<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) OCTOBER 16, 1997
-------------------------------
P-COM, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
DELAWARE 0-25356 77-02893711
- ------------------------------ ----------- ------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
3175 S. WINCHESTER BOULEVARD, CAMPBELL, CALIFORNIA 95008
- -------------------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 866-3666
-----------------------------
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 5. Other Events
- ------ ------------
(a) In a press release disseminated on October 16, 1997, the
Registrant publicly announced that it intends, subject to market and
other conditions, to raise $150 million in a proposed private
placement of convertible subordinated notes and up to an additional
$22.5 million if an over-allotment option to be granted to the
initial purchasers were to be exercised in full. A copy of the press
release is attached hereto and incorporated herein by reference.
(b) In a press release disseminated on October 16, 1997, the
Registrant publicly announced its earnings for the quarter ended
September 30, 1997. A copy of the press release is attached hereto
and incorporated herein by reference.
(c) In a press release disseminated on October 16, 1997, the
Registrant publicly announced an order valued at $20 million for its
Italian subsidiary, Technosystem S.p.A. to construct a broadcast
network in Papua - New Guinea.
(d) In accordance with the rules and regulations of the Securities
and Exchange Commission, The Registrant has restated its consolidated
financial statements to reflect its merger with Control Resources
Corporation ("CRC"), consummated on May 29, 1997, which merger is
being accounted for under the pooling of interests method of
accounting. Such financial statements, together with selected
consolidated financial data and management's discussion and analysis,
and the report of the Independent Accountants are attached hereto as
exhibits incorporated by reference. This information is being filed
pursuant to this current Report on Form 8-K soley to reflect the
change in the Registrant's financial statements and related discussion
as a result of the business combination with CRC.
ITEM 7. Financial Statements and Exhibits
- ------ ---------------------------------
(a) A copy of the Registrant's press release announcing a proposed
private placement of convertible subordinated notes is attached
hereto as an exhibit.
(b) A copy of the Registrant's press release announcing its
earnings for the quarter ended September 30, 1997 is attached hereto
as an exhibit.
(c) A copy of the Registrant's press release announcing an order for
its Italian subsidiary, Technosystem S.p.A. to construct a broadcast
network in Papua - New Guinea valued at $20 million.
(d) The Registrant's selected consolidated financial data.
(e) The Registrant's management's discussion and analysis of its
selected consolidated financial data.
(f) The Registrant's Report of Independent Accountants and
consolidated financial statements for the year ended December 31, 1997
and the periods ended June 30, 1996 and June 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
P-COM, INC.
-----------
(Registrant)
Date: October 16, 1997 By: /s/ Michael J. Sophie
-----------------------------------
Name: Michael J. Sophie
Title: Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
99.1 Press release disseminated October 16, 1997, announcing the
Registrant's proposed private placement of convertible
subordinated notes.
99.2 Press release disseminated October 16, 1997, announcing the
Registrant's earnings for the quarter ended September 30, 1997.
99.3 Press release disseminated October 16, 1997, announcing an order
for the Registrant's Italian subsidiary, Technosystem S.p.A. to
construct a broadcast network in Papua - New Guinea valued at
$20 million.
99.4 Selected consolidated financial data.
99.5 Management's discussion and analysis of its selected
consolidated financial data.
99.6 Report of Independent Accountants and consolidated financial
statements for the year ended December 31, 1997, and the periods
ended June 30, 1996 and June 30, 1997.
<PAGE>
EXHIBIT 99.1
FOR IMMEDIATE RELEASE
Page 1 of 1
COMPANY CONTACTS:
Karl Spurzem Michael Sophie
Investor Relations Chief Financial Officer
(408) 866-3666 (408) 866-3666
PROPOSED PRIVATE PLACEMENT OF $150 MILLION CONVERTIBLE
SUBORDINATED NOTES DUE 2002
- --------------------------------------------------------------------------------
CAMPBELL, CA, USA (October 16, 1997) -- P-Com, Inc. (NASDAQ National Market:
PCMS), today announced that, subject to market and other conditions, it
intends to raise $150 million (excluding proceeds of the over-allotment
option, if any) through a private placement of convertible subordinated notes
within the United States to qualified institutional accredited investors and
qualified institutional buyers and, outside the United States, to non-U.S.
investors.
It is contemplated that 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.
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.
###
<PAGE>
EXHIBIT 99.2
FOR IMMEDIATE RELEASE
Page 1 of 4
COMPANY CONTACT:
Karl Spurzem Michael Sophie
Investor Relations Chief Financial Officer
(408) 866-3666 (408) 866-3666
P-COM, INC. ANNOUNCES RECORD NET SALES AND
NET INCOME FOR THIRD QUARTER OF 1997
- --------------------------------------------------------------------------------
CAMBELL, CA USA (October 16, 1997) - P-Com, Inc. (NASDAQ National
Market: PCMS), reported results for its third quarter ended September
30, 1997 with sales of $51.5 million, a 91% increase over $27.0 million in
sales for the comparable quarter of 1996. For the nine months ended September
30, 1997, sales were $139.2 million, a 106% increase over the $67.7 million
for the same period in 1996. The results include the effects of the pooling of
interest accounting treatment for the financial statements of Control Resource
Corporation which the Company acquired on May 29, 1997. The share
information also reflects the two-for-one stock split effected on September 26,
1997.
The Company's net income increased 102% to $5.1 million for the third
quarter of 1997 compared to a net income of $2.5 million for the comparable
period last year. The net income results of $0.12 per share with weighted
average common and common equivalent shares of 43.6 million in the third quarter
of 1997 compares to a net income per share of $0.06 with weighted average common
and common equivalent shares of 41.2 million for the prior year's third quarter.
For the nine months ended September 30, 1997, the Company's net income was $11.1
million or $0.26 per share, compared to $4.6 million or $0.12 per share for the
comparable period in 1996.
P-Com's Chairman and Chief Executive Officer George P. Roberts said,
"Demand for P-Com products and services increased during the third quarter.
Our strategy for providing systems and services for worldwide network
solutions generated market penetration and created opportunities in new
regions around the world."
-more-
<PAGE>
Page 2 of 4
P-COM, INC. ANNOUNCES RECORD NET SALES AND NET
INCOME FOR THIRD QUARTER OF 1997
- --------------------------------------------------------------------------------
Michael J. Sophie, Chief Financial Officer and Vice President, Finance
added, "Our acquisition strategy continued to expand our product and service
presence with our customer base."
P-Com, Inc. develops, manufactures and markets network access systems
for the worldwide wireless telecommunications market. The point-to-point and
spread spectrum radio links provided by P-Com are designed to satisfy the
network requirements of cellular and personal communications services,
corporate communications, public utilities and local governments.
Statements in this release that are forward looking involve known and
unknown risks and uncertainties, which may cause the Company's actual results
in future periods to be materially different from any future performance that
may be suggested in this release. Such factors may include, but are not
limited to, reliance upon subcontractors, fluctuations in customer demand and
commitments, both in timing and volume, the Company's ability to have
available an appropriate amount of production capacity in a timely manner, the
ability of the Company's customers to finance their purchases of the Company's
products and/or services, the timing of new technology and product
introductions and the risk of early obsolescence. Further, the Company
operates in an industry sector where securities values are highly volatile and
may be influenced by economic and other factors beyond the Company's control.
Reference is made to the discussion of risk factors detailed in the Company's
filings with the Securities and Exchange Commission, including its reports on
Form 10-K and 10-Q.
P-Com, Inc., with world headquarters in Campbell, California, USA and
offices in Florida, New Jersey, Virginia, the UK, Italy, France, Germany,
Mexico and Singapore, is committed to designing, manufacturing and marketing
highly reliable and cost-effective radio transmission systems for the
worldwide telecommunications industry. P-Com, Inc. is an ISO 9001 certified
company. For additional information, contact P-Com at:
P-Com, Inc. _ 3175 S. Winchester Boulevard _ Campbell, CA 95008 _ USA
TEL: (408) 866-3666 _ FAX: (408) 866-3655
--more--
<PAGE>
Page 3 of 4
P-COM, INC.
