<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
COMMISSION FILE NUMBER: 0-25356
_______________
P-Com, Inc.
(Exact name of Registrant as specified in its charter)
_______________
<TABLE>
<S> <C>
DELAWARE 77-0289371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3175 S. WINCHESTER BOULEVARD, CAMPBELL, CALIFORNIA 95008
(Address of principal executive offices) (zip code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 866-3666
_______________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 9, 1998, there were 43,531,805 shares of the Registrant's
Common Stock outstanding, par value $0.0001.
This quarterly report on Form 10-Q Consists of 32 pages of which this is page
1. The Exhibit Index appears on page 32.
<PAGE>
P-COM, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Page
PART I. Financial Information Number
---------------------
Item 1. Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31,
1997................................................................................... 3
Condensed Consolidated Statements of Operations for the three and nine month periods
ended September 30, 1998 and 1997...................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 1998 and 1997............................................................ 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................. 10
PART II. Other Information
---------------------------------------------------------------------------------------
Item 1. Legal Proceedings...................................................................... 29
Item 2. Changes in Securities.................................................................. 29
Item 3. Defaults Upon Senior Securities........................................................ 29
Item 4. Submission of Matters to a Vote of Security Holders.................................... 29
Item 5. Other Information...................................................................... 29
Item 6. Exhibits and Reports on Form 8-K....................................................... 29
Signatures............................................................................................... 31
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM I
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------------- ----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,600 $ 88,145
Accounts receivable, net 49,906 70,883
Notes receivable 426 205
Inventory 83,227 58,003
Prepaid expenses and other current assets 16,917 12,329
-------- --------
Total current assets 174,076 229,565
Property and equipment, net 47,319 32,313
Deferred income taxes 19,236 1,697
Goodwill and other assets 53,761 41,946
-------- --------
$294,392 $305,521
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,879 $ 38,043
Accrued employee benefits 2,983 3,930
Other accrued liabilities 10,723 6,255
Income taxes payable 4,140 6,409
Notes payable 45,967 293
-------- --------
Total current liabiltities 96,692 54,930
-------- --------
Long-term debt 104,922 101,690
-------- --------
Minority interest - 604
-------- --------
Stockholders' equity:
Preferred stock - -
Common Stock 4 4
Additional paid-in capital 136,174 131,735
Retained earnings (40,645) 18,380
Cumulative translation adjustment (2,755) (1,822)
-------- --------
Total stockholders' equity 92,778 148,297
-------- --------
$294,392 $305,521
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 30,240 $ 57,191 $ 152,336 $ 156,476
Cost of sales 41,701 33,074 113,953 92,901
--------- --------- --------- ---------
Gross profit (loss) (11,461) 24,117 38,383 63,575
--------- --------- --------- ---------
Operating expenses:
Research and development 12,005 7,081 29,925 20,906
Selling and marketing 6,288 4,070 16,951 10,993
General and administrative 10,775 4,689 19,644 12,158
Goodwill amortization 1,109 614 2,927 1,525
Restructuring and other one-time charges 4,332 - 4,332 -
Acquired in-process research and
development expenses - - 33,882 -
--------- --------- --------- ---------
Total operating expenses 34,509 16,454 107,661 45,582
--------- --------- --------- ---------
Income (loss) from operations (45,970) 7,663 (69,278) 17,993
Interest and other income (expense), net (2,652) (99) (4,958) (270)
--------- --------- --------- ---------
Income (loss) before income taxes (48,622) 7,564 (74,236) 17,723
Provision (benefit) for income taxes (6,500) 3,528 (15,211) 6,897
--------- --------- --------- ---------
Net income (loss) $ (42,122) $ 4,036 $ (59,025) $ 10,826
========= ========= ========= =========
Net income (loss) per share:
Basic $ (0.97) $ 0.10 $ (1.37) $ 0.26
========= ========= ========= =========
Diluted $ (0.97) $ 0.09 $ (1.37) $ 0.25
========= ========= ========= =========
Shares used in per share computation:
Basic 43,459 42,435 43,204 41,993
========= ========= ========= =========
Diluted 43,459 44,604 43,204 43,871
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
- -------------------------------------
Net income (loss) $(59,025) $ 10,824
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 8,541 3,240
Amortization of goodwill 2,106 1,527
Change in minority interest (604) 34
Acquired in-process research and development expenses 33,856 -
Restructuring and other one-time charges 4,332 -
Change in assets and liabilities (net of acquisition balances):
Accounts receivable 30,042 (15,300)
Notes receivable (221) 1,811
Inventory (20,115) (14,890)
Prepaid expenses (4,588) (2,388)
Goodwill and other assets (18,431) (994)
Accounts payable (6,519) (6,099)
Accrued employee benefits (947) 929
Other accrued liabilities 3,295 (2,767)
Income taxes payable (2,269) 3,460
-------- --------
Net cash used in operating activities (30,547) (20,613)
-------- --------
Cash flows from investing activities:
- -------------------------------------
Acquisition of property and equipment (23,427) (6,487)
Acquisitions, net of cash acquired (62,983) (10,855)
-------- --------
Net cash used in investing activities (86,410) (17,342)
-------- --------
Cash flows from financing activities:
- -------------------------------------
Proceeds from notes payable 48,906 4,431
Proceeds from stock issuances, net of expenses 4,439 3,886
-------- --------
Net cash provided by financing activities 53,345 8,317
-------- --------
Effect of exchange rate changes on cash (933) (576)
-------- --------
Net decrease in cash and cash equivalents (64,545) (30,214)
Cash and cash equivalents at the beginning of the period 88,145 42,226
-------- --------
Cash and cash equivalents at the end of the period $ 23,600 $ 12,012
======== ========
Supplemental cash flow disclosures:
Cash paid for income taxes $ 1,922 $ 2,288
======== ========
Cash paid for interest $ 5,306 $ 501
======== ========
Stock issued in connection with the acquisition of CSM $ - $ 14,500
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not contain all of the information
and footnotes required by generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of P-Com, Inc.'s (referred to herein, together
with its wholly owned and partially owned subsidiaries, as "P-Com" or the
"Company") financial condition as of September 30, 1998, and the results of its
operations for the three and nine-month periods ended September 30, 1998 and
1997 and its cash flows for the nine months ended September 30, 1998 and 1997.
These consolidated financial statements should be read in conjunction with the
Company's audited 1997 consolidated financial statements, including the notes
thereto, and the other information set forth therein, included in the Company's
Annual Report on Form 10-K (File No. 0-25356). Operating results for the three
and nine-month periods ended September 30, 1998 are not necessarily indicative
of the operating results that may be expected for the year ending December 31,
1998. This Quarterly Report on Form 10-Q may contain forward-looking statements
that may involve numerous risks and uncertainties. The statements contained in
this Quarterly Report on Form 10-Q that are not purely historical are forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the factors affecting operating results contained in this Quarterly
Report on Form 10-Q.
2. NET INCOME (LOSS) PER SHARE
Following is a reconciliation of the numerators and denominators of the
basic and diluted earnings (loss) per share computations for the periods
presented below (unaudited; in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Numerator - net income (loss) $(42,122) $ 4,036 $(59,025) $10,826
======== ======= ======== =======
Denominator for basic net income per common share 43,459 42,435 43,204 41,993
Effect of dilutive securities:
Stock options - 2,169 - 1,878
Denominator for diluted net income per common share 43,459 44,604 43,204 43,871
======== ======= ======== =======
Net income (loss) per share:
Basic $ (0.97) $ 0.10 $ (1.37) $ 0.26
======== ======= ======== =======
Diluted $ (0.97) $ 0.09 $ (1.37) $ 0.25
======== ======= ======== =======
</TABLE>
For purpose of computing diluted earnings (loss) per share, weighted average
common share equivalents do not include stock options with an exercise price
that exceeds the average fair market value of the Company's Common Stock for the
period because the effect would be antidilutive. For the three and nine-months
ended September 30, 1998, options to purchase approximately 2,095,779 and
743,689 shares of Common Stock, respectively, were excluded from the
computation. For the three and nine-months ended September 30, 1998, the assumed
conversion
6
<PAGE>
of convertible subordinated notes into 3,641,661 shares of Common Stock was not
included in the computation of diluted earnings (loss) per share because the
effect would be antidilutive.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income."
SFAS 130 establishes standards for reporting comprehensive income and its
components in a consolidated financial statement that is displayed with the same
prominence as other consolidated 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
Company's total comprehensive net income (loss) was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $(42,122) $4,036 $(59,025) $10,826
Other comprehensive charges (1,981) (28) (933) (577)
-------- ------ -------- -------
Total comprehensive income (loss) $(44,103) $4,008 $(59,958) $10,249
======== ====== ======== =======
</TABLE>
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
consolidated financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The disclosures prescribed by SFAS 131 are effective in 1998, and are not
required for interim periods. The Company does not expect this pronouncement to
have a material effect on its consolidated financial statements.
4. ACQUISITIONS
On March 28, 1998 and April 1, 1998, the Company acquired substantially all of
the assets of the Wireless Communications Group of Cylink Corporation ("Cylink
Wireless Group"), a Sunnyvale, California-based company, for $46.0 million in
cash and $14.5 million in a short-term, non-interest bearing unsecured
subordinated promissory note. The Company withheld approximately $6 million of
the short-term promissory note due to the Company's belief that Cylink breached
various provisions of the acquisition agreement. The Cylink Wireless Group
designs, manufactures and markets spread spectrum radio products for voice and
data applications in both domestic and international markets. The Company
incurred a one time research and development charge of approximately $33.9
million during the three-month period ended March 31, 1998 related to this
acquisition. Additionally, although the Company believes the accounting for its
acquisitions has been appropriate, in general the Securities and Exchange
Commission has recently been reviewing more closely the accounting for
acquisitions and the resulting charges for "in-process" research and development
costs. Any resulting restatement of the "in-process" research and development
charge the Company recognized in conjunction with any of its acquisitions ,
including the Cylink Wireless Group acquisition, could result in a lesser charge
to income for "in-process" technology and the creation of a higher value of
acquired technology, an intangible asset. The creation of additional intangible
assets would have the impact of increasing amortization expense, which could
have a material adverse affect on the Company's results of operations, business
and financial condition.
The Company accounted for this acquisition based on the purchase method of
accounting. The results of the Cylink Wireless Group have been included since
the date of acquisition and were not material to the Company's results of
operations.
7
<PAGE>
The total purchase price of the acquisition was as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash Payment $46,000
Short-term promissory note 14,500
Expenses 2,483
-------
Total $62,983
=======
</TABLE>
The allocation of the purchase price was as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable, net $ 9,065
Inventory 5,109
Property and equipment, net 461
In-process research and development 33,856
Intangible assets 15,847
Current liabilities assumed (1,355)
--------
Total $ 62,983
========
</TABLE>
The following estimated unaudited pro forma sales, net income (loss) and
income (loss) per share (in thousands, except per share data) combine the
historical sales and net income (loss) and income (loss) per share of P-Com and
Cylink for the three months ended March 31, 1998 and the year ended December 31,
1997 in each case as if the acquisition had occurred at the beginning of the
earliest period presented. The results include goodwill amortization related to
the Cylink acquisition.
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
---------------------------------- ----------------------------------
March 31, 1998 December 31, 1997
----------------------------------- ----------------------------------
P-Com Cylink Pro Forma P-Com Cylink Pro Forma
------- ------ --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 58,637 $ 4,508 $ 63,145 $220,702 $31,267 $251,969
Net income (loss) (17,249) (3,510) (20,757) 18,891 2,948 21,839
Net Income (loss) per share:
Basic (0.40) (0.08) (0.48) 0.45 0.07 0.52
Diluted (0.40) (0.08) (0.48) 0.43 0.06 0.49
</TABLE>
5. BORROWING ARRANGEMENTS
The Company entered into a new revolving line-of-credit agreement on May 15,
1998 as amended on July 31, 1998 and October 21, 1998 that provides for
borrowings of up to $50 million. At September 30, 1998, the Company had been
advanced approximately $45.9 million under such line. The maturity date of the
line-of-credit agreement is April 30, 2001. Borrowings under the line are
secured 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 specific minimum ratios. The Company was
in compliance with such covenants as of September 30, 1998 or had received
waivers of any breach.
