<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 March 31, 1999.
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)
_______________
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)
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 May 6, 1999, there were 48,967,028 shares of the Registrant's Common Stock
outstanding, par value $0.0001.
This quarterly report on Form 10-Q Consists of 40 pages of which this is page 1.
The Exhibit Index appears on page 40.
1
<PAGE>
P-COM, INC.
TABLE OF CONTENTS
Page
PART I. Financial Information Number
--------------------- ------
Item 1 Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998........................................ 3
Condensed Consolidated Statements of Operations for the
three month periods ended March 31, 1999 and 1998............ 4
Condensed Consolidated Statements of Cash Flows for the
three month periods ended March 31, 1999 and 1998............ 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 11
PART II. Other Information
-----------------
Item 1 Legal Proceedings............................................ 36
Item 2 Changes in Securities........................................ 37
Item 3 Defaults Upon Senior Securities.............................. 37
Item 4 Submission of Matters to a Vote of Security Holders.......... 37
Item 5 Other Information............................................ 37
Item 6 Exhibits and Reports on Form 8-K............................. 37
Signatures............................................................. 39
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1.
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited)
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,884 $ 29,241
Accounts receivable, net 44,712 50,533
Inventory 75,447 79,026
Prepaid expenses and notes receivable 19,390 21,949
---------------- ----------------
Total current assets 160,433 180,749
Property and equipment, net 49,153 52,086
Deferred income taxes 9,678 9,678
Goodwill and other assets 71,258 71,845
---------------- ----------------
$ 290,522 $ 314,358
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,568 $ 39,618
Accrued employee benefits 3,779 3,345
Other accrued liabilities 8,063 10,318
Notes payable 46,325 46,360
---------------- ----------------
Total current liabilities 88,735 99,641
---------------- ----------------
Long-term debt 68,385 92,769
---------------- ----------------
Series B Mandatorily Redeemable Convertible Preferred Stock 13,559 13,559
---------------- ----------------
Mandatorily Redeemable Common Stock Warrants 1,839 1,839
---------------- ----------------
Stockholders' equity:
Series A Preferred Stock - -
Common Stock 5 5
Additional paid-in capital 163,613 145,246
Accumulated deficit (44,575) (38,783)
Accumulated other comprehensive income (1,039) 82
---------------- ----------------
Total stockholders' equity 118,004 106,550
---------------- ----------------
$ 290,522 $ 314,358
================ ================
</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>
Three months ended March 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Sales:
Product $ 27,634 $ 51,421
Service 10,414 7,216
--------------- ---------------
Total sales 38,048 58,637
--------------- ---------------
Cost of sales:
Product 19,075 28,847
Service 7,573 4,665
--------------- ---------------
Total cost of sales 26,648 33,512
--------------- ---------------
Gross profit 11,400 25,125
--------------- ---------------
Operating expenses:
Research and development 9,640 7,728
Selling and marketing 5,135 4,225
General and administrative 5,701 3,891
Goodwill amortization 2,054 698
Acquired in-process research and development - 15,442
--------------- ---------------
Total operating expenses 22,530 31,984
--------------- ---------------
Loss from operations (11,130) (6,859)
Interest expense (2,318) (1,766)
Interest income 221 882
Other income (expense), net 151 20
--------------- ---------------
Loss before extraordinary item and income taxes (13,076) (7,723)
Provision (benefit) for income taxes - (2,626)
--------------- ---------------
Loss before extraordinary item (13,076) (5,097)
Extraordinary item: retirement of Notes 7,284 -
--------------- ---------------
Net loss $ (5,792) $ (5,097)
=============== ===============
Basic and diluted loss per share:
Loss before extraordinary item $ (0.27) $ (0.12)
Extraordinary item 0.15 -
--------------- ---------------
Net loss $ (0.12) $ (0.12)
=============== ===============
Shares used in per share computation:
Basic and diluted 48,198 42,951
=============== ===============
</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>
Three months ended March 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,792) $ (5,097)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 4,201 2,923
Amortization of goodwill 2,054 698
Change in minority interest - 101
Deferred income taxes - (5,158)
Acquired in-process research and development - 15,442
Non-cash effect of retirement of Notes (7,284) -
Change in assets and liabilities (net of acquisition balances):
Accounts receivable 5,821 (3,214)
Inventory 3,579 (11,736)
Prepaid expenses and notes receivable 2,559 (3,187)
Goodwill and other assets (1,467) (1,859)
Accounts payable (9,050) (1,205)
Accrued employee benefits 434 (1,120)
Other accrued liabilities (2,255) 4,264
Income taxes payable - 2,840
--------------- ---------------
Net cash used in operating activities (7,200) (6,308)
--------------- ---------------
Cash flows from investing activities:
Acquisition of property and equipment (1,268) (9,805)
Cash paid in business combinations, net of cash acquired - (48,874)
--------------- ---------------
Net cash used in investing activities (1,268) (58,679)
--------------- ---------------
Cash flows from financing activities:
Payments under capital lease obligation (137) -
Proceeds (payments) of notes payable (35) 517
Proceeds from the issuance of Common Stock 112 2,430
Proceeds from long-term debt 1,292 -
--------------- ---------------
Net cash provided by financing activities 1,232 2,947
--------------- ---------------
Effect of exchange rate changes on cash (1,121) (183)
--------------- ---------------
Net decrease in cash and cash equivalents (8,357) (62,223)
Cash and cash equivalents at the beginning of the period 29,241 88,145
--------------- ---------------
Cash and cash equivalents at the end of the period $ 20,884 $ 25,922
=============== ===============
Supplemental cash flow disclosures:
Cash paid for income taxes $ 330 $ 676
=============== ===============
Cash paid for interest $ 2,521 $ 345
=============== ===============
Exchange of Convertible Subordinated Notes for Common Stock $ 25,539 $ -
=============== ===============
</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 March 31, 1999, and the results of its
operations and its cash flows for the three months ended March 31, 1999 and
1998. These consolidated financial statements should be read in conjunction with
the Company's audited 1998 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-month period ended March 31, 1999 are not necessarily indicative of
the operating results that may be expected for the year ending December 31,
1999.
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 LOSS PER SHARE
For purpose of computing diluted 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 months ended
March 31, 1999, options to purchase approximately 1,922,005 shares of Common
Stock were excluded from the computation. For the three months ended March 31,
1999, the assumed conversion of the 4 1/4% Convertible Subordinated Notes
("Notes") into 2,472,246 shares of Common Stock was not included in the
computation of diluted loss per share because the effect would be antidilutive.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 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 non-owner 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
(in thousands, unaudited):
Three Months Ended
March 31,
1999 1998
-------------- --------------
Net loss $ (5,792) $ (5,097)
Other comprehensive charges (1,121) (183)
-------------- --------------
Total comprehensive loss $ (6,913) $ (5,280)
============== ==============
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP No. 98-1
requires that entities capitalize certain costs related to internal-use software
once certain criteria have been met. The Company is required to implement SOP
No. 98-1 for the year ending December 31, 1999. Adoption of SOP No. 98-1 is not
expected to have a material impact on the Company's financial position or
results of operations.
6
<PAGE>
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," effective beginning in the first quarter of
2000. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting under SFAS No. 133. The
Company is currently evaluating the impact of SFAS No. 133 on its financial
position and results of operations.
4. BORROWING ARRANGEMENTS
The Company entered into a new revolving line-of-credit agreement on May 15,
1998, as amended during the year, that provides for borrowings of up to $50
million. At March 31, 1999, the Company had been advanced approximately $46.3
million and had used the remaining $3.7 million to secure letters of credit
under such line. The revolving commitment, as amended, will be reduced from $50
million to $40 million on August 15, 1999 and to $30 million on October 15, 1999
until its maturity on January 15, 2000. Borrowings under the line are secured by
the assets of the Company 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. Amendments to the bank credit agreement have allowed the Company to
remain in compliance with the debt covenants through March 31, 1999, and have
been structured based on the Company's business plan which would allow the
Company to continue to be in compliance with such covenants. Non-compliance
could cause the Company to be in default under the bank credit agreement. If a
default is declared by the lenders, cross defaults will be triggered on the
Company's outstanding Notes and other debt instruments resulting in accelerated
repayments of such debts, and the holders of all outstanding Series B Preferred
Stock would have the right to have their stock redeemed by the Company.
The remaining borrowings consist of bank loans and notes payable of $3.7
million, and amounts drawn under lines of credit available to the Company's
foreign subsidiaries, with interest rates ranging from 8% to 12%. The Company's
foreign subsidiaries had lines of credit available from various financial
institutions. At March 31, 1999, $3.5 million had been drawn down under these
facilities. Generally, these foreign credit lines do not require commitment fees
or compensating balances and are cancelable at the option of the Company or the
financial institutions.
5. BALANCE SHEET COMPONENTS
Inventory consists of the following (in thousands):
March 31, December 31,
1999 1998
(unaudited)
----------- ------------
Raw materials $ 10,715 $ 16,395
Work-in-process 41,791 42,995
Finished goods 22,941 19,636
----------- ------------
$ 75,447 $ 79,026
=========== ============
Property and equipment consist of the following (in thousands):
March 31, December 31,
1999 1998
(unaudited)
----------- ------------
Tooling and test equipment $ 54,060 $ 52,718
Computer equipment 9,054 9,210
Furniture and fixtures 4,170 7,220
Land and buildings 7,148 3,506
Construction-in-process 3,429 4,878
----------- ------------
77,861 77,532
Less-accumulated depreciation and
amortization (28,708) (25,446)
----------- ------------
$ 49,153 $ 52,086
=========== ============
7
<PAGE>
Goodwill and other assets consist of the following (in thousands):
March 31, December 31,
1999 1998
(unaudited)
----------- ------------
Goodwill:
Technosystem $ 15,850 $ 15,850
CSM 22,295 22,295
Cylink 34,261 34,261
Cemetel 4,360 4,360
----------- ------------
76,766 76,766
Less- accumulated amortization (10,478) (8,424)
----------- ------------
Net goodwill 66,288 68,342
Other assets 4,970 3,503
----------- ------------
$ 71,258 $ 71,845
=========== ============
6. RESTRUCTURING AND OTHER ONE-TIME CHARGES
During the third quarter of 1998, the Company's management approved
restructuring plans, which included initiatives to integrate the operations of
acquired companies, consolidate duplicate facilities, and reduce overhead.
Total accrued restructuring and other one-time costs of $26.6 million were
recorded in the third quarter of 1998 relating to these initiatives.
The accrued restructuring and other one-time charges and amounts charged
against the accrual as of March 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Beginning Expenditures Remaining
Accrual and Write-offs Accrual
--------- -------------- ---------
<S> <C> <C> <C>
Severance and benefits $ 568 $ (568) $ --
Facilities and fixed assets impairment 879 (551) 328
Goodwill impairment 2,884 (2,884) --
Inventory reserve 16,922 (11,718) 5,204
Accounts receivable reserve 5,386 (5,386) --
--------- -------------- ---------
Total accrued restructuring and other one-time
charges $26,639 $(21,107) $ 5,532
========= ============== =========
</TABLE>
Management anticipates that additional asset impairments may result in the
future as restructuring plans are implemented and additional assets are taken
out of service and held for sale or disposal. Additional increases in
depreciation expense may occur as asset lives are adjusted as a result of the
integration process.
7. SEGMENT REPORTING
For purposes of segment reporting, the Company aggregates operating segments
that have similar economic characteristics and meet the aggregation criteria of
SFAS No. 131. The Company has determined that there are two reportable segments:
Product Sales and Service Sales. The Product Sales segment consists of
organizations located primarily in the United States, the United Kingdom, and
Italy which develop, manufacture, and/or market network access systems for use
in the worldwide wireless telecommunications market. The Service Sales segment
consists of an organization primarily located in the United States, the United
Kingdom, and Italy which provides comprehensive network services including
system and program planning and management, path design, and installation for
the wireless communications market.
8
<PAGE>
The accounting policies of the operating segments are the same as those
described in the "Summary of Significant Accounting Policies" included in the
Company's Annual Report on Form 10-K. The Company evaluates performance based on
operating income. Capital expenditures for long-lived assets are not reported to
management by segment and are excluded as presenting such information is not
practical. The following tables show the operations of the Company's operating
segments (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended Product Service
March 31, 1999 Sales Sales Total
- -------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Sales $ 27,634 $ 10,414 $ 38,048
Income (loss) from operations $ (11,637) $ 507 $ (11,130)
Depreciation $ 3,691 $ 510 $ 4,201
Total assets $ 267,652 $ 22,870 $ 290,522
Interest expense $ (2,222) $ (96) $ (2,318)
For the Three Months Ended Product Service
March 31, 1998 Sales Sales Total
- -------------------------- ---------- ---------- ----------
Sales $ 51,421 $ 7,216 $ 58,637
Income (loss) from operations $ (7,920) $ 1,061 $ (6,859)
Depreciation $ 2,861 $ 62 $ 2,923
Total assets $ 300,746 $ 13,612 $ 314,358
Interest expense $ (1,756) $ (10) $ (1,766)
</TABLE>
A reconciliation of loss from operations to loss before extraordinary item
and income taxes is as follows (in thousands, unaudited):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Loss from operations $ (11,130) $ (6,859)
Interest expense (2,318) (1,766)
Interest income 221 882
Other income (expense), net (151) 20
----------------- -----------------
Loss before extraordinary item and income taxes $ (13,076) $ (7,723)
================= =================
</TABLE>
The Company's product and service sales by category are as follows (in
thousands, unaudited):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Microwave radio transmission equipment $ 20,890 $ 45,032
Broadcast equipment 3,280 5,282
Network monitoring equipment 3,463 1,107
Service 10,414 7,216
----------------- -----------------
$ 38,048 $ 58,637
================= =================
</TABLE>
The breakdown of sales by geographic customer destination and property and
equipment, net, are as follows (in thousands, unaudited):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------------- -----------------
Sales:
<S> <C> <C>
United States $ 11,576 $ 9,909
United Kingdom 14,565 22,922
Europe 6,821 10,722
Africa 178 10,845
Asia 1,318 4,942
Other geographic region 3,589 (703)
----------------- -----------------
$ 38,048 $ 58,637
================= =================
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------------- -----------------
Property and equipment, net:
<S> <C> <C>
United States $ 29,308 $ 30,726
United Kingdom 9,770 9,845
Italy 9,930 11,317
Other geographic region 145 198
----------------- -----------------
$ 49,153 $ 52,086
================= =================
</TABLE>
8. CONTINGENCIES
The Company is a defendant in several class action lawsuits in which the
plaintiffs are alleging various federal and state securities laws violations by
the Company and certain of its officers and directors. The plaintiffs seek
unspecified damages based upon the decrease in market value of shares of the
Company's Common Stock. The Company believes the actions are without merit and
intends to defend these actions vigorously, all of these proceedings are at the
very early stage and the Company is unable to speculate on their ultimate
outcomes. However, the ultimate results of the matters described above could
have a material adverse effect on the Company's results of operations or
financial position either through the defense or results of such litigation.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which 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 under
"Certain Factors Affecting the Company" contained in this Item 2 and elsewhere
in this Quarterly Report on From 10-Q. Additional factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the Company's 1998 Annual Report on Form 10-K, and other documents filed by
the Company with the Securities and Exchange Commission.
Overview
P-Com, Inc. (the "Company") supplies equipment and services for access to
worldwide telecommunications and broadcast networks. All financial information
presented in this Quarterly Report on Form 10-Q has been presented to include
the operating results of Control Resources Corporation ("CRC"), which was
acquired in a pooling-of-interests transaction on May 29, 1997; and RT Masts
Limited ("RT Masts") and Telematics, Inc. ("Telematics"), which were acquired in
pooling-of-interests transactions on November 27, 1997. Currently, the Company
ships 2.4 GHz and 5.7 GHz spread spectrum radio systems, as well as 7 GHz, 13
GHz, 14 GHz, 15 GHz, 18 GHz, 23 GHz, 26 GHz, 38 GHz and 50 GHz radio systems,
and the Company also provides software and related services for these products.