CONSOLIDATED BALANCE SHEETS*
(In thousands)
<TABLE>
<CAPTION>
September 30, 1997 December 31,
(unaudited) 1996
------------------ ------------------
<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 currents 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 $ 23,960
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 35,108
Long-term debt 2,389 260
Minority interest 653 619
Stockholders' equity:
Common stock 4 4
Additional paid-in capital 130,809 112,423
Retained earnings 8,812 (2,246)
Cumulative translation adjustment (504) 73
------------------ ------------------
Total stockholders' equity 139,121 110,254
------------------ ------------------
$197,386 $146,241
================== ==================
</TABLE>
- --------------------------------------
* On May 29, 1997, the Company acquired Control Resources Corporation in a
stock-for-stock merger. This transaction has been accoutned for based on the
pooling-of-interests method of accounting. As a result, prior period amounts
present the effect of a pooling of interests transaction as if the two
companies had been combined for all periods presented. The Company's results
also reflect a two for one stock split paid in the form of a 100% stock
dividend effective September 26, 1997.
-more-
<PAGE>
Page 4 of 4
P-COM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS*
(In thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------- -------- -------- -------
<S> <C> <C> <C> <C>
Net 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
Sales 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 42,400 38,690
======= ======= ======== =======
</TABLE>
- ----------------------------
*On May 29, 1997, the Company acquired Control Resources Corporation in a
stock-for-merger. This transaction has been accounted for based on the pooling-
of-interests method of accounting. As a result, prior period amounts present
to the effect of a pooling of interst transaction as if the two companies had
been combined for all periods presented. The Company's results also reflect a
two-for-one stock split paid in the form of a 100% stock dividend effective
September 26, 1997.
###
<PAGE>
EXHIBIT 99.3
FOR IMMEDIATE RELEASE
Page 1 of 2
COMPANY CONTACTS:
Karl Spurzem Michael Sophie
Investor Relations Chief Financial Officer
(408)866-3666 (408)866-3666
P-COM, INC.'S ITALIAN SUBSIDIARY ANNOUNCES ORDER VALUED AT $20 MILLION
FOR THE SUPPLY AND INSTALLATION OF A COMPLETE BROADCAST NETWORK
----------------------------------------------------------------------
CAMPBELL, CA, USA (October 16, 1997) -- P-com, Inc. (NASDAQ National Market:
PCMS), announced today that its Italian subsidiary has received an order valued
at $20 million for the construction of a complete broadcast network for a group
of private companies located in Papua-New Guinea.
Through its Italian subsidiary, Technosystem, S.p.A., P-Com will provide
traditional TV broadcasting equipment, studio equipment, and terrestrial
equipment. In addition, the network will include a Point-to-MultiPoint based
"Pay TV" system as part of its structure.
It is anticipated that deliveries associated with the contract will ship over
the next 12 months.
P-Com, Inc. develops, manufactures and markets network access systems for the
worldwide wireless telecommunications market. The point-to-point and spread
spectrum radio links provided by P-Com are designed to satisfy the network
requirements of cellular and personal communications services, corporate
communications, public utilities and local governments.
Statements in this release that are forward looking involve known and unkown
risks and uncertainties, which may cause the Company's actual results in future
periods to be materially different from any future performance that may be
suggested in this release. Such factors
-More-
<PAGE>
Page 2 of 2
P-COM, INC.'S ITALIAN SUBSIDIARY ANNOUNCES ORDER VALUED AT $20 MILLION
FOR THE SUPPLY AND INSTALLATION OF A COMPLETE BROADCAST NETWORK
----------------------------------------------------------------------
may include, but are not limited to, reliance upon subcontractors, fluctuations
in customer demand and commitments, both in timing and volume, the Company's
ability to have available an appropriate amount of production capacity in a
timely manner, the ability of the Company's customers to finance their purchases
of the Company's products and/or services, the timing of new technology and
product introductions and the risk of early obsolescence. Further, the Company
operates in an industry sector where securities values are highly volatile and
may be influenced by economic and other factors beyond the Company's control.
Reference is made to the discussion of risk factors detailed in the Company's
filings with the Securities and Exchange Commission, including its reports on
Form 10-K and 10-Q.
P-Com, Inc., with world headquarters in Campbell, California, USA and
offices in Florida, New Jersey, Virginia, the UK, France, Germany, Mexico and
Singapore, is committed to designing, manufacturing and marketing highly
reliable and cost-effective radio transmission systems for the worldwide
telecommunications industry. P-Com, Inc. is an ISO 9001 certified company. For
additional information, contact P-Com at:
P-Com, Inc. 3175 S. Winchester Boulevard Campbell, CA 95008 USA
TEL: (408)866-3666 FAX: (408)866-3655
###
<PAGE>
EXHIBIT 99.4
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below with respect to
P-Com's consolidated statements of operations for each of the three years in
the period ended December 31, 1996, and with respect to P-Com's consolidated
balance sheets at December 31, 1995 and 1996, are derived from the
consolidated financial statements included elsewhere in this Form 8-K, which
have been audited by Price Waterhouse LLP. All such data are qualified by, and
should be read in conjunction with, such consolidated financial statements and
the notes related thereto. The selected consolidated financial data presented
below with respect to P-Com's consolidated statements of operations for the
years ended December 31, 1992 and 1993, and with respect to P-Com's
consolidated balance sheets at December 31, 1992, 1993 and 1994, are derived
from the Company's audited consolidated financial statements which are not
included herein. The selected consolidated financial data presented below with
respect to P-Com's consolidated statements of operations for the six months
ended June 30, 1996 and 1997 and with respect to P-Com's consolidated balance
sheet at June 30, 1997 are derived from unaudited interim consolidated
financial statements which, in the opinion of the Company's management,
include all material adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the consolidated financial
position and results of operations of the Company for the unaudited interim
periods. The consolidated statement of operations data for any particular
period are not necessarily indicative of the results of operations for any
future period, including the Company's fiscal year ending December 31, 1997.
The data set forth below is qualified in its entirety by, and should be read
in conjunction with the consolidated financial statements and notes thereto
and the discussion thereof included elsewhere in this Form 8-K, including but
not limited to "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The following information as previously reported
has been restated for all periods to include the financial data of Control
Resources Corporation ("CRC"), which was acquired in a pooling of interests
transaction on May 29, 1997.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIO AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales................... $ 8,516 $ 9,575 $19,198 $52,846 $101,853 $40,673 $87,771
Cost of sales........... 3,994 5,404 11,517 29,947 60,362 24,609 51,630
------- ------- ------- ------- -------- ------- -------
Gross profit........... 4,522 4,171 7,681 22,899 41,491 16,064 36,141
------- ------- ------- ------- -------- ------- -------
Operating expenses:
Research and
development........... 3,002 6,313 7,978 12,284 20,163 8,393 13,825
Selling and marketing.. 1,603 1,811 2,841 4,487 6,930 2,937 6,598
General and
administrative........ 1,938 2,271 3,026 3,329 5,760 2,456 6,335
------- ------- ------- ------- -------- ------- -------
Total operating
expenses............ 6,543 10,395 13,845 20,100 32,853 13,786 26,758
------- ------- ------- ------- -------- ------- -------
Income (loss) from
operations............. (2,021) (6,224) (6,164) 2,799 8,638 2,278 9,383
Interest and other
income (expense), net.. 77 (25) (169) 244 1,156 129 (68)
------- ------- ------- ------- -------- ------- -------
Income (loss) before
income taxes........... (1,944) (6,249) (6,333) 3,043 9,794 2,407 9,315
Provision for income
taxes.................. 104 49 95 221 922 357 3,353
------- ------- ------- ------- -------- ------- -------
Net income (loss).... $(2,048) $(6,298) $(6,428) $ 2,822 $ 8,872 $ 2,050 $ 5,962
======= ======= ======= ======= ======== ======= =======
Net income (loss) per
share(1)............... $ (0.27) $ 0.08 $ 0.22 $ 0.05 $ 0.14
======= ======= ======== ======= =======
Weighted average common
and common equivalent
shares(1).............. 24,255 33,741 39,418 39,023 42,400
======= ======= ======== ======= =======
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1997
---------------------------------------------- -----------
1992 1993 1994 1995 1996 ACTUAL
------- ------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 1,077 $ 3,660 $ 1,294 $ 8,186 $ 42,025 $ 19,511
Working capital......... 3,944 5,001 2,886 36,662 88,604 71,996
Total assets............ 6,601 9,178 14,818 58,884 146,241 190,306
Long-term debt.......... 353 688 894 221 259 2,087
Retained earnings
(accumulated deficit).. (1,215) (7,513) (13,941) (11,118) (2,246) 3,716
Stockholders' equity.... 4,731 6,128 4,716 45,010 110,254 131,886
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the calculation of the method used to determine the number of shares
used to compute share and per share amounts. Net loss per share for the
years ended December 31, 1992 and 1993 is not considered meaningful and is
not presented herein.
