<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q/A
(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, 1998.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-25356
---------------
P-Com, Inc.
(Exact name of Registrant as specified in its charter)
---------------
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 11, 1998, there were 43,155,565 shares of the Registrant's Common
Stock outstanding, par value $0.0001.
This quarterly report on Form 10-Q/A Consists of 32 pages of which this is
page 1. The Exhibit Index appears on page 32.
<PAGE>
AMENDED FILING OF FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 - RESTATEMENT
OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
P-Com, Inc. (the "Company") is amending, pursuant to this amendment, its
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. The Company
has adjusted the allocation of the purchase price related to the March 28, 1998
and April 1, 1998 acquisition of the Wireless Communications Group of Cylink
Corporation (the "Cylink Wireless Group"). The Company initially recorded a
charge for purchased in-process research and development ("IPR&D") in March 1998
based upon an independent valuation of the assets acquired. In September 1998,
subsequent to the filing of the Quarterly Report on Form 10-Q in May 1998, the
Securities and Exchange Commission raised the concern that U.S. reporting
companies were classifying an ever-growing portion of the acquisition price for
acquisitions as purchased IPR&D. Although the Company believes that its original
accounting treatment, based on an independent appraisal, was in accordance with
generally accepted accounting principles, it has accepted the SEC's view with
respect to these matters and adopted the application of the recent SEC guidance.
As such, the Company has adjusted the allocation of the purchase price related
to the acquisition of the Cylink Wireless Group. This adjustment reduced the
charge to operations for IPR&D from $33.9 million to $15.4 million and created a
higher recorded value of goodwill and other intangible assets. This amended
filing contains related financial information and disclosures as of and for the
three month period ended March 31, 1998. See Note 1 to the Condensed
Consolidated Financial Statements.
2
<PAGE>
P-COM, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Part I. Financial Information Number
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1998
and December 31,1997 ................................................................... 4
Condensed Consolidated Statements of Operations for the three month periods
ended March 31, 1998 and 1997 .......................................................... 5
Condensed Consolidated Statements of Cash Flows for the
three month periods ended March 31, 1998 and 1997 ...................................... 6
Notes to Condensed Consolidated Financial Statements ................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................................. 11
Part II. Other Information
Item 1. Legal Proceedings ...................................................................... 30
Item 2. Changes in Securities .................................................................. 30
Item 3. Defaults Upon Senior Securities ........................................................ 30
Item 4. Submission of Matters to a Vote of Security Holders .................................... 30
Item 5. Other Information ...................................................................... 30
Item 6. Exhibits and Reports on Form 8-K ....................................................... 30
Signatures............................................................................. 31
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM I
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1998 1997
-------------- ---------------
<S> <C> <C>
ASSETS (restated)
Current assets:
Cash and cash equivalents $ 25,922 $ 88,145
Accounts receivable, net 68,667 70,883
Notes receivable 207 205
Inventory 74,848 58,003
Prepaid expenses and other current assets 15,514 10,632
-------------- ---------------
Total current assets 185,158 227,868
Property and equipment, net 39,656 32,313
Deferred income taxes 6,855 1,697
Goodwill and other assets 77,754 43,643
-------------- ---------------
$ 309,423 $ 305,521
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,193 $ 38,043
Accrued employee benefits 2,810 3,930
Other accrued liabilities 10,519 6,255
Income taxes payable 9,249 6,409
Notes payable 245 293
-------------- ---------------
Total current liabiltities 61,016 54,930
-------------- ---------------
Long-term debt 102,255 101,690
-------------- ---------------
Minority interest 705 604
-------------- ---------------