Additionally, the Company offers turnkey microwave relocation services,
engineering, path design, program management, installation and maintenance of
communication systems to network service providers. The Company is currently
field testing and further developing a range of point-to-multipoint radio
systems for use in both the telecommunications and broadcast industries.
The Company was founded in August 1991 to develop, manufacture, market and
sell millimeter wave radio systems for wireless networks. The Company was in the
development stage until October 1993. From October 1993 through March 31, 1999,
the Company generated sales of approximately $687.8 million, of which $233.0
million or 34% of total sales since inception were generated during 1998 and the
first quarter of 1999. From inception to March 31, 1999, the Company had
generated an accumulated deficit of approximately $44.6 million. The decrease in
retained earnings from $18.4 million at December 31, 1997 to an accumulated
deficit of $44.6 million at March 31, 1999 was due primarily to the net loss of
$55.3 million in 1998 which included restructuring and other charges of $26.6
million and acquired in-process research and development expenses of
approximately $15.4 million related to the acquisition of the assets of the
Cylink Wireless Group from Cylink Corporation. In addition to these charges,
the net loss was also due to a downturn and slowdown in the telecommunications
equipment industry as a whole which began in the second half of 1998, in part
due to the economic turmoil in Asia. The Company experienced a sharp decrease in
its sales beginning in June 1998, as compared to prior quarters, and began a
cost reduction program shortly thereafter. The Company laid off a portion of its
work force in September, October and November 1998 and increased its inventory
reserves and allowance for doubtful accounts and wrote down certain of its
facilities, fixed assets and goodwill in the third quarter of 1998.
Due to many factors, including the Company's limited operating history and
limited resources, there can be no assurance that profitability or significant
sales on a quarterly or annual basis will occur in the future. During 1997 and
the first half of 1998, both the Company's sales and operating expenses
increased rapidly. During the remainder of 1998 and the first quarter of 1999,
the Company's operating expenses continued to increase, while the Company's
sales declined significantly. There can be no assurance that the Company's
sales will continue to remain at or increase from the levels experienced in 1997
or in the first half of 1998 or that sales will not continue to decline.
Although the fourth quarter of 1998 and the first quarter of 1999 showed an
improvement, the Company had not recovered from the downturn and sales remained
sluggish. In recent quarters, the Company has been experiencing higher than
normal price declines. The declines in prices have had a downward impact on the
Company's gross margin. There can be no assurance that such pricing pressure
will not continue in future quarters. Although the Company is taking measures to
reduce operating expenses, the Company intends to continue to invest in its
operations, particularly to support product development and the marketing and
sales of recently introduced products. As such, there can be no assurance that
operating expenses will not continue to increase in 1999 as compared to 1998, or
that the operating expense cuts will prove effective. If the Company's sales do
not correspondingly increase, the Company's business, financial condition, and
results of operations would continue to be materially adversely affected.
Accordingly, there can be no assurance that the Company will achieve
profitability in future periods. The Company is subject to all of the risks
inherent in the operation of a new business enterprise, and there
11
<PAGE>
can be no assurance that the Company will be able to successfully address these
risks.
During the second half of 1997 and the first half of 1998, the Company
significantly expanded the scale of its operations to support potential market
opportunities and to address critical infrastructure and other requirements.
This expansion included the opening of sales offices in the United Arab
Emirates, Singapore, China and Mexico, the acquisition of the assets of the
Cylink Wireless Group, significant investments in research and development to
support product development and services, and the hiring of additional personnel
in all functional areas, including sales and marketing, finance, manufacturing
and operations. Because the Company's sales did not correspondingly increase
during the second half of the year, the Company's results of operations were
materially adversely affected and the cost reduction program was initiated. The
Company raised gross proceeds of $15 million through the issuance of convertible
preferred stock and warrants in December 1998. The Company retired approximately
$40 million of its 4 1/4% Convertible Subordinated Notes ("Notes") between
December 1998 and February 1999 through the issuance of 5,279,257 shares of
Common Stock.
The following table sets forth items from the Consolidated Condensed
Statement of Operations as a percentage of sales for the periods indicated.
Three Months Ended
March 31,
1999 1998
-------- --------
Sales:
Product 72.6% 87.7%
Service 27.4 12.3%
-------- --------
Total sales 100.0 100.0
-------- --------
Cost of sales:
Product 50.1 49.2
Service 19.9 8.0
-------- --------
Total cost of sales 70.0 57.2
-------- --------
Gross profit 30.0 42.8
-------- --------
Operating expenses:
Research and development 25.3 13.2
Selling and marketing 13.5 7.2
General and administrative 15.0 6.8
Goodwill amortization 5.4 1.1
Acquired in-process
research and development 0.0 26.3
-------- --------
Total operating expenses 59.2 54.5
-------- --------
Loss from operations (29.3) (11.7)
Interest expense (6.1) (3.0)
Interest income 0.6 1.5
Other income (expense) 0.4 --
-------- --------
Loss before income taxes (34.4) (13.2)
Provision (benefit) for income taxes -- (4.5)
-------- --------
Loss before extraordinary item (34.4) (8.7)
Extraordinary item: retirement of Notes 19.1 --
-------- --------
Net loss (15.2%) (8.7%)
======== ========
Results of operations for the three months ended March 31, 1999 and 1998
Sales. Sales for the three months ended March 31, 1999 were approximately
$38.0 million, compared to $58.6 million for the same period in the prior year,
a decrease of $20.6 million or 35%. The decrease was primarily due to the market
slowdown for the Company's Tel-Link product line. Sales for the Tel-Link product
line for the three months ended March 31, 1999, and 1998 were approximately
$18.2 million and $35.8 million, respectively. The slowdown in the market is
attributable to the lower demand for the product due in part to the economic
turmoil in the Pacific Rim countries, and increased competition and downward
pricing pressure. Sales to new customers in the first quarter of 1999 (excluding
sales for the Cylink Wireless Group which was acquired on March 28, 1998 and
April 1, 1998, and accounted for as a purchase business combination) were less
than 20% of total sales. For the corresponding period in 1998, sales to new
customers were less than 10% of total sales. For the three months ended March
31, 1999, two customers accounted for 38% of the sales of the Company. For the
three months ended March 31, 1998, five customers accounted for 63% of the sales
of the Company.
12
<PAGE>
Product sales for the three months ended March 31, 1999 were approximately
$27.6 million or 73% of total sales, and service sales were approximately $10.4
million or 27% of total sales. For the corresponding period in 1998, product
sales were $51.4 or 88% of total sales, and service sales were $7.2 million of
12% of total sales. The decrease in product sales was primarily due to the
slowdown in the telecommunication equipment industry, which resulted in
declining prices and surplus capacity in the industry. The increase in service
sales was primarily due to increased presence in international markets through
acquisitions in the United Kingdom and Italy and from introductions to new
customers by the sales force.
Historically, the Company has generated a majority of its sales outside of
the United States. For the three months ended March 31, 1999, the Company
generated approximately $11.6 million or 30% of its sales in the U.S. and
approximately $26.4 million or 70% internationally. For the three months ended
March 31, 1998, the Company generated approximately $9.9 million or 17% of its
sales in the U.S. and approximately $48.7 million or 83% internationally. Many
of the Company's largest customers use the Company's products and services to
build telecommunication network infrastructures. These purchases represent
significant investments in capital equipment and the amounts purchased depend on
the phase of the rollout in a geographic area or a market. Consequently, the
customer may have different purchasing requirements from quarter to quarter, and
may continue to vary the amount purchased from the Company accordingly.
The Company acquired the assets of the Cylink Wireless Group on March 28,
1998 and April 1, 1998. Sales for the Cylink Wireless Group in the first quarter
of 1998 were approximately $2.0 million, as compared with approximately $3.2
million during the first quarter of 1999.
There can be no assurance that sales of the Company's products or services
will increase or that such systems or services will achieve market acceptance.
The Company provides to its customers significant volume price discounts, which
are expected to lower the average selling price of a particular product line as
more units are sold. In addition, the Company expects that the average selling
price of a particular product line will also decline as such product matures,
and as competition increases in the future. Accordingly, the Company's ability
to maintain or increase sales will depend upon many factors, including its
ability to increase unit sales volumes of its systems and to introduce and sell
systems at prices sufficient to compensate for reduced revenues resulting from
declines in the average selling price of the Company's more mature products. To
date, most of the Company's sales have been made to customers located outside
the United States. For risk factors associated with customer concentration,
declining average selling prices, results of operations and international sales,
please see "Certain Factors Affecting the Company-- Customer Concentration", "--
Fluctuations in Operating Results", and "--Decline in Selling Prices" .
Gross Profit. For the three months ended March 31, 1999 and 1998, gross
profit was approximately $11.4 million, or 30% of sales, and approximately $25.1
million, or 42.8% of sales, respectively. The decline in gross margin in the
first quarter of 1999 compared to the corresponding period in 1998 was primarily
due to declining average selling prices for the industry sector and increased
service sales, which generated lower margins.
For the first quarter of 1999 and 1998, product gross profit as a percentage
of product sales was approximately 30.9% and 43.9%, respectively. The decrease
in product gross profit percentage was due to declining average selling prices
and lower sales volumes. Service gross profit as a percentage of service sales
was approximately 27.3% and 35.4% for the first quarter of 1999 and 1998,
respectively. The decline in service gross profit percentage was due to
increased price competition and changes in the service offering mix.
The Company has an ongoing program to reduce the costs of manufacturing its
radio systems. As part of this program, the Company has been attempting to
achieve cost reductions principally through engineering and manufacturing
improvements, production economies and utilization of third party subcontractors
for the manufacture of the Company's radio systems and certain components and
subassemblies used in the systems. The Company is also implementing other cost
reduction programs in an effort to maintain gross margins in the future. There
can be no assurance that the Company's ongoing or future programs can be
accomplished or that they will increase gross profits. For risk factors
associated with gross profit, please see "Certain Factors Affecting the Company-
- -Fluctuations in Operating Results," "--Decline in Selling Prices," "--Product
Quality, Performance and Reliability," and "--Uncertainty in International
Operations."
Research and Development. Expenses consist primarily of costs associated
with personnel and equipment. The Company's research and development activities
include the development of additional frequencies and varying operating features
and related software tools. The Company's software products are integrated into
its hardware products. Software development costs incurred prior to the
establishment of technological feasibility are expensed as incurred. Software
development costs incurred subsequent to the establishment of technological
feasibility and before general release to customers are capitalized, if
material. To date, all software development costs incurred subsequent to the
establishment of technological feasibility have been immaterial.
13
<PAGE>
For the three months ended March 31, 1999 and 1998, research and development
expenses were approximately $9.6 million and $7.7 million, respectively. As a
percentage of sales, research and development expenses increased from 13.2% in
the three months ended March 31, 1998 to 25.3% in the corresponding period in
1999. The percentage increase in research and development expenses during the
three months ended March 31, 1999 as compared to the corresponding period in
1998 was primarily due to the Company's sales decline and the significant
investment in research and development to support product development and
services, including the costs associated with new product development due to the
acquisition of the Cylink Wireless Group in March 1998, and the Company's
engineering efforts to develop a point-to-multipoint product. Though the Company
is taking measures to reduce expenses where appropriate, the Company intends to
continue investing resources for the development of new systems and enhancements
(including additional frequencies and various operating features and related
software tools). As such, there can be no assurance that research and
development expenses will not continue to increase in absolute dollars in 1999
as compared to 1998.
Selling and Marketing. Expenses consist of salaries, investments in
international operations, sales commissions, travel expenses, customer service
and support expenses, and costs related to advertising and trade shows. For the
three months ended March 31, 1999 and 1998, selling and marketing expenses were
approximately $5.1 million and $4.2 million, respectively. As a percentage of
sales, selling and marketing expenses increased from 7.2% in the three months
ended March 31, 1998 to 13.5% in the corresponding period in 1999. The increase
in selling and marketing expenses as a percentage of sales was primarily due to
the lower level of sales in the first quarter of 1999, as compared to the
corresponding period in 1998, and the expansion and start-up of the Company's
international sales organization, including opening sales offices in the United
Arab Emirates, Singapore, China, and Mexico. Though the Company is taking
measures to reduce expenses where appropriate, the Company intends to continue
investing resources to expand its sales and marketing efforts, including the
hiring of additional personnel, and to establish the infrastructure necessary to
support future operations. As such, there can be no assurance that sales and
marketing expenses will not continue to increase in 1999 as compared to 1998.
General and Administrative. Expenses consist primarily of salaries and other
expenses for management, finance, accounting, legal and other professional
services. For the three months ended March 31, 1999 and 1998, general and
administrative expenses were $5.7 million and $3.9 million, respectively. As a
percentage of sales, general and administrative expenses increased from 6.8% in
the three months ended March 31, 1998 to 14.8% in the corresponding period in
1999. This increase in general and administrative expenses as a percentage of
sales was due primarily to a lower level of sales in the three months ended
March 31, 1999, as compared to the corresponding period in 1998, increased
staffing and other costs resulting from the Company's international expansion,
primarily in its services segment, and the acquisition of the Cylink Wireless
Group. Though the Company is taking measures to reduce expenses where
appropriate, the Company expects to continue to incur additional significant
ongoing expenses as a publicly owned company relating to legal, accounting and
other administrative services and expenses, including its class action
litigation. The Company expects general and administrative expenses to increase
in absolute dollars in 1999 as compared to 1998.
Goodwill Amortization. Goodwill represents the excess of the purchase price
over the fair value of the net assets of acquired companies accounted for as
purchase business combinations. Goodwill is amortized based on the expected
revenue stream or on a straight-line basis over the period of expected benefit,
ranging from 3 to 20 years. For the three months ended March 31, 1999 and 1998,
goodwill amortization was $2.1 million and $0.7 million, respectively. The
increase in goodwill amortization in the three months ended March 31, 1999 as
compared to the corresponding period in 1998 was due to the Company recording
amortization expense relating to the acquisition of the assets of the Cylink
Wireless Group, which was acquired on March 28 and April 1, 1998.
Restructuring and Other One-time Charges. During the third quarter of 1998,
the Company's management approved restructuring plans, which included
initiatives to integrate the operations of acquired companies, consolidate
duplicate facilities, and reduce overhead. Total accrued restructuring and
other one-time costs of $26.6 million were recorded in the third quarter of 1998
relating to these initiatives.
The accrued restructuring and other one-time charges and the amounts charged
against the provisions as of March 31, 1999, were as follows (in thousands,
unaudited):
<TABLE>
<CAPTION>
Beginning Expenditures Remaining
Accrual and Write-offs Accrual
--------- -------------- ---------
<S> <C> <C> <C>
Severance and benefits $ 568 $ (568) $ --
Facilities and fixed assets impairment 879 (551) 328
Goodwill impairment 2,884 (2,884) --
Inventory reserve 16,922 (11,718) 5,204
Accounts receivable reserve 5,386 (5,386) --
--------- -------------- ---------
Total accrued restructuring and other one-time charges $26,639 $(21,107) $ 5,532
========= ============== =========
</TABLE>
14
<PAGE>
Management anticipates that additional asset impairments may result in the
future as restructuring plans are implemented and additional assets are taken
out of service and held for sale or disposal. Additional increases in
depreciation expense may occur as asset lives are adjusted as a result of the
integration process.
In-Process research and Development. On March 28, 1998, the Company acquired
substantially all of the assets, and on April 1, 1998, the accounts receivable
of the Cylink Wireless Group. The acquisition was accounted for as a purchase
business combination. Under the purchase method of accounting, the purchase
price is allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of the acquisition with any excess recorded as
goodwill. Results of operations for the Cylink Wirless Group have been included
with those of the Company for periods subsequent to the date of acquisition.
