<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 8-K/A
AMENDMENT NO. 4 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
___________________
Date of Report
(Date of earliest event reported)
March 28, 1998
___________________
P-COM, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-25356 77-02893711
- ---------------------------- ------------ -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
</TABLE>
___________________
3175 S. WINCHESTER BOULEVARD,
CAMPBELL, CALIFORNIA 95008
___________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 866-3666
___________________
NOT APPLICABLE
___________________
(Former name or former address, if changed since last report.)
<PAGE>
AMENDMENT NO. 4
P-Com, Inc. ("P-Com") hereby amends the following items to its Current
Reports on Form 8-K, Form 8-K/A (Amendment No. 1), Form 8-K/A, (Amendment No.
2) and Form 8-K/A, (Amendment No.3) filed with the Securities and Exchange
Commission on April 9, 1998, April 17, 1998 and June 12, 1998, respectively,
as set forth in the pages attached hereto:
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS:
The following financial statements and pro forma financial information
are filed as exhibits to this report.
(1) Exhibit 99.1 - Financial Statements of Business Acquired, Wireless
Communications Group of Cylink Corporation (a division of Cylink
Corporation), as restated
A. Report of Independent Accountants (PricewaterhouseCoopers
LLP);
B. Balance Sheet at December 31, 1997;
C. Statement of Operations and Divisional Equity for the year
ended December 31, 1997;
D. Statement of Cash Flows for the year ended December 31,
1997; and
E. Notes to Financial Statements.
(2) Exhibit 99.2 - Pro Forma Financial Information, P-Com, Inc. (on a
consolidated basis) and the Wireless Communications Group of Cylink
Corporation (a division of Cylink Corporation) (unaudited), as
restated
A. Pro forma Combined Condensed Statement of Operations for the
year ended December 31, 1997;
B. Pro forma Combined Condensed Balance Sheet at December 31,
1997; and
C. Notes to Pro Forma Financial Information.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
P-Com, Inc.
(Registrant)
Date: August 3, 1999 By:/s/ Robert E. Collins
Name: Robert E. Collins
Title: Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit 99.1 Financial Statements of Business Acquired. Wireless
Communications Group of Cylink Corporation (a division of Cylink
Corporation), as restated
(1) Report of Independent Accountants (PricewaterhouseCoopers
LLP)
(2) Balance Sheet at December 31, 1997
(3) Statement of Operations and Divisional Equity for the year
ended December 31, 1997
(4) Statement of Cash Flows for the year ended December 31, 1997
(5) Notes to Financial Statements
Exhibit 99.2 Pro Forma Financial Information. P-Com, Inc. (on a consolidated
basis) and the Wireless Communications Group of Cylink
Corporation (a division of Cylink Corporation) (unaudited), as
restated
(1) Pro forma Combined Condensed Statement of Operations for the
year ended December 31, 1997
(2) Pro forma Combined Condensed Balance Sheet at December 31,
1997
(3) Notes to Pro Forma Financial Information
3
<PAGE>
TYPE: EX-99.1
SEQUNECE:2
DESCRIPTION: FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
EXHIBIT 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of P-Com, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and divisional equity and of cash flows, after the restatement
described in Note 2, present fairly, in all material respects, the financial
position of the Wireless Communications Group (a division of Cylink Corporation)
at December 31, 1997 and the results of its operations and its cash flows for
the year in conformity with generally accepted accounting principles. These
financial statements are the responsibility of P-Com, Inc.'s management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As disclosed in Note 1 of the Notes to Financial Statements, on March 28, 1998
and April 1, 1998, P-Com, Inc. acquired the assets of the Wireless
Communications Group.
As disclosed in Note 1 of the Notes to Financial Statements, certain
administrative services are provided to the Wireless Communications Group by
Cylink Corporation. It is possible that the terms of these services are not the
same as those that would result from transactions among wholly unrelated
parties.
As disclosed in Note 2 of the Notes to Financial Statements, Cylink Corporation
restated its 1997 financial statements with respect to revenue recognition.