Stockholders' equity:
Preferred stock - -
Common Stock 4 4
Additional paid-in capital 134,165 131,735
Retained earnings 13,283 18,380
Accumulated other comprehensive income (2,005) (1,822)
-------------- ---------------
Total stockholders' equity 145,447 148,297
-------------- ---------------
$ 309,423 $ 305,521
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
<TABLE>
<CAPTION>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
Three Months Ended March 31,
1998 1997
-------------- ---------------
(restated)
<S> <C> <C>
Sales
Product $ 51,421 $ 38,593
Service 7,216 5,634
-------------- ---------------
Total Sales 58,637 44,227
-------------- ---------------
Cost of sales
Product 28,847 23,141
Service 4,665 4,311
-------------- ---------------
Total cost of Sales 33,512 27,452
-------------- ---------------
Gross profit 25,125 16,775
-------------- ---------------
Operating expenses:
Research and development 7,728 6,774
Selling and marketing 4,225 2,915
General and administrative 3,891 3,437
Goodwill amortization 698 346
Acquired in-process research and development 15,442 -
-------------- --------------
Total operating expenses 31,984 13,472
-------------- ---------------
Income (loss) from operations (6,859) 3,303
Interest expense (1,766) (296)
Interest income 882 380
Other income (expense) 20 (156)
-------------- ---------------
Income (loss) before income taxes (7,723) 3,231
Provision (benefit) for income taxes (2,626) 1,553
-------------- ---------------
Net income (loss) $ (5,097) $ 1,678
============== ===============
Net income (loss) per share:
Basic $ (0.12) $ 0.04
============== ===============
Diluted $ (0.12) $ 0.04
============== ===============
Shares used in per share computation:
Basic 42,951 41,371
============== ===============
Diluted 42,951 43,238
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Three Months Ended March 31,
1998 1997
--------------- ---------------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,097) $ 1,678
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 2,923 1,136
Amortization of goodwill 698 346
Change in minority interest 101 (21)
Deferred income taxes (5,158) 14
Acquired in-process research and development expenses 15,442 -
Change in assets and liabilities (net of acquisition balances):
Accounts receivable (3,214) 2,287
Notes receivable (2) 435
Inventory (11,736) (6,881)
Prepaid expenses (3,185) 115
Goodwill and other assets (1,854) (126)
Accounts payable (1,205) 229
Accrued employee benefits (1,120) 135
Other accrued liabilities 4,264 (2,759)
Income taxes payable 2,840 1,337
--------------- ---------------
Net cash used in operating activities (6,303) (2,075)
--------------- ---------------
Cash flows from investing activities:
Acquisition of property and equipment (9,805) (2,618)
Acquisitions, net of cash acquired (48,874) (10,855)
--------------- ---------------
Net cash used in investing activities (58,679) (13,473)
--------------- ---------------
Cash flows from financing activities:
Proceeds (payment) of notes payable 517 (4,754)
Proceeds from stock issuances, net of expenses 2,430 1,418
--------------- ---------------
Net cash provided by (used in) financing activities 2,947 (3,336)
--------------- ---------------
Effect of exchange rate changes on cash (183) (228)
--------------- ---------------
Net decrease in cash and cash equivalents (62,223) (19,112)
Cash and cash equivalents at the beginning of the period 88,145 42,226
--------------- ---------------
Cash and cash equivalents at the end of the period $ 25,922 $ 23,114
=============== ===============
Supplemental cash flow disclosures:
Cash paid for income taxes $ 676 $ 200
=============== ===============
Stock issued in connection with the acquisition of CSM and ACS $ - $ 14,500
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not contain all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. 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, 1998, and the results of its operations and its cash
flows for the three months ended March 31, 1998 and 1997. These financial
statements should be read in conjunction with the Company's audited 1997
financial statements, including the notes thereto, and the other information set
forth therein, included in the Company's Annual Report on Form 10-K/A (File No.
0-25356). Operating results for the three month period ended March 31, 1998 are
not necessarily indicative of the operating results that may be expected for the
year ending December 31, 1998.
This Quarterly Report on Form 10-Q/A contains forward-looking statements
that involve numerous risks and uncertainties. The statements contained in this
Quarterly Report on Form 10-Q/A 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/A.