8
<PAGE>
6. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
------------ -------------
<S> <C> <C>
Raw materials $18,227 $ 9,695
Work-in-process 46,544 32,472
Finished goods 18,456 15,836
------- -------
$83,227 $58,003
======= =======
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
------------
<S> <C> <C>
Tooling and test equipment $ 48,605 $ 31,603
Computer equipment 7,730 4,950
Furniture and fixtures 7,033 4,979
Land and buildings 1,679 1,389
Construction-in-process 4,715 3,294
------- -------
69,762 46,215
Less-accumulated depreciation and amortization (22,443) (13,902)
------------ ------------
$ 47,319 $ 32,313
============ ============
</TABLE>
8. RESTRUCTURING AND OTHER ONE-TIME CHARGES
During the quarter ended September 30, 1998, the Company recorded
restructuring and other one-time charges of $26.6 million. The restructuring
and other one-time charges are comprised primarily of severance and benefits,
facilities and fixed assets impairments, goodwill impairments, inventory
reserves and accounts receivable reserves.
The following is an analysis of the components of the restructuring and other
one-time charges recorded in the third quarter of 1998 (in thousands).
Inventory reserves of $16.9 million (including $14.5 million in inventory write
downs related to the Company's existing core business and $2.4 million in other
one-time charges to inventory relating to the elimination of product lines) were
charged to costs of goods sold, accounts receivable reserves of $5.4 million
were charged to general and administrative expenses and restructuring charges of
$4.3 million consisting of severance benefits, facilities and fixed assets
impairments and goodwill impairments was charged to restructuring and other one-
time charges.
9
<PAGE>
<TABLE>
<CAPTION>
Restructuring
Charges Other Charges Cash Paid Balance
------------- ------------- --------- -------
<S> <C> <C> <C> <C>
Severance and benefits 568 - (378) 190
Facilities and fixed assets impairment 879 - - 879
Goodwill impairment 2,884 - - 2,884
Inventory reserve - 16,922 - 16,922
Accounts receivable reserve - 5,386 - 5,386
----- ------ ---- ------
Total 4,331 22,308 (378) 26,261
===== ====== ==== ======
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth items from the Consolidated Condensed Income
Statements as a percentage of sales for the periods indicated. In addition, this
Quarterly Report on Form 10-Q may contain forward-looking statements that
involve numerous risks and uncertainties. The statements contained in this
Quarterly Report on Form 10-Q that are not purely historical may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including without limitation, statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the factors affecting operating results contained in this Quarterly
Report on Form 10-Q.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed in the Company's 1997 Annual Report on Form 10-
K, Quarterly Report on Form 10-Q for the period ended June 30, 1998 and other
documents filed by the Company with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 137.9 57.8 74.8 59.4
------ ----- ----- -----
Gross profit (37.9) 42.2 25.2 40.6
------ ----- ----- -----
Operating expenses:
Research and development 39.7 12.4 19.6 13.4
Selling and marketing 20.8 7.1 11.1 7.0
General and administrative 35.6 8.1 12.9 7.6
Goodwill amortization 3.7 1.2 1.9 1.1
Restructuring and other one-time charges 14.3 - 2.8 -
Acquired in-process
research and development expenses - - 22.3 -
------ ----- ----- -----
Total operating expenses 114.1 28.8 70.6 29.1
------ ----- ----- -----
Income (loss) from operations (152.0) 13.4 (45.4) 11.5
------ ----- ----- -----
Interest and other income (expense), net (8.8) (0.2) (3.3) (0.2)
------ ----- ----- -----
Income (loss) before income taxes (160.8) 13.2 (48.7) 11.3
Provision (benefit) for income taxes (21.5) 6.2 (10.0) 4.4
------ ----- ----- -----
Net income (loss) (139.3%) 7.1% (38.7%) 6.9%
------ ----- ----- -----
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997
Overview. In the third quarter of 1998, the Company incurred restructuring
and other one-time charges of $26.6 million. The $26.6 million restructuring
and other one-time charges consisted of $4.3 million in restructuring charges,
including severance and benefits, facilities and fixed assets impairments and
goodwill impairments, $16.9 million in inventory reserves (including $14.5
million in inventory write downs relating to the Company's existing core
business and $2.4 million in other one-time charges to inventory relating to the
elimination of product lines) and $5.4 million in accounts receivable reserves.
The restructuring charges were a result of the Company's completion of a
worldwide reorganization and consolidation of its operations in the United
Kingdom and Italy. In addition, the Company took steps to reduce costs and
improve its competitiveness business processes. These actions included the
recruitment of a new senior vice president and general manager to lead the newly
created Wireless Access Group, reduction of the number of employees and
consolidation of the sales, marketing, engineering and customer support
functions.
Sales. Sales for the three months ended September 30, 1998 and 1997 were
approximately $30.2 million and $57.2 million, respectively, a decrease of
47.2%. Sales for the nine months ended September 30, 1998 and 1997 were
approximately $152.3 million and $156.5 million, respectively, a decrease of
2.7%. The decrease was primarily due to the market slowdown for the Company's
Tel Link product line. For the nine months ended September 30, 1998, four
customers accounted for 44.7% of the sales of the Company. For the nine months
ended September 30, 1997, seven customers accounted for 52.5% of the sales of
the Company.
Gross Profit. For the three months ended September 30, 1998, the gross
profit was approximately $(11.5) million, or (37.9)% of sales. For the three
months ended September 30, 1997, gross profit was approximately $24.1 million,
or 42.2% of sales. For the nine months ended September 30, 1998 and 1997, gross
profit was approximately $38.4 million or 25.2% of net sales, and approximately
$63.6 million, or 40.6% of net sales, respectively. As discussed above, the
decline in gross profit in the third quarter of 1998 compared to the
corresponding period in 1997 was primarily due to one time inventory write-downs
of $16.9 million.
Research and Development. For the three months ended September 30, 1998 and
1997, research and development expenses were approximately $12.0 million and
$7.1 million, respectively. The increase in research and development expenses
during the three months ended September 30, 1998 as compared to the
corresponding period in 1997 was due primarily to increased staffing and new
product development. As a percentage of sales, research and development expenses
increased from 12.4% in the three months ended September 30, 1997 to 39.7% in
the corresponding period in 1998. The increase in research and development
expenses as a percentage of sales was primarily due to a lower level of sales in
the three months ended September 30, 1998 as compared to the corresponding
period in 1997. The Company expects that research and development expenses will
continue to increase significantly in absolute dollars during the remainder of
1998 compared to the 1997 fiscal year.
Research and development expenses for the nine months ended September 30, 1998
and 1997 were approximately $29.9 million and $20.9 million, respectively. The
increase in research and development during the nine months ended September 30,
1998, as compared to the corresponding period in 1997 was due primarily to
increased staffing and new product development. As a percentage of sales,
research and development expenses increased from 13.4% in the nine months ended
September 30, 1997 to 19.6% in the corresponding period in 1998. The increase in
research and development expenses as a percentage of sales was primarily due to
increased expenses related to new product development and slower growth in
sales. The Company expects that research and development expenses will continue
to increase significantly in absolute dollars during the remainder of 1998
compared to the 1997 fiscal year.
Selling and Marketing. For the three months ended September 30, 1998 and 1997,
selling and marketing expenses were approximately $6.3 million and $4.1 million,
respectively. The increase in selling and marketing expenses in the three months
ended September 30, 1998, as compared to the corresponding period in 1997, was
primarily due to increased staffing and increased expenses relating to the
Company's expansion of its international sales and marketing organization. As a
percentage of sales, selling and marketing expenses increased from 7.1% in the
three months ended September 30, 1997 to 20.8% in the corresponding period in
1998. The increase in selling
11
<PAGE>
and marketing expenses as a percentage of sales was primarily due a lower level
of sales in the three months ended September 30, 1998 as compared to the
corresponding period in 1997. The Company expects that such expenses will
continue to increase significantly in absolute dollars during the remainder of
1998 compared to the 1997 fiscal year.
Selling and marketing expenses for the nine months ended September 30, 1998
and 1997 were approximately $17.0 million and $11.0 million, respectively. The
increase in selling and marketing during the nine months ended September 30,
1998, as compared to the corresponding period in 1997 was due primarily to
increased staffing, and increased expenses relating to the Company's expansion
of its international sales and marketing organization. As a percentage of sales,
selling and marketing expenses increased from 7.0% in the nine months ended
September 30, 1997 to 11.1% in the corresponding period in 1998. The increase in
selling and marketing expenses as a percentage of sales was primarily due to the
costs relating to the expansion of the Company's international sales force. The
Company expects that selling and marketing expenses will continue to increase
significantly in absolute dollars during the remainder of 1998.
General and Administrative. For the three months ended September 30, 1998 and
1997, general and administrative expenses were $10.8 million and $4.7 million,
respectively. The increase was principally due to increased staffing, other
costs resulting from the Company's expansion of its operations and a $5.4
million increase in the allowance for doubtful accounts in 1998. As a percentage
of sales, general and administrative expenses increased from 8.1% in the three
months ended September 30, 1997 to 35.6% in the corresponding period in 1998.
This increase in general and administrative expenses as a percentage of sales
was due primarily to and the increase in the allowance for doubtful accounts to
a lower level of sales in the three months ended September 30, 1998 as compared
to the corresponding period in 1997. The Company expects that general and
administrative expenses may continue to increase significantly in absolute
dollars during the remainder of 1998.
General and administrative expenses for the nine months ended September 30,
1998 and 1997 were approximately $19.6 million and $12.2 million, respectively.
This increase was due primarily to increased staffing, other costs resulting
from the Company's expansion of its operations and a $5.4 million increase in
the allowance for doubtful accounts. As a percentage of sales, general and
administrative expenses increased from 7.6% in the nine months ended September
30, 1997 to 12.9% in the corresponding period in 1998. This increase in general
and administrative expenses as a percentage of sales during the nine months
ended September 30, 1998 as compared to the corresponding period in 1997 was
primarily due to increased staffing and the increase in the allowance for
doubtful accounts. The Company expects that general and administrative expenses
may continue to increase significantly in absolute dollars during the remainder
of 1998.
Goodwill Amortization. Goodwill amortization consists of the charge to income
that results from the allocation over the estimated useful life of the component
of the cost of the Company's acquisitions accounted for by the purchase method
which is greater than the fair value of the net assets acquired. For the three
months ended September 30, 1998 and 1997, goodwill amortization was $1.1 million
and $0.6 million, respectively. The increase in goodwill amortization in the
three months ended September 30, 1998 as compared to the corresponding period in
1997 was due primarily to the acquisition of the Wireless Communications Group
of Cylink Corporation ("Cylink Wireless Group"), a Sunnyvale, California-based
company in March 1998.
Goodwill amortization for the nine months ended September 30, 1998 and 1997
was $2.9 million and $1.5 million, respectively. The increase in goodwill
amortization in the nine months ended September 30, 1998 as compared to the
corresponding period in 1997 was due to the acquisitions of Technosystem S.p.A.