PricewaterhouseCoopers LLP
San Jose, California
May 15, 1998, except as to the effect of the
restatement described in Note 2,
which is as of July 15, 1999
<PAGE>
WIRELESS COMMUNICATIONS GROUP
(a division of Cylink Corporation)
Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
December 31,
1997
ASSETS ---------------
(As restated)
<S> <C>
Current Assets:
Accounts receivable, net of allowances of $155 $7,378
Inventories 5,691
Deferred income taxes 933
---------------
Total current assets 14,002
Property and equipment, net 440
Other assets 7
---------------
$14,449
===============
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable $1,874
Accrued employee benefits 602
---------------
Total current liabilities 2,476
Commitments (Note 7) --
Divisional equity 11,973
$14,449
---------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
WIRELESS COMMUNICATIONS GROUP
(a division of Cylink Corporation)
STATEMENT OF OPERATIONS AND DIVISIONAL EQUITY
(in thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
1997
----------------
(As restated)
<S> <C>
Revenue $27,957
Cost of Revenue 12,070
----------------
Gross profit 15,887
================
Operating expenses:
Research and development 3,608
Selling and marketing 6,934
General and administrative 3,576
----------------
Total operating expenses 14,118
----------------
Income from operations 1,769
Royalty and other income, net 115
----------------
Income before income taxes 1,884
Provision for income taxes 541
----------------
Net income 1,343
Divisional equity at beginning of year 8,646
Net advances from Cylink Corporation 1,984
----------------
Divisional equity at end of year $11,973
================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
WIRELESS COMMUNICATIONS GROUP
(a division of Cylink Corporation)
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
1997
---------------
(As restated)
<S> <C>
Cash flows from operating activities:
Net income $ 1,343
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 186
Changes in assets and liabilities:
Accounts receivable (2,606)
Inventories (1,768)
Deferred income taxes 116
Other assets (7)
Accounts payable 824
Accrued liabilities 209
---------------
Net cash used in operating activities (1,703)
---------------
Cash flows from investing activities:
Acquisition of property and equipment (281)
---------------
Net cash used in investing activities (281)
---------------
Cash flows from financing activities:
Net advances from Cylink Corporation 1,984
---------------
Net cash provided by financing activities 1,984
---------------
Net change in cash and cash equivalents --
Cash and cash equivalents at beginning of year --
---------------
Cash and cash equivalents at end of year $ --
===============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
WIRELESS COMMUNICATIONS GROUP
(a division of Cylink Corporation)
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Wireless Communications Group ("Wireless") is a division of Cylink
Corporation ("Cylink") which develops, manufactures and sells wireless
communication products. On March 28, 1998, and April 1, 1998, Cylink sold
Wireless to P-Com, Inc. for approximately $46.0 million in cash and a $14.5
million unsecured note receivable due July 6, 1998.
BASIS OF PRESENTATION
The statement of operations includes all revenues and expenses
directly attributable to Wireless as well as an allocation of costs for
management and administrative functions and services performed by Cylink on
behalf of Wireless. The allocation of these costs is based on various factors
including, but not limited to, revenues, employees and operating space using a
methodology that Cylink management believes is reasonable. For the year ended
December 31, 1997 these allocated costs totaled $2,764,000.
These allocated costs are not necessarily indicative of the costs and
expenses that would have resulted if Wireless had operated as a separate entity.
As more fully described in Note 4, current and deferred income taxes and related
tax expense have been allocated to Wireless as if it was a separate taxpayer.
The balance sheet includes all assets and liabilities directly
attributable to Wireless. Divisional equity is the result of the difference
between residual earnings of Wireless, plus borrowings from Cylink, less cash
paid to Cylink. All liabilities related to allocated costs of Cylink have been
considered paid through divisional equity.
CASH
Wireless participated in Cylink's centralized cash management system.
In general, the cash funding requirements of Wireless were met by, and all cash
generated by Wireless was transferred to, Cylink.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
generally five years.
REVENUE RECOGNITION
Revenue is recognized upon the shipment of product to customers.
Concurrently, a provision is made for estimated costs to repair or replace
products under warranty arrangements, deemed immaterial on December 31, 1997.
Revenue from sales to distributors is recognized upon shipment; no right of
return, stock rotation or price protection is granted to distributors.
Revenue from sales to value added resellers is recognized upon
shipment and concurrently a provision for estimated returns is recorded and is
netted against accounts receivable.
<PAGE>
SOFTWARE DEVELOPMENT COSTS
Software development costs are expensed as incurred and classified as
research and development costs. Statement of Financial Accounting Standards No.