The accompanying condensed consolidated financial statements as of March 31,
1998 and for the three month period then ended have been restated to reflect a
change in the original accounting for the purchase price allocation related to
the March 28, 1998 and April 1, 1998 acquisition of the Cylink Wireless Group
(see Note 4). After consideration of recent guidance from the Securities and
Exchange Commission (the "SEC"), the Company has revised the original accounting
for the purchase price allocation and the related amortization of goodwill and
other intangible assets. Although the Company believes that its original
accounting treatment, based on an independent appraisal, was in accordance with
generally accepted accounting principles, it has accepted the SEC's view with
respect to these matters. This resulted in a reduction in the amount of the
charge for in-process research and development ("IPR&D") from $33.9 million to
$15.4 million, a decrease of $18.5 million ($12.2 million net of applicable
income taxes), and an increase in the amounts allocated to deferred income
taxes, and goodwill and other intangible assets, resulting in an increase in
their balances as of March 31, 1998 from $13.1 million and $59.3 million,
respectively, to $7.6 million and $77.8 million, respectively. The effect of
this reallocation on previously reported condensed consolidated financial
statements as of and for the three month period ended March 31, 1998 is as
follows (in thousands except per share amounts, unaudited):
7
<PAGE>
<TABLE>
<CAPTION>
Three months ended
March 31, 1998
Statements of Operations: As reported Restated
----------- ---------
<S> <C> <C>
Acquired in-process research and development expenses $ 33,856 $ 15,442
Loss from operations $ (25,273) $ (6,859)
Net loss $ (17,249) $ (5,097)
Net loss per share
Basic and diluted $ (0.40) $ (0.12)
March 31, 1998
Balance Sheets: As reported Restated
----------- ---------
Deferred income taxes $ 13,117 $ 6,855
Goodwill and other assets $ 59,340 $ 77,754
Total assets $ 297,271 $ 309,423
Retained earnings $ 1,131 $ 13,283
Total stockholders' equity $ 133,295 $ 145,447
</TABLE>
2. NET INCOME (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires presentation of both
Basic EPS and Diluted EPS on the face of the income statement. Basic EPS, which
replaces primary EPS, is computed by dividing net income available to Common
Stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Unlike the computation of primary
EPS, Basic EPS excludes the dilutive effect of stock options. Diluted EPS
replaces fully diluted EPS and gives effect to all dilutive potential common
shares outstanding during a period. In computing Diluted EPS, the average stock
price for the period is used in determining the number of shares assumed to be
purchased from exercise of stock options rather than the higher of the average
or ending stock price as used in the computation of fully diluted EPS.
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below (in thousands
except per share data):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------------ ------------
(restated)
<S> <C> <C>
Numerator for basic income (loss) per share - net income (loss) $ (5,097) $ 1,678
============ ============
Denominator for basic income (loss) per common share 42,951 41,371
Effect of dilutive securities:
Stock options and warrants - 1,867
------------ ------------
Denominator for diluted income (loss) per common share 42,951 43,238
============ ============
Income (loss) from continuing operations before
extraordinary items per common share:
Basic $ (0.12) $ 0.04
============ ============
Diluted $ (0.12) $ 0.04
============ ============
</TABLE>
For the first quarter of 1998, the weighted-average unexercised stock
options to purchase 1,570,817 shares of Common Stock were excluded from the
computation of diluted net loss per share, as the effect would be antidilutive.
For the first quarter of 1997, 142,300 weighted-average outstanding stock
options were also excluded from the computation of net income per share. Options
are antidilutive when the Company has a net loss or when the exercise price of
the stock option is greater than the average market price of the Company's
Common Stock.
8
<PAGE>
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income".
SFAS 130 establishes standards for reporting comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. Comprehensive income as defined includes all
changes in equity (net assets) during a period from 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
income (loss) was as follows (in thousands):
Three Months Ended
March 31,
1998 1997
------------- -------------
(restated)
Net income (loss) $ (5,097) $ 1,679
Other comprehensive income (loss) (183) (277)
============= =============
Total comprehensive income (loss) $ (5,280) $ 1,402
============= =============
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
disclosures prescribed by SFAS 131 are effective in 1998, and are not required
for interim periods. The Company does not expect this pronouncement to have a
material effect on its financial statements.
4. ACQUISITIONS
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 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 Cylink Wireless
Group designs, manufactures and markets spread spectrum radio products for voice
and data applications in both domestic and international markets. The
acquisition of the accounts receivable on April 1, 1998 was recorded in the
second quarter of 1998.
The Company accounted for this acquisition as a purchase business
combination. The results of Cylink Wireless Group are included from the date of
acquisition and were not material to the Company's results of operations for the
three month period ended March 31, 1998.
