of
Common Stock issued in the acquisitions of Columbia Spectrum Management L.P.
and CRC, 140,000 shares issued in connection with the acquisition of Atlantic
Communication Sciences, Inc., and option shares registered on the Company's
registration statements covering employee compensation plans are also, or will
be in the near future, eligible for immediate and unrestricted sale in the
public market at any time. In addition, approximately $15 million of Common
Stock will be issued in connection with the acquisition of R T Masts and will
be eligible in the near future for immediate and unrestricted sale in the
public market. Substantially all of the other shares of the Company's Common
Stock are not restricted and are freely tradeable in the public market.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. NONE.
ITEM 2. CHANGES IN SECURITIES. NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NONE.
ITEM 5. OTHER INFORMATION.
On August 18, 1997, the Company through one of its wholly-owned
subsidiaries, acquired the assets of Telesys (UK) Limited ("Telesys"), a
provider of engineering program management and installation of wireless
communications and fiber optic systems. The transaction consisted of cash
consideration of United States $245,000 and up to an additional United States
$200,000 payable over two years based upon successful achievement of
objectives. Telesys, located in Harlow, Essex, U.K., provides services to
operators of wireless, fiber optic, and cable systems in Europe. It installs
and commissions radio systems, as well as designs and installs fiber optic and
cable systems.
On September 26, 1997, the Board of Directors of the Company adopted a
Stockholder Rights Agreement (the "Agreement"). Pursuant to the Agreement,
rights (the "Rights") will be distributed as a dividend at the rate of one
preferred share purchase right on each outstanding share of its Common Stock
held by stockholder of record as of the close of business on November 3, 1997.
Each Right will entitle stockholders to buy one-hundredth of one share of
Series A Preferred at an exercise price of $125.00 upon certain events. The
Rights will expire ten (10) years from the date the Agreement is executed by
the Company and BankBoston, N.A., the Rights agent.
The Rights will be exercisable only if a person or group acquires 15% or
more of the Company's Common Stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 15% or
more of the Company's Common Stock. If, after the Rights become exercisable,
P-Com is acquired in a merger or other business combination transaction, or
sells 50% or more of its assets or earning power, each unexercised Right will
entitle its holder to purchase, at the Right's then-current exercise price, a
number of the acquiring company's common shares having a market value at the
time of twice the Right's exercise price. In addition, if a person or group
acquires 15% or more of the Company's outstanding Common Stock, each Right
will entitle its holder (other than such person or members of such group) to
purchase, at the Right's then-current exercise price, a number of shares of
the Company's Common Stock (or cash, other securities or property, at the
discretion of the Board of Directors) having a market value of twice the
Right's exercise price. At any time within ten days after the public
announcement that a person or group has acquired beneficial ownership of 15%
or more of the Company's Common Stock, the Board, in its sole discretion, may
redeem the Rights for $0.0001 per Right.
In addition, effective as of September 26, 1997, the Company effected a 2-
for-1 stock split in the form of a 100% stock dividend.
On November 5, 1997, the Company announced that it had sold $100 million
(excluding proceeds of the over-allotment option, if any) of convertible
subordinated notes through a private placement within the United States to
qualified institutional accredited investors and qualified institutional
buyers and, outside the United States, to non-U.S. investors.
The notes will have a term of five years and be convertible into P-Com
common stock. The Company stated that it intends to use the net proceeds of
the offering for possible acquisitions, repayment of debt and for general
corporate purposes, including working capital and capital expenditures.
27
<PAGE>
The securities offered will not be registered under the Securities Act of
1933, as amended, or applicable state securities laws, and may not be offered
or sold in the United States absent registration under the Securities Act of
1933 and applicable state securities laws or available exemptions from
registration requirements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<C> <S>
3 Certificate of Designation for the Series A Junior Participating
Preferred Stock, as filed with the Delaware Secretary of State on
October 8, 1997. (Previously filed as an exhibit to the Company's
Current Report on Form 8-K dated September 26, 1997 as filed with
the Securities and Exchange Commission on October 14, 1997 (File
No. 001-13475))
4 Rights Agreement, dated as of October 1, 1997, between the Company
and BankBoston, N.A., which includes the form of Certificate of
Designation for the Series A Junior Participating Preferred Stock
as Exhibit A, the form of Right Certificate as Exhibit B and the
Summary of Rights to Purchase Preferred Shares as Exhibit C.