2
<PAGE>
EXHIBIT 99.5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 8-K contains forward-looking statements that involve numerous risk
and uncertainties. The statements contained in this Form 8-K 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. All forward-looking statements included in
this Form 8-K are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-
looking statements. 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 below and in the Registrant's Form 10-Q for
the quarter ended June 30, 1997. All financial information presented in this
Form 8-K has been restated to include the operating results of Control
Resources Corporation ("CRC"), which was acquired in a pooling of interests
transaction on May 29, 1997.
OVERVIEW
P-Com, Inc. (the "Company") supplies equipment and services for access to
worldwide telecommunications and broadcast networks. Currently, the Company
ships 2.4 GHz and 5.7 GHz spread spectrum radio systems, as well as 7 GHz, 13
GHz, 14 GHz, 15 GHz, 18 GHz, 23 GHz, 26 GHz, 38 GHz and 50 GHz radio systems,
all with related software.
From October 1993 through June 30, 1997, the Company generated sales of
approximately $264.6 million, of which $189.6 million, or 72% of such amount,
was generated in the eighteen months ended June 30, 1997. From inception to
the end of the second fiscal quarter of 1997, the Company had generated
cumulative profits of approximately $3.7 million. Although the Company has
experienced a significant percentage growth in sales and gross profit from
fiscal 1993 through the first half of fiscal, 1997, the Company does not
believe prior growth rates are indicative of future operating results. Due to
the Company's limited operating history and 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. There can be no assurance
that the Company's revenues will continue to remain at or increase from the
levels experienced in recent quarters, or that sales will not decline. The
Company intends, however, to continue to invest significant amounts in its
operations, particularly to support product development and the marketing and
sales of recently introduced products and services, 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.
Recently, the Company has significantly expanded the scale of its operations
to support the increases in its sales levels 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 acquisitions of all or majority
interests in Geritel S.p.A. ("Geritel"), Atlantic Communication Sciences, Inc.
("ACS"), Technosystem S.p.A. ("Technosystem"), Columbia Spectrum Management
L.P. ("CSM"), CRC and Telesys (UK) Limited ("Telesys") and a pending
acquisition of R T Masts Limited ("R T Masts"), significant investments in
research and development to support product development and services, and the
hiring of additional personnel in all functional areas, including in sales and
marketing, finance, manufacturing and operations.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. The sale and implementation
of the Company's products generally involve a significant commitment of the
Company's management, sales and other resources. The sales cycle for the
Company's products is lengthy and typically involves a significant technical
evaluation and commitment of cash and other resources, with the attendant
delays.
1
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
that certain items bear to sales:
<TABLE>
<CAPTION>
YEARS SIX MONTHS
ENDED DECEMBER ENDED JUNE
31, 30,
-------------------- ------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 60.0 56.7 59.3 60.5 58.8
----- ----- ----- ----- -----
Gross margin.......................... 40.0 43.3 40.7 39.5 41.2
----- ----- ----- ----- -----
Operating expenses:
Research and development.............. 41.5 23.2 19.8 20.7 15.8
Selling and marketing................. 14.8 8.5 6.8 7.2 7.5
General and administrative............ 15.8 6.3 5.6 6.0 7.2
----- ----- ----- ----- -----
Total operating expenses................ 72.1 38.0 32.2 33.9 30.5
----- ----- ----- ----- -----
Income (loss) from operations........... (32.1) 5.3 8.5 5.6 10.7
Interest and other income (expense),
net.................................... (0.9) 0.5 1.1 0.3 (0.1)
----- ----- ----- ----- -----
Income (loss) before income taxes....... (33.0) 5.8 9.6 5.9 10.6
Provision for income taxes.............. 0.5 0.4 0.9 0.9 3.8
----- ----- ----- ----- -----
Net income (loss)....................... (33.5)% 5.4% 8.7% 5.0% 6.8%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Sales
Sales consist of revenues from radio systems and related software tools and
service offerings. Sales for the six months ended June 30, 1997 and 1996 were
$87.8 million and $40.7 million, respectively. The increase in sales in the
six months ended June 30, 1997 was primarily due to increased unit sales of 38
GHz and 23 GHz radio systems to new and existing customers and sales from
products acquired in recent acquisitions, and, to a lesser extent, from
service offerings. For the six months ended June 30, 1997, two customers
accounted for 22% of the Company's sales, and as of June 30, 1997, four
customers accounted for 60% of the Company's backlog scheduled for shipment in
the twelve months subsequent to June 30, 1997.
Gross Profit
The Company's cost of sales consists primarily of costs related to
materials, labor and overhead. Gross profit for the six months ended June 30,
1997 and 1996, was approximately $36.1 million, or 41.2% of sales, and
approximately $16.1 million, or 39.5% of sales, respectively. The improvement
in gross profit 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.
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 on a project at the time when the
technological feasibility of such project has been achieved. The Company's
software development
2
<PAGE>
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
totaled approximately $13.8 million for the six months ended June 30, 1997,
compared to $8.4 million for the six months ended June 30, 1996. The increase
in absolute dollars for the six months ended June 30, 1997 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 15.8% in the six months ended June 30, 1997 from 20.7%
in the corresponding period in 1996. The decrease as a percentage of sales was
primarily due to a higher level of sales in the six months ended June 30,
1997, as compared to the corresponding period in 1996.
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 six months ended June 30, 1997
and 1996 were $6.6 million and $2.9 million, respectively. The increase in
selling and marketing expenses in the six months ended June 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 six month period ended June 30, 1997 as compared to 7.2% in
the corresponding period in 1996. This increase was due primarily to the
expansion of the Company's international sales in the six months ended
June 30, 1997 as compared to the corresponding period in 1996.
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 six months ended June
30, 1997 and 1996, were $6.3 million and $2.5 million, respectively. The
increase in general and administrative expenses in the six months ended
June 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, ACS, Technosystem, CSM. As a percentage of sales,
general and administrative expenses were 7.2% in the six months ended June 30,
1997, as compared to 6.0% 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 and goodwill
amortization associated with the Company's acquisitions in the six months
ended June 30, 1997 as compared to the corresponding period in 1996. The
Company expects general and administrative expenses to continue to increase
significantly in absolute dollars in 1997 as compared to 1996, as the Company
continues to expand its operations and acquire companies. 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.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, consists primarily of interest
expense incurred by the Company related to borrowings under its revolving
line-of-credit agreement, offset by interest income generated from the
investment of cash and cash equivalents. During the six months ended June 30,
1997, the Company generated net interest and other expense of $68,000, or 0.1%
of sales, as compared to $129,000 of net interest and other
3
<PAGE>
income, or 0.3% of sales, during the corresponding period in 1996. The
increase in interest expense during the six months ended June 30, 1997
compared to the corresponding period of 1996 is due to interest expense
increased on borrowings under the Company's revolving line of credit, which
the Company anticipates will be paid down out of the proceeds of this Offering
and terminated.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Sales
In 1996, 1995 and 1994, sales were approximately $101.9 million,
$52.8 million, and $19.2 million, respectively. The increased sales from the
periods in 1995 to 1996 and from 1994 to 1995 were primarily due to increased
volume of 38 GHz and 23 GHz radio systems to new and existing customers. There
can be no assurance that sales of the Company's radio systems will increase or
that such systems will achieve market acceptance. The Company provides
significant volume price discounts to its customers, which are expected to
lower the average selling price of a particular product line as more units are
sold. In addition, the Company expects that the average selling price of a
particular product line will also decline as such product matures, and as
competition increases in the future. Accordingly, the Company's ability to
maintain or increase sales will depend upon many factors, including its
ability to increase unit sales volumes of its systems and to introduce and
sell systems at prices sufficient to compensate for reduced revenues resulting
from declines in the average selling price of the Company's more mature
products. To date, most of the Company's sales have been made to a relatively
small number of customers, located primarily outside the United States.
Gross Profit
In 1996, 1995 and 1994, gross profit was $41.5 million, $22.9 million and
$7.7 million, respectively, or 40.7%, 43.3% and 40.0% of sales, respectively.