The total purchase price of the acquisition is as follows (in thousands):
Cash Payment $ 46,000
Short-term promissory note 14,500
Expenses 2,483
-------------
Total $ 62,983
=============
9
<PAGE>
The allocation of the purchase price, restated for the revision of the
amount allocated to in-process research and development ("IPR&D"), as discussed
below, was as follows (in thousands):
<TABLE>
<CAPTION>
(As reported) (Restated)
--------------- ---------------
<S> <C> <C>
Accounts receivable, net $ 9,065 $ 9,065
Inventory 5,109 5,109
Property and equipment, net 461 461
Current liabilities assumed (1,355) (1,355)
Intangible assets: 15,847
Goodwill - 23,482
In-process research and development 33,856 15,442
Developed technology - 6,291
Acquired workforce - 1,781
Core technology - 2,707
--------------- ---------------
Total $ 62,983 $ 62,983
=============== ===============
</TABLE>
The following unaudited pro forma information combines the historical sales
and net income (loss) and net income (loss) per share of P-Com and the Cylink
Wireless Group for the three months ended March 31, 1998 and the year ended
December 31, 1997 in each case as if the acquisition had occurred at the
beginning of the earliest period presented. The results include amortization of
goodwill and other intangible assets related to the acquisition of the Cylink
Wireless Group, as restated for the revision of the amount of purchase price
allocated to IPR&D as discussed below, and as previously reported. (In
thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, 1998 December 31, 1997
(restated) (restated)
------------------------------------------- --------------------------------------------
P-Com Cylink (1) Pro Forma P-Com Cylink (1) Pro Forma
---------- ------------ ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 58,637 $ 4,508 $ 63,145 $ 220,702 $ 27,957 $ 248,659
Net income (loss) (5,097) (4,706) (9,803) 18,891 (3,443) 15,448
Net income (loss) per share:
Basic (0.12) (0.11) (0.23) 0.45 (0.08) 0.37
Diluted (0.12) (0.11) (0.23) 0.43 (0.08) 0.35
</TABLE>
- --------------
(1) All Cylink Corporation financial information presented in this table
has been amended to reflect certain adjustments made by Cylink
Corporation. In November 1998, Cylink Corporation publicly announced
that it and its independent accountants had initiated a review of
revenue recognition practices, which resulted in a restatement of
previously issued first quarter 1998 results, as well as annual 1997
results.
After consideration of recent guidance from the SEC, the Company has
adjusted the allocation of the purchase price related to the acquisition of the
Cylink Wireless Group, which included decreasing the IPR&D charge from $33.9
million as originally reported in the Company's Quarterly Report on Form 10-Q
for its quarter ended March 31, 1998 to $15.4 million. The result of this
restatement is a lesser charge to income for IPR&D and a higher recorded value
of goodwill and other intangible assets, resulting in increased amortization of
such goodwill and other intangible assets in future periods.
IPR&D had no alternative future use at the date of acquisition and
technological feasibility had not been established.
Among the various factors considered in determining the amount of the
allocation of the purchase price to IPR&D were 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 of $6.3 million will be amortized over the period of the expected
revenue stream of the developed products of approximately four years. The value
of the acquired workforce, $1.8 million, will be amortized on a straight-line
basis over three years, and the remaining identified intangible assets,
including core technology of $2.7 million and goodwill of $23.5 million will be
amortized on a
10
<PAGE>
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 in-process technology such as research projects in areas supporting
products which address the growing third world markets by offering a new
point-to-multipoint 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.
If none of these projects are 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.
5. BORROWING ARRANGEMENTS
The Company entered into a new revolving line-of-credit agreement on April
23, 1998 that provides for borrowings of up to $25 million. The line-of-credit
expires on June 22, 1998 or upon demand by the bank. Borrowings under the line
are secured and bear interest at either a base interest rate or a variable
interest rate.
The Company entered into a new revolving line of credit agreement on May
15, 1998 that provides for borrowings of up to $50 million and replaces the
revolving line of credit agreement dated April 23, 1998. The line of credit
expires on April 30, 2001. Borrowings under the line are secured and bear
interest at either a base interest rate or a variable interest rate. The
agreement requires the Company to comply with certain financial covenants
including the maintenance of specific minimum ratios. The Company was in
compliance with such covenants as of March 31, 1998.
6. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(unaudited)
------------- ------------
<S> <C> <C>
Raw materials $ 10,940 $ 9,695
Work-in-process 38,355 32,472
Finished goods 25,553 15,836
------------- ------------
$ 74,848 $ 58,003
============= ============
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(unaudited)
------------- -------------
<S> <C> <C>
Tooling and test equipment $ 35,304 $ 31,603
Computer equipment 5,719 4,950
Furniture and fixtures 5,238 4,979
Land and buildings 1,357 1,389
Construction-in-process 8,863 3,294
------------- -------------
56,481 46,215
Less - accumulated depreciation and
amortization (16,825) (13,902)
------------- -------------
$ 39,656 $ 32,313
============= =============
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
On March 28, 1998, the Company acquired substantially all of the assets, and
on April 1, 1998, the accounts receivable, of the Wireless Communications Group
of Cylink Corporation (the "Cylink Wireless Group"). The acquisition was
accounted for as a purchase business combination in accordance with APB Opinion
No. 16. Under the purchase method of accounting, the purchase price was
allocated to the net tangible and identifiable intangible 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 Wireless 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. The Company originally recorded a $33.9
million charge for purchased IPR&D in March 1998 based upon an independent
valuation. In September 1998, subsequent to the filing of the Form 10-Q in May
1998 covering the fiscal quarter ended on March 31, 1998, the Securities and
Exchange Commission raised the concern that U.S. reporting companies were
classifying an ever-growing portion of the acquisition price for acquisitions as
purchased IPR&D. Although the Company believes that its original accounting
treatment, based on an independent appraisal, was in accordance with generally
accepted accounting principles and the Company's appraisal, it has accepted the
SEC's view with respect to these matters and adopted the application of the
recent SEC guidance. As such, the Company has adjusted the allocation of the
purchase price related to the acquisition of the Cylink Wireless Group. The
result is a lesser charge to income for IPR&D and a higher recorded value of
goodwill and other intangible assets.
Among the various factors considered in determining the amount of the
allocation of the purchase price to IPR&D were 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 will be amortized over the period of the expected revenue stream of
the developed products of approximately four years. The value of the acquired
workforce will be amortized on a straight-line basis over three years, and the
remaining identified intangibles, including goodwill and core technology will be
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 such as 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. The Company
expects to begin to benefit from these projects in 1999.
If none of these projects are 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.
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, is scheduled
12
<PAGE>
to be completed during the third quarter of 1998 at an estimated total cost of
$2.0million. The enhanced Airlink projects are scheduled to be completed during
the first quarter of 1999 at an estimated total cost of $0.6 million.
The following table sets forth items from the Consolidated Condensed Income
Statements as a percentage of sales for the periods indicated. In addition, this
Quarterly Report on Form 10-Q/A may contain forward-looking statements that
involve numerous risks and uncertainties. The statements contained in this
Quarterly Report on Form 10-Q/A that are not purely historical may be
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/A.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed in the Company's 1997 Annual Report on Form
10-K/A and other documents filed by the Company with the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------------- --------------
(restated)
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 57.2 62.1
------------- --------------
Gross profit 42.8 37.9
------------- --------------
Operating expenses:
Research and development 13.2 15.3
Selling and marketing 7.2 6.6
General and administrative 6.8 7.7
Goodwill amortization 1.1 0.8
Acquired in-process research and development 26.3 -
------------- --------------
Total operating expenses 54.5 30.4
------------- --------------
Income (loss) from operations (11.7) 7.5
------------- --------------
Interest and other income (expense), net (1.5) (0.2)
------------- --------------
Income (loss) before income taxes (13.2) 7.3
Provision (benefit) for income taxes (4.5) 3.5
-------------- --------------
Net income (loss) (8.7%) 3.8%
============== ==============
</TABLE>
Results of Operations for the Three Months Ended March 31, 1998 and 1997
Sales. Sales for the three months ended March 31, 1998 and 1997 were
approximately $58.6 million and $44.2 million, respectively, an increase of 33%.
The increase was primarily due to increased unit sales of 23 GHz, 38 GHz and 15
GHz radio systems to new and existing customers and sales from companies
recently acquired. Sales to new customers in the first quarter of 1998
(excluding companies recently acquired) were less than 5% of total sales. For
the three months ended March 31, 1998, five customers accounted for 63% of the
sales of the Company. For the three months ended March 31, 1997, five customers
accounted for 55% of the sales of the Company.
The Company recently acquired three companies, including the
acquisition of the assets of the Cylink Wireless Group which were acquired 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. RT Masts and Telematics
were acquired on November 27, 1997 and are accounted for as
poolings-of-interest. Under the pooling-of-interest method of accounting, prior
period financial statements are restated to present the results of the combined
companies as if they had been combined since inception. Sales for RT Masts in
the first quarter of 1998 and 1997 were approximately $4.4 million and $4.6
million, respectively. Sales for Telematics in the first quarter of 1998 and
1997 were approximately $1.3 million and $2.0 million, respectively.
13
<PAGE>
Product sales for the three months ended March 31, 1998 were approximately
$51.4 million or 88% of total sales, and service sales were approximately $7.2
million. Historically, the Company has generated a majority of its sales outside
of the United States. 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.