Pursuant to the Rights Agreement, printed Right Certificates will
not be mailed until as soon as practicable after the earlier of the
tenth (10th) business day after public announcement that a person
or group has acquired beneficial ownership of 15% or more of the
Common Shares or the tenth (10th) business day (or such later date
as may be determined by action of the Board of Directors) after a
person commences, or announces its intention to commence, a tender
offer or exchange offer the consummation of which would result in
the beneficial ownership by a person or group of 15% or more of the
Common Shares. (Previously filed as an exhibit to the Company's
Current Report on Form 8-K dated September 26, 1997 as filed with
the Securities and Exchange Commission on October 14, 1997 (File
No. 001-13475))
10.30C Amended and Restated Loan Agreement dated September 17, 1997 by and
between the Company and Union Bank of California, N.A.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the three-month period ended September 30, 1997.
28
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
P-COM, INC.
(Registrant)
Date: November 5, 1997
By: /s/ George Roberts
-------------------------------------
George Roberts
Chairman of the Board of Directors
and Chief Executive Officer
Date: November 5, 1997
By: /s/ Michael Sophie
-------------------------------------
Michael Sophie
Chief Financial Officer and Vice
President Finance and Administration
29
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
3 Certificate of Designation for the Series A Junior Participating
Preferred Stock, as filed with the Delaware Secretary of State on
October 8, 1997. (Previously filed as an exhibit to the Company's
Current Report on Form 8-K dated September 26, 1997 as filed with the
Securities and Exchange Commission on October 14, 1997 (File No. 001-
13475))
4 Rights Agreement, dated as of October 1, 1997, between the Company and
BankBoston, N.A., which includes the form of Certificate of
Designation for the Series A Junior Participating Preferred Stock as
Exhibit A, the form of Right Certificate as Exhibit B and the Summary
of Rights to Purchase Preferred Shares as Exhibit C. Pursuant to the
Rights Agreement, printed Right Certificates will not be mailed until
as soon as practicable after the earlier of the tenth (10th) business
day after public announcement that a person or group has acquired
beneficial ownership of 15% or more of the Common Shares or the tenth
(10th) business day (or such later date as may be determined by action
of the Board of Directors) after a person commences, or announces its
intention to commence, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a
person or group of 15% or more of the Common Shares. (Previously filed
as an exhibit to the Company's Current Report on Form 8-K dated
September 26, 1997 as filed with the Securities and Exchange
Commission on October 14, 1997 (File No. 001-13475))
10.30C Amended and Restated Loan Agreement dated September 17, 1997 by and
between the Company and
Union Bank of California, N.A.
27 Financial Data Schedule
</TABLE>
30
<PAGE>
EXHIBIT 10.30C
LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT ("Agreement") is made and entered
into as of September 17, 1997 by and between P-Com, Inc. a Delaware Corporation
("Borrower") and UNION BANK OF CALIFORNIA, N.A. ("Bank") This Agreement amends
and restates in its entirety that certain loan agreement dated March 3, 1997
between Bank and Borrower.
SECTION 1. THE LOAN
1.1.1 THE REVOLVING LOAN. Bank will loan to Borrower an amount not to
exceed Twenty Million Dollars ($20,000,000) outstanding in the aggregate at any
one time (the "Revolving Loan"). Borrower may borrow, repay and reborrow all or
part of the Revolving Loan in amounts of not less than One Million Dollars
($1,000,000) in accordance with the terms of the Revolving Note. All
borrowing's of the Revolving Loan must be made before March 31, 1998, at which
time all unpaid principal and interest of the Revolving Loan shall be due and
payable. The Revolving Loan shall be evidenced by a promissory note (the
"Revolving Note") on the standard form used by Bank for commercial loans. Bank
shall enter each amount borrowed and repaid in Bank's records, and such entries
shall be deemed to accurately reflect both principal outstanding and payments
made. Omission of Bank to make any such entries shall not discharge Borrower of
its obligation to repay in full with interest all amounts borrowed.