The improvement in gross profit as a percentage of sales from 1994 to 1995 was
due to product design improvements and economies of scale. The decrease of
gross profit percentage from 1995 to 1996 was due primarily to new product
introductions in the first and third quarters and related production
inefficiencies.
The Company has an ongoing program to reduce the costs of manufacturing its
radio systems. As part of this program, the Company has been attempting to
achieve cost reductions principally through engineering and manufacturing
improvements, production economies and utilization of third party
subcontractors for the manufacture of the Company's radio systems and certain
components and subassemblies used in the systems. The Company is also
implementing other cost reduction programs in order to maintain gross margins
in the future. There can be no assurance that the Company's ongoing or future
programs can be accomplished or that they will increase gross profits.
Research and Development
In 1996, 1995 and 1994, research and development expenses were approximately
$20.2 million, $12.3 million and $8.0 million, respectively. The increase in
research and development expenses from 1995 to 1996 and from 1994 to 1995 was
due to increased staffing as the Company concentrated on new product
development, including costs associated with new product development by CRC
beginning in 1996.
Selling and Marketing
In 1996, 1995 and 1994, selling and marketing expenses were $6.9 million,
$4.5 million and $2.8 million, respectively. The Company intends to continue
to invest significant resources to expand its sales and marketing efforts,
including the hiring of additional personnel, and to establish the
infrastructure necessary to support future operations.
4
<PAGE>
General and Administrative
In 1996, 1995 and 1994, general and administrative expenses were $5.8
million, $3.3 million and $3.0 million, respectively. The increase in general
and administrative expenses of $2.5 million from 1995 to 1996 is related to
expansion of the Company's business as well as goodwill amortization
associated with acquisitions of Geritel and ACS. The goodwill is being
amortized over the estimated lives of acquired assets.
Interest and Other Income (Expense), Net
Interest and other income (expense), net consists primarily of interest
income generated from the investment of cash received from financing
activities in 1996, 1995 and 1994, partially offset by interest expense
incurred on the Company's bank line of credit and equipment lease lines. In
1996, 1995 and 1994, interest and other income (expense), net were $1.2
million, $0.2 million and $(0.2) million, respectively. Through fiscal 1996,
contracts negotiated in foreign currencies were limited to pound sterling
contracts, and any impact due to currency fluctuations has been insignificant.
However, the Company may in the future be exposed to the risk of foreign
currency gains or losses depending upon the magnitude of a change in the value
of a local currency in an international market. The Company has entered into
foreign currency hedging transactions to reduce exposure to foreign exchange
risks. As of December 31, 1996, the Company had forward exchange contracts
with notional amounts of approximately $25.0 million.
Income Tax Provision
The Company's effective tax rates for 1996 and 1995 were 9.4% and 7.3%,
respectively. Income taxes provided in 1994 represent amounts attributable to
taxable income generated by CRC. The Company's effective tax rate is less than
the combined federal and state statutory rate due principally to net operating
loss credit carryforwards available to offset taxable income. As the result of
exhausting the net operating loss and the credit carryover, as well as the
expansion of the operations into Europe, the Company expects the effective tax
rate to increase in the future.
LIQUIDITY AND CAPITAL RESOURCES
For the Six Months Ended June 30, 1997 and 1996
The Company used approximately $14.3 million in operating activities during
the six months ended June 30, 1997, primarily due to an increase in accounts
receivable, prepaid expenses and inventory of $6.6 million, $5.8 million and
$7.1 million, respectively, and a decrease in accounts payable and other
accrued liabilities of $3.6 million and $4.0 million, respectively. This was
partially offset by net income of $6.0 million, depreciation and amortization
expense of $2.7 million, an increase in notes receivable of $1.8 million, and
increases in accrued employee benefits and income taxes payable of $1.3
million and $1.7 million, respectively.
The Company used approximately $13.9 million in investing activities during
the six months ended June 30, 1997 consisting of approximately $3.1 million to
purchase Technosystem, $7.8 million to purchase CSM, and $3.1 million to
acquire capital equipment.
The Company generated approximately $6.3 million in financing its activities
during the six months ended June 30, 1997. The Company received approximately
$15.0 million from its borrowings under its bank line of credit, partially
offset by the payment of approximately $10.8 million to retire a portion of
the bank debt of Technosystem and all of the bank debt of Geritel, and
approximately $1.7 million from the issuance of the Company's Common Stock
pursuant to the Company's stock option and employee stock purchase plan.
At June 30, 1997 and December 31, 1996, accounts receivable were
approximately $52.1 million and $42.8 million, respectively. Of the $9.3
million increase that occurred for the six months ended June 30, 1997, $2.7
million was due to the acquisition of accounts receivable from both
Technosystem and CSM. At June 30, 1997 and December 31, 1996, inventory was
approximately $42.2 million and $30.8 million, respectively. Of
5
<PAGE>
the $11.4 million increase that occurred in the six months ended June 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 quarter ended June 30,
1997. At June 30, 1997 and December 31, 1996, notes payable were approximately
$17.5 million and
$2.1 million, respectively. Of the $15.4 million increase that occurred in the
six months ended June 30, 1997, $15.0 million was due to borrowings under the
bank line of credit.
At June 30, 1997, the Company had working capital of approximately $72.0
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 may subject the Company to increased risks, including obsolescence
and write-offs that could materially adversely affect the Company's business,
prospects, financial condition and results in operations.
The Company's principal sources of liquidity as of June 30, 1997 consisted
of approximately $19.5 million of cash and cash equivalents. In March 1997,
the Company entered into an unsecured line-of-credit agreement with Union Bank
which provides for borrowings up to $17.5 million. At June 30, 1997, the
Company had $15.0 million of borrowings outstanding under such line of credit.
As of June 30, 1997, the Company did not meet certain specified minimum
ratios, however, the Company received a waiver from Union Bank with respect to
such compliance. In September 1997, the Company entered into a replacement
unsecured line-of-credit agreement with Union Bank which increased the
Company's borrowing limit to $20.0 million and modified the specified minimum
ratios. The line contains numerous financial ratio covenants and expires on
March 31, 1998.
For the Years Ended December 31, 1996, 1995 and 1994
The Company has financed its operations and met its capital requirements
through net proceeds of approximately $89.5 million from its initial and two
follow-on public offerings of its Common Stock, three preferred stock
financings aggregating approximately $17.2 million, and borrowings under its
bank lines of credit and equipment lease arrangements.
Operating activities used net cash of $5.3 million, $18.8 million and $9.4
million in fiscal 1996, 1995 and 1994, respectively. Net cash used by
operating activities in 1996 was primarily due to increases in accounts
receivable and inventory of $20.5 million and $13.4 million, respectively,
which were partially offset by net income of $8.9 million and increases in
accounts payable of $11.9 million and depreciation and amortization expense of
$5.1 million. The net cash used in operating activities in 1995 was primarily
due to increases in accounts receivable and inventory of $14.3 million and
$13.3 million, respectively, which were partially offset by an increase in
accounts payable of $7.4 million. Net cash used in operating activities in
1994 was primarily due to operating losses and increases in accounts
receivable and inventory of $5.0 million and $2.1 million, respectively, which
were partially offset by increases in accounts payable of $2.5 million and in
accrued employee benefits and other liabilities of $1.0 million.
Investing activities used net cash of $16.7 million, $7.2 million, and
$631,000 in fiscal 1996, 1995 and 1994, respectively. In the last three fiscal
years, the Company invested primarily in short-term investments, capital
equipment and technologies.
Financing activities in 1996 consisted primarily of the issuance of Common
Stock from a follow-on public offering in May 1996 which raised net proceeds
of approximately $52.5 million and the issuance of Common Stock upon exercise
of stock options and employee stock purchase plans resulting in proceeds to
the Company of $2.1 million and an increase in notes payable of approximately
$1.2 million. These amounts were partially offset by payments of approximately
$1.2 million to retire notes payable and short-term borrowings.
Financing activities in 1995 consisted primarily of the issuance of Common
Stock from an initial and follow-on public offerings which raised net proceeds
of approximately $37.0 million and the issuance of
6
<PAGE>
Common Stock upon exercise of stock options and employee stock purchase plans
resulting in proceeds to the Company of $0.2 million. These amounts were
partially offset by payments of approximately $4.3 million on capitalized
lease obligations and notes payable.
Financing activities in 1994 consisted primarily of the issuance of
preferred stock which raised net proceeds of approximately $5.0 million and
proceeds of approximately $3.1 million from borrowings under notes payable.