The total purchase price of the acquisition was $63.0 million including
acquisition expenses of $2.5 million. Of the purchase price, $15.4 million has
been assigned to in-process research and development ("IPR&D") and expensed upon
the consummation of the acquisition. In-process and development had no future
use at the date of acquisition and technological feasibility had not been
established.
Among the factors considered in determining the amount of the allocation of
the purchase price to IPR&D were various factors such as estimating the stage of
development of each IPR&D project at the date of acquisition, estimating cash
flows resulting from the expected revenues generated from such projects, and
discounting the net cash flows, in addition to other assumptions. Developed
technology is being amortized over the expected revenue stream of the developed
products. The value of the acquired workforce is being amortized on a straight-
line basis over three years, and the remaining identified intangibles, including
core technology and other intangibles are being amortized on a straight-line
basis over ten years. Due to the timing of the acquisition, there was no
amortization expense related to the acquisition of the Cylink Wireless Group
during the quarter ended March 31, 1998.
In addition, other factors were considered in determining the value assigned
to purchased IPR&D, which consisted of research projects in areas supporting
products which address the growing third world markets by offering a new point
to multi-point product, a faster, less expensive more flexible point-to-point
product, and the development of enhanced Airlink products, consisting of a Voice
Extender, Data Metro II, and RLL Encoding products. At the time of acquisition,
these projects were estimated to be 60%, 85%, and 50% complete, respectively.
During the second quarter of 1998, due to limited staff and facilities, the
Company delayed the research project for the new narrowband point-to-multipoint
project acquired from the Cylink Wireless Group and focused available resources
on the broadband point-to-multipoint project which is targeted for a larger
addressable market. The narrowband point-to-multipoint project has a total
remaining expected development cost of approximately $2.4 million and, due to
the allocation of resources discussed above, is not expected to be completed
prior to the year 2000. The point-to-point project, discussed above, which was
acquired from the Cylink Wireless Group, was completed during the third quarter
of 1998 at an estimated total cost of $2.0 million. The enhanced Airlink
projects were completed during the first quarter of 1999 at an estimated total
cost of $0.6 million.
If the remaining projects are not successfully developed, the Company's sales
and profitability may be adversely affected in future periods. Additionally, the
failure of any particular individual project in-process could impair the value
of other intangible assets acquired. The Company expects to begin to benefit
from the purchased in-process technology in 1999.
Interest and Other Income (Expense). For the first quarter of 1999, interest
expense consisted primarily of interest and fees incurred on borrowings under
the Company's bank line of credit, interest on the principal amount of the
Company's Notes, and finance charges and fees related to the Company's
receivables purchase agreements. For the first quarter of 1998, interest expense
consisted primarily of interest on the principal amount of the Company's Notes,
and finance charges and fees related to the Company's receivables purchase
agreements. The Company incurred interest expense of $2.3 million during the
three-month period ended March 31, 1999 as compared to $1.8 million during the
corresponding period in 1998. The increase in interest expense during the first
quarter of 1999 as compared to the same period in 1998 is due to an increase in
borrowings under the Company's bank line of credit, partially offset by a
reduction in the principal balance of the Notes.
The Company generated interest income of $0.2 million during the three-month
period ended March 31, 1999 as compared to $0.9 million during the corresponding
period in 1998. Interest income consisted primarily of interest generated from
the Company's cash in its interest bearing bank accounts, for both periods
presented.
Other income and expense consist primarily of translation gains and losses
relating to the financial statements of the Company's international
subsidiaries, and trade discounts taken.
During 1998, contracts negotiated in foreign currencies were limited to
British pound sterling contracts and Italian lira contracts, and any impact to
date due to currency fluctuations has been immaterial. However, the Company may
in the future be exposed to the risk of foreign currency gains or losses
depending upon the magnitude
15
<PAGE>
of a change in the value of a local currency in an international market. The
Company has entered into foreign currency hedging transactions to reduce
exposure to foreign exchange risks. As of March 31, 1999 and 1998, the Company
had forward exchange contracts valued at approximately $9.7 million and $15.9
million, respectively. The forward contracts generally have maturities of six
months or less.
Extraordinary Item. In January and February of 1999, the Company exchanged
an aggregate of $25.5 million of its Notes for an aggregate of 2,792,257 shares
of its Common Stock with a fair market value of $18.3 million and recorded an
extraordinary gain of $7.3 million in the first quarter of 1999.
Provision (Benefit) for Income Taxes. The Company's effective tax rates for
the first quarter of 1999 and the year ended December 31, 1998 were 0% and
16.9%, respectively. The Company's effective tax rate is less than the combined
federal and state statutory rate, principally due to net operating losses and
loss credit carry forwards available to offset taxable income.
The Company accounts for income taxes under the liability method, which
recognizes deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, the Company can not determine will more
likely than not be realized.
Though most of the Company's sales are to foreign customers, the majority of
the Company's pre-tax income is domestic as most sales take place in the United
States and then title transfers to the foreign customers.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in August 1991, the Company has financed its operations
and met its capital requirements through net proceeds of approximately $89.5
million from the Company's initial and two follow-on public offerings of its
Common Stock, four preferred stock financings aggregating approximately $32.2
million, including a $15 million preferred stock financing in 1998, the issuance
of Notes with net proceeds of approximately $97.5 million in 1997 and borrowings
under its bank lines of credit and equipment lease arrangements.
The Company used approximately $7.2 million in operating activities during
the three months ended March 31, 1999, primarily due to the net loss (excluding
an extraordinary gain on the retirement of Notes of $7.3 million) of $13.1
million, and a decrease in accounts payable and other accrued liabilities of
$9.1 million and $2.3 million, respectively, and an increase in other assets
of $1.5 million. These uses of cash were partially offset by an increase in
accrued employee benefits of $0.4 million, and depreciation and amortization of
$4.2 million and $2.1 million, respectively, and a decrease in accounts
receivable, inventory, and prepaid expenses and notes receivable, of $5.8
million, $3.6 million, $2.6 million, respectively.
On March 28 and April 1, 1998, the Company acquired substantially all of the
assets of the Wireless Group of Cylink Corporation (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 due July 6, 1998. 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. 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 $15.4 million in the first quarter of 1998.
In connection with the acquisition of the assets of the Cylink Wireless Group,
the Company purchased the net accounts receivable balance of $4.2 million on
April 1, 1998. The consideration for these accounts receivable was included in
the total purchase price of $58.2 million in cash and debt mentioned above.
The Company used approximately $1.3 million in investing activities during
the three months ended March 31, 1999 to acquire capital equipment.
The Company generated approximately $1.2 million in its financing activities
during the three months ended March 31, 1999. The Company received $1.3 million
from banking relationships, principally with the Company's subsidiaries in
Italy, and approximately $0.1 million from the issuance of the Company's Common
Stock pursuant to the Company's stock option and employee stock purchase plans.
These proceeds were offset by payments of approximately $0.2 million for a sale
leaseback transaction and the repayment of notes payable.
16
<PAGE>
At March 31, 1999 and December 31, 1998, net accounts receivable were
approximately $44.7 million and $50.5 million, respectively. The Company has
established a receivables purchase agreement which allows the Company to sell up
to $14 million in accounts receivable to two banks. For this service, the banks
received a fee of between 0.5% and 1.0% plus interest of between 6% and 10% per
annum. In 1999 and 1998, there were no material gains or losses on accounts
receivable sold without recourse. As of March 31, 1999, $13.6 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 March 31, 1999 and December 31, 1998, inventory was
approximately $75.4 million and $79.0 million, respectively.
At March 31, 1999, the Company had working capital of approximately $71.7
million, compared to $81.1 million at December 31, 1998. In recent quarters,
most of the Company's sales have been realized near the end of each quarter,
resulting in a significant investment in accounts receivable at the end of the
quarter. In addition, the Company expects that its investments in accounts
receivable and inventories will continue to be significant and will continue to
represent a significant portion of working capital. Significant investments in
accounts receivable and inventories will 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 March 31, 1999 consisted
of approximately $20.9 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, which provided for borrowings of up to $50.0 million. At March 31,
1999, the Company had borrowed or had used as security for letters of credit the
entire amount available under the line-of-credit. The revolving commitment, as
amended, is reduced from $50.0 million to $40.0 million on August 15, 1999 and
to $30.0 million on October 15, 1999 until maturity on January 15, 2000.
Borrowings under the line are secured by all of the assets of the Company and
its subsidiaries and bear interest at either a base interest rate or a variable
interest rate. The agreement requires the Company to comply with certain
financial covenants including the maintenance of specified minimum ratios.
Amendments to the bank credit agreement have allowed the Company to remain in
compliance with the debt covenants through March 31, 1999. While the amendments
to the covenants have been structured based on the Company's business plan that
would allow the Company to continue to be in compliance with such covenants, the
Company's business plan includes provisions for the infusion of approximately
$15 million of capital during the second quarter of 1999. The Company does not
currently have commitments from any potential investors. Should the Company not
meet its business plan, or should the Company not be able to raise adequate
capital, it is possible that an event of default will occur under the line-of-
credit agreement. If a default is declared by the lenders, cross defaults will
be triggered on the Company's outstanding Notes and other debt instruments
resulting in accelerated repayments of such debts, and the holders of all
outstanding Series B Preferred Stock would have the right to have their stock
redeemed by the Company. Management believes, in the event that the Company
fails to fully meet its business plan, the Company has other alternatives
available which may remedy any negative consequences arising from a potential
default under the agreement. 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 condition or
results of operation. In addition, the Company could be restricted in its
ability to use more flexible registration statements to issue securities and
could be delisted by the Nasdaq National Market. Such events would materially
adversely affect the Company's business, financial condition and results of
operations. Management has implemented plans designed to reduce the Company's
cash requirements through a combination of reductions in components of working
capital, equipment purchases and operating expenditures. 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 condition or results of operations.
On November 5, 1997, the Company issued $100 million in Notes due November 1,
2002. The Notes are convertible at the option of the holder into shares of the
Company's Common Stock at an initial conversion price of $27.46 per share at any
time. The Notes are redeemable by the Company, beginning on November 5, 2000,
upon 30 days notice, subject to a declining redemption price. Interest on the
Notes will be paid semi-annually on May 1 and November 1 of each year. On
December 30 and 31, 1998, the Company issued 2,467,000 shares of Common Stock in
exchange for $14.4 million of Notes and recorded an extraordinary gain of $5.3
million. On January 4 and February 2, 1999, the Company issued an additional
2,792,257 shares of Common Stock in exchange for $25.5 million of Notes and
recorded an extraordinary gain of $7.3 million in the first quarter of 1999.
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 repayment of its debt, 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
17
<PAGE>
facilities, working capital requirements for the Company's acquired entities,
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, cash flow from operations and funds available, if any, from
the Company's bank line of credit are adequate to fund its operations in the
ordinary course of business 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. Specifically, given the Company's
obligations to repay its bank and other debt, the Company intends to raise
additional capital.
The Company has in the past and may from time to time in the future sell
its receivables, as part of an overall customer financing program, with
immaterial recourse to the Company. There can be no assurance that the Company
will be able to locate parties to purchase such receivables on acceptable terms,
or at all. To the extent that the Company's financial resources are insufficient
to fund the Company's activities and to repay its debts, additional funds will
be required. There can be no assurance that any additional financing will be
available to the Company on acceptable terms, or at all, when required by the
Company. If additional funds are raised by issuing equity securities, further
dilution to the existing stockholders will result. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate one or
more of its research and development or manufacturing programs, cease its
acquisition activities or obtain funds through arrangements with partners or
others that may require the Company to relinquish rights to certain of its
technologies or potential products or other assets that the Company would not
otherwise relinquish. Accordingly, the inability to obtain such financing could
have a material adverse effect on the Company's business, financial condition
and results of operations. For risk factors associated with the Company's future
capital requirements, please see "Certain Factors Affecting the Company --
Additional Capital Requirements."
CERTAIN FACTORS AFFECTING THE COMPANY
History of Losses
From inception to March 31, 1999, the Company had generated an accumulated
deficit of approximately $44.6 million. The decrease in retained earnings from
$18.4 million at December 31, 1997 to an accumulated deficit of $44.6 million at
March 31, 1999 was due primarily to the net loss of $55.3 million in 1998 which
included restructuring and other charges of $26.6 million and acquired in-
process research and development expenses of approximately $15.4 million related
to the acquisition of the assets of the Cylink Wireless Group. In addition to
these charges, the net loss was also due to a downturn and slowdown in the
telecommunications equipment industry as a whole which began in the second half
of the year, in part due to the economic turmoil in Asia.
From October 1993 through March 31, 1999, the Company generated sales of
approximately $687.8 million, of which $233.0 million or 34.0% was generated in
the two years ended March 31, 1999. However, the Company does not believe such
growth rates are indicative of future operating results. During the third and
fourth quarter of 1998, and the first quarter of 1999, the Company experienced a
significant decrease in sales. This decrease in revenue was principally the
result of the market slowdown for the Company's Tel-Link product line and for
the industry segment in general, in particular the economic turmoil in Asia.
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 of 1998 or
that sales will not decline. The Company's net sales for the first quarter of
1999 (which included sales from many recently acquired businesses) were
approximately 35% less than its sales for the comparable period in 1998. 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. The Company expects pricing
pressures to continue for the next several quarters and also expects gross
margins as a percentage of revenues to continue to be below comparable periods
for the next several quarters.
During 1997 and 1998, operating expenses increased more rapidly than the
Company had anticipated, and these increases also contributed to net losses. The
Company plans to continue the Company's investments in operations, particularly
to support product development and the marketing and sales of recently
introduced products. In parallel, the Company has undertaken cost-cutting
efforts in other areas. However, if sales do not increase, the Company's results
of operations, business and financial condition may continue to be materially
adversely affected. Accordingly, the Company may not achieve profitability for
the next several quarters.
18
<PAGE>
Customer Concentration
For 1998 and the first quarter of 1999, approximately two hundred customers
accounted for substantially all of the Company's sales, and one customer
individually accounted for over 10% of the Company's 1998 sales. In the first
quarter of 1999, the Company had two customers which individually accounted for
over 10% of the Company's sales. Sales to one customer accounted for
approximately 23% and 27% of the Company's sales in 1998 and the first quarter
of 1999, respectively. Many of the Company's major customers are located in
foreign countries, primarily in the United Kingdom and Europe. The Company
anticipates continuing to sell products and services to existing customers and
adding new customers, many of which the Company expects to continue to be
located outside of the United States.
Similarly, several of the Company's subsidiaries are dependent on a few
customers. Some of these customers are implementing new networks and are
themselves in the early stages of development. They may require additional
capital to fully implement their planned networks, which may be unavailable to
them on an as-needed basis.
If the Company's customers cannot finance their purchases of the Company's or
its subsidiaries products or services, then this may materially adversely affect
the Company's business, operations and financial condition. Financial
difficulties of existing or potential customers may also limit the overall
demand for the Company's products and services. Specifically, both current
customers and potential future customers in the telecommunications industry have
reportedly undergone financial difficulties and may therefore limit their future
orders. The Company's ability to achieve sales in the future will depend in
significant part upon the Company's ability to:
. obtain and fulfill orders from, maintain relationships with and provide
support to existing and new customers;
. manufacture systems in volume on a timely and cost-effective basis; and
. meet stringent customer performance and other requirements and shipment
delivery dates.
The Company's success will also depend in part on the financial condition,
working capital availability and success of the Company's customers. As a
result, any cancellation, reduction or delay in orders or shipments, for
example, as a result of manufacturing or supply difficulties or a customer's
inability to finance its purchases of the Company's products or services, may
materially adversely affect the Company's business. Some difficulties of this
nature have occurred in the past and the Company believes they will occur in the
future.