1.1.2 THE STANDBY L/C SUBLIMIT. As a sublimit to the Revolving Loan, Bank
shall issue, for the account of Borrower, one or more irrevocable, standby
letters of credit (individually, an "L/C" and collectively, the "L/Cs"). All
such standby L/Cs shall be drawn on such terms and conditions as are acceptable
to Bank. The aggregate amount available to be drawn under all outstanding L/Cs
and the aggregate amount of unpaid reimbursement obligations under drawn L/Cs
shall not exceed Ten Million Dollars ($10,000,000) and shall reduce, dollar for
dollar, the maximum amount available under the Revolving Loan. No standby L/C
shall have an expiry date more than twelve months from its date of issuance and
each L/C shall be governed by the terms of (and Borrower agrees to execute)
Bank's standard form for standby L/C applications and reimbursement agreements.
No L/C shall expire after June 30, 1998.
1.2 TERMINOLOGY.
As used herein the following words shall have the following definitions:
"Loan" shall mean, collectively, all the credit facilities described above.
"Note" shall mean, collectively, all the promissory notes described above.
"Loan Documents" shall mean all documents executed in connection with this
Agreement.
"Guarantor" or "Guarantors" shall mean Geritel S.p.A., Technosystem S.p.A.,
P-Com United Kingdom, Inc., P-Com Finance Corporation, P-Com Field Services,
Inc. and Control Resources Corporation and each and every entity in which
Borrower now or hereafter owns a majority interest, each Guarantor to execute a
continuing Guaranty of all Borrower's obligations to Bank and each such Guaranty
being in form and substance satisfactory to Bank.
"EBITDA" shall mean income statement earnings before interest expense,
taxes, depreciation and amortization expenses as measured for the preceding
four fiscal quarters.
1.3 PURPOSE OF LOAN. The proceeds of the Revolving Loan shall be used for
general short term working capital purposes, issuance of performance Standby
L/C's, and allowable acquisitions.
<PAGE>
1.4 INTEREST. The unpaid principal balance of the Revolving Loan shall
bear interest at the rates set in the following matrix based on Borrower's ratio
of Total Liabilities to EBITDA, as more specifically provided in the Revolving
Note.
Interest Rate Matrix:
- ---------------------
<TABLE>
<CAPTION>
Total Liabilities to EBITDA LIBOR Margin Base Rate Margin
<S> <C> <C>
Greater than 2.25 to 2.75 1.75% 0.50%
Greater than 2.00 to 2.25 1.50% 0.0%
Greater than 1.25 to 2.00 1.25% 0.0%
1.25 1.00% 0.0%
</TABLE>
1.5 FEES. All fees in connection with the Loan are as follows:
(a) On the last calendar day of the third month following the
execution of this Agreement and on the last calendar day of each three-month
period thereafter until March 31, 1998, or the earlier termination of the Loan,
Borrower shall pay to Bank a fee of Two Hundred Fifteen Thousandths of One
percent (0.215%) per year on the average unused portion of the Loan for the
preceding quarter computed on the basis of actual days elapsed of a year of 360
days;
(b) Standby L/C Issuance Fee shall be at One and One-half of One
Percent (1.50%) per annum.
1.6 BALANCES. Borrower shall maintain its major depository accounts with
Bank until the Note and all sums payable pursuant to this Agreement have been
paid in full and Banks commitment to lend has been canceled.
1.7 DISBURSEMENT. Upon execution hereof, Bank shall disburse the proceeds
of the Loan as provided in Bank's standard form Authorization executed by
Borrower.
1.8 CONTROLLING DOCUMENT. In the event of any inconsistency between the
terms of this Agreement and any Note or any of the other Loan Documents, the
terms of such Note or other Loan Documents will prevail over the terms of this
Agreement.
1.9 FURTHER DEFINITION. As used throughout this Agreement, "material",
"material adverse change," and/or "material adverse effect," as each of these
terms may appear in this Agreement and any of the Loan Documents, shall mean,
each in context, a negative result or potential result arising directly or
indirectly from facts that, in the totality of the circumstances, Bank considers
substantive and germane to (a) the business, assets, operations, or financial or
other condition or Borrower or any existing or future guarantor ("guarantor");
(b) the ability of Borrower or any guarantor to pay or perform in accordance
with the terms of this Agreement and any Loan Document to which either or any
are a party; or (C) the rights and remedies of Bank under this Agreement or any
Loan Documents.