These amounts were partially offset by payments on capitalized lease
obligations of approximately $0.5 million.
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, ACS, Technosystem, CSM, CRC, Telesys and potentially R T Masts, 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. To the extent that the Company's financial
resources are insufficient to fund the Company's activities, additional funds
will be required. There can be no assurance that any additional financing will
be available to the Company on acceptable terms, or at all, when required by
the Company. 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 one or more of its research and development or manufacturing
programs, cease its acquisition activities 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 that the Company would not otherwise relinquish. Accordingly, the
inability to obtain such financing could have a material adverse effect on the
Company's business, financial condition and results of operations.
Recent and Pending Acquisitions
As discussed in Note 4 to the Consolidated Financial Statements, the Company
completed several acquisitions and a merger during the first six months of
1997. Note 4 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. In addition, Note 9 to the Consolidated
Financial Statements discusses the pending acquisition of R T Masts pursuant
to the share purchase agreement executed on October 14, 1997.
In addition to the acquisitions discussed in the Notes to the Consolidated
Financial Statements, on August 18, 1997, the Company, through one of its
wholly owned subsidiaries, acquired the assets of Telesys (UK) Limited, 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.
7
<PAGE>
EXHIBIT 99.6
P-COM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996, and June
30, 1997 (unaudited).................................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1994, 1995 and 1996, and the six months ended June 30, 1996 and 1997
(unaudited)............................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996, and the six months ended June 30, 1997
(unaudited)............................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996, and the six months ended June 30, 1996 and 1997
(unaudited)............................................................. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of P-Com, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of P-
Com, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
January 22, 1997 (except for
the pooling of interests
with Control Resources
Corporation and other 1997
acquisitions described in
Note 4, which is as of May
29, 1997, and except for
the second paragraph of
Note 1 which is as of
September 26, 1997.)
1
<PAGE>
P-COM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
-------- -------- ----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 8,186 $ 42,025 $ 19,511
Accounts receivable, net of allowance for
doubtful accounts of $35, $580 and $4,572
(unaudited)................................. 21,870 42,804 52,059
Notes receivable............................. -- 2,013 199
Inventory.................................... 16,440 30,819 42,182
Prepaid expenses............................. 3,819 6,052 13,726
-------- -------- --------
Total current assets....................... 50,315 123,713 127,677
Property and equipment, net.................... 8,290 19,955 22,227
Other assets................................... 279 2,573 40,402
-------- -------- --------
$ 58,884 $146,241 $190,306
======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable............................. $ 11,371 $ 23,961 $ 26,324
Accrued employee benefits.................... 760 1,378 3,241
Other accrued liabilities.................... 1,506 5,160 4,350
Income taxes payable......................... 16 2,494 4,225
Notes payable................................ -- 2,116 17,541
-------- -------- --------
Total current liabilities.................. 13,653 35,109 55,681
Long-term debt................................. 221 259 2,087
-------- -------- --------
Total liabilities.......................... 13,874 35,368 57,768
-------- -------- --------
Minority interest.......................... -- 619 652
-------- -------- --------
Commitments (Note 7)
Stockholders' equity:
Preferred Stock, $0.0001 par value, 2,000,000
shares authorized; no shares issued and
outstanding................................. -- -- --
Common Stock, $0.0001 par value; 95,000,000
shares authorized; 34,512,662, 39,822,840
and 41,107,398 unaudited shares issued and
outstanding at December 31, 1995 and 1996,
and June 30, 1997, respectively............. 4 4 4
Additional paid-in capital................... 56,124 112,423 128,643
Retained earnings (accumulated deficit)...... (11,118) (2,246) 3,716
Cumulative translation adjustment............ -- 73 (477)
-------- -------- --------
Total stockholders' equity................. 45,010 110,254 131,886
-------- -------- --------
$ 58,884 $146,241 $190,306
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
P-COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales............................ $19,198 $52,846 $101,853 $40,673 $87,771
Cost of sales.................... 11,517 29,947 60,362 24,609 51,630
------- ------- -------- ------- -------
Gross profit................. 7,681 22,899 41,491 16,064 36,141
------- ------- -------- ------- -------
Operating expenses:
Research and development....... 7,978 12,284 20,163 8,393 13,825
Selling and marketing.......... 2,841 4,487 6,930 2,937 6,598
General and administrative..... 3,026 3,329 5,760 2,456 6,335
------- ------- -------- ------- -------
Total operating expenses..... 13,845 20,100 32,853 13,786 26,758
------- ------- -------- ------- -------
Income (loss) from operations.... (6,164) 2,799 8,638 2,278 9,383
Interest and other income........ 62 614 1,316 185 391
Interest expense................. (231) (370) (160) (56) (459)
------- ------- -------- ------- -------
Income (loss) before income
taxes........................... (6,333) 3,043 9,794 2,407 9,315
Provision for income taxes....... 95 221 922 357 3,353
------- ------- -------- ------- -------
Net income (loss)................ $(6,428) $ 2,822 $ 8,872 $ 2,050 $ 5,962
======= ======= ======== ======= =======
Net income (loss) per share...... $ (0.27) $ 0.08 $ 0.22 $ 0.05 $ 0.14
======= ======= ======== ======= =======
Weighted average common and
common equivalent shares........ 24,255 33,741 39,418 39,023 42,400
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
P-COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS CUMULATIVE
------------------- ----------------- PAID-IN (ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT
----------- ------ ---------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... 15,872,916 $ 2 4,506,818 $-- $ 13,638 $ (7,512) $ --
Issuance of Common Stock
upon exercise of stock
options, net of
repurchases............ -- -- 290,756 -- 23 -- --
Issuance of Common Stock
in exchange for
services............... -- -- 34,112 -- 26 -- --
Issuance of Preferred
Stock, net of issuance
costs.................. 3,333,428 -- -- -- 4,967 -- --
Net loss................ -- -- -- -- -- (6,428) --
----------- ---- ---------- ---- -------- -------- ------
Balance at December 31,
1994................... 19,206,344 2 4,831,686 -- 18,654 (13,940) --
Issuance of Common Stock
in public stock
offerings, net of
issuance cost.......... -- -- 9,260,000 2 36,950 -- --
Conversion of Preferred
Stock into Common Stock
upon initial public
offering............... (19,206,344) (2) 19,206,344 2 -- -- --
Issuance of Common Stock
upon exercise of stock
options and warrants,
net of repurchases..... -- -- 945,460 -- 71 -- --
Issuance of Common Stock
upon exercise of
warrants............... -- -- 217,304 -- -- -- --
Issuance of options and
warrants in exchange
for services........... -- -- -- -- 284 -- --
Issuance of Common Stock
under employee stock
purchase plan.......... -- -- 51,868 -- 165 -- --
Net income.............. -- -- -- -- -- 2,822 --
----------- ---- ---------- ---- -------- -------- ------
Balance at December 31,
1995................... -- -- 34,512,662 4 56,124 (11,118) --
Issuance of Common Stock
in public offerings,
net of issuance costs.. -- -- 4,196,970 -- 52,531 -- --
Issuance of Common Stock
upon exercise of stock
options................ -- -- 784,408 -- 1,353 -- --
Issuance of Common Stock
for the purchase of
ACS.................... -- -- 140,000 -- 1,698 -- --
Issuance of Common Stock
under employee stock
purchase plan.......... -- -- 188,800 -- 717 -- --
Cumulative translation
adjustment............. -- -- -- -- -- -- 73
Net income.............. -- -- -- -- -- 8,872 --
----------- ---- ---------- ---- -------- -------- ------
Balance at December 31,
1996................... -- -- 39,822,840 4 112,423 (2,246) 73
Issuance of Common Stock
for the purchase of CSM
(unaudited)............ -- -- 796,612 -- 14,500 -- --
Issuance of Common Stock
upon exercise of stock
options (unaudited).... -- -- 371,902 -- 1,209 -- --
Issuance of Common Stock
under employee stock
purchase plan
(unaudited)............ -- -- 116,044 -- 511 -- --
Cumulative translation
adjustment (unaudited). -- -- -- -- -- (550)
Net income (unaudited).. -- -- -- -- -- 5,962 --
----------- ---- ---------- ---- -------- -------- ------
Balance at June 30, 1997
(unaudited) ........... -- $-- 41,107,398 $ 4 $128,643 $ 3,716 $ (477)
=========== ==== ========== ==== ======== ======== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
P-COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -----------------
1994 1995 1996 1996 1997
------- -------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net income (loss).............. $(6,428) $ 2,822 $ 8,872 $ 2,050 $ 5,962