("Technosystem") a Rome, Italy-based company, Columbia Spectrum Management
("CSM") a Vienna, Virginia-based company, and the Cylink Wireless Group in
February 1997, March 1997, and March 1998, respectively
In-Process Research and Development. During the three months ended March 31,
1998, the Company incurred an in-process research and development expense of
$33.9 million. This in-process research and development expense was related to
the acquisition of the assets of the Cylink Wireless Group. Additionally,
although the Company believes the accounting for its acquisitions has been
appropriate, in general the Securities and Exchange Commission has recently been
reviewing more closely the accounting for acquisitions and the resulting charges
for "in-process" research and development costs. Any resulting restatement of
the "in-process" research and development charge the Company recognized in
conjunction with any of its acquisitions , including the Cylink
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Wireless Group acquisition, could result in a lesser charge to income for "in-
process" technology and the creation of a higher value of acquired technology,
an intangible asset. The creation of additional intangible assets would have the
impact of increasing amortization expense, which could have a material adverse
affect on the Company's results of operations, business and financial condition.
Interest and Other Income (Expense), Net . The Company incurred net interest
and other expense of $2.7 million during the three months ended September 30,
1998, as compared to $0.1 million of net interest and other expense during the
corresponding period in 1997. The Company incurred net interest and other
expense of $5.0 million during the nine months ended September 30, 1998, as
compared to $0.3 million of net interest and other expense during the
corresponding period in 1997. The increase in net interest and other expense was
primarily due to interest expense incurred on its $100 million aggregate
principal amount of its convertible promissory notes, borrowings under the
Company's bank line of credit, and finance charges related to the Company's
receivables purchase agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Company used approximately $30.5 million in operating activities during
the nine months ended September 30, 1998, primarily due to the net loss
(excluding $38.2 million non-cash charges for acquired in-process research and
development expense and restructuring and other one-time charges) of $20.8
million and an increase in inventory, prepaid expenses and goodwill and other
assets of $20.1 million, $4.6 million and $18.4 million, respectively, and a
decrease in accounts payable of $6.5 million. These uses of cash were partially
offset by a decrease in accounts receivable of $30.0 million and depreciation
and amortization expense of $10.6 million.
On March 28 and April 1, 1998, the Company acquired substantially all of the
assets of the Cylink Wireless Group, for $46.0 million in cash and $14.5 million
in a short term, non-interest bearing unsecured subordinated promissory note.
The Company has withheld approximately $6 million of the short-term promissory
note due to the Company's belief that Cylink breached various provisions of the
acquisition agreement. The Cylink Wireless Group designs, manufactures and
markets spread spectrum radio products for voice and data applications in both
domestic and international markets. The Company incurred a one time research and
development charge of approximately $33.9 million in the first quarter of 1998.
In connection with the acquisition of the assets of the Cylink Wireless Group,
the Company purchased the accounts receivable balance of $9.1 million on April
1, 1998. The consideration for these accounts receivable was included in the
total of $60.5 million in cash and the debt mentioned above.
The Company used approximately $86.4 million in investing activities during
the nine months ended September 30, 1998 consisting of approximately $63.0
million to acquire the assets of the Cylink Wireless Group and $23.4 million to
acquire capital equipment.
The Company generated approximately $53.3 million in its financing activities
during the nine months ended September 30, 1998. The Company received
approximately $48.9 million from borrowings under its bank line of credit and
overdraft facility in Italy and approximately $4.4 million from the issuance of
the Company's Common Stock pursuant to the Company's stock option and employee
stock purchase plans.
At September 30, 1998 and December 31, 1997, net accounts receivable were
approximately $49.9 million and $70.9 million, respectively. The Company has
established a receivables purchase agreement which allows the Company to sell up
to $25 million in accounts receivable to two banks. As of September 30, 1998,
$24.5 million of the Company's accounts receivable have been sold pursuant to
such contract. These sales have no recourse to the Company. The Company plans to
continue to utilize this facility as part of managing its overall liquidity
and/or third-party financing programs. At September 30, 1998 and December 31,
1997, inventory was approximately $83.2 million and $58.0 million, respectively.
Of the $25.2 million increase that occurred in the nine months ended September
30, 1998, $5.1 million was due to the acquisition of inventory from the Cylink
Wireless Group acquisition.
At September 30, 1998, the Company had working capital of approximately $77.4
million, compared to $174.6 million at December 31, 1997. 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
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continue to represent a significant portion of working capital. Significant
investments in accounts receivable and inventories will continue to subject the
Company to increased risks that has and could continue to materially adversely
affect the Company's business, prospects, financial condition and results of
operations.
The Company's principal sources of liquidity as of September 30, 1998
consisted of approximately $23.6 million of cash and cash equivalents. In
addition, the Company entered into a new revolving line-of-credit agreement on
May 15, 1998, as amended July 31, 1998 and October 21, 1998, that provides for
borrowings of up to $50.0 million. As of September 30, 1998, the Company had
been advanced approximately $45.9 million under such line. The maturity date of
the line of credit is April 30, 2001. Borrowings under the line are secured 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 specific minimum ratios. The Company was in
compliance with such covenants as of September 30, 1998 or had received waivers
for breach of any covenant. Management has implemented plans to reduce the
Company's cash requirement, through a combination of reductions in working
capital, equipment purchases and operating expenditures. Management believes
that such plans, combined with existing cash balances and other sources of
liquidity, should enable the Company to meet its cash requirements through
fiscal year 1999. However, there can be no assurance that the Company will be
able to implement these plans or that it will be able to do so without a
material adverse effect on the Company's business, financial results or results
of operations.
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 its
acquired entities including Geritel S.p.A. ("Geritel"), Atlantic Communication
Sciences, Inc. ("ACS"), Technosystem, Control Resources Corporation ("CRC"),
Columbia Spectrum Management ("CSM"), RT Masts Limited ("RT Masts"), Advanced
Wireless Engineering LLC ("Advanced"), Telesys (UK) Limited ("Telesys"), Cemetel
S.p.A. ("Cemetel"), Telematics, Inc. ("Telematics") and Cylink Wireless Group,
the progress of the Company's research and development efforts, expansion of the
Company's marketing and sales efforts, the Company's results of operations and
the status of competitive products. The Company believes that cash and cash
equivalents on hand, anticipated cash flow from operations, if any, and funds
available from the Company's bank line-of-credit may be adequate to fund its
ordinary operations for at least the next twelve months. There can be no
assurance, however, that the Company will not require additional financing prior
to such date to fund its operations or for acquisitions. For a discussion of
risk factors associated with the Company's future capital requirements, please
see "Certain Factors Affecting Operating Results--Future Capital Requirements"
and "Acquisitions."
There can be no assurance that any of the operations of ACS, Geritel, RT
Masts, Advanced, Telematics, Telesys, Technosystem, CRC, CSM or Cylink Wireless
Group will be profitable after the acquisitions. Moreover, there can be no
assurance that the anticipated benefits of the ACS, Geritel, Technosystem, RT
Masts, Telematics, Telesys, CRC, Advanced, CSM and Cylink Wireless Group
acquisitions will be realized. The ongoing process of integrating the operations
of ACS, Geritel, Technosystem, RT Masts, Telematics, Telesys, Advanced, CRC, CSM
and Cylink Wireless Group into the Company's operations has resulted in
unforeseen operating difficulties and could continue to absorb significant
management attention, expenditures and reserves that would otherwise be
available for the ongoing development of the Company's business.
CERTAIN FACTORS AFFECTING OPERATING RESULTS
Limited Operating History
P-Com was founded in August 1991 and was in the development stage until
October 1993 when it began commercial shipments of its first product. From
inception to the end of the third quarter of fiscal 1998, the Company generated
a cumulative net loss of approximately $40.6 million. The decrease in cumulative
net profit from the fourth quarter of 1997 through the third quarter of 1998 was
due primarily to the net loss of $42.1 million in the third quarter of 1998
which included restructuring and other charges of $26.6 million and the acquired
in-process research and development charge of approximately $33.9 million
related to the acquisition of the assets of the Cylink Wireless Group recorded
in the first quarter of fiscal 1998. From October 1993 through September 30,
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1998, the Company generated sales of approximately $607.2 million, of which
$373.0 million, or 61.4% of such amount, was generated in the year ended
December 31, 1997 and the first three quarters of 1998. The Company does not
believe recent growth rates are indicative of future operating results. Due to
the Company's limited operating history and limited resources, among other
factors, there can be no assurance that profitability or significant revenues on
a quarterly or annual basis will occur in the future. During 1997 and the first
three quarters of 1998, the Company's operating expenses increased more rapidly
than the Company had anticipated. During the third quarter of 1998, the Company
has also experienced a decrease in revenue as compared to the first two quarters
of 1998 due principally to the market slowdown for the Company's Tel Link
product line. There can be no assurance that the Company's revenues will
continue to remain at or increase from the levels experienced in 1997 or in
the first half 1998 or that sales will not decline. In fact, during the first
nine months of 1998, the Company has experienced its lowest rates of
sequential sales growth since it became a public company. The Company's net
sales for the third quarter of 1998 (which included sales from many newly
acquired businesses in 1998) were approximately 50% less than its sales for
the comparable period in 1997. The Company expects its sales in the near
future to be significantly below recent comparable periods. In recent
quarters, the Company has been experiencing higher than historical price
declines. The decline in prices has had a significant downward impact on the
Company's gross margin. There can be no assurance that such pricing pressure
will not continue in future quarters. The Company expects its gross margins as
a percentage of revenues to continue to be below comparable periods for the
next several quarters. The Company intends to continue to invest significant
amounts in its operations, particularly to support product development and the
marketing and sales of recently introduced products, and, despite recent cost-
cutting efforts, the Company will continue to incur significant operating
expenses. If the Company's sales do not correspondingly increase, the
Company's results of operations, business and financial condition would be
materially adversely affected. Accordingly, there can be no assurance that the
Company will achieve profitability in future periods. The Company believes it
will likely report an operating loss during the fourth quarter of fiscal year
1998 and could report a net loss for such quarter. The Company is subject to
all of the risks inherent in the operation of a new business enterprise, and
there can be no assurance that the Company will be able to successfully
address these risks.
Significant Customer Concentration
To date, approximately four hundred customers accounted for substantially all
of the Company's sales, and two customers, each of which individually accounted
for over 10% of the Company's 1997 sales, accounted for over 27% of the
Company's 1997 sales. During the first three quarters of 1998, four customers
accounted for 44.7% of the Company's sales and as of September 30, 1998, seven
customers accounted for 46.1% of the Company's backlog scheduled for shipment in
the twelve months subsequent to September 30, 1998. The Company anticipates that
it will continue to sell its products and services to a changing but still
relatively small group of customers. Several of the Company's subsidiaries are
dependent on one or a few customers. Some companies implementing new networks
are at early stages of development and may require additional capital to fully
implement their planned networks. The Company's ability to achieve sales in the
future will depend in significant part upon its ability to obtain and fulfill
orders from, maintain relationships with and provide support to existing and new
customers, to manufacture systems in volume on a timely and cost-effective basis
and to meet stringent customer performance and other requirements and shipment
delivery dates, as well as the condition, working capital availability and
success of its customers. As a result, any cancellation, reduction or delay in
orders by or shipments to any customer, as a result of manufacturing or supply
difficulties or otherwise, or the inability of any customer to finance its
purchases of the Company's products or services, as has been the case with
certain customers historically, may materially adversely affect the Company's
business, financial condition and results of operations. In addition, financial
difficulties of any existing or potential customers may limit the overall demand
for the Company's products and services (for example, certain potential
customers in the telecommunications industry have been reported to have
undergone financial difficulties and may therefore limit their future orders).
In addition, acquisitions in the communications industry are common, which
further concentrates the customer base and may cause orders to be delayed or
cancelled. There can be no assurance that the Company's sales will increase in
the future or that the Company will be able to support or attract customers. See
"Results of Operations".