-2-
<PAGE>
SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to disburse all or any portion of the
proceeds of the Loan or issue any L/C unless at or prior to the time for the
making of such disbursement, the following conditions have been fulfilled to
Bank's satisfaction:
2.1 COMPLIANCE. Borrower shall have performed and complied with all terms
and conditions required by this Agreement to be performed or complied with by it
prior to or at the date of the making of such disbursement and shall have
executed and delivered to Bank the Note and other documents deemed necessary by
Bank.
2.2 GUARANTIES. Borrower shall ensure Bank is provided the Continuing
Guaranties from the Guarantors.
2.3 BORROWING RESOLUTION. Borrower shall have provided Bank with certified
copies of resolutions duly adopted by the Board of Directors of Borrower,
authorizing this Agreement and the Loan Documents. Such resolutions shall also
designate the persons who are authorized to act on Borrower's behalf in
connection with this Agreement and to do the things required of Borrower
pursuant to this Agreement.
2.4 CONTINUING COMPLIANCE. At the time any disbursement is to be made,
there shall not exist any event, condition or act which constitutes an event of
default under Section 6 hereof or any event, condition or act which with notice,
lapse of time or both would constitute such event of default; nor shall there be
any such event, condition, or act immediately after the disbursement were it to
be made.
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 BUSINESS ACTIVITY. The principal business of Borrower is the design,
development, and marketing of short-haul microwave radio systems for use in the
telecommunications marketplace.
3.2 AUTHORITY TO BORROW. The execution, delivery and performance of this
Agreement, the Note and all other agreements and instruments required by Bank in
connection with the Loan are not in contravention of any of the terms of any
indenture, agreement or undertaking to which Borrower is a party or by which it
or any of its property is bound or affected.
3.3 FINANCIAL STATEMENTS. The financial statements of Borrower, including
both a balance sheet at , December 31, 1996 and June 30, 1997, together with
supporting schedules, and an income statement for the twelve (12) months ended
December 31, 1996 and six (6) months-ended June 30, 1997, have heretofore been
furnished to Bank, and are true and complete and fairly represent the financial
condition of Borrower during the period covered thereby. Since December 31,
1996, and June 30, 1997, there has been no material adverse change in the
financial condition or operations of Borrower.
3.4 TITLE. Except for assets which may have been disposed of in the
ordinary course of business, Borrower has good and marketable title to all of
the property reflected in its financial statements delivered to Bank and to all
property acquired by Borrower since the date of said financial statements, free
and clear of all liens, encumbrances, security interests, adverse claims, and
negative pledges, except those specifically referred to in said financial
statements.
3.5 LITIGATION. There is no litigation or proceeding pending or
threatened against Borrower or any of its property which is reasonably likely to
affect the financial
-3-
<PAGE>
condition, property or business of Borrower in a materially adverse manner or
result in liability in excess of Borrower's insurance coverage or an aggregate
of Five Hundred Thousand Dollars ($500,000).
3.6 DEFAULT. Borrower is not now in default in the payment of any of its
material obligations, and there exists no event, condition or act which
constitutes an event of default under Section 6 hereof and no condition, event
or act which with notice or lapse of time, or both, would constitute an event of
default.
3.7 ORGANIZATION. Borrower is duly organized and existing under the laws
of the state of its organization, and has the power and authority to carry on
the business in which it is engaged and/or proposes to engage.
3.8 POWER. Borrower has the power and authority to enter into this
Agreement and to execute and deliver the Note and all of the other Loan
Documents.
3.9 AUTHORIZATION. This Agreement and all things required by this
Agreement have been duly authorized by all requisite action of Borrower.
3.10 QUALIFICATION. Borrower is duly qualified and in good standing in any
jurisdiction where such qualification is required, except to the extent that a
failure to so qualify would not have a material adverse effect on Borrower's
financial condition.
3.11 COMPLIANCE WITH LAWS. Borrower is not in violation with respect to any
applicable laws, rules, ordinances or regulations which materially affect the
operations or financial condition of Borrower.