Adjustments to reconcile net
income (loss) to net cash
used in operating activities,
net of effect of
acquisitions:
Depreciation and
amortization................ 801 1,399 5,136 1,354 2,664
Change in minority interest.. -- -- 619 -- 33
Non-cash charges............. 26 284 -- -- --
Change in assets and
liabilities:
Accounts receivable........ (4,989) (14,336) (20,533) (7,057) (6,551)
Notes receivable........... -- -- (2,513) -- 1,814
Inventory.................. (2,063) (13,300) (13,359) (6,890) (7,114)
Prepaid expenses........... (44) (3,693) (2,031) (3,007) (5,804)
Other assets............... (72) (28) 245 (29) (733)
Accounts payable........... 2,544 7,394 11,870 3,918 (3,603)
Accrued employee benefits.. 430 12 526 199 1,278
Other accrued liabilities.. 520 686 3,253 -- (3,992)
Income taxes payable....... (75) 9 2,590 236 1,731
------- -------- ------- ------- --------
Net cash used in operating
activities................ (9,350) (18,751) (5,325) (9,226) (14,315)
------- -------- ------- ------- --------
Cash flows from investing
activities:
Purchase of property and
equipment..................... (631) (7,224) (13,991) (5,945) (3,076)
Acquisitions, net of cash
acquired...................... -- -- (2,714) (2,714) (10,855)
------- -------- ------- ------- --------
Net cash used in investing
activities................ (631) (7,224) (16,705) (8,659) (13,931)
------- -------- ------- ------- --------
Cash flows from financing
activities:
Payments on capitalized lease
obligations................... (497) (1,229) -- -- --
Proceeds (payments) from notes
payable....................... 3,122 (3,091) 1,195 520 4,230
Proceeds of long-term debt..... -- -- -- -- 332
Net proceeds from issuance of
stock......................... 4,990 37,187 54,601 53,731 1,720
------- -------- ------- ------- --------
Net cash provided by
financing activities...... 7,615 32,867 55,796 54,251 6,282
------- -------- ------- ------- --------
Effect of exchange rate changes
on cash........................ -- -- 73 (40) (550)
------- -------- ------- ------- --------
Net increase (decrease) in cash
and cash equivalents........... (2,366) 6,892 33,839 36,326 (22,514)
Cash and cash equivalents at the
beginning of the period........ 3,660 1,294 8,186 8,186 42,025
------- -------- ------- ------- --------
Cash and cash equivalents at the
end of the period.............. $ 1,294 $ 8,186 $42,025 $44,512 $ 19,511
======= ======== ======= ======= ========
Supplemental cash flow
disclosures:
Cash paid for income taxes..... $ 85 $ 352 $ 217 $ -- $ 1,510
======= ======== ======= ======= ========
Cash paid for interest......... $ 128 $ 171 $ 133 $ 175 $ 459
======= ======== ======= ======= ========
Stock issued in connection
with the acquisition of ACS... $ -- $ -- $ 1,698 $ -- $ --
======= ======== ======= ======= ========
Stock issued in connection
with the acquisition of CSM... $ -- $ -- $ -- $ -- $ 14,500
======= ======== ======= ======= ========
Equipment acquired under
capital lease obligations..... $ 932 $ -- $ -- $ -- $ 797
======= ======== ======= ======= ========
Stock options and warrants
issued for services........... $ -- $ 284 $ -- $ -- $ --
======= ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
P-Com, Inc. (the "Company") supplies equipment and services for access to
worldwide telecommunications and broadcast networks. The Company's Tel-Link(R)
systems are used as wireless digital links in applications that include
interconnecting base stations and mobile switching centers in microcellular
and personal communications services ("PCN/PCS") networks and providing local
telephone company connectivity in the local loop.
On January 11, 1995, the Company effected a 1-for-3 reverse stock split. On
October 27, 1995, the Company effected a 2-for-1 stock split in the form of a
100% stock dividend. 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 these stock splits. In
conjunction with an initial public offering of the Company's Common Stock (the
"Offering"), all outstanding shares of Preferred Stock were converted into
Common Stock at the closing of the Offering on March 9, 1995.
Effective May 29, 1997, the Company acquired Control Resources Corporation
("CRC") in a transaction accounted for as a pooling of interests. Accordingly,
the financial statements for all periods presented have been retroactively
restated to include CRC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Company's significant accounting policies:
Management's use of estimates and assumptions
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned and wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Foreign currency translation
The functional currency of the Company's majority owned foreign subsidiaries
is the local currency. Assets and liabilities of each subsidiary are
translated into U.S. dollars at exchange rates in effect at the balance sheet
date. Income and expense items are translated at average exchange rates for
the period. Cumulative translation adjustments are recorded in stockholders'
equity. Foreign exchange transaction gains and losses are included in the
results of operations, and were not material in all periods presented.
Cash and cash equivalents
The Company considers all highly liquid debt instruments with a maturity
when acquired of three months or less to be cash equivalents.
Revenue recognition
Revenue from product sales is recognized upon shipment of the product
provided no significant obligations remain and collectibility is probable.
Provisions for estimated warranty repairs, returns and allowances are recorded
at the time products are shipped.
Inventory
Inventory is stated at the lower of cost or market, cost being determined on
a first-in, first-out basis.
6
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the useful lives of the assets ranging
from three to seven years. Leasehold improvements are amortized using the
straight-line method based upon the shorter of the estimated useful lives or
the lease term of the respective assets.
Software development costs
The Company's software products are integrated into its hardware products.
Software development costs incurred prior to the establishment of
technological feasibility are expensed as incurred. Software development costs
incurred subsequent to the establishment of technological feasibility and
before general release to customers are capitalized, if material. To date, all
software development costs incurred subsequent to the establishment of
technological feasibility have been immaterial.
Goodwill
Goodwill, representing the excess of the purchase price over the fair value
of the net assets of the acquired entities, is being amortized on a straight-
line basis over the period of expected benefit ranging from seven to twenty
years.
Impairment of long-lived assets
In the event that facts and circumstances indicate that the cost of assets
may be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow value is
required.
Income taxes
The Company accounts for income taxes under the liability method, which
recognizes deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
and trade accounts receivable. The Company places its cash and cash
equivalents in a variety of financial instruments such as market rate accounts
and U.S. Government agency debt securities. The Company, by policy, limits the
amount of credit exposure to any one financial institution or commercial
issuer.
To date, the Company has sold most of its products in international markets.
Sales to seven customers have been denominated in British pounds, and at
December 31, 1996 and 1995 amounts due from these customers represented 54%
and 32%, respectively, of total accounts receivable. Any gains and/or losses
incurred on the settlement of these receivables are included in the financial
statements as they occur and have been immaterial to date. As of December 31,
1996 and 1995 the balance due in British pounds was (Pounds)14,600,501 and
(Pounds)4,300,000, respectively, and was translated at $1.65 and $1.57,
respectively, per British pound. The Company intends to bill its customers in
U.S. dollars whenever possible.
The Company extends credit terms to international customers of up to 120
days, which is consistent with local business practices. The Company performs
on-going credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers.
7
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996 and 1995 approximately 64% and 56%, respectively, of
trade accounts receivable represents amounts due from four customers.
Off-balance sheet risk
The Company enters into foreign forward exchange contracts to reduce the
impact of currency fluctuations of anticipated sales to British customers. The
objectives of these contracts is to neutralize the impact of foreign currency
exchange rate movements on the Company's operating results. The gains and
losses on forward exchange contracts are included in earnings when the
underlying foreign currency denominated transaction is recognized.
The foreign exchange forward contracts described above generally require the
Company to sell foreign currencies for U.S. dollars at rates agreed to at the
inception of the contracts. The forward contracts generally have maturities
equal to six months or less. These contracts generally do not subject the
Company to significant market risk from exchange rate movements because the
contracts are designed to offset gains and losses on the balances and
transactions being hedged. At December 31, 1996, the Company had forward
contracts to sell approximately $25.0 million in British pounds. The fair
value of forward exchange contracts approximates cost. The Company does not
anticipate any material adverse effect on its financial position resulting
from the use of these instruments.