Finally, acquisitions in the communications industry are common, which
further concentrates the customer base and may cause some orders to be delayed
or cancelled. No assurance can be given that the Company's sales will increase
in the future or that the Company will be able to support or attract customers.
Fluctuations in Operating Results
The Company has experienced and will continue to experience significant
fluctuations in sales, gross margins and operating results. The procurement
process for most of its current and potential customers is complex and lengthy.
As a result, the timing and amount of sales is often difficult to predict
reliably. The sale and implementation of its products and services generally
involves a significant commitment of senior management, as well as its sales
force and other resources. The sales cycle for its products and services
typically involves technical evaluation and commitment of cash and other
resources and delays often occur. Delays are frequently associated with, among
other things:
. customers' seasonal purchasing and budgetary cycles;
. education of customers as to the potential applications of its products
and services, as well as related product-life cost savings;
. compliance with customers' internal procedures for approving large
expenditures and evaluating and accepting new technologies;
. compliance with governmental or other regulatory standards;
. difficulties associated with customers' ability to secure financing;
. negotiation of purchase and service terms for each sale; and
. price decreases required to secure purchase orders.
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A single customer's order scheduled for shipment in a quarter can represent a
large portion of the Company's potential sales for such quarter. 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 been and could in the future be materially adversely affected by a
delay, rescheduling or cancellation of even one purchase order. In addition, the
Company's operating results may be affected by an inability to obtain such large
orders from single customers in the future.
Uncertainty in Telecommunications Industry
Although much of the anticipated growth in the telecommunications
infrastructure is expected to result from the entrance of new service providers,
many new providers do not have the financial resources of existing service
providers. If these new service providers are unable to adequately finance their
operations, they may cancel or delay orders. Moreover, purchase orders are often
received and accepted far in advance of shipment and, as a result, the Company
typically permits orders to be modified or canceled with limited or no
penalties. In addition, any failure to reduce actual costs to the extent
anticipated when an order is received substantially in advance of shipment or an
increase in anticipated costs before shipment could materially adversely affect
the Company's gross margin for such orders.
Inventory
The Company's customers have also increasingly been requiring product
shipment upon ordering rather than submitting purchase orders far in advance of
expected shipment dates. This practice requires the Company to keep inventory on
hand for immediate shipment. Given the variability of customer need and
purchasing power, it is hard to predict the amount of inventory needed to
satisfy customer demand. If the Company over- or under-estimates inventory
requirements, its results of operations could continue to be adversely affected.
In particular, increases in inventory could materially adversely affect
operations if such inventory is not used or becomes obsolete.
Shipment delays
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 for any reason may cause sales in a particular quarter to
fall significantly below the Company's expectations. Such delays have occurred
in the past due to, for example, unanticipated shipment rescheduling, pricing
concessions to customers, cancellations or deferrals by customers, competitive
and economic factors, unexpected manufacturing or other difficulties, delays in
deliveries of components, subassemblies or services by suppliers and failure to
receive anticipated orders. The Company cannot determine whether similar or
other delays might occur in the future, but expect that some or all of such
problems might recur.
Expenses
Magnifying the effects of any revenue shortfall, a material portion of the
Company's expenses are fixed and difficult to reduce should revenues not meet
expectations. The failure to reduce actual costs to the extent anticipated, or
an increase in anticipated costs before shipment of an order or orders could
affect the gross margins for such orders. If the Company or its competitors
announce new products, services and technologies, it could cause customers to
defer or cancel purchases of its systems and services. Additional factors have
caused and will continue to cause the Company's performance to vary
significantly from period to period. These factors include:
. new product introductions and enhancements and related costs;
. weakness in Asia and Latin America, resulting in overcapacity;
. ability to manufacture and produce sufficient volumes of systems and meet
customer requirements;
. manufacturing efficiencies and costs;
. customer confusion due to impact of actions of competitors;
. variations in mix of sales through direct efforts or through distributors
or other third parties;
. variations in mix of systems and related software tools sold and services
provided as margins from service revenues are typically lower than margins
from product sales;
. operating and new product development expenses;
. product discounts;
. accounts receivable collection, in particular those acquired in recent
acquisitions;
. changes in its pricing or customers' or suppliers' pricing;
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. inventory write-downs and obsolescence;
. market acceptance by customers and timing of availability of new products
and services provided by the Company or its competitors;
. acquisitions, including costs and expenses;
. use of different distribution and sales channels;
. fluctuations in foreign currency exchange rates;
. delays or changes in regulatory approval of systems and services;
. warranty and customer support expenses;
. severance costs;
. consolidation and other restructuring costs;
. the pending stockholder class action lawsuits;
. need for additional financing;
. customization of systems;
. general economic and political conditions; and
. natural disasters.
The Company's results of operations have been and will continue to be
influenced by competitive factors, including pricing, availability and demand
for other competitive products and services. All of the above factors are
difficult for the Company to forecast, and could materially adversely affect its
business, financial condition and results of operations. The Company believes
that period-to-period comparisons are thus not necessarily meaningful and should
not be relied upon as indications of future performance.
Because of all of the foregoing factors, in some future quarter or quarters
the Company's operating results may continue to be below those projected by
public market analysts, and the price of its common stock may continue to be
materially adversely affected. Because of lack of order visibility and the
current trend of order delays, deferrals and cancellations, the Company cannot
assure you that it will be able to achieve or maintain its current or recent
historical sales levels.
The Company incurred a net loss for each of the quarters in 1998, and for the
first quarter of 1999. Should current market conditions continue to deteriorate,
the Company may also 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 the Company's cost
structure with anticipated revenues. Any subsequent actions 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.
Acquisition Related Risks
The Company may be unable to realize the full value of its past acquisitions.
Since April 1996, the Company has acquired nine complementary companies and
businesses. Integration and management of these companies into the Company's
business is ongoing. The Company has encountered or expects to encounter the
following problems relating to such transactions:
. difficulty of assimilating operations and personnel of combined companies;
. potential disruption of ongoing business;
. inability to retain key technical and managerial personnel;
. inability of management to maximize financial and strategic position
through integration of acquired businesses;
. additional expenses associated with amortization of acquired intangible
assets;
. dilution to existing stockholders;
. maintenance of uniform standards, controls, procedures and policies;
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. impairment of relationships with employees and customers as result of
integration of new personnel;
. risks of entering markets in which it has no or limited direct prior
experience; and
. operation of companies in different geographical locations with different
cultures.
The Company may not be successful in overcoming any or all of these risks or
any other problems encountered in connection with such acquisitions, and such
transactions may materially adversely affect its business, financial condition
and results of operations or require divestment of one or more business units or
a charge due to impairment of assets, in particular, goodwill.
The Company may have to acquire new businesses
As part of its overall strategy, the Company plans to continue acquisitions
of or investments in complementary companies, products or technologies and to
continue entering into joint ventures and strategic alliances with other
companies. Its success in future acquisition transactions may, however, be
limited. The Company competes for acquisition and expansion opportunities
against many entities that have substantially greater resources. The Company may
not be able to successfully identify suitable candidates, pay for or complete
acquisitions, or expand into new markets. Certain of the Company's acquisitions
have not produced the benefits originally anticipated by the Company and such
acquired entity. Once integrated, acquired businesses may not achieve comparable
levels of revenues, profitability, or productivity to its existing business, or
the stand alone acquired company, or otherwise perform as expected. Also, as
commonly occurs with mergers of technology companies during the pre-merger and
integration phases, aggressive competitors may also undertake formal initiatives
to attract customers and to recruit key employees through various incentives.
Moreover, if the Company proceeds with acquisitions in which the consideration
consists of cash, a substantial portion of its limited cash could be used to
consummate its acquisitions, as was the case with the acquisition of the Cylink
Wireless Group. 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. See "-Management of Growth."
Accounting Issues Related to Acquisitions
In addition, many business acquisitions must be accounted for under the
purchase method of accounting for financial reporting purposes. Many of the
attractive acquisition candidates are technology companies which tend to have
insignificant amounts of tangible assets and significant intangible assets, and
the acquisition of these businesses would typically result in substantial
charges related to the amortization of such intangible assets. For example, all
of the Company's past acquisitions to date, except the acquisitions of Control
Resources Corporation, RT Masts Limited and Telematics, Inc. have been accounted
for under the purchase method of accounting, and as a result, a significant
amount of goodwill is being amortized. This amortization expense may have a
significant effect on the Company's financial results.
Contract Manufacturers and Limited Sources of Supply
The Company's internal manufacturing capacity is very limited. The Company
uses contract manufacturers to produce its systems, components and subassemblies
and expects to rely increasingly on these manufacturers in the future. The
Company also relies on outside vendors to manufacture certain other components
and subassemblies. Its internal manufacturing capacity and that of its contract
manufacturers may not be sufficient to fulfill its orders. The Company's 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 its business, financial condition and results of
operations.
In addition, certain components, subassemblies and services necessary for the
manufacture of its systems are obtained from a sole supplier or a limited group
of suppliers. In particular, Eltel Engineering S.r.L. and Associates, Milliwave
and Xilinx, Inc. are sole source or limited source suppliers for critical
components used in its radio systems.
The Company's reliance on contract manufacturers and on sole suppliers or a
limited group of suppliers and increasing reliance on contract manufacturers and
suppliers involves risks. The Company has experienced an inability to obtain an
adequate supply of finished products and required components and subassemblies.
As a result, the Company has reduced control over the price, timely delivery,
reliability and quality of finished products, components and subassemblies. The
Company does not have long-term supply agreements with most of its manufacturers
or suppliers. The Company has experienced problems in the timely delivery and
quality of products and certain components and subassemblies from vendors. Some
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 would require the Company to seek alternative
sources of supply, or to manufacture finished
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products or components and subassemblies internally. As manufacture of its
products and certain of its components and subassemblies is an extremely complex
process, finding and educating new vendors could delay the Company's ability to
ship its systems, which could damage relationships with current or prospective
customers and materially adversely affect its business, financial condition and
results of operations.
Management of Growth
Recently, in response to market declines and poor performance in its sector
generally and its lower than expected performance over the last several
quarters, the Company introduced measures to reduce operating expenses,
including reductions in its workforce in July, September and November 1998.
However, prior to such 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 leasing additional space, opening branch offices and subsidiaries in
the United Kingdom, Italy, Germany, Mexico, United Arab Emirates, China and
Singapore, opening design centers in the United Kingdom and the United States,
acquiring a large amount of inventory and funding accounts receivable, and
acquiring nine businesses. The Company had also invested significantly in
research and development to support product development and services. Further,
the Company had hired additional personnel in all functional areas, including in
sales and marketing, manufacturing and operations and finance. The Company
experienced significantly higher operating expenses than in prior years as a
result of this expansion. A material portion of these expenses remain
significant fixed costs.
In addition, 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 are conducting evaluations of these products. The Company will
continue to invest additional resources in plant and equipment, inventory,
personnel and other items, to begin production of these products and to provide
any necessary marketing and administration to service and support these new
products. Accordingly, in addition to the effect its recent performance has had
on gross profit margin and inventory levels, its gross profit margin and
inventory levels may be further adversely impacted in the future by start-up
costs associated with the initial production and installation of these new
products. Start-up costs may include additional manufacturing overhead,
additional allowance for doubtful accounts, inventory and warranty reserve
requirements and the creation of service and support organizations. Additional
inventory on hand for new product development and customer service requirements
also increases the risk of inventory write-downs. Based on the foregoing, if its
sales do not increase, its results of operations will continue to be materially
adversely affected.
Expansion of its operations and acquisitions have caused and continue to
impose a significant strain on the Company's management, financial,
manufacturing and other resources and have disrupted its normal business
operations. The Company's ability to manage any possible future growth may
depend upon significant expansion of its manufacturing, accounting and other
internal management systems and the implementation of a variety of systems,
procedures and controls, including improvements relating to inventory control.
In particular, the Company must successfully manage and control 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 third party manufacturers and suppliers. The Company
cannot be certain that attempts to manage or expand its marketing, sales,
manufacturing and customer support efforts will be successful or result in
future additional sales or profitability. The Company must also more efficiently
coordinate activities in its companies and facilities in Rome and Milan, Italy,
France, Poland, the United Kingdom, Mexico, United Arab Emirates, New Jersey,
Florida, Virginia, Washington and elsewhere. For a number of reasons, the
Company has in the past experienced and may continue to experience significant
problems in these areas. For example, the Company has experienced difficulties
due to the acquired businesses utilizing differing business and accounting
systems, currencies, and a variety of unique customs, culture, and language
barriers. Additionally, the products and associated marketing and sales
processes differ for each acquisition. As a result of the foregoing, as well as
difficulty in forecasting revenue levels, the Company will continue to
experience fluctuations in revenues, costs, and gross margins.
Any failure to implement efficiently, coordinate and improve systems,
procedures and controls, including improvements relating to inventory control
and coordination with its subsidiaries, at a pace consistent with its business,
could cause continued inefficiencies, additional operational complexities and
expenses, greater risk of billing delays, inventory write-downs and financial
reporting difficulties. Such problems could have a material adverse effect on
its business, financial condition and results of operations.
A significant ramp-up of production of products and services could require
the Company to make substantial capital investments in equipment and inventory,
in recruitment and training additional personnel and possibly in investment in
additional manufacturing facilities. If undertaken, the Company anticipates
these expenditures would be made in advance of increased sales. In such event,
gross margins would be adversely affected from time-to-time
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due to short-term inefficiencies associated with the addition of equipment and
inventory, personnel or facilities, and cost categories may periodically
increase as a percentage of revenues.
Decline in Selling Prices
The Company believes that average selling prices and possibly gross margins
for its systems and services will decline in the long term. Reasons for such
decline may include the maturation of such systems, the effect of volume price
discounts in existing and future contracts and the intensification of
competition. To offset declining average selling prices, the Company believes it
must take a number of steps, including:
. successfully introducing and selling new systems on a timely basis;
. developing new products that incorporate advanced software and other
features that can be sold at higher average selling prices; and
. reducing the costs of its systems through contract manufacturing, design
improvements and component cost reduction, among other actions.
If the Company cannot develop new products in a timely manner, fails to
achieve customer acceptance or does not generate higher average selling prices,
then the Company would be unable to offset declining average selling prices. If
the Company is unable to offset declining average selling prices, its gross
margins will decline.
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 for customers in the early phases of business development. In
addition, many of its foreign customers are granted longer payment terms than
those typically existing in the United States. The Company typically does not
require collateral or other security to support customer receivables, but in
some instances the Company has required down payments or letters of credit from
a customer before booking their order. The Company has had difficulties in the
past in receiving payment in accordance with its policies, particularly from
customers awaiting financing to fund their expansion and from customers outside
of the United States. The days sales outstanding of receivables have also
recently increased. Such difficulties may continue in the future, which could
have a material adverse effect on its business, financial condition and results
of operations.
The Company's bank line of credit currently permits the Company to sell up to
$25 million of its receivables at any one time to a limited group of purchasers
on a non-recourse basis. The Company has in the past utilized such sales and may
continue from time to time to sell its receivables, as part of an overall
customer financing program. However, the Company may not be able to locate
parties to purchase such receivables on acceptable terms or at all.
Product Quality, Performance and Reliability
The Company has limited experience in producing and manufacturing systems and
contracting for such manufacture. customers require very demanding
specifications for quality, performance and reliability. As a consequence,
problems may occur with respect to the quality, performance and reliability of
its systems or related software tools. If such problems occur, the Company could
experience increased costs, delays or cancellations or reschedulings of orders
or shipments, delays in collecting accounts receivable and product returns and
discounts. If any of these events occur, it would have a material adverse effect
on its business, financial condition and results of operations.