3.12 ERISA. Any defined benefit pension plans as defined in the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), of Borrower meet,
as of the date hereof, the minimum funding standards of Section 302 of ERISA,
and no Reportable Event or Prohibited Transaction as defined in ERISA has
occurred with respect to any such plan.
3.13 REGULATION U. No action has been taken or is currently planned by
Borrower, or any agent acting on its behalf, which would cause this Agreement or
the Note to violate Regulation U or any other regulation of the Board of
Governors of the Federal Reserve System or to violate the Securities and
Exchange Act of 1934, in each case as in effect now or as the same may hereafter
be in effect. Borrower is not engaged in the business of extending credit for
the purpose of purchasing or carrying margin stock as one of its important
activities and none of the proceeds of the Loan will be used directly or
indirectly for such purpose.
3.14 CONTINUING REPRESENTATIONS. These representations shall be considered
to have been made again at and as of the date of each disbursement of the Loan
and shall be true and correct as of such date or dates.
SECTION 4. AFFIRMATIVE COVENANTS
Until the Note and all sums payable pursuant to this Agreement or any
other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
4.1 USE OF PROCEEDS. Borrower will use the proceeds of the Loan only as
provided in subsection 1.3 above.
4.2 PAYMENT OF OBLIGATIONS. Borrower will pay and discharge promptly all
taxes, assessments and other governmental charges and claims levied or imposed
upon it or its property, or any part thereof, provided, however, that Borrower
shall have the right in good faith to contest
-4-
<PAGE>
any such taxes, assessments, charges or claims and, pending the outcome of such
contest, to delay or refuse payment thereof provided that adequately funded
reserves are established by it to pay and discharge any such taxes, assessments,
charges and claims.
4.3 MAINTENANCE OF EXISTENCE. Borrower will maintain and preserve its
existence and assets and all rights, franchises, licenses and other authority
necessary for the conduct of its business and will maintain and preserve its
property, equipment and facilities in good order, condition and repair. Bank
may, at reasonable times, visit and inspect any of the properties of Borrower.
4.4 RECORDS. Borrower will keep and maintain full and accurate accounts
and records of its operations according to generally accepted accounting
principles and will permit Bank to have access thereto, to make examination and
photocopies thereof, and to make audits during regular business hours. Costs for
such audits shall be paid by Borrower.
4.5 INFORMATION FURNISHED. Borrower will furnish to Bank:
(a) Within sixty (60) days after the close of each fiscal quarter,
its 10-Q as of the close of such fiscal quarter, prepared in accordance with the
generally accepted accounting principles and the requirements of the Securities
and Exchange Commission;
(b) Within One Hundred Twenty (120) days after the close of each
fiscal year, Form 10-K as of the close of such fiscal quarter, prepared in
accordance with the generally accepted accounting principles applied on a
consistent basis with that of last year and the requirements of the Securities
and Exchange Commission;
(c) Copies of such financial statements and reports as Borrower may
file with any state or federal agency, including all state and federal income
tax returns, as Bank may reasonably request from time to time.
(d) Such other financial statements and information as Bank may
reasonably request from time to time;
(e) In connection with each financial statement provided hereunder, a
statement executed by the president or chief financial officer of Borrower,
certifying that no default has occurred and no event exists which with notice or
the lapse of time, or both, would result in a default hereunder;
(f) Prompt written notice to Bank of all events of default under any
of the terms or provisions of this Agreement or of any other agreement,
contract, document or instrument entered, or to be entered into with Bank; and
of any litigation which, if decided adversely to Borrower, would have a
material adverse effect on Borrower's financial condition; and of any other
matter which has resulted in, or is likely to result in, a material adverse
change in its financial condition or operations;
(g) Prior written notice to Bank of any changes in Borrower's
officers and other senior management; Borrower's name; and location of
Borrower's assets, principal place of business or chief executive office.
4.6 QUICK RATIO. Borrower shall maintain at all times a ratio of
unrestricted cash, accounts receivable and marketable securities to current
liabilities, including any outstandings under the Revolving Loan of not less
than 0.9:1.0, as such terms are defined by generally accepted accounting
principles, except for the inclusion of Revolving Loan outstandings as a current
liability during the term of the commitment.