Net income (loss) per share
Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the periods presented.
Common equivalent shares consist of Convertible Preferred Stock (using the if
converted method) and stock options and warrants (using the treasury stock
method). Common equivalent shares from stock options and warrants are excluded
from the computation if their effect is antidilutive, except that, pursuant to
the Securities and Exchange Commission Staff Accounting Bulletin, common and
common equivalent shares issued from January 1, 1994 through the closing of
the Company's Offering on March 9, 1995 have been included in the computation
using the treasury stock method as if they were outstanding for all periods
prior to the initial public offering. Furthermore, common equivalent shares
from Convertible Preferred Stock that converted into Common Stock upon the
closing of the Offering are included using the if converted method.
Recently issued accounting pronouncements
The Company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," which establishes a
fair value method of accounting for stock based compensation plans, and
requires additional disclosures for those companies who elect not to adopt the
new method of accounting. The Company has elected to continue to measure
compensation costs using the intrinsic value method prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and to comply with the pro
forma disclosure requirements of SFAS 123 (See Note 5). As such, adoption of
SFAS 123 has had no impact on the Company's results of operations.
8
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 periods presented, the Company's earning per share
would have been as follows (unaudited):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------- -----------
1994 1995 1996 1996 1997
------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Earnings per share:
Basic........................................ $(0.29) $0.10 $0.24 $0.06 $0.14
Diluted...................................... $(0.29) $0.08 $0.22 $0.05 $0.14
</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
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
Company has not yet determined the impact, if any, of adopting this new
standard. The disclosures prescribed by SFAS 131 are effective in 1998.
Interim results (unaudited)
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six months ended June 30, 1996 and 1997
and the statement of stockholders' equity for the six months ended June 30,
1997 are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting of only normal recurring adjustments, necessary for
the fair presentation of the results of the interim periods. The data
disclosed in these Notes to the Financial Statements at such date and for such
periods is unaudited.
9
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------- -----------
1995 1996 1997
------- ------- -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
Inventory:
Raw materials................................ $ 7,205 $ 7,948 $ 6,335
Work-in-process.............................. 6,560 15,834 23,370
Finished goods............................... 2,675 7,037 12,477
------- ------- -------
$16,440 $30,819 $42,182
======= ======= =======
Property and equipment:
Tooling and test equipment................... $ 7,990 $20,044 $21,720
Computer equipment........................... 1,266 2,482 3,601
Furniture and fixtures....................... 1,214 2,056 3,291
Land and buildings........................... -- 1,204 1,390
Construction-in-progress..................... 1,068 1,817 1,496
------- ------- -------
11,538 27,603 31,498
Less accumulated depreciation.................. (3,248) (7,648) (9,271)
------- ------- -------
$ 8,290 $19,955 $22,227
======= ======= =======
</TABLE>
NOTE 3--CAPITAL STOCK:
Preferred Stock
Under the Company's Restated Certificate of Incorporation, the Company is
authorized to issue 2,000,000 shares of Preferred Stock, par value $0.0001 per
share. The Board of Directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the dividend rate, voting rights and other rights, preferences
and restrictions of each series.
Common Stock
In March 1995, the Company received net proceeds of $26.1 million from the
sale of 7,820,000 shares of Common Stock in the Offering, which was declared
effective by the Securities and Exchange Commission on March 2, 1995. In
September 1995, the Company received net proceeds of $10.8 million from the
sale of 1,440,000 shares of Common Stock in a follow-on public offering. In
May 1996, the Company received net proceeds of $52.5 million from the sale of
4,196,970 shares of Common Stock in a follow-on public offering. In May 1997,
the shareholders approved an increase to the number of shares of Common Stock
authorized for issuance to 95,000,000 shares.
NOTE 4--ACQUISITIONS:
On April 30, 1996, the Company acquired a 51% interest in Geritel, a
Tortona, Italy-based manufacturer of telecommunications equipment, with
additional operations in France. The Company accounted for the stock
acquisition based on the purchase method of accounting and the results of
operations of Geritel are included in
10
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company's consolidated results for all periods subsequent to the date of
acquisition. The purchase price of Geritel comprised the following (in
thousands):
<TABLE>
<S> <C>
Cash payment..................................................... $2,300
Additional cash committed........................................ 340
Expenses......................................................... 446
------
$3,086
======
</TABLE>
On August 23, 1996, the Company acquired the assets of Atlantic
Communication Sciences, Inc. ("ACS"), a Florida-based manufacturer of
telecommunications equipment, in exchange for 140,000 shares of P-Com Common
Stock valued at $1,698,000. The Company accounted for the acquisition based on
the purchase method of accounting and the results of operations of ACS are
included in the Company's consolidated results for all periods subsequent to
the date of acquisition.
The allocation of the purchase price of these 1996 acquisitions was as
follows (in thousands):
<TABLE>
<CAPTION>
GERITEL ACS TOTAL
------- ------ -------
<S> <C> <C> <C>
Goodwill........................................ $ 1,100 $1,347 $ 2,447
Current assets.................................. 1,247 243 1,490
Non-current assets.............................. 395 22 417
Property and equipment.......................... 2,659 86 2,745
Liabilities assumed............................. (2,315) -- (2,315)
------- ------ -------
$ 3,086 $1,698 $ 4,784
======= ====== =======
</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
$14.5 million. The former partners of CSM may receive up to $1.5 million in
cash (as part of such $8.0 million cash amount) over the next two years,
subject to the satisfaction of certain indemnification obligations.
On May 29, 1997, the Company acquired all of the outstanding shares of
capital stock of 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.
11
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The combined sales and net income (loss) shown below combine the historical
sales and net income (loss) of P-Com and CRC for the years ended December 31,
1994, 1995 and 1996 and six months ended June 30, 1996 in each case as if the
merger had occurred at the beginning of the earliest period presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------- ----------------
1994 1995 1996 JUNE 30, 1996
------- ------- -------- ----------------
<S> <C> <C> <C> <C>
Sales:
P-COM.......................... $ 9,238 $42,805 $ 97,515 $37,340
CRC............................ 9,960 10,041 4,338 3,333
------- ------- -------- -------
$19,198 $52,846 $101,853 $40,673
======= ======= ======== =======
Net income (loss):
P-COM.......................... $(6,680) $ 2,585 $ 14,068 $ 3,743
CRC............................ 252 237 (5,196) (1,693)
------- ------- -------- -------
$(6,428) $ 2,822 $ 8,872 $ 2,050
======= ======= ======== =======
</TABLE>
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 respective dates 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 June 30, 1997 and for
the six months then ended, were restated as if the merger took place at the
beginning of such periods.
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 1997 acquisitions of CSM and
Technosystem was 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 -- 4,196
Other current assets......................... 1,870 53 1,923
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>
12
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The unaudited pro forma combined results of operations of the Company,
Technosystem and CSM for the year ended December 31, 1996 after giving effect
to certain pro forma adjustments are as follows (in thousands, except per
share amount):
<TABLE>
<S> <C>
Revenue......................................................... $128,702
========
Net income...................................................... $ 12,156
========
Net income per share............................................ $ 0.31
========
</TABLE>
The foregoing unaudited pro forma results of operations reflect one year's
amortization of goodwill resulting from the acquisitions of CSM and
Technosystem.
NOTE 5--EMPLOYEE BENEFIT PLANS:
At December 31, 1996, the Company had two stock-based compensation plans
which are described below. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation." All grants have been at FMV.
Accordingly, no compensation expense has been recognized for its stock option
plan or its stock purchase plan. Had compensation costs for the Company's two
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans, consistent with the fair value
methodology of SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Net income
As reported.............................................. $2,822 $8,872
Pro forma................................................ 971 5,254
Net income per share
As reported.............................................. 0.08 0.22
Pro forma................................................ 0.03 0.13
</TABLE>
Stock Option Plans
On January 11, 1995, the Company's Board of Directors adopted the 1995 Stock
Option/Stock Issuance Plan (the "1995 Plan") as a successor to its 1992 Stock
Option Plan (the "1992 Plan"). In addition to the 3,295,888 shares of Common
Stock authorized for issuance under the 1992 Plan, the 1995 Plan authorizes
the Board of Directors to issue an additional 640,000 shares of Common Stock
in 1995, and 1,600,000 shares of Common Stock in 1996. As of January 11, 1995,
no further option grants or stock issuances were made under the 1992 Plan, and
all option grants and stock issuances made during the remainder of 1995 were
made under the 1995 Plan. All outstanding options under the 1992 Plan were
incorporated into the 1995 Plan.