In addition, to maintain its ISO 9001 registration, the Company must
periodically undergo certification assessment. Failure to maintain such
registration could materially adversely affect its business. The Company
completed ISO 9001 registration for its United Kingdom sales and customer
support facility in 1996, its Geritel facility in Italy in 1996, and its
Technosystem facility in Italy in 1997. Other facilities are also attempting to
obtain ISO 9001 registration. Such registrations may not be achieved and the
Company may be unable to maintain those registrations the Company has already
completed. Any such failure could have a material adverse effect on its
business, financial condition and results of operations.
Changes in Financial Accounting Standards
The Company prepare its financial statements in conformity with generally
accepted accounting principles ("GAAP"). GAAP is subject to interpretation by
the American Institute of Certified Public Accountants, the Securities and
Exchange Commission and various bodies formed to interpret and create
appropriate accounting policies. A change in these policies can have a
significant effect on its reported results, and may even affect its reporting of
transactions completed before a change is announced. Accounting policies
affecting many other aspects of its business, including rules relating to
software and license revenue recognition, purchase and pooling-of-interests
accounting for business combinations, employee stock purchase plans and stock
option grants have recently
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been revised or are under review by one or more groups. Changes to these rules,
or the questioning of current practices, may have a material adverse effect on
its reported financial results or in the way the Company conducts its business.
In addition, the preparation of financial statements in conformity with GAAP
requires the Company to make estimates and assumptions that affect the recorded
amounts of assets and liabilities, disclosure of those assets and liabilities at
the date of the financial statements and the recorded amounts of expenses during
the reporting period. A change in the facts and circumstances surrounding these
estimates could result in a change to the estimates and impact future operating
results.
Market Acceptance
The Company's future operating results depend 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. The volume and variety of wireless telecommunications services
or the markets for and acceptance of such services may not continue to grow as
expected. The growth of such services may also fail to create anticipated demand
for its systems. Because these markets are relatively new, predicting which
segments of these markets will develop and at what rate these markets will grow
is difficult. In addition to its other products, the Company has recently
invested significant time and resources in the development of point-to-
multipoint radio systems. If the licensed millimeter wave, spread spectrum
microwave radio or point-to-multipoint microwave radio market and related
services for its systems fails to grow, or grows more slowly than anticipated,
its business, financial condition and results of operations will 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. Communications providers may not make the necessary
investment in such infrastructure, and the creation of this infrastructure may
not occur in a timely manner. Moreover, one potential application of the
Company's technology--use of its systems in conjunction with the provision of
alternative wireless access in competition with the existing wireline local
exchange providers--depends on the pricing of wireless telecommunications
services at rates competitive with those charged by wireline telephone
companies. Rates for wireless access must become competitive with rates charged
by wireline companies for this approach to be successful. If wireless access
rates are not competitive, consumer demand for wireless access will be
materially adversely affected. If the Company allocates resources to any market
segment that does not grow, it may be unable to reallocate resources to other
market segments in a timely manner, ultimately curtailing or eliminating its
ability to enter such segments.
Certain current and prospective customers are delivering services and
features that use 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 offer systems with
superior price/performance characteristics and extensive customer service and
support. Additionally, the Company must 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 using alternative
technologies in their next generation of systems and networks.
Prospective customers may not design their systems or networks to include its
systems. Existing customers may not continue to include its systems in their
products, systems or networks in the future. The Company's technology may not
replace existing technologies and achieve widespread acceptance in the wireless
telecommunications market. Failure to achieve or sustain commercial acceptance
of its currently available radio systems or to develop other commercially
acceptable radio systems would materially adversely affect us. Also, industry
technical standards may change or, if emerging standards become established, the
Company may not 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 is experiencing intense competition worldwide
from a number of leading telecommunications companies. Such companies offer a
variety of competitive products and services and broader telecommunications
product lines, and include Adtran, Inc., Alcatel Network Systems, Bosch Telekom,
California Microwave, Inc., Digital Microwave Corporation (which has recently
acquired other competitors, including Innova International Corp. and MAS
Technology, Ltd.), Ericsson Limited, Harris Corporation-Farinon Division, Larus
Corporation, Lucent T.R.T., NEC, Nokia Telecommunications, Nortel/BNI, Philips
T.R.T., SIAE, Siemens, Utilicom and Western Multiplex Corporation.
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Many of these companies have greater installed bases, financial resources and
production, marketing, manufacturing, engineering and other capabilities than
the Company does. In early 1998, the Company acquired the Cylink Wireless Group
which 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 Cylink Wireless 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 compete in the future with other market entrants
offering competing technologies. Some of the Company's current and prospective
customers and partners have developed, are currently developing or could
manufacture products competitive with the Company's. Nokia and Ericsson have
recently developed new competitive radio systems.
The principal elements of competition in its 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 competitors have announced the introduction of new
competitive products, including related software tools and services, and the
acquisition of other competitors and competitive technologies. The Company
expects 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 its competitors
could cause a decline in sales or loss of market acceptance of its systems. New
offerings could also make the Company's systems, services or technologies
obsolete or non-competitive. In addition, the Company are experiencing
significant price competition and expect such competition to intensify.
The Company believes that to be competitive, the Company will need to expend
significant resources on, among other items, new product development and
enhancements. In marketing the Company's systems and services, the Company will
compete with 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. The Company may not be able
to compete successfully in the future.
Rapid Technological Change
Rapid technological change, frequent new product introductions and
enhancements, product obsolescence, changes in end-user requirements and
evolving industry standards characterize the communications market. The
Company's ability to compete in this market will depend upon successful
development, introduction and sale of new systems and enhancements and related
software tools, on a timely and cost-effective basis, in response to changing
customer requirements. Recently, the Company has been developing point-to-
multipoint radio systems. Any success in developing new and enhanced systems,
including point-to-multipoint systems, and related software tools will depend
upon a variety of factors. Such factors include:
. new product selection;
. integration of various elements of complex technology;
. timely and efficient implementation of manufacturing and assembly
processes and cost reduction programs;
. development and completion of related software tools, system performance,
quality and reliability of systems;
. development and introduction of competitive systems; and
. timely and efficient completion of system design.
The Company has experienced and continues to experience delays in customer
procurement and in completing development and introduction of new systems and
related software tools, including products acquired in acquisitions. Moreover,
the Company may not be successful in selecting, developing, manufacturing and
marketing new systems or enhancements or related software tools. Also, errors
could be found in the Company's systems after commencement of commercial
shipments. Such errors could result in the loss of or delay in market
acceptance, as well as expenses associated with re-work of previously delivered
equipment. The Company's inability 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 its business, financial condition and results of
operations.
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Uncertainty in International Operations
In doing business in international markets, the Company faces economic,
political and foreign currency fluctuations that are more volatile than those
commonly experienced in the United States and other areas. 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,
Technosystem S.p.A., Cemetel S.p.A., and Geritel S.p.A., and two United Kingdom-
based companies, RT Masts Limited and Telesys Limited, as well as the
acquisition of the assets of the Wireless Group of Cylink Corporation (the
"Cylink Wireless Group"), a division with substantial international operations.
These companies 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 are denominated
in other foreign currencies, including Italian Lira. A decrease in the value of
foreign currencies relative to the United States dollar could result in
decreased margins from those transactions. For international sales that are
United States dollar-denominated, such a decrease could make its systems less
price-competitive and could have a material adverse effect upon its financial
condition. The Company has in the past mitigated 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 are inherent in the
Company's international business activities. Such risks 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;
. 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;
. the difficulty in accounts receivable collections; and
. political and economic instability.
In addition, 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.
In many cases, local regulatory authorities own or strictly regulate
international telephone companies. Established relationships between government
owned or controlled telephone companies and their traditional indigenous
suppliers of telecommunications often limit access to such markets. 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 limit its ability to expand operations. The Company's inability to
identify suitable parties for such relationships, or even if identified, to form
and maintain strong relationships could prevent the Company from generating
sales of products and services in targeted markets or industries. Moreover, even
if such relationships are established, the Company may be unable to increase
sales of products and services through such relationships.
Some of the Company's potential markets include 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. If such events occur, any demand for its
systems in these countries will be similarly limited or delayed. Also, in
developing markets, economic, political and foreign currency fluctuations may be
even more volatile than conditions in other developed areas. Such volatility
could have a material adverse effect on its ability to develop or continue to do
business in such countries.
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Countries in the Asia/Pacific and Latin American regions have recently
experienced weaknesses in their currency, banking and equity markets. These
weaknesses have adversely affected and could continue to adversely affect demand
for products, the availability and supply of product components to the Company
and, ultimately, its consolidated results of operations.
Extensive Government Regulation
Radio communications are extensively regulated by the United States, 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. Historically, in many developed countries, the
limited availability of radio frequency spectrum has inhibited the growth of
wireless telecommunications networks.
Each country's regulatory process differs. To operate in a jurisdiction, the
Company must obtain regulatory approval for its systems and comply with
differing regulations. Regulatory bodies worldwide continue to adopt 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. 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 products and services and
incur substantial costs to comply with such regulations and changes.
In addition, the Company is also affected by domestic and international
authorities' regulation of the allocation and auction of the radio frequency
spectrum. Equipment to support new systems and services can be marketed only if
permitted by governmental regulations and if suitable frequency allocations are
auctioned to service providers. Establishing new regulations and obtaining
frequency allocation at auction is a complex and lengthy process. If PCS
operators and others are delayed in deploying new systems and services, the
Company could experience delays in orders. Similarly, failure by regulatory
authorities to allocate suitable frequency spectrum could have a material
adverse effect on its results. In addition, delays in the radio frequency
spectrum auction process in the United States could delay its ability to develop
and market equipment to support new services.
The Company operate in a regulatory environment subject to significant
change. Regulatory changes, which are affected by political, economic and
technical factors, could significantly impact its operations by restricting its
development efforts and those of its customers, making current systems obsolete
or increasing competition. Any such regulatory changes, including changes in the
allocation of available spectrum, could have a material adverse effect on its
business, financial condition and results of operations. The Company may also
find 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.
Additional Capital Requirements
Future capital requirements will depend upon many factors, including the
development of new products and related software tools, potential acquisitions,
maintenance of adequate manufacturing facilities and contract manufacturing
agreements, progress of research and development efforts, expansion of marketing
and sales efforts, and the status of competitive products. Additional financing
may not be available in the future on acceptable terms, or at all. The continued
existence of a substantial amount of indebtedness incurred through the issuance
of the Company's Notes, the incurrence of debt under the Company's bank line of
credit and the rights of the holders of the Series B Preferred Stock may affect
the Company's ability to raise additional financing. Given the recent price for
its Common Stock, if additional funds are raised by issuing equity securities,
significant dilution to its stockholders could result.
The Company has, however, recently retired approximately $40 million of its
Notes in exchange for approximately 5.3 million shares of its Common Stock. By
retiring the debt at a significant discount from its face value, the Company
realized an immediate improvement to its balance sheet, and expects to improve
future earnings and cash flow by reducing interest expense. The Company may
exchange additional Notes for shares of Common Stock or, alternatively,
refinance or exchange the remainder of the Notes and/or the bank debt or
exchange the Notes for other forms of securities. The Company has also recently
issued 15,000 shares of Series B Preferred Stock and warrants to purchase up to
1,242,257 shares of its Common Stock in exchange for a $15 million investment.
These transactions have had and may continue to have a substantial dilutive
effect on its stockholders and may make it difficult for the Company to obtain
additional future financing, if needed.
If adequate funds are not available, the Company may be required to
restructure or refinance its debt or delay, scale back or eliminate research and
development, acquisition or manufacturing programs. The Company may also
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need to 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.
Class Action Litigation
State Actions
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 P-Com stockholders who purchased or
otherwise acquired its Common Stock between April 15, 1997 and September 11,
1998. The plaintiffs allege various state securities laws violations by P-Com
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 P-Com stockholders who purchased or otherwise acquired its
Common Stock between April 1, 1998 and September 11, 1998. The plaintiff alleges
various state securities laws violations P-Com 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 who purchased or otherwise acquired its Common
Stock between April 15, 1997 and September 11, 1998. This complaint is 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.
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 P-Com stockholders who purchased
or otherwise acquired its Common Stock between April 15, 1997 and September 11,
1998. This complaint is 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.
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 P-Com stockholders who purchased or otherwise acquired its
Common Stock between April 15, 1997 and September 11, 1998. This complaint is
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.
On December 3, 1998, the Superior Court of California, County of Santa Clara,
entered an order consolidating all of the above complaints. On January 15, 1999,
the plaintiffs filed a consolidated amended class action complaint superseding
all of the foregoing complaints. On March 1, 1999, defendants filed a demurrer
to the consolidated amended complaint and each cause of action stated therein.
On May 13, 1999, the Court heard the defendants' demurrer and sustained the
demurrer with leave to amend the claims under state securities laws and the
common law claim of fraud. A claim under the Business and Professions Code
remains.
Federal Actions
On November 13, 1998, a putative class action complaint was filed in the
United States District Court, Northern District of California, by Robert Schmidt
on behalf of himself and other P-Com stockholders who purchased or otherwise
acquired its Common Stock between April 15, 1997 and September 11, 1998. The
plaintiff alleged violations of the Securities Exchange Act of 1934 by P-Com and
certain of its officers and directors. The complaint sought unquantified
compensatory damages, attorneys' fees and injunctive and/or equitable relief. On
January 26, 1999, the plaintiff voluntarily dismissed the Schmidt action. The
court entered an order dismissing the action without prejudice on January 29,
1999.
On December 3, 1998, a putative class action complaint was filed in the
United States District Court, Northern District of California, by Robert Dwyer
on behalf of himself and other P-Com stockholders who purchased or otherwise
acquired its Common Stock between April 15, 1997 and September 11, 1998. The
plaintiff alleged violations of the Securities Exchange Act of 1934 by P-Com and
certain of its officers and directors. The complaint sought unquantified
compensatory damages, attorneys' fees and injunctive and/or equitable relief. On
December 22, 1998 and February 2, 1999, the plaintiff sought to voluntarily
dismiss this action. On February 11, 1999, the court entered an order dismissing
the action without prejudice.
All of 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 its business, prospects, financial condition and results of
operations. Even if all of the litigation is resolved in its favor, the defense
of such litigation may entail considerable cost and the significant diversion of
efforts of management,
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either of which may have a material adverse effect on its business, prospects,
financial condition and results of operations.
Protection of Proprietary Rights
The Company relies on a combination of patents, trademarks, trade secrets,
copyrights and other measures to protect its intellectual property rights. The
Company generally enters into confidentiality and nondisclosure agreements with
service providers, customers and others to limit access to and distribution of
proprietary rights. The Company also enters into software license agreements
with customers and others. However, such measures may not provide adequate
protection for its trade secrets or other proprietary information for a number
of reasons. For example, its trade secrets or proprietary technology may
otherwise become known or be independently developed by competitors, and the
Company may not be able to otherwise meaningfully protect intellectual property
rights.
Any of the Company's patents could be invalidated, circumvented or
challenged, or the rights granted thereunder may not provide competitive
advantages to us. Any of the Company's pending or future patent applications
might not be issued with the scope of the claims sought, if at all. Furthermore,
others may develop similar products or software or duplicate its products or
software. Similarly, others might design around the patents owned by us, or
third parties may assert intellectual property infringement claims against us.
In addition, foreign intellectual property laws may not adequately protect its
intellectual property rights abroad. A failure or inability to protect
proprietary rights could have a material adverse effect on its business,
financial condition and results of operations.
Even if the Company's intellectual property rights are adequately protected,
litigation may also be necessary to enforce patents, copyrights and other
intellectual property rights, to protect its trade secrets, to determine the
validity of and scope of proprietary rights of others or to defend against
claims of infringement or invalidity. The Company has, through its acquisition
of the Cylink Wireless Group, 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. Any such intellectual property litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on its business, financial condition and results of operations.