Significant Fluctuations in Results of Operations
The Company has experienced and will in the future continue to experience
significant fluctuations in sales, gross margins and operating results. The
procurement process for most of the Company's current and potential
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customers is complex and lengthy, and the timing and amount of sales is
difficult to predict reliably. There can be no assurance that profitability or
significant revenue growth on a quarterly or annual basis will occur in the
future. The sale and implementation of the Company's products and services
generally involves a significant commitment of the Company's senior management,
sales force and other resources. The sales cycle for the Company's products and
services typically involves a significant technical evaluation and commitment of
cash and other resources, with the attendant delays frequently associated with,
among other things: (i) existing and potential customers' seasonal purchasing
and budgetary cycles; (ii) educating customers as to the potential applications
of, and product-life cost savings associated with, using the Company's products
and services; (iii) complying with customers' internal procedures for approving
large expenditures and evaluating and accepting new technologies that affect key
operations; (iv) complying with governmental or other regulatory standards; (v)
difficulties associated with each customer's ability to secure financing; (vi)
negotiating purchase and service terms for each sale; and (vii) price decreases
required to secure purchase orders. Orders for the Company's products have
typically been strongest towards the end of the calendar year, with a reduction
in shipments occurring during the summer months, as evidenced in the third
quarter of fiscal years 1997 and 1998, due primarily to the inactivity of the
European market, the Company's major current customer base, at such time. To the
extent such seasonality continues, the Company's results of operations will
fluctuate from quarter to quarter.
In addition, a single customer's order scheduled for shipment in a quarter
can represent a significant portion of the Company's potential sales for such
quarter. There can be no assurance that the Company will be able to obtain such
large orders from single customers in the future. The Company has at times
failed to receive expected orders, and delivery schedules have been deferred as
a result of changes in customer requirements and commitments, among other
factors. As a result, the Company's operating results for a particular period
have in the past been and will in the future be materially adversely affected by
a delay, rescheduling or cancellation of even one purchase order. Much of the
anticipated growth in telecommunications infrastructure, if any, is expected to
result from the entrance of new service providers, many of which do not have the
financial resources of existing service providers. To the extent these new
service providers are unable to adequately finance their operations, they may
cancel orders. Moreover, purchase orders are often received and accepted
substantially in advance of shipment, and the failure to reduce actual costs to
the extent anticipated or an increase in anticipated costs before shipment could
materially adversely affect the gross margins for such orders, and as a result,
the Company's results of operations. Moreover, most of the Company's backlog
scheduled for shipment in the twelve months subsequent to September 30, 1998 can
be canceled since orders are often made substantially in advance of shipment,
and the Company's contracts typically provide that orders may be canceled with
limited or no penalties. As a result, backlog is not necessarily indicative of
future sales for any particular period. In addition, the Company's customers
have increasingly been requiring shipment of products at the time of ordering
rather than submitting purchase orders far in advance of expected dates of
product shipment. Furthermore, most of the Company's sales in recent quarters
have been realized near the end of each quarter. Accordingly, a delay in a
shipment near the end of a particular quarter, as the Company has been
experiencing recently, due to, for example, an unanticipated shipment
rescheduling, pricing concessions to customers, a cancellation or deferral by a
customer, competitive or economic factors, unexpected manufacturing or other
difficulties, delays in deliveries of components, subassemblies or services by
suppliers, or the failure to receive an anticipated order, may cause sales in a
particular quarter to fall significantly below the Company's expectations and
may materially adversely affect the Company's operating results for such
quarter.
In connection with its efforts to ramp-up production of products and
services, the Company expects to continue to make substantial capital
investments in equipment and inventory, recruit and train additional personnel
and possibly invest in additional manufacturing facilities. The Company
anticipates that these expenditures will be made in advance of, and in
anticipation of, increased sales and, therefore, that its gross margins will
continue to be adversely affected from time-to-time due to short-term
inefficiencies associated with the addition of equipment and inventory,
personnel or facilities, and that each cost category may increase as a
percentage of revenues from time-to-time on a periodic basis. In addition, as
the Company's customers increasingly require shipment of products at the time of
ordering, the Company must forecast demand for each quarter and build up
inventory accordingly. Such increases in inventory could materially adversely
affect the Company's operations, if such inventory were not utilized or becomes
obsolete. In the first three quarters of 1998, the Company wrote down $18.3
million of inventory.
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A large portion of the Company's expenses are fixed and difficult to reduce
should revenues not meet the Company's expectations, thus magnifying the
material adverse effect of any revenue shortfall. Furthermore, announcements by
the Company or its competitors of new products, services and technologies could
cause customers to defer or cancel purchases of the Company's systems and
services, which would materially adversely affect the Company's business,
financial condition and results of operations. Additional factors that have
caused and will continue to cause the Company's sales, gross margins and results
of operations to vary significantly from period to period include new product
introductions and enhancements, including related costs; weakness in Asia
overcapacity for microwave industry; the Company's ability to manufacture and
produce sufficient volumes of systems and meet customer requirements;
manufacturing capacity, efficiencies and costs; customer confusion due to the
impact of actions of competitors; mix of sales through direct efforts or through
distributors or other third parties; mix of systems and related software tools
sold and services provided; operating and new product development expenses;
product discounts; accounts receivable collection, in particular those acquired
in recent acquisitions, especially outside of the United States; changes in
pricing by the Company, its customers or suppliers; inventory write-offs, as the
Company has been experiencing in several recent quarters and which the Company
may experience again in the future; inventory obsolescence; natural disasters;
market acceptance by the Company's customers and the timing of availability of
new products and services by the Company or its competitors; acquisitions,
including costs and expenses; usage of different distribution and sales
channels; fluctuations in foreign currency exchange rates; delays or changes in
regulatory approval of its systems and services; warranty and customer support
expenses; severance costs; consolidation and other restructuring costs; the
pending stockholder class action litigation suits; the Company's potential need
for additional financing; customization of systems; and general economic and
political conditions. In addition, the Company's results of operations have been
and will continue to be influenced significantly by competitive factors,
including the pricing and availability of, and demand for, competitive products
and services. All of the above factors are difficult for the Company to
forecast, and these or other factors could continue to materially adversely
affect the Company's business, financial condition and results of operations. As
a result, the Company believes that period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indications of future
performance. Based on current market conditions, the Company presently expects
that net sales for the three month period ending December 31, 1998 will be
significantly lower than net sales in the comparable period in 1997. Due to lack
of order visibility and the current trend of order delays, deferrals and
cancellations, the Company can give no assurance that it will be able to achieve
o maintain its current sales levels. The Company believes it will likely report
an operating loss for the quarter ending December 31, 1998 and could report a
net loss for such quarter. Should current market conditions continue to
deteriorate, the Company may incur operating and net losses in subsequent
periods. Additionally, management continues to evaluate market conditions in
order to assess the need to take further action to more closely align its cost
structure with anticipated revenues. Any subsequent actions by the Company
could result in restructuring charges, inventory write-downs and provisions for
the impairment of long-lived assets, which could materially adversely affect the
Company's business, financial condition and results of operations. Due to all of
the foregoing factors, it is likely that the Company's operating results could
continue to be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock may continue to be
materially adversely affected.
Acquisitions
Since April 1996, the Company has acquired nine complementary companies and
businesses. Integration of these companies into the Company's business is
currently ongoing, and no assurance may be made that the Company will be able to
successfully complete this process. Risks commonly encountered in such
transactions include the difficulty of assimilating the operations and personnel
of the combined companies, the potential disruption of the Company's ongoing
business, the inability to retain key technical and managerial personnel, the
inability of management to maximize the financial and strategic position of the
Company through the integration of acquired businesses, additional expenses
associated with amortization of acquired intangible assets, dilution of existing
stockholders, the maintenance of uniform standards, controls, procedures, and
policies, the impairment of relationships with employees and customers as a
result of any integration of new personnel, risks of entering markets in which
the Company has no or limited direct prior experience, and operating companies
in different geographical locations with different cultures. All of the
Company's acquisitions to date (the "Acquisitions"), except the acquisitions of
CRC, RT Masts and Telematics have been accounted for under the purchase method
of
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accounting, and as a result, a significant amount of goodwill is being
amortized as set forth in the Company's consolidated financial statements. This
amortization expense may have a significant effect on the Company's financial
results. Additionally, although the Company believes the accounting for its
acquisitions has been appropriate, in general the Securities and Exchange
Commission has recently been reviewing more closely the accounting for
acquisitions and the resulting charges for "in-process" research and development
costs. Any resulting restatement of the "in-process" research and development
charge the Company recognized in conjunction with any of its acquisitions ,
including the Cylink Wireless Group acquisition, could result in a lesser charge
to income for "in-process" technology and the creation of a higher value of
acquired technology, an intangible asset. The creation of additional intangible
assets would have the impact of increasing amortization expense, which could
have a material adverse affect on the Company's results of operations, business
and financial condition. There can be no assurance that the Company will be
successful in overcoming these risks or any other problems encountered in
connection with such acquisitions, or that such transactions will not materially
adversely affect the Company's business, financial condition, or results of
operations.
As part of its overall strategy, the Company plans to continue to acquire or
invest in complementary companies, products or technologies and to enter into
joint ventures and strategic alliances with other companies. In July 1998, the
Company acquired Cemetel S.r.L., an Italian limited liability company engaged in
the supply of engineering services to wireless telecommunication providers in
Italy, for an aggregate consideration of approximately $2.9 million. The Company
competes for acquisition and expansion opportunities with many entities that
have substantially greater resources than the Company. There can be no assurance
that the Company will be able to successfully identify suitable acquisition
candidates, pay for acquisitions, complete acquisitions, or expand into new
markets. Once integrated, acquired businesses may not achieve comparable levels
of revenues, profitability, or productivity as the existing business of the
Company, or the stand alone acquired company, or otherwise perform as expected.
In addition, as commonly occurs with mergers of technology companies, during the
pre-merger and integration phases, aggressive competitors may undertake formal
initiatives to attract customers and to recruit key employees through various
incentives. If the Company proceeds with one or more significant acquisitions in
which the consideration consists of cash, as was the case with Cylink Wireless
Group, a substantial portion of the Company's available cash could be used to
consummate the acquisitions. Many business acquisitions must be accounted for as
a purchase for financial reporting purposes. Most of the businesses that might
become attractive acquisition candidates for the Company are likely to have
significant goodwill and intangible assets, and acquisition of these businesses,
if accounted for as a purchase, as was the case with Cylink Wireless Group,
would typically result in substantial amortization of goodwill charges to the
Company. The occurrence of any of these events could have a material adverse
effect on the Company's workforce, business, financial condition and results of
operations.
Dependence on Contract Manufacturers; Reliance on Sole or Limited Sources of
Supply
The Company's internal manufacturing capacity is very limited. The Company
utilizes contract manufacturers such as Remec, Inc., Sanmina Corporation, SPC
Electronics Corp., GSS Array Technology, Celeritek, Inc. and Senior Systems
Technology, Inc. to produce its systems, components and subassemblies and
expects to rely increasingly on these and other manufacturers in the future. The
Company also relies on outside vendors to manufacture certain other components
and subassemblies. There can be no assurance that the Company's internal
manufacturing capacity and that of its contract manufacturers will be sufficient
to fulfill the Company's orders. Failure to manufacture, assemble and ship
systems and meet customer demands on a timely and cost-effective basis could
damage relationships with customers and have a material adverse effect on the
Company's business, financial condition and operating results. Certain necessary
components, subassemblies and services necessary for the manufacture of the
Company's systems are obtained from a sole supplier or a limited group of
suppliers. In particular, Eltel Engineering S.r.L. and Associates, Milliwave,
Scientific Atlanta and Xilinx, Inc. each are sole source or limited source
suppliers for critical components used in the Company's radio systems.