Options granted under the 1992 plan are generally exercisable for a period
not to exceed ten years, and generally must be issued with exercise prices not
less than 100% and 85%, for incentive and non-qualified stock options,
respectively, of the fair market value of the Common Stock as determined on
the date of grant by the Board of Directors. Options granted under the 1992
Plan are exercisable immediately upon grant. Options granted under the 1992
Plan generally vest 25% on the first anniversary from the date of grant, and
ratably each month over the remaining thirty-six month period. Unvested shares
purchased through the exercise of stock options are subject to repurchase by
the Company.
13
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The 1995 Plan contains three equity incentive programs: a Discretionary
Option Grant Program, a Stock Issuance Program for officers and employees of
the Company and independent consultants and advisors to the Company and an
Automatic Option Grant Program for non-employee members of the Company's Board
of Directors.
Options under the Discretionary Option Grant Program may be granted at not
less than 85% of the fair market value per share of Common Stock on the grant
date with exercise periods not to exceed ten years. The Plan Administrator is
authorized to issue tandem stock appreciation rights and limited stock
appreciation rights in connection with the option grants.
The Stock Issuance Program provides for the sale of Common Stock at a price
not less than 85% of fair market value. Shares may also be issued solely for
services. The administrator has discretion as to vesting provisions, including
accelerations, and may institute a loan program to assist participants with
financing stock purchases. The program also provides certain alternatives to
satisfy tax liabilities incurred by participants in connection with the
program.
Under the Automatic Option Grant Program, as amended at the May 1996 Annual
Meeting of Stockholders, participants will automatically receive an option to
purchase 40,000 shares of Common Stock upon initially joining the Board of
Directors and will receive an additional automatic grant each year at each
annual stockholders' meeting for 4,000 shares. Each option will have an
exercise price per share equal to 100% of the fair market value of the Common
Stock on the grant date. The shares subject to the initial share option and
the annual 4,000 share option will vest in eight successive equal quarterly
installments upon the optionee's completion of each successive 3-month period
of Board service over the 24-month period measured from the grant date.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants in 1996 and 1995, respectively: expected volatility of 57
percent for all years; weighted average risk-free interest rates of 6.0% and
6.4%, and weighted average expected lives of 4.11 years and 2.88 years.
The following table summarizes stock option activity under the Company's
1992 and 1995 Plans.
<TABLE>
<CAPTION>
1995 1996
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.... 2,128,972 $0.24 2,948,920 $3.05
Granted............................. 1,742,044 5.05 2,226,405 9.75
Exercised........................... (632,584) 0.12 (784,408) 1.73
Forfeited........................... (289,512) 1.38 (456,276) 4.74
--------- ---------
Outstanding at end of year.......... 2,948,920 3.08 3,934,641 6.86
========= =========
Options exercisable at year-end..... 2,927,720 3,627,855
========= =========
Weighted-average fair value of op-
tions granted during the year...... $ 2.11 $ 4.71
</TABLE>
14
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ------------------------
WEIGHTED-
OPTIONS AVERAGE WEIGHTED- OPTIONS WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1996 LIFE PRICE 1996 PRICE
--------------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.01- 4.75............ 1,407,286 7.4 $ 1.84 1,354,905 $ 1.88
6.57- 9.75............ 1,878,154 9.2 8.63 1,823,750 8.64
10.07-14.88............ 573,800 9.4 12.47 373,800 12.52
15.13-17.00............ 75,400 8.8 15.75 75,400 15.75
--------- ---------
3,934,640 3,627,855
========= =========
</TABLE>
Employee Stock Purchase Plan
On January 11, 1995, the Company's Board of Directors adopted the Employee
Stock Purchase Plan (the "Purchase Plan"), which was approved by stockholders
in February 1995. The Purchase Plan permits eligible employees to purchase
Common Stock at a discount through payroll deductions during successive
offering periods with a maximum duration of 24 months. Each offering period
shall be divided into consecutive semi-annual purchase periods. The price at
which the Common Stock is purchased under the Purchase Plan is equal to 85% of
the fair market value of the Common Stock on the first day of the offering
period or the last day of the purchase period, whichever is lower. The initial
offering period commenced on the effectiveness of the Offering. A total of
600,000 shares of Common Stock has been reserved for issuance under the
Purchase Plan, as amended at the May 1996 Annual Meeting of Stockholders.
Awards and terms are established by the Company's Board of Directors. The
Purchase Plan may be canceled at any time at the discretion of the Company's
Board of Directors prior to its expiration in December 2004. Under the Plan,
the Company sold 103,736 shares and 377,600 shares in 1995 and 1996,
respectively.
The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following assumptions for 1996 and 1995,
respectively: expected volatility of 57 percent for all years; weighted-
average risk-free interest rates of 5.0% and 6.4%; and weighted-average
expected lives of 0.7 years and 1.2 years. The weighted-average fair value of
those purchase rights granted in 1995 and 1996 was $0.55 and $0.78,
respectively.
NOTE 6--INCOME TAXES:
Income (loss) before income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-----------------------
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
Domestic............................................ $(6,333) $3,043 $10,124
Foreign............................................. -- -- (330)
------- ------ -------
$(6,333) $3,043 $ 9,794
======= ====== =======
</TABLE>
15
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes comprises the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal......................................... $ 32 $ 206 $ 2,598
State........................................... 63 15 35
------- ------- -------
Total......................................... 95 221 2,633
------- ------- -------
Deferred:
Federal......................................... -- -- (1,617)
State........................................... -- -- (94)
------- ------- -------
Total......................................... -- -- (1,711)
------- ------- -------
Total............................................. $ 95 $ 221 $ 922
======= ======= =======
Deferred tax assets consist of the following (in thousands):
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Net operating loss carryforwards.................. $ 4,280 $ 3,146 $ --
Credit carryforwards.............................. 1,250 1,364 --
Capitalized research and development costs........ 615 482 335
Start-up costs.................................... 609 429 376
Reserves and other................................ 187 494 1,000
------- ------- -------
6,941 5,915 1,711
Valuation allowance............................... (6,941) (5,915) --
------- ------- -------
$ -- $ -- $ 1,711
======= ======= =======
</TABLE>
Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
U.S. federal statutory rate............................ (35.0)% 35.0% 35.0%
State income taxes, net of federal tax benefit......... (5.1) 5.1 6.0
Change in valuation allowance.......................... -- (24.8) (36.6)
Taxable income of CRC taxed separately................. 36.1 -- --
Other, net............................................. 5.5 (8.0) 5.0
----- ----- -----
1.5% 7.3% 9.4%
===== ===== =====
</TABLE>
16
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 7--COMMITMENTS:
LEASE OBLIGATIONS
The Company leases its facilities under non-cancelable operating leases. The
leases require the Company to pay taxes, maintenance and repair costs. Future
minimum lease payments under the Company's operating leases at December 31,
1996 are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31,
1997............................................................ $1,423
1998............................................................ 1,413
1999............................................................ 1,446
2000............................................................ 1,388
Thereafter...................................................... 2,495
------
$8,165
======
</TABLE>
Rent expense for all operating leases was approximately $532,000, $862,000
and $1,877,000 in 1994, 1995, and 1996, respectively.
NOTE 8--GEOGRAPHIC SALES AND MAJOR CUSTOMERS:
The following is a summary of the Company's sales by geographic area:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Europe..................................................... 29% 57% 59%
North America.............................................. 60 42 37
Middle East................................................ -- -- 3
Central and South America.................................. 11 1 1
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
The following table summarizes the percentage of sales accounted for by the
Company's significant customers with sales of 10% or more:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Customer A.................................................. -- -- 13%
Customer B.................................................. -- 19% --
Customer C.................................................. 12% -- --
Customer D.................................................. -- 18 12
Customer E.................................................. -- 10 10
Customer F.................................................. -- 18 13
Customer G.................................................. -- -- 13
Customer H.................................................. -- -- 13
</TABLE>
17
<PAGE>
P-COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--SUBSEQUENT EVENTS (UNAUDITED):
The Company entered into a new revolving line-of-credit agreement as amended
and restated as of September 17, 1997 that provides for borrowings of up to
$20.0 million. 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.
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, Northamptonshire,
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
effect 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.
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 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.
18