Litigation, even if wholly without merit, could result in substantial costs and
diversion of resources, regardless of the outcome. Infringement, invalidity,
right to use or ownership claims by third parties or claims for indemnification
resulting from infringement claims could be asserted in the future and such
assertions may materially adversely affect us. If any claims or actions are
asserted against us, the Company may seek a license under a third party's
intellectual property rights. However, such a license may not be available under
reasonable terms or at all.
Dependence on Key Personnel
The Company's future operating results depend in significant part upon the
continued contributions of key technical and senior management personnel, many
of whom would be difficult to replace. Future operating results also depend upon
the ability to attract and retain such specially qualified management,
manufacturing, quality assurance, engineering, marketing, sales and support
personnel. Competition for such personnel is intense, and the Company may not be
successful in attracting or retaining such personnel. Only a limited number of
persons with the requisite skills to serve in these positions may exist and it
may be increasingly difficult for the Company to hire such personnel.
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. Such
turnover could adversely impact its business. The Company is presently
addressing these issues and intend to pursue solutions designed to provide
performance incentives and thereby retain employees. The loss of any key
employee, the failure of any key employee to perform in his or her position, its
inability to attract and retain skilled employees as needed or the inability of
its officers and key employees to expand, train and manage its employee base
could all materially adversely affect its business.
Year 2000
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 a year, computer systems and/or software used by many
companies may need to be upgraded to comply with such Year 2000 ("Y2K")
requirements.
P-Com's compliance efforts to date have emphasized product and infrastructure
compliance. Vendor compliance has been addressed at several locations.
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Products
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. P-Com has completed testing of all products in its radio products
operations. There can be no assurance that its testing procedures detect every
potential Y2K complication. Products were tested according to various product-
specific standards. Based on these tests, all products in the Tel Link, Air
Link, and Spread Spectrum product lines have been found to be compliant in all
material respects. At the CRC facility, all products in the current line of Net
Path, Rivets, Network Series and Recovery Series product lines have been tested
and found to be compliant in all material respects. There can be no assurance,
however, that its testing procedures detect every potential Y2K complication.
CRC supports several older modem systems. These systems have not been tested for
Y2K compliance; therefore, P-Com cannot make any representations with respect to
the Y2K readiness of these products. Any complications which arise as a result
of an untested modem system's potential Y2K failures could result in increased
warranty costs, customer satisfaction issues, potential lawsuits and other
material costs and liabilities. Products produced at the Technosystem facility,
the radio & TV broadcast products and the one way point to multipoint products
under development, have been tested and are Y2K compliant in all material
respects. There can be no assurance that our testing procedures detect every
potential Y2K complication. The equipment manager utilized by the products
manufactured at Technosystem is not Y2K compliant. Any complications which arise
as a result of the equipment manager's potential Y2K failures could result in
increased warranty costs, customer satisfaction issues, potential lawsuits and
other material costs and liabilities. In 1998, the sales of radio products
represented approximately 60% of P-Com's net sales while CRC and Technosystem's
products represented approximately 4% and 14%, respectively. The Company's
network services division in Virginia represented approximately 22% of P-Com's
net sales in 1998. The Virginia division does not manufacture any products; it
provides services to networks. Y2K failures in the Company's products could
materially adversely affect the Company's results of operations.
Infrastructure.
The failure of any internal system to achieve Y2K readiness could result in
material disruption to the Company's operations. While we have completed
evaluations of several of our internal systems and are in the process of
completing internal system review, we cannot be assured that our testing
procedures will detect every potential Y2K related failure at each of the
facilities listed below:
California, Florida, Italy, United Kingdom, Germany
In November of 1998, the Company installed in its corporate headquarters a
new internal business system that is Y2K ready. The cost of the upgrade was
approximately $250,000. Since then, P-Com has completed an evaluation of many of
its internal systems. Most of its internal systems have been found to be
compliant, however we cannot guarantee that Y2K related complications will not
arise. The HP UX operating system should receive a Y2K patch by the end of June
1999. The Server Operating Systems (Novell) should receive Y2K patches by the
end of September 1999. Y2K verification procedures are currently underway to
determine the compliance status of phone systems, ATE stations and personal
computers. Verification of phone systems and ATE stations is estimated to be
completed by the end of June 1999. Verification of personal computers is
estimated to be completed by the end of September 1999. The MRP Business System
in Tortona, Italy at the Company's Geritel facility is noncompliant. Subject to
Board approval, the proposed Y2K project management office will revise and
implement a plan to address this situation. The Company's customer service
database and QA Database are noncompliant; upgrades of these two systems is
scheduled to be completed by the end of June 1999. Any unforeseen circumstances
which cause delay in upgrading any of the above systems could result in
increased warranty costs, potential customer dissatisfaction, delayed production
and/ or supply, lawsuits and other material costs and liabilities.
Network Services (Vienna, VA)
With the exception of personal computers, the internal systems at Network
Services in Vienna, Virginia have been tested and found to be compliant in all
material respects, however there can be no assurance that Y2K related
complications will not arise. Verification of the Y2K status of personal
computers is currently in progress and is estimated to be completed by the end
of June 1999. Any unforeseen circumstances which cause delay in upgrading any of
the above systems could result in increased warranty costs, potential customer
dissatisfaction, delayed production and/ or supply, lawsuits and other material
costs and liabilities.
CRC Control Resources (Fair Lawn, NJ)
Most of CRC's internal systems have been tested and many have been found to
be compliant, however there can be no assurance that Y2K related complications
will not arise. The MRP Business System Proprietary Server OS Novell 3.11, and
Corporate Server, Mail System are noncompliant and are scheduled to be replaced
by the end of
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September 1999. The Defect Control System is noncompliant and is scheduled to be
replaced by the end of December 1999. Verification of the compliance status of
personal computers is in progress and is scheduled to be completed by the end of
June 1999. Any unforeseen circumstances which cause delay in upgrading any of
the above systems could result in increased warranty costs, potential customer
dissatisfaction, delayed production and/or supply, lawsuits and other material
costs and liabilities.
Technosystem (Rome, Italy)
The ERP business system has been found to be compliant, however there can be
no assurance that Y2K related complications will not arise. The financial
administration system is noncompliant and replacement is scheduled to be
completed by the end of September 1999. Verification of the Y2K compliance
status of all other internal systems is currently underway and is estimated to
be completed by the end of June 1999. Any unforeseen circumstances which cause
delay in upgrading any of the above systems could result in increased warranty
costs, potential customer dissatisfaction, delayed production and/ or supply,
lawsuits and other material costs and liabilities.
Vendors
The Company is cognizant of the risk posed by single source or large volume
suppliers that may not be addressing their Y2K readiness. Even if 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's business, condition and results of operations.
We cannot be assured that reasonable alternative suppliers or contractors will
be available. Even if assurances are received from third parties, a risk remains
that failures of systems and products of other companies on which we rely could
have a material adverse effect on our business, condition and results of
operations.
Critical suppliers are currently being identified at the California, Florida,
United Kingdom, Germany and Italy sites. Six critical suppliers have been
identified at Network Services in Vienna, Virginia. Three have been evaluated
and found to be compliant, however we cannot be certain that Y2K failures will
not affect these suppliers. The remaining suppliers are scheduled to be
evaluated by the end of June 1999. CRC has identified its critical suppliers.
Evaluations are scheduled to be completed by the end of September 1999. There
are three critical suppliers for the Technosystem product line. Evaluation of
these suppliers is scheduled to be completed by the end of September 1999.
Subject to Board approval, the proposed Y2K project management office should
establish and implement a vendor management strategy to ensure compliance of its
vendors. The plan should provide for onsite audits of critical suppliers and
creation and execution of compliance agreements.
Year 2000 Project Management Plan
P-Com has utilized Y2K consultants to audit its revenue generating facilities
which are located in California, and Tortona, Italy and its subsidiaries CRC in
New Jersey and Technosystem in Rome, Italy. The consultants' both reviewed P-
Com's Y2K compliance efforts to date and identified areas warranting further
review. Based on the consultants' recommendations, P-Com has embarked on a
global program to address its readiness for the century change. The Company will
create a Y2K project management office. A project manager will direct the office
and supervise its functions. The Y2K project manager and the office's staff will
be responsible for among other tasks, business and continuity planning, vendor
compliance management, creating and maintaining an inventory of Y2K action
items, establishing and publishing standards, and maintaining a document
archive. The Y2K project management office will also be responsible for creating
and managing a contingency plan which is scheduled to be established and
implemented by the end of June 1999. P-Com has not yet established a
comprehensive contingency plan, however with the help of our consultants, we
have identified the issues which such a plan must address.
The Company's budget for the Y2K Program is approximately $2 million and will
be submitted to the Board of Directors for approval. In addition, P-Com will
incur material expenses associated with onsite audits of its critical suppliers.
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 Y2K 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 Y2K ready
in time.
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Volatility of Stock Price
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. Such fluctuations have often been unrelated to the
operating performance of affected companies. The Company believes that factors
such as announcements of developments related to its 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 its customers, sales of its common stock into the public
market, including by members of management, developments in its relationships
with 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 its market or markets served by its customers or the economy,
could cause the price of its common stock to fluctuate, sometimes reaching
extreme and unexpected lows. The market price of its Common Stock may continue
to decline substantially, or otherwise continue to experience significant
fluctuations in the future, including fluctuations that are unrelated to its
performance. Such fluctuations could continue to materially adversely affect the
market price of its Common Stock.
Substantial Amount of Debt
In November 1997, through a private placement of the Company's Notes, the
Company incurred $100 million of indebtedness. In December 1998, January 1999
and February 1999, the Company retired approximately $40 million of such
indebtedness in exchange for approximately 5.3 million shares of its Common
Stock. As of March 31, 1999, its total indebtedness including current
liabilities was approximately $157.2 million and its stockholders' equity was
approximately $117.9 million.
The Company's bank line of credit provides for borrowings of approximately
$50 million, which as of March 31, 1999 had been almost fully utilized. In
addition, the revolving commitment, as amended, is reduced from $50 million to
$40 million on August 15, 1999 and to $30 million on October 15, 1999 until
maturity on January 15, 2000. The line of credit requires the Company to comply
with several financial covenants, including the maintenance of specific minimum
ratios. At periods in time since June 30, 1998, the Company has amended its
existing bank line of credit to prevent defaults with respect to several
covenants. Had these amendments not been made, the Company would have defaulted
on those covenants in its bank line, which would have triggered cross defaults
in the Notes, preferred stock instruments and other debt. While the amendments
to the covenants have been structured based on the Company's business plan that
would allow the Company to continue to be in compliance with such covenants, the
Company's business plan includes provisions for the infusion of approximately
$15 million of capital during the second quarter of 1999. The Company does not
currently have commitments from any potential investors. There can be no
assurance that the Company will be able to raise additional capital. Should the
Company not meet its business plan, or should the Company not be able to raise
adequate capital, it is possible that an event of default will occur under the
line-of-credit agreement. If a default is declared by the lenders, cross
defaults will be triggered on the Company's Notes and other debt instruments
resulting in accelerated repayments of such debts, and the holders of all
outstanding Series B Preferred Stock would have the right to have their stock
redeemed by the Company. Management believes, in the event the Company fails to
fully meet its business plan, the Company has other alternatives available which
may remedy any negative consequences arising from a potential default under the
agreement. 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 condition or results of
operations. In addition, the Company could be restricted in its ability to use
more flexible registration statements to issue securities and could be delisted
by the Nasdaq National Market. Such events would materially adversely affect the
Company's business, financial condition and results of operations.
The Company's ability to make scheduled payments of the principal and
interest on indebtedness will depend on future performance, which is subject in
part to economic, financial, competitive and other factors beyond its control.
There can be no assurance that the Company will be able to make payments on or
restructure or refinance its debt in the future, if necessary.
Dividends
Since the Company's 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 the business. The Company is,
however, required to pay a 6% per year premium on the Series B preferred stock,
payable in cash or common stock at its option. 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, its earnings, financial condition, capital
requirements, extent of indebtedness and contractual restrictions with respect
to the payment of dividends.
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Change of Control
Members of the Company's board of directors and executive officers, 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. Accordingly, these stockholders are able to
influence the election of the members of its 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 stockholder rights agreement,
certificate of incorporation, privileges of the Series B preferred stock, equity
incentive plans, bylaws and Delaware law, may have a significant effect in
delaying, deferring or preventing a change in control of P-Com 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 the Series B preferred stock
and any other preferred stock that may be issued in the future, including the
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 its
board of directors and stockholders may act to substantially dilute the share
position of any takeover bidder that acquires 15% or more of its Common Stock.
The issuance of the Series B preferred stock or the future issuance of the
Series A preferred stock or any additional preferred stock could have the effect
of making it more difficult for a third party to acquire a majority of its
outstanding voting stock.
Series B Preferred Stock Financing
In December 1998, the Company raised gross proceeds of $15 million through
the issuance of 15,000 shares of a newly designated Series B convertible
participating preferred stock and warrants to purchase up to 1,242,257 shares of
Common Stock. The issuance of the Series B preferred stock and warrants provided
the Company with additional working capital required to fund continuing
operations. However, the agreements with the purchasers of the Series B
preferred stock and warrants contain terms and covenants that could result in
substantial dilution to its stockholders, could render future financings and
loans and merger and acquisition activities more difficult and could require the
Company to expend substantial amounts of cash, even if unavailable at the time
such expenditure was required.
Certain covenants that the Company made in connection with the issuance of
the Series B preferred stock may also have the effect of limiting its ability to
obtain additional financing and issue other securities. The Company has agreed,
until December 22, 1999, not to issue or agree to issue any equity securities at
a price less than fair market value or any variably priced securities, subject
to limited exceptions. In addition, the terms of the Series B preferred stock
financing agreements prohibit the Company from, among other things, altering,
changing or otherwise adversely affecting the terms of the Series B preferred
stock; creating or issuing any senior or pari passu securities; or redeeming or
paying any dividend on any junior securities.
The terms of the Series B preferred stock financing agreements also include
mandatory redemption features and payment provisions that are triggered in the
event the Company fails to satisfy certain obligations. Holders of the Series B
preferred stock may require redemption of their shares at a substantial premium,
plus a default interest rate, if applicable, upon the occurrence of certain
events deemed within its control. Upon the occurrence of certain other events
deemed outside of its control, including among others, its failure to obtain
stockholder approval (which the Company must solicit at its expense) of the
potential issuance of more than 20% of the Common Stock outstanding on December
22, 1998, or 8,707,488 shares, at a price less than the greater of book value or
fair market value may be required to make significant payments to the holders of
Series B preferred stock and warrants. All such payments are capped at
$4,950,000 plus a default interest rate, if applicable, and are in lieu of
redemption for these provisions. If the holders of Series B preferred stock
demand redemption or if the Company is required to make significant payments to
such stockholders, the Company may not be able to fund such redemption or
payments, and even if funding is available, the expenditures required to fund
such redemption or payments could have a material adverse effect on its
financial condition.
The Series B preferred stock is convertible into shares of its Common Stock
at variable rates based on future trading prices of its Common Stock and events
that may occur in the future. The number of shares of Common Stock that may
ultimately be issued upon conversion is therefore presently indeterminable and
could fluctuate significantly based on the issuance by the Company of other
securities. Also, the warrants are subject to anti-dilution protection and thus
may require the issuance of more shares than originally anticipated. These
factors may result in substantial future dilution to the holders of its Common
Stock.