The Company's reliance on contract manufacturers and on sole suppliers or a
limited group of suppliers and the Company's increasing reliance on contract
manufacturers and suppliers involves several risks, many of which the Company
has been experiencing, including an inability to obtain an adequate supply of
finished products and required components and subassemblies, and reduced control
over the price, timely delivery, reliability and quality
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of finished products, components and subassemblies. The Company does not have
long-term supply agreements with most of its manufacturers or suppliers.
Manufacture of the Company's products and certain of these components and
subassemblies is an extremely complex process, and the Company has from time to
time experienced and may in the future continue to experience problems in the
timely delivery and quality of products and certain components and subassemblies
from vendors. Certain of the Company's suppliers have relatively limited
financial and other resources. Any inability to obtain timely deliveries of
components and subassemblies of acceptable quality or any other circumstance
that would require the Company to seek alternative sources of supply, or to
manufacture its finished products or such components and subassemblies
internally, could delay the Company's ability to ship its systems, which could
damage relationships with current or prospective customers and have a material
adverse effect on the Company's business, financial condition and results of
operations.
No Assurance of Successful Expansion of Operations; Management of Growth
Recently, in response to market declines generally and lower than expected
performance over the last few quarters, the Company has introduced measures to
reduce operating expenses, including reductions in the Company's workforce in
July and September 1998. However, prior to such cost reduction measures, the
Company had significantly expanded the scale of its operations to support then
anticipated continuing increased sales and to address critical infrastructure
and other requirements. This expansion included the leasing of additional space,
the opening of branch offices and subsidiaries in the United Kingdom, Italy,
Germany, Singapore, Mexico and Dubai, the opening of design centers and
manufacturing operations throughout the world, the acquisition of a significant
amount of inventory (the Company's inventory increased from approximately $58.0
million at December 31, 1997 to approximately $83.2 million at September 30,
1998) and accounts receivable, nine acquisitions, significant investments in
research and development to support product development and services, including
the recently introduced products and the development of point-to-multipoint
systems, and the hiring of additional personnel in all functional areas,
including in sales and marketing, manufacturing and operations and finance.
Such expansion resulted in significantly higher operating expenses for the
Company than in prior years, most of which are significant fixed costs which the
Company must maintain despite cost-cutting initiatives. In addition, in order to
prepare for the future, the Company is required to continue to invest resources
in its acquired and new businesses. Currently, the Company is devoting
significant resources to the development of new products and technologies and is
conducting evaluations of these products and will continue to invest significant
additional resources in plant and equipment, inventory and other items, to begin
production of these products and to provide the marketing and administration, if
any, required to service and support these new products. Accordingly, there can
be no assurance that gross profit margin and inventory levels will not continue
to be materially adversely impacted in the future by the Company's recent and
future performance, as well as start-up costs associated with initial production
and installation of new products. These start-up costs include, but are not
limited to, additional manufacturing overhead, additional allowance for doubtful
accounts, inventory and warranty reserve requirements and the creation of
service and support organizations. In addition, the increases in inventory on
hand for new product development and customer service requirements has
significantly increased the risk and occurrence of inventory write-offs. As a
result, the Company anticipates that it will continue to incur significant
operating expenses. If the Company's sales do not correspondingly increase, the
Company's results of operations will continue to be materially adversely
affected.
Expansion of the Company's operations and its acquisitions have caused and
are continuing to impose a significant strain on the Company's management,
financial, manufacturing and other resources and have disrupted the Company's
normal business operations. The Company's ability to manage the recent and any
possible future growth, should it occur, will depend upon a significant
expansion of its manufacturing, accounting and other internal management systems
and the implementation and subsequent improvement of a variety of systems,
procedures and controls, including improvements relating to inventory control.
For a number of reasons, the Company has not been able to fully consolidate and
integrate the operations of certain acquired businesses. This inability may
continue to cause inefficiencies, additional operational complexities and
expenses and greater risks of billing delays, inventory write-offs and financial
reporting difficulties. The Company must establish and improve a variety of
systems, procedures and controls to more efficiently coordinate its activities
in its companies and their facilities in Rome and Milan, Italy, France, Poland,
the United Kingdom, Mexico, Dubai, New Jersey, Florida, Virginia, Washington and
elsewhere. There can be no assurance that significant problems in these areas
will not re-occur. Any failure to expand these areas and implement and improve
such systems, procedures and controls,
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including improvements relating to inventory control, in an efficient manner at
a pace consistent with the Company's business could have a material adverse
effect on the Company's business, financial condition and results of operations.
In particular, the Company must successfully manage the transition to higher
internal and external volume manufacturing, including the establishment of
adequate facilities, the control of overhead expenses and inventories, the
development, introduction, marketing and sales of new products, the management
and training of its employee base, the integration and coordination of a
geographically and ethnically diverse group of employees and the monitoring of
its third party manufacturers and suppliers. Although the Company has
substantially increased the number of its manufacturing personnel and
significantly expanded its internal and external manufacturing capacity, there
can be no assurance that the Company will not experience manufacturing or other
delays or problems that could materially adversely affect the Company's
business, financial condition or results of operations.
In this regard, any significant sales growth, should it occur, will be
dependent in significant part upon the Company's expansion of its marketing,
sales, manufacturing and customer support capabilities. This expansion will
continue to require significant expenditures to build the necessary
infrastructure. There can be no assurance that the Company's attempts to expand
its marketing, sales, manufacturing and customer support efforts will be
successful or will result in additional sales or profitability in any future
period. As a result of the expansion of its operations and the significant
increase in its operating expenses, as well as the difficulty in forecasting
revenue levels, the Company will continue to experience significant fluctuations
in its revenues, costs, and gross margins, and therefore its results of
operations. See "Results of Operations."
Declining Average Selling Prices
The Company believes that average selling prices and gross margins for its
systems and services will continue to decline in the long term as such systems
mature, as volume price discounts in existing and future contracts take effect
and as competition intensifies, among other factors. To offset declining average
selling prices, the Company believes that it must successfully introduce and
sell new systems and additional features on a timely basis, develop new products
that incorporate advanced software and other features that can be sold at higher
average selling prices and reduce the costs of its systems through contract
manufacturing, design improvements and component cost reduction, among other
actions. To the extent that new products and additional features are not
developed in a timely manner, do not achieve customer acceptance or do not
generate higher average selling prices, and the Company is unable to offset
declining average selling prices, the Company's gross margins will decline, and
such decline will have a material adverse effect on the Company's business,
financial condition and results of operations. See "Results of Operations."
Trade Account Receivables
The Company is subject to credit risk in the form of trade account
receivables. The Company may in certain circumstances be unable to enforce a
policy of receiving payment within a limited number of days of issuing bills,
especially in the case of customers that are in the early phases of business
development. In addition, many of the Company's foreign customers are granted
longer payment terms than those typically existing in the United States. The
Company has experienced difficulties in the past in receiving payment in
accordance with the Company's policies, particularly from customers awaiting
financing to fund their expansion and from customers outside of the United
States and the days sales outstanding of receivables have increased recently.
There can be no assurance that such difficulties will not continue in the
future, which could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company typically does not
require collateral or other security to support customer receivables. The
Company is currently party to a contract pursuant to which it is permitted to
sell up to $25 million of its receivables. The Company may from time to time in
the future continue to sell its receivables, as part of an overall customer
financing program. There can be no assurance that the Company will be able to
locate parties to purchase such receivables on acceptable terms, or at all. See
"Results of Operations."
No Assurance of Product Quality, Performance and Reliability
The Company has limited experience in producing and manufacturing its systems
and contracting for such manufacture. The Company's customers require very
demanding specifications for quality, performance and reliability. There can be
no assurance that problems will not occur in the future with respect to the
quality,
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performance and reliability of the Company's systems or related software tools.
If such problems occur, the Company could experience increased costs, delays in
or cancellations or reschedulings of orders or shipments, delays in collecting
accounts receivable and product returns and discounts, any of which would have a
material adverse effect on the Company's business, financial condition or
results of operations. In addition, in order to maintain its ISO 9001
registration, the Company periodically must undergo a recertification
assessment. Failure to maintain such registration could materially adversely
affect the Company's business, financial condition and results of operations.
The Company completed ISO 9001 registration for its United Kingdom sales and
customer support facility, its Geritel facility in Italy in 1996, and its
Technosystem facility in Italy in 1997 and other facilities will also be
attempting ISO 9001 registration. There can be no assurance that such
registration will be achieved.
Uncertainty of Market Acceptance
The future operating results of the Company depend to a significant extent
upon the continued growth and increased availability and acceptance of
microcellular, PCN/PCS and wireless local loop access telecommunications
services in the United States and internationally. There can be no assurance
that the volume and variety of wireless telecommunications services or the
markets for and acceptance of such services will continue to grow, or that such
services will create a demand for the Company's systems. Because these markets
are relatively new, it is difficult to predict which segments of these markets
will develop and at what rate these markets will grow, if at all. If the short-
haul millimeter wave or spread spectrum microwave wireless radio market and
related services for the Company's systems fails to grow, or grows more slowly
than anticipated, the Company's business, financial condition and results of
operations would be materially adversely affected. In addition, the Company has
invested a significant amount of time and resources in the development of point-
to-multipoint radio systems. Should the point-to-multipoint radio market fail to
develop, or should the Company's products fail to gain market acceptance, the
Company's business, financial condition and results of operations could be
materially adversely affected. Certain sectors of the communications market will
require the development and deployment of an extensive and expensive
communications infrastructure. In particular, the establishment of PCN/PCS
networks will require very large capital expenditures. There can be no assurance
that communications providers have the ability to or will make the necessary
investment in such infrastructure or that the creation of this infrastructure
will occur in a timely manner. Moreover, one potential application of the
Company's technology, use of the Company's systems in conjunction with the
provision by wireless telecommunications service providers of alternative
wireless access in competition with the existing wireline local exchange
providers, is dependent on the pricing of wireless telecommunications services
at rates competitive with those charged by wireline telephone companies. Rates
for wireless access are currently substantially higher than those charged by
wireline companies, and there can be no assurance that rates for wireless access
will generally be competitive with rates charged by wireline companies. If
wireless access rates are not competitive, consumer demand for wireless access
will be materially adversely affected. If the Company allocates its resources to
any market segment that does not grow, it may be unable to reallocate its
resources to other market segments in a timely manner, which may curtail or
eliminate its ability to enter such market segments.
Certain of the Company's current and prospective customers are currently
delivering products and technologies which utilize competing transmission media
such as fiber optic and copper cable, particularly in the local loop access
market. To successfully compete with existing products and technologies, the
Company must, among many actions, offer systems with superior price/performance
characteristics and extensive customer service and support, supply such systems
on a timely and cost-effective basis in sufficient volume to satisfy such
prospective customers' requirements and otherwise overcome any reluctance on the
part of such customers to transition to new technologies. Any delay in the
adoption of the Company's systems may result in prospective customers utilizing
alternative technologies in their next generation of systems and networks, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that prospective
customers will design their systems or networks to include the Company's
systems, that existing customers will continue to include the Company's systems
in their products, systems or networks in the future, or that the Company's
technology will to any significant extent replace existing technologies and
achieve widespread acceptance in the wireless telecommunications market. Failure
to achieve or sustain commercial acceptance of the Company's currently available
radio systems or to develop other commercially acceptable radio systems would
materially adversely affect the Company's business, financial condition and
results of operations. In addition, there can be no assurance that industry
technical standards will remain the same or, if emerging standards
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become established, that the Company will be able to conform to these new
standards in a timely and cost-effective manner.