Gross Profit. For the three months ended March 31, 1998 and 1997, gross
profit was approximately $25.1 million, or 42.8% of sales, and approximately
$16.8 million, or 37.9% of sales, respectively. The improvement in gross profit
in the first quarter of 1998 compared to the corresponding period in 1997 was
primarily due to the Company negotiating lower prices with vendors and product
design improvements, such as reducing the number of components across the range
of the Company's products, which increased manufacturing efficiencies and
economies of scale. There can be no assurance that gross profit will remain at
this level or continue to improve.
Research and Development. For the three months ended March 31, 1998 and
1997, research and development expenses were approximately $7.7 million and $6.8
million, respectively. The increase in dollars in research and development
expenses during the three months ended March 31, 1998 as compared to the
corresponding period in 1997 was due primarily to expenses associated with
increased staffing. As a percentage of sales, research and development expenses
decreased from 15.3% in the three months ended March 31, 1997 to 13.2% in the
corresponding period in 1998. The decrease in research and development expenses
as a percentage of sales was primarily due to higher level of sales in the three
months ended March 31, 1998, as compared to the corresponding period in 1997.
The Company expects that research and development expenses will continue to
increase significantly in dollars during the remainder of 1998.
Selling and Marketing. For the three months ended March 31, 1998 and 1997,
selling and marketing expenses were approximately $4.2 million and $2.9 million,
respectively. The increase in selling and marketing expenses in the three months
ended March 31, 1998, as compared to the corresponding period in 1997, was
primarily due to increased staffing and increased expenses relating to the
Company's expansion of its international sales and marketing organization. As a
percentage of sales, selling and marketing expenses increased from 6.6% in the
three months ended March 31, 1997 to 7.2% in the corresponding period in 1998.
The increase in selling and marketing expenses as a percentage of sales was
primarily due to the Company's expansion of its international market. The
Company expects that such expenses will continue to increase significantly in
dollars during the remainder of 1998, as the Company continues to expand its
operations.
General and Administrative. For the three months ended March 31, 1998 and
1997, general and administrative expenses were $3.9 million and $3.4 million,
respectively. The increase was principally due to increased staffing and other
costs resulting from the Company's expansion of its operations. As a percentage
of sales, general and administrative expenses decreased from 7.7% in the three
months ended March 31, 1997 to 6.8% in the corresponding period in 1998. This
decrease in general and administrative expenses as a percentage of sales was due
primarily to a higher level of sales in the three months ended March 31, 1998,
as compared to the corresponding period in 1997. The Company expects that
general and administrative expenses will continue to increase significantly in
dollars during the remainder of 1998 as compared to 1997 as the Company
continues to expand its operations.
Goodwill Amortization. Goodwill amortization consists of the charge to
income that results from the allocation over the estimated useful life of the
component of the cost of the Company's acquisitions accounted for by the
purchase method which is greater than the fair value of the net assets acquired.
For the three months ended March 31, 1998 and 1997, goodwill amortization was
$0.7 million and $0.3 million, respectively. The increase in goodwill
amortization in the three months ended March 31, 1998 as compared to the
corresponding period in 1997 was because Technosystem S.p.A. ("Technosystem") a
Rome, Italy-based company, and Columbia Spectrum Management LP ("CSM") a Vienna,
Virginia-based company were acquired in February 1997 and March 1997,
respectively. As a result, goodwill was not amortized for the entire quarter for
the three months ended March 31, 1997.
In-Process Research and Development. The Company recorded a charge for
purchased IPR&D in March 1998 based upon an independent valuation relating to
the acquisition of the Cylink Wireless Group. Subsequent to the acquisition, in
a letter dated September 15, 1998 to the American Institute of Certified Public
Accountants, the Chief
14
<PAGE>
Accountant of the Securities and Exchange Commission ("SEC") raised the concern
that U.S. reporting companies were classifying an ever-growing portion of the
acquisition price for acquisitions as purchased IPR&D. Although the Company
believes that its original accounting treatment, based on an independent
appraisal, was in accordance with generally accepted accounting principles, it
has accepted the SEC's view with respect to these matters and adopted the
application of the recent SEC guidance. As such, the Company has restated its
first, second, and third quarter 1998 consolidated financial statements. As a
result, the first quarter charge for acquired IPR&D was decreased from $33.9
million previously recorded to $15.4 million, a decrease of $18.5 million with a
corresponding increase in goodwill and other intangible assets and related
amortization in subsequent quarters. Technological feasibility was not
established for the expensed IPR&D, and the expensed IPR&D had no alternative
future use. The portion of the purchase price allocated to goodwill and other
intangible assets includes $6.3 million of developed technology, $2.7 million of
core technology, $1.8 million of assembled workforce, and $23.5 million of
goodwill.