86 requires the capitalization of certain software development costs once
technological feasibility is established, which Wireless defines as completion
of a working model. The capitalized cost is then amortized on a straight-line
basis over the estimated product life, or on the ratio of current revenues to
total projected product revenues, whichever is greater.
To date, the period between achieving technological feasibility and
the general availability of such software has been short and software
development costs qualifying for capitalization have been insignificant.
Accordingly, Wireless has not capitalized any software development costs.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected
tax consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts. The measurement of
deferred income tax assets is reduced, if necessary, by the amount of any tax
benefits that, based on available evidence, are not expected to be realized.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Wireless to significant
concentration of credit risk consist primarily of accounts receivable. Wireless
performs on-going credit evaluations and maintains reserves for potential credit
losses; historically such losses have been immaterial.
Two customers accounted for 23% and 14%, respectively, of total
accounts receivable at December 31, 1997. One customer accounted for 14% of
revenue in 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. RESTATEMENT OF FINANCIAL RESULTS
On November 5, 1998, Cylink publicly announced that it and its
independent accountants had initiated a review of revenue recognition practices
which would result in a restatement of Cylink's previously issued first and
second quarter 1998 results and that the first three quarters of 1998 were all
expected to show substantial operating losses. During the review, certain facts
became publicly available that indicated that errors had been made in the
application of revenue recognition policies which also impacted Cylink's fourth
quarter of 1997, and as a result, Cylink's 1997 full-year results have been
restated along with first and second quarter 1998 results. These restated
results were announced in a press release issued by Cylink dated December 16,
1998. The following table reflects the impact of this restatement as it relates
to the results of the operations of Wireless:
<PAGE>
Year ended
December 31, 1997
(As reported) (As restated)
------------------------ --------------------
(in thousands)
Revenue $ 31,267 $ 27,957
Cost of revenue 13,461 12,070
Gross profit 17,806 15,887
Operating expenses 14,118 14,118
Income from operations 3,688 1,769
Net income 2,668 1,343
The restatement of results for 1997 resulted in a reduction of
previously reported amounts at December 31, 1997 for accounts receivable of
$3.31 million and divisional equity of $1.92 million, and a corresponding
increase in the previously reported amounts for inventory of $1.39 million.
3. DETAILS OF BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
December 31, 1997
---------------------
(As restated)
(in thousands)
<S> <C>
Inventories:
Raw materials $ 2,590
Work in process and subassemblies 1,474
Finished goods 1,627
---------------------
$ 5,691
=====================
Property and equipment:
Machinery and equipment $ 1,660
Accumulated depreciation (1,220)
---------------------
$ 440
=====================
</TABLE>
4. INCOME TAXES
The provision for income taxes and related deferred tax assets are
presented as if Wireless was a separate taxpayer. In 1997, Cylink utilized
various tax planning strategies and elections to minimize its total income tax
expense. Tax payments are made by Cylink on a consolidated basis. It is not
practical to identify the effects of these strategies, elections, and payments
on the results of operations of Wireless.
<PAGE>
The provision for income taxes consists of the following:
Year Ended
December 31, 1997
-------------------
(As restated)
(in thousands)
Current
Federal $ 628
State 29
-------------------
657
-------------------
Deferred
Federal (104)
State (12)
-------------------
(116)
-------------------
$ 541
===================
December 31, 1997
--------------------
(in thousands)
Deferred income tax assets comprise the following:
Research and development tax credit carryforwards $ 184
Allowances for sales returns and doubtful accounts 62
Inventory reserves and basis differences 614
Accrued expenses 73
--------------------
Total deferred income tax assets $ 933
====================
Net deferred income tax assets result from temporary differences
between the financial carrying value and the tax basis of Wireless' assets and
liabilities and are expected to be utilized in future years.
The effective tax rate reconciles to the percentage computed by
applying the federal statutory rate to income before income taxes as follows:
Year Ended December
31, 1997
---------------------
(As restated)
U.S. federal statutory income tax rate 34.0%
State taxes, net of federal tax benefit 5.8
Research and development tax credits (7.0)
Other (4.1)
---------------------
Effective tax rate 28.7%
=====================
Research and development credit carry forwards expire at various times
through 2010.