Intensely Competitive Industry
The wireless communications market is intensely competitive. The Company's
wireless-based radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media, including copper
and fiber optic cable. The Company has experienced increasingly intense
competition worldwide from a number of leading telecommunications companies that
offer a variety of competitive products and services and broader
telecommunications product lines, including Adtran, Inc., Alcatel Network
Systems, California Microwave, Inc., Digital Microwave Corporation (which has
recently acquired other competitors, including Innova International Corp. and
MAS Technology, Ltd.), Ericsson Limited ("Ericsson"), Harris Corporation-Farinon
Division, Larus Corporation, Nokia Telecommunications ("Nokia"), Philips T.R.T.,
Utilicom and Western Multiplex Corporation, many of which have substantially
greater installed bases, financial resources and production, marketing,
manufacturing, engineering and other capabilities than the Company. The Cylink
Wireless Group which the Company acquired in early 1998, competes with a large
number of companies in the wireless communications markets, including U.S. local
exchange carriers and foreign telephone companies. The most significant
competition for such group's products in the wireless market is from telephone
companies that offer leased line data services. The Company faces actual and
potential competition not only from these established companies, but also from
start-up companies that are developing and marketing new commercial products and
services. The Company may also face competition in the future from new market
entrants offering competing technologies. In addition, the Company's current and
prospective customers and partners, certain of which have access to the
Company's technology or under some circumstances are granted the right to use
the technology for purposes of manufacturing, have developed, are currently
developing or could develop the capability to manufacture products competitive
with those that have been or may be developed or manufactured by the Company. In
addition, Nokia and Ericsson have recently developed new competitive radio
systems. The Company's results of operations will depend in part upon the extent
to which these customers elect to purchase from outside sources rather than
develop and manufacture their own radio systems. There can be no assurance that
such customers will rely on or expand their reliance on the Company as an
external source of supply for their radio systems. The principal elements of
competition in the Company's market and the basis upon which customers may
select the Company's systems include price, performance, software functionality,
ability to meet delivery requirements and customer service and support.
Recently, certain of the Company's competitors have announced the introduction
of competitive products, including related software tools and services, and the
acquisition of other competitors and competitive technologies. The Company
expects its competitors to continue to improve the performance and lower the
price of their current products and services and to introduce new products and
services or new technologies that provide added functionality and other
features. New product and service offerings and enhancements by the Company's
competitors could cause a significant decline in sales or loss of market
acceptance of the Company's systems, or make the Company's systems, services or
technologies obsolete or noncompetitive. The Company is experiencing significant
price competition especially from large system integrators, and expects such
competition to intensify, which could continue to materially adversely affect
its gross margins and its business, financial condition and results of
operations. The Company believes that to be competitive, it will continue to be
required to expend significant resources on, among other items, new product
development and enhancements. In marketing its systems and services, the Company
will face competition from vendors employing other technologies and services
that may extend the capabilities of their competitive products beyond their
current limits, increase their productivity or add other features. There can be
no assurance that the Company will be able to compete successfully in the
future.
Requirement for Response to Rapid Technological Change and Requirement for
Frequent New Product Introductions
The communications market is subject to rapid technological change, frequent
new product introductions and enhancements, product obsolescence, changes in
end-user requirements and evolving industry standards. The Company's ability to
be competitive in this market will depend in significant part upon its ability
to successfully develop, introduce and sell new systems and enhancements and
related software tools, including its point-to-multipoint systems currently
under development, on a timely and cost-effective basis that respond to changing
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customer requirements. Recently, the Company has been developing point-to-
multipoint radio systems. Any success of the Company in developing new and
enhanced systems, including its point-to-multipoint systems currently under
development, and related software tools will depend upon a variety of factors,
including new product selection, integration of the various elements of its
complex technology, timely and efficient completion of system design, timely and
efficient implementation of manufacturing and assembly processes and its cost
reduction program, development and completion of related software tools, system
performance, quality and reliability of its systems and development and
introduction of competitive systems by competitors. The Company has experienced
and is continuing to experience delays from time to time in completing
development and introduction of new systems and related software tools,
including products acquired in the Acquisitions. Moreover, there can be no
assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new systems or enhancements or related software
tools. There can be no assurance that errors will not be found in the Company's
systems after commencement of commercial shipments, which could result in the
loss of or delay in market acceptance, as well as significant expenses
associated with re-work of previously delivered equipment. The inability of the
Company to introduce in a timely manner new systems or enhancements or related
software tools that contribute to sales could have a material adverse effect on
the Company's business, financial condition and results of operations.
International Operations; Risks of Doing Business in Developing Countries
Most of the Company's sales to date have been made to customers located
outside of the United States. In addition, to date, the Company has acquired
three Italy-based companies and two United Kingdom-based companies and four U.S.
companies with substantial international operations. These companies currently
sell their products and services primarily to customers in Europe, the Middle
East and Africa. The Company anticipates that international sales will continue
to account for a majority of its sales for the foreseeable future. Historically,
the Company's international sales have been denominated in British pounds
sterling or United States dollars. With recent acquisitions of foreign
companies, certain of the Company's international sales may be denominated in
other foreign currencies. A decrease in the value of foreign currencies relative
to the United States dollar could result in losses from transactions denominated
in foreign currencies. With respect to the Company's international sales that
are United States dollar-denominated, such a decrease could make the Company's
systems less price-competitive and could have a material adverse effect upon the
Company's business, financial condition and results of operations. The Company
has in the past mitigated its currency exposure to the British pound sterling
through hedging measures. However, any future hedging measures may be limited in
their effectiveness with respect to the British pound sterling and other foreign
currencies. Additional risks inherent in the Company's international business
activities include changes in regulatory requirements, costs and risks of
localizing systems in foreign countries, delays in receiving components and
materials, availability of suitable export financing, timing and availability of
export licenses, tariffs and other trade barriers, political and economic
instability, difficulties in staffing and managing foreign operations, branches
and subsidiaries, difficulties in managing distributors, potentially adverse tax
consequences, foreign currency exchange fluctuations, the burden of complying
with a wide variety of complex foreign laws and treaties and the difficulty in
accounts receivable collections. Many of the Company's customer purchase and
other agreements are governed by foreign laws, which may differ significantly
from U.S. laws. Therefore, the Company may be limited in its ability to enforce
its rights under such agreements and to collect damages, if awarded. There can
be no assurance that any of these factors will not have a material adverse
effect on the Company's business, financial condition and results of operations.
International telephone companies are in many cases owned or strictly
regulated by local regulatory authorities. Access to such markets is often
difficult due to the established relationships between a government owned or
controlled telephone company and its traditional indigenous suppliers of
telecommunications equipment. The successful expansion of the Company's
international operations in certain markets will depend on its ability to
locate, form and maintain strong relationships with established companies
providing communication services and equipment in targeted regions. The failure
to establish regional or local relationships or to successfully market or sell
its products in international markets could significantly limit the Company's
ability to expand its operations and would materially adversely affect the
Company's business, financial condition and results of operations. The Company's
inability to identify suitable parties for such relationships, or even if such
parties are identified, to form and maintain strong relationships with such
parties could prevent the Company from generating sales of its products and
services in targeted markets or industries. Moreover, even if such relationships
are established, there
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can be no assurance that the Company will be able to increase sales of its
products and services through such relationships.
Some of the Company's potential markets consist of developing countries that
may deploy wireless communications networks as an alternative to the
construction of a limited wired infrastructure. These countries may decline to
construct wireless telecommunications systems or construction of such systems
may be delayed for a variety of reasons, in which event any demand for the
Company's systems in those countries will be similarly limited or delayed. In
doing business in developing markets, the Company may also face economic,
political and foreign currency fluctuations that are more volatile than those
commonly experienced in the United States and other areas.
Extensive Government Regulation
Radio communications are subject to extensive regulation by the United States
and foreign laws and international treaties. The Company's systems must conform
to a variety of domestic and international requirements established to, among
other things, avoid interference among users of radio frequencies and to permit
interconnection of equipment. Each country has a different regulatory process.
Historically, in many developed countries, the unavailability of frequency
spectrum has inhibited the growth of wireless telecommunications networks. In
order for the Company to operate in a jurisdiction, it must obtain regulatory
approval for its systems and comply with different regulations in each
jurisdiction. Regulatory bodies worldwide are continuing the process of adopting
new standards for wireless communications products. The delays inherent in this
governmental approval process may cause the cancellation, postponement or
rescheduling of the installation of communications systems by the Company and
its customers, which in turn may have a material adverse effect on the sale of
systems by the Company to such customers. The failure to comply with current or
future regulations or changes in the interpretation of existing regulations
could result in the suspension or cessation of operations. Such regulations or
such changes in interpretation could require the Company to modify its products
and services and incur substantial costs to comply with such time-consuming
regulations and changes. In addition, the Company is also affected to the extent
that domestic and international authorities regulate the allocation and auction
of the radio frequency spectrum. Equipment to support new services can be
marketed only if permitted by suitable frequency allocations, auctions and
regulations, and the process of establishing new regulations is complex and
lengthy. To the extent PCS operators and others are delayed in deploying these
systems, the Company could experience delays in orders. Failure by the
regulatory authorities to allocate suitable frequency spectrum could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, delays in the radio frequency spectrum
auction process in the United States could delay the Company's ability to
develop and market equipment to support new services. These delays could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The regulatory environment in which the Company operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly impact the Company's
operations by restricting development efforts by the Company and its customers,
making current systems obsolete or increasing the opportunity for additional
competition. Any such regulatory changes, including changes in the allocation of
available spectrum, could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company might deem
it necessary or advisable to modify its systems and services to operate in
compliance with such regulations. Such modifications could be extremely
expensive and time-consuming.
Future Capital Requirements
The Company's future capital requirements will depend upon many factors,
including the development of new products and related software tools, potential
acquisitions, requirements to maintain adequate manufacturing facilities and
contract manufacturing agreements, the progress of the Company's research and
development efforts, expansion of the Company's marketing and sales efforts, and
the status of competitive products. There can be no assurance that additional
financing will be available to the Company on acceptable terms, or at all. As a
result of the issuance of the Notes (as defined below) and the new bank line of
credit, the Company is severely limited in its ability to raise additional
financing. If additional funds are raised by issuing equity securities and as a
result of the significant decline in its stock price, further significant
dilution to the existing stockholders will result. If adequate
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funds are not available, the Company may be required to restructure or refinance
the debt or delay, scale back or eliminate its research and development,
acquisition or manufacturing programs or obtain funds through arrangements with
partners or others that may require the Company to relinquish rights to certain
of its technologies or potential products or other assets. Accordingly, the
inability to obtain such financing could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Pending Class Action Litigation
On September 23, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Leonard Vernon and Gayle
M. Wing on behalf of themselves and other stockholders of the Company who
purchased the Company's Common Stock between April 15, 1997 and September 11,
1998. The plaintiffs allege various state securities laws violations by the
Company and certain of its officers and directors. The complaint seeks
unquantified compensatory, punitive and other damages, attorneys' fees and
injunctive and/or equitable relief. On October 16, 1998, a putative class action
complaint was filed in the Superior Court of California, County of Santa Clara,
by Terry Sommer on behalf of herself and other stockholders of the Company who
purchased the Company's Common Stock between April 1, 1998 and September 11,
1998. The plaintiffs allege various state securities laws violations by the
Company and certain of its officers. The complaint seeks unquantified
compensatory and other damages, attorneys' fees and injunctive and/or equitable
relief. On October 20, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Leo Rubin on behalf of
himself and other stockholders of the Company who purchased the Company's Common
Stock between April 15, 1997 and September 11, 1998. On October 26, 1998, a
putative class action complaint was filed in the Superior Court of California,
County of Santa Clara, by Betty B. Hoigaard and Steve Pomex on behalf of
themselves and other stockholders of the Company who purchased the Company's
Common Stock between April 15, 1997 and September 11, 1998. On October 27,
1998, a putative class action complaint was filed in the Superior Court of
California, County of Santa Clara, by Judith Thurman on behalf of herself and
other stockholders of the Company who purchased the Company's Common Stock
between April 15, 1997 and September 11, 1998. These complaints are identical
in all relevant respects to that filed on September 23, 1998 which is described
above, other than the fact that the plaintiffs are different.