-5-
<PAGE>
4.7 TANGIBLE NET WORTH. Starting July 1, 1997, Borrower will at all times
maintain Tangible Net Worth of not less than Eighty Five Million Dollars
($85,000,000). Thereafter, Borrower will at all times maintain a minimum
Tangible Net Worth that increases from said amount as of the end of Borrower's
fiscal quarter by eighty five percent (85%) of Borrower's net profit after taxes
plus One Hundred Percent (100%) of the proceed from any additional equity
offerings. "Tangible Net Worth" shall mean net worth increased by both
indebtedness of Borrower subordinated to Bank, and equity offerings, and
decreased by patents, licenses, trademarks, trade names, goodwill and other
similar intangible assets, organizational expenses, and monies due from
affiliates (including officers, shareholders and directors). In the event
Borrower completes an acquisition(s) and accounts for this acquisition(s) on the
pooling of interest accounting method, then any restatement of prior periods
shall not count against this tangible net worth covenant up to a maximum of Five
Million Dollars ($5,000,000).
4.8 DEBT TO EBITDA. Borrower will at all times maintain a ratio of total
liabilities to EBITDA of not more than 2.75:1.0. Debt shall include all balance
sheet liabilities. In the event Borrower acquires other companies using the
pooling of interest accounting method under generally-accepted accounting
principals, this ratio shall be calculated excluding the positive or negative
impact on EBITDA resulting from the pooling of interest restatement.
4.9 PROFITABILITY. Borrower will maintain its operating and net profit
after provision for income taxes, of not less than One Dollar ($1) for any
fiscal year, and that there will be no two consecutive quarterly operating or
after tax losses. In the event of a quarterly operating or after tax loss, the
amount of the quarterly operating or after tax loss cannot exceed five percent
(5%) of the preceding quarters-ended tangible net worth.
4.10 FIXED COVERAGE CHARGE. Borrower shall maintain at all times the ratio
of EBITDA plus rent expense minus capital expenditures divided by scheduled
principal payments plus interest expense plus rent expense of not less than 2:1
on a rolling four quarter basis. In the event Borrower acquires other companies
using the pooling of interest accounting method under generally-accepted
accounting principals, this ratio shall be calculated excluding the positive or
negative impact on EBITDA resulting from the pooling of interest restatement.
4.11 ALLOWABLE ACQUISITIONS. Borrower shall have the ability to enter into
a consolidation or merger or purchase all or the greater part of the assets or
business of another entity provided: (1)the Borrower is the surviving entity and
management team, (2) the acquired business or assets thereof are of a
complimentary or similar business compared to the Borrower, (3) the amount of
cash used, and/or debt assumed in any acquisition transactions does not exceed
an aggregate of Fifteen Million Dollars ($15,000,000) during any fiscal year and
(4) the Borrower certifies in writing at least five business days in advance of
consummation of any allowable acquisition that it is in full compliance on a
pre- and post- acquisition basis of all covenants contained within this
Agreement.
4.12 INSURANCE. Borrower will keep all of its insurable property, real,
personal or mixed, insured by companies and in amounts approved by Bank against
fire and such other risks, and in such amounts, as is customarily obtained by
companies conducting similar business with respect to like properties. Borrower
will furnish to Bank statements of its insurance coverage, will promptly furnish
other or additional insurance deemed necessary by and upon request of Bank to
the extent that such insurance may be available and hereby assigns to Bank, as
security for Borrower's obligations to Bank, the proceeds of any such insurance.
Borrower will maintain adequate worker's compensation insurance and adequate
insurance against liability for damage to persons or property. All policies
shall require at least ten (10) days' written notice to Bank before any policy
may be altered or canceled.
4.13 ADDITIONAL REQUIREMENTS. Borrower will promptly, upon demand by Bank,
take such further action and execute all such additional documents and
instruments in connection with this Agreement as Bank in its reasonable
discretion deems necessary, and promptly supply Bank with such other information
concerning its affairs as Bank may request from time to time.