In addition to the foregoing, the redemption rights, liquidated damages
provisions, cross default provisions to its debt instruments and other terms of
the Series B preferred stock, under certain circumstances, could lead to a
34
<PAGE>
significant accounting charge to earnings and could materially adversely affect
its business, results of operations and financial condition. The Series B
preferred stock will be classified as mandatorily redeemable preferred stock. As
a result, in the fourth quarter of 1998, the Company recognized in its earnings
(loss) per share calculation the fair value of warrants issued and the accretion
of the Series B preferred stock to its fair value. During the period of
conversion of the Series B preferred stock, the Company will be required to
recognize in its earnings (loss) per share calculation any accretion of the
Series B preferred stock to its redemption value as a dividend to the holders of
the Series B preferred stock. Consequently, the Company took a charge of
approximately $1.8 million to its accumulated deficit for the fourth quarter of
fiscal 1998 as a result of the accounting treatment for issuance of the related
warrants. Such charge and potential other future charges relating to the
provisions of the Series B preferred stock financing agreements may adversely
affect its earnings (loss) per share and the market price of its Common Stock
and may continue to do so. The convertibility features of such Series B
preferred stock and subsequent sales of the Common Stock underlying both it and
the warrants could materially adversely affect its valuation and the market
trading price of its shares of Common Stock.
Market Risk Disclosure
The Company has international sales and facilities and is, therefore, subject
to foreign currency rate exposure. Historically, its international sales have
been denominated in British pounds sterling or United States dollars. With
recent acquisitions of foreign companies, certain of its international sales are
denominated in other foreign currencies, including Italian lira. The Company
enters into foreign forward exchange contracts to reduce the impact of currency
fluctuations of anticipated sales to British customers. The objectives of these
contracts is to neutralize the impact of foreign currency exchange rate
movements on the Company's operating results. The gains and losses on forward
exchange contracts are included in earnings when the underlying foreign currency
denominated transaction is recognized.
The foreign exchange forward contracts described above generally require the
Company to sell foreign currencies for U.S. dollars at rates agreed to at the
inception of the contracts. The forward contracts generally have maturities of
six months or less. These contracts generally do not subject the Company to
significant market risk from exchange rate movements because the contracts are
designed to offset gains and losses on the balances and transactions being
hedged. At March 31, 1999 and 1998, the Company had forward contracts to sell
approximately $9.7 million and $15.9 million in British pounds, respectively.
The fair value of forward exchange contracts approximates cost. The Company does
not anticipate any material adverse effect on its financial position resulting
from the use of these instruments.
The functional currency of the Company's wholly owned and majority-owned
foreign subsidiaries are the local currencies. Assets and liabilities of these
subsidiaries are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Income and expense items are translated at average exchange
rates for the period. Accumulated net translation adjustments are recorded in
stockholders' equity. Foreign exchange transaction gains and losses are included
in the results of operations, and were not material for all periods presented.
Based on our overall currency rate exposure at March 31, 1999, a near-term 10%
appreciation or depreciation of the U.S. dollar would have an insignificant
effect on our financial position, results of operations and cash flows over the
next fiscal year. In 1998, a near-term 10% appreciation or depreciation of the
U.S. dollar was also determined to have an insignificant effect. The Company
does not use derivative financial instruments for speculative or trading
purposes.
Interest Rate Risk
The Company's Notes bear interest at a fixed rate, therefore, the Company's
financial condition and results of operations would not be affected by interest
rate changes in this regard. The Company's revolving line of credit is subject
to interest at either a base interest rate or a variable interest rate that is
within 200 basis points of the base interest rate. A 200 basis point increase
over the base interest rate would not be material to the Company's financial
condition or results of operations.
35
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS.
State Actions
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 P-Com stockholders who purchased or
otherwise acquired its Common Stock between April 15, 1997 and September 11,
1998. The plaintiffs allege various state securities laws violations by P-Com
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 P-Com stockholders who purchased or otherwise acquired its
Common Stock between April 1, 1998 and September 11, 1998. The plaintiff alleges
various state securities laws violations P-Com 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 who purchased or otherwise acquired its Common
Stock between April 15, 1997 and September 11, 1998. This complaint is 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.
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 P-Com stockholders who purchased
or otherwise acquired its Common Stock between April 15, 1997 and September 11,
1998. This complaint is 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.
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 P-Com stockholders who purchased or otherwise acquired its
Common Stock between April 15, 1997 and September 11, 1998. This complaint is
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.
On December 3, 1998, the Superior Court of California, County of Santa Clara,
entered an order consolidating all of the above complaints. On January 15, 1999,
the plaintiffs filed a consolidated amended class action complaint superseding
all of the foregoing complaints. On March 1, 1999, defendants filed a demurrer
to the consolidated amended complaint and each cause of action stated therein.
On May 13, 1999, the Court heard the defendants' demurrer and sustained the
demurrer with leave to amend the claims under state securities laws and the
common law claim of fraud. A claim under the Business and Professions Code
remains.
Federal Actions
On November 13, 1998, a putative class action complaint was filed in the
United States District Court, Northern District of California, by Robert Schmidt
on behalf of himself and other P-Com stockholders who purchased or otherwise
acquired its Common Stock between April 15, 1997 and September 11, 1998. The
plaintiff alleged violations of the Securities Exchange Act of 1934 by P-Com and
certain of its officers and directors. The complaint sought unquantified
compensatory damages, attorneys' fees and injunctive and/or equitable relief. On
January 26, 1999, the plaintiff voluntarily dismissed the Schmidt action. The
court entered an order dismissing the action without prejudice on January 29,
1999.
On December 3, 1998, a putative class action complaint was filed in the
United States District Court, Northern District of California, by Robert Dwyer
on behalf of himself and other P-Com stockholders who purchased or otherwise
acquired its Common Stock between April 15, 1997 and September 11, 1998. The
plaintiff alleged violations of the Securities Exchange Act of 1934 by P-Com and
certain of its officers and directors. The complaint sought unquantified
compensatory damages, attorneys' fees and injunctive and/or equitable relief. On
December 22, 1998 and February 2, 1999, the plaintiff sought to voluntarily
dismiss this action. On February 11, 1999, the court entered an order dismissing
the action without prejudice.
All of 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 its business, prospects, financial condition and results of
operations. Even if all of the litigation is resolved in its favor, the defense
of such litigation may entail considerable cost and the significant diversion of
efforts of management, either of which may have a material adverse effect on its
business, prospects, 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.
10.45 (1) Sixth Amendment to Credit Agreement by and among the
Registrant, 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 March 31, 1999.
10.46 Severance Agreement dated April 21, 1999 by and between
the Company and Mr. Robert E. Collins.
10.47 Offer letter dated April 1, 1999 by and between the
Company and Mr. Robert E. Collins.
27.1 Financial Data Schedule.
________________________
(1) Incorporated by reference to identically numbered exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
36
<PAGE>
(b) Reports on Form 8-K.
Report on Form 8-K dated January 4, 1999, regarding the
Company's exchange of an aggregate of $7,425,000 of its 4
1/4% Convertible Subordinated Notes due 2002 for an
aggregate of 1,090,250 shares of common stock, as filed
with the Securities and Exchange Commission on January 4,
1999.
Amendment No. 1 to Report on Form 8-K/A dated January 4,
1999, regarding the Company's exchange of an aggregate of
$7,425,000 of its 4 1/4% Convertible Subordinated Notes
due 2002 for an aggregate of 1,254,250 shares of common
stock, as filed with the Securities and Exchange
Commission on January 6, 1999.
Report on Form 8-K dated January 28, 1999, regarding the
Company's press release announcing its earnings for the
fourth quarter and twelve months ended December 31, 1998,
as filed with the Securities and Exchange Commission on
January 29, 1999.
Report on Form 8-K dated February 2, 1999, regarding the
Company's exchange of an aggregate of $18,114,000 of its
4 1/4% Convertible Subordinated Notes due 2002 for an
aggregate of 1,558,007 shares of common stock, as filed
with the Securities and Exchange Commission on February
3, 1999.
37
<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: May 17, 1999 By: /s/ George P. Roberts
--------------------------
George P. Roberts
Chairman of the Board of Directors
and Chief Executive Officer
Date: May 17, 1999 By: /s/ Robert E. Collins
--------------------------
Robert E. Collins
Chief Financial Officer and Vice
President, Finance and
Administration
38
<PAGE>
EXHIBIT INDEX
Exhibit No.
-----------
10.45 (1) Sixth Amendment to Credit Agreement by and among the
Registrant, 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 March 31, 1999.
10.46 Severance Agreement dated April 21, 1999 by and between the
Company and Mr. Robert E. Collins.
10.47 Offer letter dated April 1, 1999 by and between the Company and
Mr. Robert E. Collins.
27.1 Financial Data Schedule.
________________________
(1) Incorporated by reference to identically numbered exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
39
<PAGE>
Exhibit 10.46
April 21, 1999
Robert E. Collins
Chief Financial Officer
P-COM, Inc.
3175 South Winchester Boulevard
Campbell, CA 95008
Dear Bob:
We are pleased to inform you that the Board of Directors of P-Com,
Inc. (the "Company") has recently authorized and approved a special benefit
program for you and the other key executives. The purpose of this letter
agreement is to set forth the terms and conditions of your benefit package and
to explain the limitations which will govern the overall value of your benefits.
Your benefits will become payable in the event your employment
terminates, either voluntarily or involuntarily for any reason, within twenty-
four (24) months following certain changes in ownership or control of the
Company. To understand the full scope of your benefits, you should familiarize
yourself with the definitional provisions of Section I of this letter agreement.
The benefits comprising your package are detailed in Section II. Section III
addresses the treatment of any excise tax imposed in the event that any of your
benefits constitute excess parachute payments for purposes of the Federal tax
laws and Section IV deals with ancillary matters affecting your arrangement.
SECTION I - DEFINITIONS
For purposes of this letter agreement the following definitions will
be in effect:
1.1 Average Compensation means the average of your W-2 wages from the
Company for the five (5) calendar years completed immediately prior to the
calendar year in which the Change of Control is effected. Any W-2 wages for a
partial year of employment will be annualized, in accordance with the frequency
which such wages are paid during such partial year, before inclusion in your
Average Compensation. If any of your compensation from the Company during such
five (5)-year or shorter period was not included in your W-2 wages for U.S.
income tax purposes, either because you were not a U.S. citizen or resident or
because such compensation was excludible from income as foreign earned income
under Code Section 911 or as pre-tax income under Code Section 125 or 402(g),
then such compensation will nevertheless be included in your Average
Compensation to the same extent as if it were part of your W-2 wages.
<PAGE>
1.2 Base Salary means the annual rate of base salary in effect for
you immediately prior to the Change in Control or (if greater) the annual rate
of base salary in effect at the time of your Termination.
1.3 Board means the Company's Board of Directors.
1.4 Change in Control means any of the following transactions
effecting a change in ownership or control of the Company:
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State in which the Company is incorporated,
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in complete liquidation or
dissolution of the Company,
(iii) any reverse merger in which the Company is the surviving
entity but in which securities possessing fifty percent (50%) or more of the
total combined voting power of the Company's outstanding securities are
transferred to person or persons different from the persons holding those
securities immediately prior to such merger,
(iv) a Hostile Take-Over, or
(v) the acquisition, directly or indirectly by any person or
related group of persons (other than the Company or a person that directly
or indirectly controls, is controlled by, or is under common control with,
the Company), of beneficial ownership (within the meaning of Rule 13d-3 of
the 1934 Act) of securities possessing more than thirty percent (30%) of
the total combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer made directly to the Company's
stockholders.
1.5 Code means the Internal Revenue Code of 1986, as amended.
1.6 Common Stock means the Company's common stock.
1.7 Disability shall mean your inability to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more.
1.8 Fair Market Value means, with respect to any shares of Common
Stock subject to any of your Options, the closing selling price per share of
Common Stock on the date in question, as reported on the Nasdaq National Market.
If there is no reported sale of Common Stock on such date, then the closing
selling price on the Nasdaq National Market on the next preceding day for which
there does exist such quotation shall be determinative of Fair Market Value.
<PAGE>
1.9 Health Care Coverage means the continued health care coverage to
which you and your eligible dependents may become entitled under Section II of
this letter agreement upon the Termination of your employment.
1.10 Hostile Take-Over means either of the following transactions:
(i) the successful acquisition by a person or a group of
related persons, other than the Company or a person controlling, controlled
by or under common control with the Company, of beneficial ownership (as
determined pursuant to the provisions of Rule 13d-3 under the 1934 Act) of
securities possessing more than twenty-five percent (25%) of the total
combined voting power of the Company's outstanding securities pursuant to a
transaction or series of related transactions which the Board does not at
any time recommend the Company's stockholders to accept or approve, or
(ii) a change in the composition of the Board over a period of
twenty-four (24) consecutive months or less such that a majority of the
Board ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (I) have been members
of the Board continuously since the beginning of such period or (II) have
been elected or nominated for election as Board members during such period
by at least a two-thirds majority of the Board members described in clause
(I) who were still in office at the time such election or nomination was
approved by the Board.
1.11 Involuntary Termination means the termination of your employment
with the Company (or successor):
(i) involuntarily upon your discharge or dismissal,
(ii) voluntarily upon your resignation following (I) a change
in your position with the Company (or successor) which reduces your duties
or level of responsibility or otherwise changes the level of management to
which you report, (II) a reduction in your level of compensation (including
base salary, fringe benefits and target bonus under any incentive
performance plan) or (III) a change in your place of employment which is
more than fifty (50) miles from your place of employment prior to the
Change in Control, provided and only if such change or reduction is
effected without your written concurrence, or
(iii) by reason of your death or Disability.
1.12 1934 Act shall mean the Securities Exchange Act of 1934, as
amended.
1.13 Option means any option granted to you under the Plans which is
outstanding at the time of the Change in Control or your subsequent Termination.
Your Options will be divided into two (2) separate categories as follows:
Acquisition-Accelerated Options: any outstanding Option (or
-------------------------------
installment thereof) which automatically accelerates, pursuant to the
acceleration
<PAGE>
provisions of the agreement evidencing that Option, upon a change in
control or ownership of the Company under certain specified circumstances.
Severance-Accelerated Options: any outstanding Option (or
-----------------------------
installment thereof) which accelerates upon your Termination pursuant to
Section II of this letter agreement.
1.14 Option Parachute Payment means, with respect to any Acquisition-
Accelerated Option or any Severance-Accelerated Option, the portion of that
Option deemed to be a parachute payment under Code Section 280G and the Treasury
Regulations issued thereunder. The portion of such Option which is categorized
as an Option Parachute Payment will be calculated in accordance with the
valuation provisions established under Code Section 280G and the applicable
Treasury Regulations and will include an appropriate dollar adjustment to
reflect the lapse of your obligation to remain in the Company's employ as a
condition to the vesting of the accelerated installment. In no event, however,
will the Option Parachute Payment attributable to any Acquisition-Accelerated
Option or Severance-Accelerated Option (or accelerated installment) exceed the
spread (the excess of the Fair Market Value of the accelerated option shares
over the option exercise price payable for those shares) existing at the time of
acceleration.
1.15 Other Parachute Payment means any payment in the nature of
compensation (other than the benefits to which you become entitled under Section
II of this letter agreement) which are made to you in connection with the Change
in Control and which accordingly qualify as parachute payments within the
meaning of Code Section 280G(b)(2) and the Treasury Regulations issued
thereunder. Your Other Parachute Payments will include (without limitation) the
Present Value, measured as of the Change in Control, of the aggregate Option
Parachute Payment attributable to your Acquisition-Accelerated Options (if any).
1.16 Plans means (i) the Company's 1992 Stock Option Plan, (ii) the
Company's 1995 Stock Option/Stock Issuance Plan, as amended or restated from
time to time, and (iii) any successor stock incentive plan subsequently
implemented by the Company.
1.17 Present Value means the value, determined as of the date of the
Change in Control, of any payment in the nature of compensation to which you
become entitled in connection with the Change in Control or the subsequent
Termination of your employment, including (without limitation) the Option
Parachute Payment attributable to your Severance-Acceleration Options, your
Severance Payments under Section II of this letter agreement and the Option
Parachute Payment attributable to your Acquisition-Accelerated Options. The
Present Value of each such payment will be determined in accordance with the
provisions of Code Section 280G(d)(4), utilizing a discount rate equal to one
hundred twenty percent (120%) of the applicable Federal rate in effect at the
time of such determination, compounded semi-annually to the effective date of
the Change in Control.