These proceedings are at a very early stage and the Company is unable to
speculate as to their ultimate outcomes. However, the Company believes the
claims in the complaints are without merit and intends to defend against them
vigorously. An unfavorable outcome in any or all of them could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. In addition, even if the litigation is resolved in favor
of the Company, the defense of such litigation could entail considerable cost
and the significant diversion of efforts of management, either of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Uncertainty Regarding Protection of Proprietary Rights
The Company relies on a combination of patents, trademarks, trade secrets,
copyrights and a variety of other measures to protect its intellectual property
rights. The Company generally enters into confidentiality and nondisclosure
agreements with its service providers, customers and others, and attempts to
limit access to and distribution of its proprietary rights. The Company also
enters into software license agreements with its customers and others. However,
there can be no assurance that such measures will provide adequate protection
for the Company's trade secrets or other proprietary information, that disputes
with respect to the ownership of its intellectual property rights will not
arise, that the Company's trade secrets or proprietary technology will not
otherwise become known or be independently developed by competitors or that the
Company can otherwise meaningfully protect its intellectual property rights.
There can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. Furthermore, there can be no assurance
that others will not develop similar products or software, duplicate the
Company's products or software or design around the patents owned by the Company
or that third parties will not assert intellectual property infringement claims
against the Company. In addition, there can be no assurance that foreign
intellectual property laws will
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adequately protect the Company's intellectual property rights abroad. The
failure of the Company to protect its proprietary rights could have a material
adverse effect on its business, financial condition and results of operations.
Litigation may be necessary to enforce the Company's patents, copyrights and
other intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. The Company has, through
its acquisition of the Cylink Wireless Group, has been put on notice from a
variety of third parties that the Group's products may be infringing the
intellectual property rights of other parties. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that infringement, invalidity, right to use or
ownership claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future or that such assertions
will not materially adversely affect the Company's business, financial condition
and results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that a license
will be available under reasonable terms or at all. In addition, should the
Company decide to litigate such claims, such litigation could be extremely
expensive and time consuming and could materially adversely affect the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation.
Dependence on Key Personnel
The Company's future operating results depend in significant part upon the
continued contributions of its key technical and senior management personnel,
many of whom would be difficult to replace. The Company's future operating
results also depend in significant part upon its ability to attract and retain
qualified management, manufacturing, quality assurance, engineering, marketing,
sales and support personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting or
retaining such personnel. There may be only a limited number of persons with the
requisite skills to serve in these positions and it may be increasingly
difficult for the Company to hire such personnel over time. The loss of any key
employee, the failure of any key employee to perform in his or her current
position, the Company's inability to attract and retain skilled employees as
needed or the inability of the officers and key employees of the Company to
expand, train and manage the Company's employee base could materially adversely
affect the Company's business, financial condition and results of operations.
The Company has experienced and may continue to experience employee turnover
due to several factors, including an expanding economy within the geographic
area in which the Company maintains its principal business offices, making it
more difficult for the Company to retain its employees. Due to this and other
factors, the Company has experienced and may continue to experience high levels
of employee turnover, which could adversely impact the Company's business,
financial condition and results of operations. The Company is presently
addressing these issues and will pursue solutions designed to retain its
employees and to provide performance incentives.
Year 2000 Compliance
Numerous computer systems and software products are coded to accept only two
digit entries in the date code field. Beginning in the year 2000, these date
code fields will have to distinguish 21st century dates from 20th century dates.
As a result, in less than two years, computer systems and/or software used by
many companies may need to be upgraded to comply with such Year 2000 ("Y2K")
requirements. The Company has embarked on a global program to address its
readiness for the century change. The Y2K readiness program involves the
assessment of products, services, internal systems and critical suppliers and,
if required, development of plans for upgrades to or replacement of products,
business systems, suppliers and services that impact the Company's Y2K readiness
and/or development of contingency plans. In November of 1998, corporate
headquarters initiated a new internal business system that is Year 2000 ready.
The cost of the upgrade was approximately $250,000. Further business system
upgrades will occur in CRC and Technosystem subsidiaries by the end of the
second quarter of 1999. Based on evaluation performed to date, the Company
believes that all "mission critical" internal systems are stable and current, in
terms of Y2K readiness. However, the failure of any internal system to achieve
Year 2000 readiness could result in material disruption to the Company's
operations. Test and assessment of all P-Com products is expected to be
completed by the end of the fourth quarter of 1998 with the exception of
Technosystem
26
<PAGE>
products. All Technosystem products will complete their Year 2000 assessment and
testing by the end of the first quarter of 1999. To date, no P-Com products have
been found non-ready or in need of Year 2000 upgrade. However, the inability of
any of the Company's products to properly manage and manipulate data in the year
2000 could result in increased warranty costs, customer satisfaction issues,
potential lawsuits and other material costs and liabilities. Critical suppliers
will undergo Y2K site evaluations between January 1, until the end of June 1999.
In November of 1998, the Company will request a year 2000 readiness statement
and progress report from critical suppliers. The Company is cognizant of the
risk posed by single source or large volume suppliers that may not be addressing
their Year 2000 readiness. Even where assurances are received from third parties
there remains a risk that failure of systems and products of other companies on
which the Company relies could have a material adverse effect on the Company.
The Company's budget for the Y2K Program is approximately 1% of the 1999 annual
revenue. The foregoing statements are based upon management's best estimates at
the present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
nature and amount of programming required to upgrade or replace each of the
affected programs, the rate and magnitude of related labor and consulting costs
and the success of the Company's external customers and suppliers in addressing
the Year 2000 issue. The Company's evaluation is on-going and it expects that
new and different information will become available to it as that evaluation
continues. Consequently, there is no guarantee that all material elements will
be Year 2000 ready in time.
Volatility of Stock Price
The Company believes that factors such as announcements of developments
related to the Company's business, announcements of technological innovations or
new products or enhancements by the Company or its competitors, developments in
the Asia/Pacific region, sales by competitors, including sales to the Company's
customers, sales of the Company's Common Stock into the public market, including
by members of management, developments in the Company's relationships with its
customers, partners, lenders, distributors and suppliers, shortfalls or changes
in revenues, gross margins, earnings or losses or other financial results that
differ from analysts' expectations (as recently experienced), regulatory
developments, fluctuations in results of operations and general conditions in
the Company's market or the markets served by the Company's customers or the
economy, could continue to cause the price of the Company's Common Stock to
fluctuate substantially. In recent years the stock market in general, and the
market for shares of small capitalization and technology stocks in particular,
have experienced extreme price fluctuations, which have often been unrelated to
the operating performance of affected companies. Many companies in the
telecommunications industry, including the Company, have experienced historic
highs in the market price of their Common Stock followed by extreme drops in the
market price of such Common Stock. There can be no assurance that the market
price of the Company's Common Stock will not continue to decline substantially,
or otherwise continue to experience significant fluctuations in the future,
including fluctuations that are unrelated to the Company's performance. Such
fluctuations could continue to materially adversely affect the market price of
the Company's Common Stock.
Substantial Leverage
In connection with the private placement of convertible promissory notes due
2002 (the "Notes") in November 1997, the Company incurred $100 million of
additional indebtedness. As a result, the Company's total indebtedness including
current liabilities, as of September 30, 1998 was approximately $201.6
million and its stockholders' equity was approximately $92.8 million. The
Company recently borrowed $45.9 million under a new bank line of credit. The
Company's ability to make scheduled payments of the principal of, or interest
on, its indebtedness will depend on its future performance, which is subject to
economic, financial, competitive and other factors beyond its control. There can
be no assurance that the Company will be able to make the payments or
restructure or refinance its debt, if necessary.
27
<PAGE>
Limitations on Dividends
Since its incorporation in 1991, the Company has not declared or paid cash
dividends on its Common Stock, and the Company anticipates that any future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends.
Global Market Risks
Countries in the Asia/Pacific region have recently experienced weaknesses in
their currency, banking and equity markets. These weaknesses could continue to
adversely affect demand for the Company's products, the availability and supply
of product components to the Company and, ultimately, the Company's business,
financial condition and results of operations.
Control by Existing Stockholders; Effects of Certain Anti-Takeover Provisions
Members of the Board of Directors and the executive officers of the Company,
together with members of their families and entities that may be deemed
affiliates of or related to such persons or entities, beneficially own
approximately 6% of the outstanding shares of Common Stock of the Company.
Accordingly, these stockholders are able to influence the election of the
members of the Company's Board of Directors and influence the outcome of
corporate actions requiring stockholder approval, such as mergers and
acquisitions. This level of ownership, together with the Company's stockholder
rights agreement, certificate of incorporation, equity incentive plans, bylaws
and Delaware law, may have a significant effect in delaying, deferring or
preventing a change in control of the Company and may adversely affect the
voting and other rights of other holders of Common Stock. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. In this regard, the Board of Directors has pre-approved the terms of a
Series A Junior Participating Preferred Stock that may be issued pursuant to the
stockholder rights agreement upon the occurrence of certain triggering events.
In general, the stockholder rights agreement provides a mechanism by which the
Board of Directors and stockholders may act to substantially dilute the share
position of any takeover bidder that acquires 15% or more of the Common Stock.
The issuance of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company.
Possible Adverse Effect on Market Price for Common Stock of Shares Eligible
for Future Sale After the Offering
Sales of the Company's Common Stock into the market could materially
adversely affect the market price of the Company's Common Stock. Substantially
all of the shares of Common Stock of the Company are eligible for immediate and
unrestricted sale in the public market at any time.
28
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS. On September 23, 1998, a putative class action
complaint was filed in the Superior Court of California, County of Santa Clara,
by Leonard Vernon and Gayle M. Wing on behalf of themselves and other
stockholders of the Company who purchased the Company's Common Stock between
April 15, 1997 and September 11, 1998. The plaintiffs allege various state
securities laws violations by the Company and certain of its officers and
directors. The complaint seeks unquantified compensatory, punitive and other
damages, attorneys' fees and injunctive and/or equitable relief. On October 16,
1998, a putative class action complaint was filed in the Superior Court of
California, County of Santa Clara, by Terry Sommer on behalf of herself and
other stockholders of the Company who purchased the Company's Common Stock
between April 1, 1998 and September 11, 1998. The plaintiffs allege various
state securities laws violations by the Company and certain of its officers.
The complaint seeks unquantified compensatory and other damages, attorneys' fees
and injunctive and/or equitable relief. On October 20, 1998, a putative class
action complaint was filed in the Superior Court of California, County of Santa
Clara, by Leo Rubin on behalf of himself and other stockholders of the Company
who purchased the Company's Common Stock between April 15, 1997 and September
11, 1998. On October 26, 1998, a putative class action complaint was filed in
the Superior Court of California, County of Santa Clara, by Betty B. Hoigaard
and Steve Pomex on behalf of themselves and other stockholders of the Company
who purchased the Company's Common Stock between April 15, 1997 and September
11, 1998. On October 27, 1998, a putative class action complaint was filed in
the Superior Court of California, County of Santa Clara, by Judith Thurman on
behalf of herself and other stockholders of the Company who purchased the
Company's Common Stock between April 15, 1997 and September 11, 1998. These
complaints are identical in all relevant respects to that filed on September 23,
1998 which is described above, other than the fact that the plaintiffs are
different.
These proceedings are at a very early stage and the Company is unable to
speculate as to their ultimate outcomes. However, the Company believes the
claims in the complaints are without merit and intends to defend against them
vigorously. An unfavorable outcome in any or all of them could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. In addition, even if the litigation is resolved in favor
of the Company, the defense of such litigation could entail considerable cost
and the diversion of efforts of management, either of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
ITEM 2. CHANGES IN SECURITIES. NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NONE.