5. STOCK OPTION PLAN
Wireless employees participate in Cylink's 1994 Flexible Stock
Incentive Plan ("1994 Plan"). The 1994 Plan provides for the grant of incentive
stock options and nonqualified stock options to executives, employees and
consultants to purchase up to 5,950,000 common shares. Stock options may be
granted at prices not less than 100% and 85% for incentive and nonqualified
stock options, respectively, of the fair market value of the stock on the date
of grant. Through December 31, 1997, all nonqualified stock options have been
granted at 100% of the fair market value of the stock on the date of grant.
Options granted under the 1994 Plan are exercisable at such times and under
<PAGE>
such conditions as determined by the Board of Directors, and generally vest over
five years. Options expire ten years from the date of grant. Shares issued upon
exercise of options are subject to certain restrictions on their
transferability. The Company has the right to repurchase such shares, at a price
equal to the fair market value, when the optionee is no longer associated with
Cylink. Shares repurchased increase the number of shares available for grant
under the Plan.
6. GEOGRAPHIC INFORMATION
Wireless operates in one industry segment. All operating expenses and
identifiable assets of Wireless were generated in the United States. Revenue,
classified by the major geographic areas in which the Company operates, was as
follows:
Year Ended
December 31,
1997
----------------------
(As restated)
(in thousands)
Asia $10,064
Central and South America 8,804
United States and Canada 5,910
Europe 2,896
Other 283
----------------------
$27,957
======================
7. COMMITMENTS
As part of the sale of Wireless to P-Com, Cylink entered into an
agreement with P-Com to allow Wireless the right to occupy and use portions of
Cylink's properties, including the use of the phone system and any necessary
services which Cylink provides to its employees. As consideration, P-Com will
pay Cylink a sum of $120,000 on the first day of each month beginning July 1998.
In addition, P-Com is required to pay $20,000 each month beginning June 1998 for
the use of the Company's computer network. This agreement expires no later than
December 31, 1998.
Prior to the sale of Wireless to P-Com, Wireless shared facilities
leased by Cylink under various noncancelable operating leases. These leases
expire at various dates through June 2001 and certain of the leases are
renewable for an additional five years. In addition to the minimum lease
payments, Cylink is responsible for insurance, repairs and certain other
operating costs under the terms of the leases. Cylink incurred rent expense of
$860,000 under operating leases during the year ended December 31, 1997.
Future minimum lease payments for Cylink under all noncancelable
operating leases are as follows:
Year Ended
December 31,
------------
(in thousands)
1998 $1,175
1999 721
2000 393
2001 197
-----------------
$2,486
=================
<PAGE>
EXHIBIT 99.2
ITEM 7(b) Pro Forma Financial Information
-----------------------------------------
Effective March 28, 1998 and April 1, 1998, P-Com, Inc., a Delaware
corporation ("P-Com" or the "Company"), completed its acquisition of
substantially all of the assets of the Wireless Communications Group of Cylink
Corporation, a California corporation ("Wireless"), for approximately $63.0
million, including $46.0 million in cash, $14.5 million in a short-term non
interest bearing unsecured subordinated promissory note, and $2.5 million of
direct acquisition costs. The transaction was accounted for as a purchase
business combination; accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed based on their estimated fair market
values at the date of acquisition.
The following unaudited pro forma combined condensed statement of
operations gives effect to the acquisition as if the transaction had taken place
at the beginning of 1997. The unaudited pro forma combined condensed balance
sheet gives effect to the acquisition as if the transaction had taken place on
December 31, 1997. In addition, this information has been restated to reflect
the restatement of the Wireless financial results for the year ended December
31, 1997, as described in Note 3 of the Notes to Pro Forma Financial
Information.
The unaudited pro forma statement of operations is not necessarily
indicative of the operating results that would have been achieved if the
transaction had occurred on the date indicated and should not be construed as
representative of future operations. The historical financial statements of
Wireless are included elsewhere in this filing, and the unaudited pro forma
financial information presented herein should be read in conjunction with those
financial statements and related notes.
<PAGE>
P-COM, INC.
PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
For the year ended December 31, 1997
(In thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
P-Com Cylink Adjustments Pro Forma
-------- ----------- ----------- -----------
(As restated) (As restated) (As restated)
<S> <C> <C> <C> <C>
Sales $220,702 $ 27,957 $ -- $ 248,659
cost of sales 129,235 12,070 2,438 143,743
-------- -------- --------- ---------
Gross profit 91,467 15,887 (2,438) 104,916
-------- -------- --------- ---------
Operating expenses:
Research and development 29,127 3,608 -- 32,735
Selling and marketing 15,696 6,934 -- 22,630
General and administrative 16,948 3,576 2,348 22,872
-------- -------- --------- ---------
Total operating expenses 61,771 14,118 2,348 78,237
-------- -------- --------- ---------
Income from operations 29,696 1,769 (4,786) 26,679
Interest and other income 247 115 -- 362
-------- -------- --------- ---------
Income before taxes 29,943 1,884 (4,786) 27,041
Provision for income taxes 11,052 541 (1,766) 9,827
-------- -------- --------- ---------
Net income $ 18,891 $ 1,343 $ (3,020) $ 17,214
-------- -------- --------- ---------
Net income per share
Basic $ 0.45 $ 0.41
======== =========
Diluted $ 0.43 $ 0.39
======== =========
Shares used in per share computation:
Basic 42,175 42,175
======== =========
Diluted 44,570 44,570
======== =========
</TABLE>
<PAGE>
P-COM, INC.
PRO FORMA COMBINED CONDENSED
BALANCE SHEET
December 31, 1997
(In thousands, unaudited)
<TABLE>
<CAPTION>
P-Com Cylink Adjustments Pro Forma
-------- ----------- ----------- -----------
(As restated) (As restated) (As restated)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 88,145 $ - $ (46,000) $ 42,145
Accounts receivable 70,883 7,378 - 78,261
Notes receivable 205 - - 205
Inventory 58,003 5,691 - 63,694
Prepaid expenses and other assets 12,329 933 - 13,262
---------- ---------- ---------- ----------
Total current assets 229,565 14,002 (46,000) 197,567
Property and equipment, net 32,313 440 - 32,753
Goodwill and other assets 43,643 7 30,750 74,400
---------- ---------- ---------- ----------
$ 305,521 $ 14,449 $ (15,250) $ 304,720
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,043 $ 1,874 $ 2,483 $ 42,400
Accrued employee benefits 3,930 602 - 4,532
Other accrued liabilities 6,255 - - 6,255
Income taxes payable 6,409 - - 6,409
Notes payable 293 - 9,682 9,975
---------- ---------- ---------- ----------
Total current liabilities 54,930 2,476 12,165 69,571
Long-term debt 101,960 - - 101,690
---------- ---------- ---------- ----------
Minority interest 604 - - 604
---------- ---------- ---------- ----------
Stockholders' equity:
Preferred stock - - - -
Common stock 4 - - 4
Additional paid-in capital 131,735 - - 131,735
Retained earnings 18,380 - (15,442) 2,938
Divisional equity - 11,973 (11,973) -
Cumulative translation adjustment (1,822) - - (1,822)
---------- ---------- ---------- ----------
Total stockholders' equity 148,297 11,973 (27,415) 132,855
---------- ---------- ---------- ----------
$ 305,521 $ 14,449 $ (15,250) $ 304,720
========== ========== ========== ==========
</TABLE>
<PAGE>
UNAUDITED NOTES TO PRO FORMA FINANCIAL INFORMATION
1. PERIOD PRESENTED
The unaudited pro forma combined condensed balance sheet combines the
balance sheet of P-Com on a consolidated basis on December 31, 1997 and the
balance sheet of Wireless for the same date. The unaudited pro forma combined
condensed statements of operations for the year ended December 31, 1997 combines
the results of operations of P-Com on a consolidated basis and the results of
operations of Wireless for the same period. The results of operations of P-Com
reported in its Quarterly Report on Form 10-Q ("Form 10-Q") for the three month
period ended March 31, 1998 include the results of operations of Wireless for
the period from the date of acquisition through March 31, 1998. All of the
outstanding accounts receivable of Wireless were purchased by P-Com on April 1,
1998.