-6-
<PAGE>
4.14 LITIGATION AND ATTORNEYS' FEES. Borrower will pay promptly to Bank
upon demand, reasonable attorneys' fees (including but not limited to the
reasonable estimate of the allocated costs and expenses of in-house legal
counsel and legal staff) and all costs and other expenses paid or incurred by
Bank in collecting, modifying or compromising the Loan or in enforcing or
exercising its rights or remedies created by, connected with or provided for in
this Agreement or any of the Loan Documents, whether or not an arbitration,
judicial action or other proceeding is commenced. If such proceeding is
commenced, only the prevailing party shall be entitled to attorneys' fees and
court costs.
4.15 BANK EXPENSES. Borrower will pay or reimburse Bank for all costs,
expenses and fees incurred by Bank in preparing and documenting this Agreement
and the Loan, and all amendments and modifications thereof, including but not
limited to all filing and recording fees, costs of appraisals, insurance and
attorneys' fees, including the reasonable estimate of the allocated costs and
expenses of in-house legal counsel and legal staff.
4.16 REPORTS UNDER PENSION PLANS. Borrower will furnish to Bank, as soon
as possible and in any event within 15 days after Borrower knows or has reason
to know that any event or condition with respect to any defined benefit pension
plans of Borrower described in Section 3 above has occurred, a statement of an
authorized officer of Borrower describing such event or condition and the
action, if any, which Borrower proposes to take with respect thereto.
SECTION 5. NEGATIVE COVENANTS
Until the Note and all other sums payable pursuant to this Agreement
or any other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
5.1 ENCUMBRANCES AND LIENS. Borrower will not create, assume or suffer to
exist any mortgage, pledge, security interest, encumbrance, negative pledge, or
lien (other than for taxes not delinquent and for taxes and other items being
contested in good faith) on property of any kind, whether real, personal or
mixed, now owned or hereafter acquired, or upon the income or profits thereof,
except to Bank and except for minor encumbrances and easements on real property
which do not affect its market value, and except for existing liens on
Borrower's personal property and future purchase money security interests
encumbering only the personal property purchased. All of such permitted property
liens shall not exceed, in the aggregate, Seven Million Dollars ($7,000,000) at
any time.
5.2 BORROWINGS. Borrower will not sell, discount or otherwise transfer any
account receivable or any note, draft or other evidence of indebtedness, except
to Bank, or except to in connection with any ongoing lease financing
arrangements having an aggregate value up to Two Million Five Hundred Thousand
Dollars ($2,500,000) and which are in process as of the date of this Agreement,
or except to a financial institution at face value for deposit or collection
purposes only and without any fee other than fees normally charged by the
financial institution for deposit or collection services. Borrower will not
borrow any money, become contingently liable to borrow money, nor enter any
agreement to directly or indirectly obtain borrowed money, except pursuant to
agreements made with Bank.
5.3 SALE OF ASSETS, LIQUIDATION, OR MERGER. Borrower will neither
liquidate nor dissolve nor enter into any unallowable consolidation or merger
where it is not the surviving entity and management team, partnership or other
combination, nor convey, nor sell, nor lease all or the greater part of its
assets or business, nor lease all or the greater part of the assets or business
of another.
5.4 LOANS, ADVANCES AND GUARANTIES. Borrower will not, except in the
ordinary course of business as currently conducted and to its subsidiaries, make
any loans or advances, become a guarantor or surety, pledge its credit or
properties in any manner or extend credit.
-7-
<PAGE>
5.5 INVESTMENTS. Borrower will not purchase the debt or equity of another
person or entity except for savings accounts and certificates of deposit of
Bank, direct U.S. Government obligations and commercial paper issued by
corporations with the top ratings of Moody's or Standard & Poor's, provided all
such permitted investments shall mature within eighteen months of purchase.
5.6 PAYMENT OF DIVIDENDS. Borrower will not declare or pay any dividends,
other than a dividend payable in its own common stock, or authorize or make any
other distribution with respect to any of its stock now or hereafter
outstanding.