Among the various factors considered in determining the amount of the
allocation of the purchase price to IPR&D were 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, other factors were considered in
determining the value assigned to purchased in-process technology such as
research projects in areas supporting products which address the growing third
world markets by offering a new point-to-multipoint product, a faster, less
expensive more flexible point-to-point product, and the development of enhanced
Airlink products acquired from the Cylink Wireless Group, 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.
The Company expects to begin to benefit from these projects in 1999. If none of
these projects are 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. At the time of acquisition,
technological feasibility had not been established and no alternative future
uses existed.
Interest and Other Income (Expense) The Company incurred interest expense
of $1.8 million during the three-month period ended March 31, 1998 as compared
to $0.3 million during the corresponding period in 1997.
For the first quarter of 1998, 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 Convertible
Subordinated Notes ("Notes") due 2002, and finance charges and fees related to
the Company's receivables purchase agreements. For the first quarter of 1997,
interest expense consisted primarily of interest and fees incurred on borrowings
under the Company's bank line of credit.
The Company generated interest income of $0.9 million during the three-month
period ended March 31, 1998 as compared to $0.4 million during the corresponding
period in 1997.
For the first quarter of 1998, interest income consisted primarily of
interest generated from the Company's cash in its interest bearing bank
accounts. For the first quarter of 1997, interest income consisted primarily of
interest income generated from the Company's cash investments.
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. In the first quarter of 1997, the Company recorded a
net expense of $0.2 million.
Liquidity and Capital Resources
The Company used approximately $6.3 million in operating activities during
the three months ended March 31, 1998, primarily due to increases in accounts
receivable, inventory, prepaid expenses, deferred income taxes, and other assets
of $3.2 million, $11.7 million, $3.2 million, $5.2 million, and $1.9 million,
respectively, and a decrease in accounts payable of $1.2 million. These uses of
cash were partially offset by the net income (excluding non-cash charges for
acquired IPR&D expense) of $10.3 million, and depreciation and amortization
expense of $2.9 million and $0.7 million, respectively, and increases in other
accrued liabilities and income taxes payable of $3.1 million and $2.8 million,
respectively.
15
<PAGE>
The Company used approximately $58.7 million in investing activities during
the three months ended March 31, 1998 consisting of approximately $48.9 million
used for acquisitions including the acquisition of the assets of the Cylink
Wireless Group, and $9.8 million to acquire capital equipment.
On March 28 and April 1, 1998, the Company acquired substantially all of
the assets of the Cylink Wireless Group, for $46.0 million in cash and $14.5
million in a three month, non-interest bearing unsecured subordinated promissory
note due July 6, 1998. 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 connection with the
acquisition of the assets of the Cylink Wireless Group, the Company purchased
the accounts receivable balance of $9.1 million on April 1, 1998. The
consideration for these accounts receivable was included in the total purchase
price of $60.5 million in cash and debt mentioned above.
The Company generated approximately $2.9 million in its financing
activities during the three months ended March 31, 1998. The Company received
approximately $2.4 million from the issuance of the Company's Common Stock
pursuant to the Company's stock option and employee stock purchase plans.
At March 31, 1998 and December 31, 1997, net accounts receivable were
approximately $68.7 million and $70.9 million, respectively. The Company has
established a receivables purchase agreement by and between the Company and
Wells Fargo HSBC Trade Bank N.A. that allows the Company to sell up to $20
million of accounts receivable. These sales have no recourse to the Company. The
Company plans to heavily utilize this facility as part of managing its overall
liquidity and/or third party financing programs. No accounts receivable from
Cylink Wireless Group were purchased in the acquisition during the first quarter
of 1998. At March 31, 1998 and December 31, 1997, inventory was approximately
$74.8 million and $58.0 million, respectively. Of the $16.8 million increase
that occurred in the three months ended March 31, 1998, $5.1 million was due to
the acquisition of inventory from Cylink Wireless Group.