2. THE ACQUISITION
The total original purchase price aggregated approximately $60.5
million, including $2.5 million of direct acquisition costs. The Company has
withheld approximately $4.8 million of the short-term promissory note due to the
Company's belief that Cylink Corporation breached various provisions of the
acquisition agreement. In the Asset Purchase Agreement between the Company and
Cylink Corporation, Cylink Corporation agreed to sell certain assets to the
Company, including a specific list of accounts receivable. Subsequent to the
purchase and before the $14.5 million note was due, the Company determined that
approximately $4.8 million of accounts receivable were uncollectible. Of this
amount, $3.3 million related to sales in 1997 that were based on errors that had
been made in the application of revenue recognition policies as described in
Note 3 of the Notes to Pro Forma Financial Information. These sales and related
accounts receivable were removed from the restated financial statements of
Wireless. The remaining sales were determined to be uncollectible based on
subsequent events that became known to the Company after the purchase of
Wireless that did not exist at the time of the purchase. Although such amounts
have been excluded from the amount allocated to accounts receivable purchased,
they were properly included in accounts receivable on December 31, 1997.
After consideration of recent guidance, which included modification of
widely recognized appraisal practices, the Company adjusted the allocation of
the purchase price related to the acquisition of the Cylink Wireless Group,
which included decreasing the in-process research and development charge from
$33.9 million to $15.4 million. The result of this restatement is a lesser
charge to income for in-process research and development and a higher recorded
value of goodwill and other intangible assets, resulting in increased
amortization of such goodwill and other intangible assets in future periods.
The purchase price was allocated to the assets acquired and
liabilities assumed based on the estimated fair market values for all other
identifiable tangible and intangible assets at the acquisition date. The
allocation of the purchase price was as follows (in thousands) (assuming that
the entire purchase occurred on March 28, 1998):
Accounts receivable, net $ 4,247
Inventory 5,109
Property and equipment, net 461
Current liabilities assumed (1,355)
Intangible assets:
Goodwill 23,482
In-process research and development 15,442
Developed technology 6,291
Acquired workforce 1,781
Core technology 2,707
--------
$ 58,165
========
<PAGE>
3. ADJUSTMENTS TO STATEMENT OF OPERATIONS AND BALANCE SHEET
On November 5, 1998, Cylink publicly announced that it and its
independent accountants had initiated a review of revenue recognition practices
which would result in a restatement of Cylink's previously issued first and
second quarter 1998 results and that the first three quarters of 1998 were all
expected to show substantial operating losses. During the review, certain facts
became publicly available that indicated that errors had been made in the
application of revenue recognition policies which also impacted Cylink's fourth
quarter of 1997, and as a result, Cylink's 1997 full-year results have been
restated along with first and second quarter 1998 results. These restated
results were announced in a press release issued by Cylink dated December 16,
1998. The following table reflects the impact of this restatement as it relates
to the results of the operations of Wireless:
<TABLE>
<CAPTION>
For the year ended
December 31, 1997
(As reported) (As restated)
--------------------------- ---------------------------
Statement of Operations: (in thousands)
<S> <C> <C>
Revenue $ 31,267 $ 27,957
Operating expenses 14,118 14,118
Income from operations 3,688 1,769
Net income 2,668 1,343
Balance Sheet:
Accounts receivable 10,688 7,378
Inventory 4,300 5,691
Divisional equity 13,892 11,973
</TABLE>
Additional adjustments to the Statement of Operations
-----------------------------------------------------
Pro forma adjustments were made to the Statement of Operations to
reflect the amortization of goodwill and other intangible assets over the
estimated lives (in thousands)
<TABLE>
<CAPTION>
Value at acquisition Estimated lives Amortization
-------------------- --------------- ------------
(As restated) (In years) (As restated)
<S> <C> <C> <C>
Goodwill $ 23,482 10 $ 2,348
Developed technology 6,291 4 1,573
Acquired workforce 1,781 3 594
Core technology 2,707 10 271
----------- ----------
$ 34,261 $ 4,786
=========== ==========
</TABLE>
The amortization of goodwill was classified as general and
administrative expense in the statement of operations, the amortization of all
other intangibles was classified as cost of goods sold.
The $15.4 million charge to operations related to in-process research
and development has been excluded from the pro forma statement of operations.
Such charge will be recognized in the period in which the transaction occurs.
Additional adjustments to the Balance Sheet
-------------------------------------------
Pro forma adjustments were made to the Balance Sheet to reflect the cash paid,
goodwill acquired, the issuance of a short-term promissory note, expenses
incurred related to the acquisition and the charge related to in-process
research and development.