5.7 CAPITAL EXPENDITURES. Borrower will not make capital expenditures in
excess of Twenty Million Dollars ($20,000,000) in fiscal year 1997 and Twenty
Four Million Dollars ($24,000,000) in fiscal year 1998; and shall only make such
expenditures as are necessary for Borrower in the conduct of its ordinary course
of business. Each said expenditure shall be needed by Borrower in the ordinary
course of its business. Expenditures as used in this subsection shall include
the current expense portion of all leases whether or not capitalized and shall
also include the current portion of any debt used to finance capital
expenditures. Expenditures shall exclude the increase in fixed assets derived
from the purchase of assets from another company, whether in part or whole
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of Default")
shall terminate any obligation on the part of Bank to make or continue the Loan
and automatically, unless otherwise provided under the Note, shall make all
sums of interest and principal and any other amounts owing under the Loan
immediately due and payable, without notice of default, presentment or demand
for payment, protest or notice of nonpayment or dishonor, or any other notices
or demands:
6.1 Borrower shall default in the due and punctual payment of the
principal of or the interest on the Note or any of the other Loan Documents; or
6.2 Any default shall occur under the Note; or
6.3 Borrower shall default in the due performance or observance of
any covenant or condition of the Loan Documents, which default continues for
more than thirty (30) days;
6.4 Any guaranty or subordination agreement required hereunder is
breached or becomes ineffective, or any Guarantor or subordinating creditor
dies, disavows or attempts to revoke or terminate such guaranty or subordination
agreement; or
6.5 There is a change in ownership or control of twenty percent (20%)
or more of the issued and outstanding stock of Borrower or any Guarantor, or (if
Borrower is a partnership) there is a change in ownership or control of any
general partner's interest.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in addition to
all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of set off or banker's
lien.
7.2 NONWAIVER. Any forbearance or failure or delay by Bank in exercising
any right, power or remedy hereunder shall not be deemed a waiver thereof and
any single or partial exercise of any right, power or remedy shall not preclude
the further exercise thereof. No waiver shall be effective unless it is in
writing and signed by an officer of Bank.
-8-
<PAGE>
7.3 INUREMENT. The benefits of this Agreement shall inure to the
successors and assigns of Bank and the permitted successors and assignees of
Borrower, and any assignment of Borrower without Bank's consent shall be null
and void.
7.4 APPLICABLE LAW. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed by and
construed according to the laws of the State of California.
7.5 SEVERABILITY. Should any one or more provisions of this Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
7.6 INTEGRATION CLAUSE. Except for documents and instruments specifically
referenced herein, this Agreement constitutes the entire agreement between Bank
and Borrower regarding the Loan and all prior communications verbal or written
between Borrower and Bank shall be of no further effect or evidentiary value.
7.7 CONSTRUCTION. The section and subsection headings herein are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
7.8 AMENDMENTS. This Agreement may be amended only in writing signed by
all parties hereto.
7.9 COUNTERPARTS. Borrower and Bank may execute one or more counterparts
to this Agreement, each of which shall be deemed an original.
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for or allowed hereunder
shall be effective only when given by one of the following methods and addressed
to the respective party at its address given with the signatures at the end of
this Agreement and shall be considered to have been validly given: (a) upon
delivery, if delivered personally; (b) upon receipt, if mailed, first class
postage prepaid, with the United States Postal Service; (C) on the next business
day, if sent by overnight courier service of recognized standing; and (d) upon
telephoned confirmation of receipt, if telecopied.
8.2 The addresses to which notices or demands are to be given may be
changed from time to time by notice delivered as provided above.
THIS AGREEMENT is executed on behalf of the parties by duly
authorized officers as of the date first above written.
UNION BANK OF CALIFORNIA, N.A.
By:
Name /s/ John A. Noble
------------------------------------------------
Title Vice President and Relationship Manager
------------------------------------------------
By
Name /s/ James B. Goudy
------------------------------------------------
Title Vice President and Credit Executive
------------------------------------------------
-9-
<PAGE>
P-COM, INC.
/s/ George P. Roberts
By: __________________________________________________
Chief Executive Officer
Title _______________________________________________
/s/ Michael J. Sophie
By: __________________________________________________
Chief Financial Officer
Title _______________________________________________
Address: 3175 South Winchester
---------------------
Campbell, CA 95008
---------------------
Attention: ___________________________________________
Telecopier: _________________________________________
Telephone: __________________________________________
-10-
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