ITEM 5. OTHER INFORMATION. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
4.6(1) First Amendment to the Rights Agreement, dated as of October
5, 1998, between the Company and BankBoston, N.A.
10.37 First Amendment to Credit Agreement by and among P-Com, Inc.,
as the Borrower, Union Bank of California N.A., as
Administrative Agent, Bank of America National Trust and
Savings Association, as Syndication Agent, and the Lenders
party thereto, dated as of July 31, 1998.
27.1 Financial Data Schedule.
(1) Incorporated by reference to the Company's Registration Statement
on Form 8-K, as filed with the Securities and Exchange Commission on
October 15, 1998.
29
<PAGE>
(b) Reports on Form 8-K.
Report on Form 8-K dated July 16, 1998 regarding the Company's press
release announcing its earnings for the quarter ended June 30, 1998 as
filed with the Securities and Exchange Commission on July 17, 1998.
Amendment No. 3 to Report on Form 8-K dated April 9, 1998 regarding the
purchase of the assets of the Wireless Communications Group of Cylink
Corporation, as filed with the Securities and Exchange Commission on
September 11, 1998.
Report on Form 8-K dated September 11, 1998 regarding the Company's
press release announcing a reduction in workforce and a restructuring
charge, as filed with the Securities and Exchange Commission on
September 11, 1998.
Report on Form 8-K dated September 24, 1998 regarding the Company's
press release announcing that a complaint alleging violations of
California state securities laws was filed against the Company on
September 23, 1998, as filed with the Securities and Exchange
Commission on September 25, 1998.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
P-COM, INC.
(Registrant)
Date: November 13, 1998
By: /s/ George P. Roberts
-----------------------------------
George P. Roberts
Chairman of the Board of Directors
and Chief Executive Officer
Date: November 13, 1998
By: /s/ Michael J. Sophie
------------------------------------
Michael J. Sophie
Chief Financial Officer and Vice President
Finance and Administration
31
<PAGE>
EXHIBIT INDEX
Exhibit No.
-----------
<TABLE>
<CAPTION>
<S> <C>
4.6(1) First Amendment to the Rights Agreement, dated as of October 5, 1998,
between the Company and BankBoston, N.A.
10.37 First Amendment to Credit Agreement by and among P-Com, Inc., as the
Borrower, Union Bank of California N.A., as Administrative Agent, Bank
of America National Trust and Savings Association, as Syndication
Agent, and the Lenders party thereto, dated as of July 31, 1998.
27.1 Financial Data Schedule.
(1) Incorporated by reference to the Company's Registration Statement on Form
8-K, as filed with the Securities and Exchange Commission on October 15,
1998.
</TABLE>
32
<PAGE>
EXHIBIT 10.37
FIRST AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
This First Amendment to Credit Agreement (this "Agreement") is made and
entered into as of July 31, 1998, by and among P-Com, Inc., a Delaware
corporation ("Borrower"), the financial institutions named on the signature
pages hereof (each, a "Lender" and collectively the "Lenders"), Union Bank of
California, N.A., as administrative agent for the Lenders ("Agent"), and Bank of
America National Trust and Savings Association, as syndication agent
("Syndication Agent").
RECITALS
--------
A. Borrower, Agent, Syndication Agent and Lenders have entered into that
certain Credit Agreement dated as of May 15, 1998 (the "Credit Agreement"). The
Credit Agreement and all other related and supporting documents are referred to
in this Agreement as the "Loan Documents."
AGREEMENT
---------
Now, therefore, the foregoing recitals are hereby acknowledged to be true and
correct and are incorporated herein by this reference, and the parties now agree
as follows:
1. Definitions. Unless otherwise specifically defined herein, the defined
-----------
terms used in this Agreement shall have the same meaning as those which are
ascribed to them in the Credit Agreement.
2. Amendments to Credit Agreement. The Credit Agreement is hereby amended as
------------------------------
follows:
(a) The following defined term is added to Section 1.1 in its proper
alphabetical order:
"'Qualified Financial Institution': Any Lender, or any commercial bank
-------------------------------
organized under the laws of the United States of America or of any State
thereof and having a combined capital and surplus of at least
$100,000,000."
(b) The defined term "Receivables Facility" in Section 1.1 is deleted and
replaced with the defined term "Receivables Facilities", which shall read
as follows:
"'Receivables Facilities': Any agreement(s), approved in advance by all
-----------------------
Lenders, by and between Borrower and no more than two (2) Qualified
Financial Institutions providing for the purchase by such financial
institution(s) of Borrower's accounts receivable, as the
1
<PAGE>
same may from time to time be modified, supplemented, amended, restated,
extended, renewed, or replaced in a manner no less favorable to Lenders or
with the prior written consent of all Lenders."
(c) Clause (iii) of Section 6.2(f) is amended to read as follows:
"(iii) Liens in favor of no more than two (2) Qualified Financial
Institutions, upon specific accounts receivable of Borrower purchased under
the Receivables Facilities, provided that the obligations secured by such
--------
Liens shall not exceed $25,000,000 in the aggregate at any one time
outstanding; and provided, further, that Borrower shall not permit any of
-------- -------
the Receivables Facilities to be modified, supplemented, amended, restated,
extended, renewed or replaced in a manner that is less favorable to Lenders
without the prior written consent of all Lenders;"
(d) Clause (ii) of Section 6.2(l) is amended to read as follows:
"(ii) the Borrower may assign and sell accounts receivable to any
two (2) Qualified Financial Institutions pursuant to the Receivables
Facilities, provided that the total outstanding amount of all purchased
--------
receivables under the Receivables Facilities shall not exceed
$25,000,000 at any time;"
3. Release.
-------
3.1 No Claims. Borrower acknowledges and agrees that: (i) it has no
---------
claim or cause of action against any of the Agent, Syndication Agent or any
Lender, or any of such party's present and former officers, directors,
employees, agents, successors, assigns and shareholders (collectively,
"Representatives"), arising from or in connection with the Loan Documents or
otherwise; (ii) it has no offset or defense against any of the indebtedness
owing to Lenders; and (iii) the Agent, Syndication Agent, and each of the
Lenders heretofore properly has performed and satisfied in a timely manner all
of their obligations to and contracts with Borrower.
3.2 Borrower's Release. Effective as of the date of this Agreement, and
------------------
except as to the obligations of the parties created by this Agreement, Borrower
hereby releases the Agent, Syndication Agent, each Lender and their respective
Representatives from any and all liabilities, causes of action and claims, which
do or may exist, whether known or unknown, suspected or unsuspected, arising out
of or connected in any way with the Loan Documents and/or the banking and/or the
lending relationship by and between Agent, Syndication Agent and any other
Lender, on the one hand, and Borrower. Borrower acknowledges that it has no
defenses against its obligation to pay any amounts or perform any obligations
under the Loan Documents and releases the Agent, Syndication Agent, each Lender
and their respective Representatives from any known or unknown claims now
existing or hereafter arising out of the
2
<PAGE>
Loan Documents or the transactions contemplated thereby. Borrower waives the
provisions of California Civil Code section 1542, which states:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
BORROWER AGREES TO ASSUME THE RISK OF ALL UNKNOWN, UNANTICIPATED OR
MISUNDERSTOOD DEFENSES, CLAIMS, CONTRACTS, LIABILITIES, INDEBTEDNESS AND
OBLIGATIONS THAT ARE RELEASED, WAIVED AND DISCHARGED BY THIS AGREEMENT IN FAVOR
OF THE AGENT, SYNDICATION AGENT, ANY LENDER OR ANY OF THEIR RESPECTIVE
REPRESENTATIVES.
4. Miscellaneous.
-------------
4.1 Choice of Law. The validity of this Agreement, its construction,
-------------
interpretation and enforcement, and the rights of the parties hereunder and
concerning the Collateral, shall be determined according to the laws of the
State of California. The parties agree that all actions or proceedings arising
in connection with this Agreement shall be tried and litigated only in the state
and federal courts in the Northern District of California or County of Santa
Clara.
4.2 Agreement Binding. This Agreement shall be binding and deemed
-----------------
effective when executed by Borrower and accepted and executed by Agent,
Syndication Agent and Lenders.
4.3 Paragraph Headings. Paragraph and subparagraph headings and
------------------
paragraph and subparagraph numbers have been set forth herein for convenience
only; unless the contrary is compelled by the context, everything contained in
each paragraph and subparagraph applies equally to this entire Agreement.
4.4 Construction. Neither this Agreement nor any uncertainty or
------------
ambiguity herein shall be construed or resolved strictly against any of the
Agent, Syndication Agent, any Lender, or Borrower, whether under any rule of
construction or otherwise. This Agreement has been reviewed by all parties and
shall be construed and interpreted according to the ordinary meaning of the
words used so as to fairly accomplish the purposes and intentions of all
parties hereto. When permitted by the context, the singular includes the
plural and vice versa.
3
<PAGE>
4.5 Severability. Each provision of this Agreement shall be severable
------------
from every other provision of this Agreement for the purpose of determining
the legal enforceability of any specific provision.
4.6 Integration. This Agreement cannot be changed or terminated orally.
-----------
All prior agreements, understandings, representations, warranties, and
negotiations, if any, with respect to the subject matter hereof, are merged
into this Agreement.
4.7 Attorneys' Fees. Borrower shall be responsible for payment of all
---------------
fees and costs (including attorneys' fees and costs and allocated fees of in-
house counsel) incurred by the Agent, Syndication Agent and Lenders in
connection with the drafting and negotiation of this Agreement in accordance
with Section 9.5 of the Credit Agreement.
4.8 Reaffirmation of Current Agreement. Except as expressly modified
----------------------------------
hereby, the Credit Agreement remains in full force and effect in accordance
with its terms.
4.9 Waiver of Jury Trial. BORROWER, AGENT, SYNDICATION AGENT AND EACH
--------------------
LENDER WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING RELATING
TO THIS AGREEMENT OR ANY TRANSACTION HEREUNDER, OR CONTEMPLATED HEREUNDER, OR
ANY OTHER CLAIM (INCLUDING TORT OR BREACH OF DUTY CLAIMS) OR DISPUTE HOWSOEVER
ARISING BETWEEN OR AMONG BORROWER, AGENT, SYNDICATION AGENT AND EACH LENDER.
4
<PAGE>
This Agreement has been executed as of the date first above written.
UNION BANK OF CALIFORNIA, N.A.
By: /s/ JOHN NOBLE
---------------------------------------
Its: VICE PRESIDENT
--------------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: /s/ RICHARD E. BRYSON
---------------------------------------
Its: MANAGING DIRECTOR
--------------------------------------
BORROWER:
P-COM, INC.
By: /s/ MICHAEL J. SOPHIE
---------------------------------------
Its: CFO/VP FINANCE
--------------------------------------
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 22,676
<SECURITIES> 924
<RECEIVABLES> 49,906
<ALLOWANCES> (8,774)
<INVENTORY> 83,227
<CURRENT-ASSETS> 174,076
<PP&E> 47,319
<DEPRECIATION> (22,443)
<TOTAL-ASSETS> 294,392
<CURRENT-LIABILITIES> 96,692
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 136,714
<TOTAL-LIABILITY-AND-EQUITY> 294,392
<SALES> 30,240
<TOTAL-REVENUES> 30,240
<CGS> 41,701
<TOTAL-COSTS> 76,210
<OTHER-EXPENSES> 34,509
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,039
<INCOME-PRETAX> (48,622)
<INCOME-TAX> (6,500)
<INCOME-CONTINUING> (42,122)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,122)
<EPS-PRIMARY> (0.97)
<EPS-DILUTED> (0.97)
</TABLE>