1.18 Severance Payments means the severance payments to which you may
become entitled under Section II in the event of a Termination following a
Change in Control, subject, however, to the dollar limitations of Section III.
<PAGE>
1.19 Termination means a Voluntary Resignation or an Involuntary
Termination of your employment.
1.20 Voluntary Resignation means a resignation by you other than one
which constitutes an Involuntary Termination.
SECTION II - BENEFITS
Upon the Termination of your employment within twenty-four (24) months
following a Change in Control, you will become entitled to receive the special
benefits provided in this Section II.
2.1 Payments
--------
(a) Base Salary
You will be entitled to a Severance Payment in an amount equal to two
(2) times your Base Salary.
(b) Bonus
You will be entitled to an additional Severance Payment in an amount
equal to the greater of the following bonus amounts: (a) two (2) times the full
amount of the target bonus payable to you with respect to the fiscal year in
which the Termination occurs or (b) two (2) times the full amount of the target
bonus payable to you with respect to the fiscal year in which the Change in
Control occurs.
(c) Payment of Severance Payments
In the absence of a Hostile Take-Over, your Severance Payments will be
made at bi-weekly intervals following your Termination. However, these payments
will immediately terminate in the event you fail to abide by the restrictive
covenants set forth in Paragraph 2.4.
Should your Termination occur in connection with a Hostile Take-Over,
the Severance Payments will be made to you in a lump sum payment within thirty
(30) days after your Termination and the provisions of Paragraph 2.4 will not
apply.
All Severance Payments will be subject to the Company's collection of
all applicable federal and state income and employment withholding taxes.
2.2 Option Acceleration
-------------------
Each of your outstanding Options will (to the extent not then
otherwise fully exercisable) automatically accelerate so that each such Option
will become fully vested and immediately exercisable for the total number of
shares of Common Stock at the time subject to that Option. Each such
accelerated Option, together with all your other vested Options, will remain
exercisable for fully-vested shares until the earlier of (i) the expiration date
of the ten
<PAGE>
(10)-year option term or (ii) the end of two (2) full years measured from the
date of your Termination or greater if set forth in the Option.
2.3 Additional Benefits
-------------------
(a) Health Care Coverage
The Company will, at its expense, provide you and your eligible
dependents with continued health care coverage under the Company's
medical/dental/vision plan until the earlier of (i) twenty-four (24) months
after the date of your Termination or (ii) the first date that you are covered
under another employer's health benefit program which provides substantially the
same level of benefits without exclusion for pre-existing medical conditions.
The coverage so provided you and your eligible dependents will be in full and
complete satisfaction of the continued health care coverage to which you or your
eligible dependents would otherwise, at your own expense, be entitled under Code
Section 4980B by reason of your termination of employment.
(b) Unpaid Benefits
You will receive an immediate lump sum payment of all unpaid vacation
days which you have accrued through the date of your Termination.
2.4 Restrictive Covenants
---------------------
For the twenty-four (24)-month period following your Termination, you
will not:
(i) directly or indirectly, whether for your own account or as
an employee, director, consultant or advisor, provide services to any
business enterprise which is at the time in competition with any of the
Company's then-existing or formally planned product lines and which is
located geographically in an area where the Company maintains substantial
business activities;
(ii) directly or indirectly encourage or solicit any individual
to leave the Company's employ for any reason or interfere in any other
manner with the employment relationships at the time existing between the
Company and its current or prospective employees; or
(iii) induce or attempt to induce any customer, supplier,
distributor, licensee or other business affiliate of the Company to cease doing
business with the Company or in any way interfere with the existing business
relationship between any such customer, supplier, distributor, licensee or other
business affiliate and the Company.
You acknowledge that monetary damages may not be sufficient to
compensate the Company for any economic loss which may be incurred by reason of
your breach of the foregoing restrictive covenants. Accordingly, in the event
of any such breach, the Company will, in addition to the cessation of the
severance benefits provided under this agreement and any
<PAGE>
remedies available to the Company at law, be entitled to obtain equitable relief
in the form of an injunction precluding you from continuing to engage in such
breach.
None of the foregoing restrictive covenants will be applicable in the
event your Termination occurs in connection with a Hostile Take-Over.
SECTION III - PARACHUTE PAYMENTS
3.1 Parachute Tax Gross-Up
----------------------
Should the aggregate Present Value (measured as of the Change in
Control) of (i) the benefits to which you become entitled under Section II at
the time of your Termination (namely the Severance Payments, the Option
Parachute Payment attributable to your Severance-Accelerated Options and your
Health Care Continuation) and (ii) all Other Parachute Payments to which you are
entitled, exceed 2.99 times your Actual Average Compensation (the "Parachute
Limit") and thereby result in an excise tax liability under Section 4999 of the
Code, then the Company will provide you with a full tax gross-up with respect to
such excise tax liability. The amount of such tax gross-up will be determined
pursuant to the following formula:
X = Y 1 - (A + B + C), where
X is the total dollar payment (the "Tax Gross-Up") required to be
paid under this letter agreement,
Y is the total excise tax (the "Parachute Tax") imposed on you
pursuant to Section 4999 of the Code (or any successor provision)
with respect to the Severance Payments, the Option Parachute
Payment attributable to your Severance-Accelerated Options, your
Health Care Continuation and all Other Parachute Payments,
A is the excise tax rate in effect under Section 4999 of the Code
for excess parachute payments,
B is the highest combined marginal federal income and applicable
state income tax rate in effect for you, after taking into
account the deductibility of state income taxes against federal
income taxes to the extent allowable, for the calendar year in
which the Tax Gross-Up is paid, and
C is the applicable Hospital Insurance (Medicare) Tax Rate in
effect for you for the calendar year in which the Tax Gross-Up is
paid.
3.2 Initial Payment
---------------
Within ninety (90) days after each determination is made by the
Internal Revenue Service or your tax advisor that you have received a parachute
payment for which you are liable for a Parachute Tax, you will identify the
nature of such parachute payment to the Company and
<PAGE>
submit to the Company the calculation of the Parachute Tax attributable to that
payment and the Tax Gross-Up to which you are entitled with respect to such tax
liability. The Company will pay such Tax Gross-Up to you (net of all applicable
withholding taxes, including any taxes required to be withheld under Section
4999 of the Code) within ten (10) business days after your submission of the
calculation of such Parachute Tax and the resulting Tax Gross-Up, provided such
calculations represent a reasonable interpretation of the applicable law and
regulations.
3.3 Final Determination
-------------------
In the event that your actual Parachute Tax liability is determined by
a Final Determination to be greater than the Parachute Tax liability taken into
account for purposes of the Tax-Gross-Up paid pursuant to this Section, then
within ninety (90) days following the Final Determination, you will submit to
the Company a new Parachute Tax calculation based upon the Final Determination.
Within ten (10) business days after receipt of such calculation, the Company
will pay you the additional Tax Gross-Up attributable to such excess Parachute
Tax liability.
3.4 Refund
------
In the event that your actual Parachute Tax liability is determined by
a Final Determination to be less than the Parachute Tax liability taken into
account for purposes of the Tax Gross-Up paid to you pursuant to this Section,
then you will refund to the Company, promptly upon receipt, any federal or state
tax refund attributable to the Parachute Tax overpayment.
3.5 Definition
----------
For purposes of this section, a Final Determination means an audit
adjustment by the Internal Revenue Service that is either agreed to by you or
your estate or an adjustment that is sustained by a court of competent
jurisdiction in a decision with which you concur or with respect to which the
period within which an appeal may be filed has lapsed without a notice of appeal
being filed.
SECTION IV - MISCELLANEOUS PROVISIONS
4.1 Death
-----
In the event of your death, the Severance Payments (including the
Parachute Payments) to which you become entitled under this letter agreement
will be made, on the due date hereunder, to the executors or administrators of
your estate. Should you die before you exercise all your outstanding Options,
then such Options may be exercised, within twelve (12) months after your death,
by the executors or administrators of your estate or by persons to whom the
Options are transferred pursuant to your will or in accordance with the laws of
inheritance. In no event, however, may any such Option be exercised after the
specified expiration date of the option term.
<PAGE>
4.2 General Creditor Status
-----------------------
The payments and benefits to which you become entitled hereunder will
be paid, when due, from the general assets of the Company, and no trust fund,
escrow arrangement or other segregated account will be established as a funding
vehicle for such payment. Accordingly, your right (or the right of the personal
representatives or beneficiaries of your estate) to receive any payments or
benefits hereunder will at all times be that of a general creditor of the
Company and will have no priority over the claims of other general creditors.
4.3 Indemnification
---------------
The indemnification provisions for officers and directors under the
Company certificate of incorporation, indemnification agreement, Bylaws and
insurance policies will (to the maximum extent permitted by law) be extended to
you with respect to any and all matters, events or transactions occurring or
effected during your employment with the Company.
4.4 Miscellaneous
-------------
This letter agreement will be binding upon the Company, its successors
and assigns (including, without limitation, the surviving entity in any Change
in Control) and is to be construed and interpreted under the laws of the State
of California. Except as set forth herein, this letter agreement supersedes all
prior agreements between you and the Company relating to the subject of
severance benefits payable upon a change in control or ownership of the Company,
including the Plans and the agreements evidencing the Options, and may only be
amended by written instrument signed by you and an authorized officer of the
Company. If any provision of this letter agreement as applied to any party or
to any circumstance should be adjudged by a court of competent jurisdiction to
be void or unenforceable for any reason, the invalidity of that provision will
in no way affect (to the maximum extent permissible by law) the application of
such provision under circumstances different from those adjudicated by the
court, the application of any other provision of this letter agreement, or the
enforceability or invalidity of this letter agreement as a whole. Should any
provision of this letter agreement become or be deemed invalid, illegal or
unenforceable in any jurisdiction by reason of the scope, extent or duration of
its coverage, then such provision will be deemed amended to the extent necessary
to conform to applicable law so as to be valid and enforceable or, if such
provision cannot be so amended without materially altering the intention of the
parties, then such provision will be stricken and the remainder of this letter
agreement will continue in full force and effect.
4.5 Attorney Fees
-------------
In the event legal proceeding should be initiated by you or by the
Company with respect to any controversy, claim or dispute relating to the
interpretation or application of the provisions of this letter agreement or any
benefits payable hereunder, the prevailing party in such proceedings will be
entitled to recover from the losing party reasonable attorney fees and costs
incurred in connection with such proceedings or in the enforcement or collection
of any judgment or award rendered in such proceedings. For purposes of this
provision, the prevailing party means the party determined by the court to have
most nearly prevailed in the proceedings, even if that party does not prevail in
all matters, and does not necessarily mean the party in
<PAGE>
whose favor the judgment is actually rendered. If the Company materially
breaches any of its obligations under this letter agreement and fails to cure
that breach within thirty (30) days after written notice from you, you will then
be entitled to reimbursement from the Company for any reasonable expenses and
attorney fees you incur in having the Company subsequently cure that breach,
whether or not legal proceedings are actually commenced in connection with such
breach.
4.6 Independent Legal Counsel
-------------------------
By executing this letter agreement, you acknowledge that (i) this
agreement has been prepared by Brobeck, Phleger & Harrison LLP ("Brobeck")
acting it its capacity as legal counsel to the Company and (ii) you have had an
opportunity to seek advice from your own legal counsel with respect to the
matters contained herein and such individual counsel is not Brobeck.
Please indicate your acceptance of the foregoing provisions of this
letter agreement by signing the enclosed copy of this agreement and returning it
to the Company.
P-COM, INC.
BY: /s/ George P. Roberts
------------------------------------
TITLE: Chairman/CEO
---------------------------------
ACCEPTANCE
I hereby agree to all the terms and provisions of the foregoing letter
agreement governing the special benefits to which I may become entitled in
connection with certain changes in control or ownership of P-Com, Inc.
Signature: /s/ Robert E. Collins
-------------------------------
Dated: April 21, 1999
<PAGE>
[LETTERHEAD OF P-COM, INC.]
Exhibit 10.47
APRIL 1, 1999
Mr. Robert E. Collins
1473 Los Rios Drive
San Jose, CA 95120
Dear Bob:
P-Com is pleased to offer you a position of employment with the Company. The
basic terms are as follows:
1. Title: Chief Financial Officer and Vice President, Administration
-----
2. Salary: $16,666.67 per month. In addition to the base salary you
------
will be eligible for an annual bonus with a target of 40% of your
annual salary. The actual bonus amount will be determined by
accomplishment of mutually established objectives .
3. Common Stock: Subject to the P-Com Board of Directors approval, you
------------
will be granted options to purchase 125,000 shares of common stock.
The exercise price of such options shall be the then existing fair
market value of the shares as determined by the Board of Directors
on the date of such grant. The terms and conditions of this issuance
shall be governed by a standard option agreement.
4. Commencement Date: Your starting date of employment with the Company
-----------------
shall be a date mutually agreed upon by you and the company, and in
any event shall be on or prior to April 19, 1999.
5. Employee Stock Purchase Plan: You will be eligible to participate in
----------------------------
the P-Com, Inc. Employee Stock Purchase Plan whereby you will be
eligible to purchase twice per year P-Com, Inc. common stock at a
discounted price through a payroll deduction of up to 15% of your
base salary not to exceed $25,000.00.
6. Medical Benefits: You are entitled to medical insurance coverage
----------------
under the Company's medical insurance plan commencing on your first
date of employment.
7. Get Acquainted Period: The first 90 days of employment at P-Com is
---------------------
considered an introductory period. This period is intended to
provide P-Com and the employee with the opportunity to get to know
one another. The employee is automatically reviewed at the end of
this period.
8. Employment at Will: Employment with the Company is not for a
------------------
specific term and can be terminated by yourself or by the
Company at any time for any reason, with or without cause. We
request that all of our employees, to the extent possible, give us
advance notice if they intend to resign. Any contrary
representation that may have been made or which may be made to you
is superseded by this offer.
<PAGE>
All offers for employment are contingent on the completion and approval of
relevant background investigations by P-Com, Inc. Investigations for business
necessity may include, but shall not be limited to criminal investigations,
driving record investigations and credit/financial background checks (if
applicable to the position.) Applicants who do not accept or authorize such
investigations should not sign this employment offer.
If you accept the above-described offer, please mail or fax me an executed copy
of this letter where indicated below. You will be required to sign a copy of the
Proprietary Information and Inventions Agreement as well as to present copies of
proper documentation as proof of your identity and authorization to work in the
United States upon your acceptance.
This offer, if not accepted, will expire on April 5, 1999
P-Com believes that a mutually beneficial relationship will result from your
positive response to this offer of employment. We look forward to your
acceptance and a long and rewarding association.
Sincerely,
P-Com, Inc.
by:/s/George Roberts
- --------------------
Chairman and CEO
I agree to the terms set forth above.
by:/s/Robert E. Collins
April 1, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE P-COM
INC. FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 20,884
<SECURITIES> 0
<RECEIVABLES> 54,672
<ALLOWANCES> (9,960)
<INVENTORY> 75,447
<CURRENT-ASSETS> 160,433
<PP&E> 77,861
<DEPRECIATION> 28,708
<TOTAL-ASSETS> 290,522
<CURRENT-LIABILITIES> 88,735
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 117,999
<TOTAL-LIABILITY-AND-EQUITY> 290,522
<SALES> 27,634
<TOTAL-REVENUES> 38,048
<CGS> 19,075
<TOTAL-COSTS> 26,648
<OTHER-EXPENSES> 22,530
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,318)
<INCOME-PRETAX> (13,076)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,076)
<DISCONTINUED> 0
<EXTRAORDINARY> 7,284
<CHANGES> 0
<NET-INCOME> (5,792)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