At March 31, 1998, the Company had working capital of approximately $124.1
million, compared to $172.9 million at December 31, 1997. In recent quarters,
most of the Company's sales have been realized near the end of each quarter,
resulting in a significant investment in accounts receivable at the end of the
quarter. In addition, the Company expects that its investments in accounts
receivable and inventories will continue to be significant and will continue to
represent a significant portion of working capital. Significant investments in
accounts receivable and inventories will subject the Company to increased risks
that could materially adversely affect the Company's business, prospects,
financial condition and results of operations.
The Company's principal sources of liquidity as of March 31, 1998 consisted
of approximately $25.9 million of cash and cash equivalents. The Company entered
into a new revolving line of credit agreement on April 23, 1998 that provides
for borrowings of up to $25.0 million. The line of credit expires on June 22,
1998 or upon demand by the bank. Borrowings under the line are secured and bear
interest at either a base interest rate or a variable interest rate. The Company
entered into a new revolving line-of-credit agreement on May 15, 1998 that
provides for borrowings of up to $50.0 million and replaces the revolving line
of credit agreement dated April 23, 1998. The line of credit expires on April
30, 2001. Borrowings under the line are secured and bear interest at either a
base interest rate or a variable interest rate. The agreement requires the
Company to comply with certain financial covenants, including the maintenance of
specific minimum ratios.
At present, the Company does not have any material commitments for capital
equipment purchases. However, the Company's future capital requirements will
depend upon many factors, including the development of new radio systems and
related software tools, potential acquisitions, the extent and timing of
acceptance of the Company's radio systems in the market, requirements to
maintain adequate manufacturing facilities, working capital requirements for
Geritel S.p.A. ("Geritel"), Atlantic Communication Sciences, Inc. ("ACS"),
Technosystem, Control Resources Corporations ("CRC"), CSM and Cylink Wireless
Group, the progress of the Company's research and development efforts, expansion
of the Company's marketing and sales efforts, the Company's results of
operations and the status of competitive products. The Company believes that
cash and cash equivalents on hand, and anticipated cash flow from operations, if
any, and funds available from the Company's bank line of credit, are adequate to
fund its ordinary operations for at least the next twelve months. There can be
no assurance, however, that the Company will not require additional financing
prior to such date to fund its operations. For a discussion of risk
16
<PAGE>
factors associated with the Company's future capital requirements, please see
"Certain Factors Affecting Operating Results--Future Capital Requirements" and
"Acquisitions".
There can be no assurance that any operations of ACS, Geritel,
Technosystem, CRC, CSM or Cylink Wireless Group will be profitable after the
acquisitions. Moreover, there can be no assurance that the anticipated benefits
of the ACS, Geritel, Technosystem, CRC, CSM and Cylink Wireless Group
acquisitions will be realized. The process of integrating the operations of ACS,
Geritel, Technosystem, CRC, CSM and Cylink Wireless Group into the Company's
operations may result in unforeseen operating difficulties and could absorb
significant management attention, expenditures and reserves that would otherwise
be available for the ongoing development of the Company's business.
Certain Factors Affecting Operating Results
Limited Operating History
P-Com was founded in August 1991 and was in the development stage until
October 1993 when it began commercial shipments of its first product. From
inception to the end of the first quarter of fiscal 1998, the Company generated
a cumulative net profit of approximately $13.3 million. The decrease in
cumulative net profit from 1997 to the first quarter of 1998 was due to the one
time IPR&D charge of approximately $15.4 million related to the acquisition of
the assets of the Cylink Wireless Group. From October 1993 through March 31,
1998, the Company generated sales of approximately $513.5 million, of which
$279.3 million, or 54% of such amount, was generated in the year ended December
31, 1997 and the first quarter of 1998. The Company does not believe recent
growth rates are indicative of future operating results. Due to the Company's
limited operating history and limited resources, among other factors, there can
be no assurance that profitability or significant revenues on a quarterly or
annual basis will occur in the future. During 1997 and the first quarter of
1998, both the Company's sales and operating expenses increased more rapidly
than the Company had anticipated. There can be no assurance that the Company's
revenues will continue to remain at or increase from the levels experienced in
1997 or in the first quarter of 1998 or that sales will not decline. The
Company's net sales for the first quarter of 1998 were lower than its net sales
of the Company for the fourth quarter of 1997. This represents the Company's
first quarter of sequentially lower sales than the prior period. The Company
intends to continue to invest significant amounts in its operations,
particularly to support product development and the marketing and sales of
recently introduced products, and operating expenses will continue to increase
significantly in absolute dollars. If the Company's sales do not correspondingly
increase, the Company's results of operations would be materially adversely
affected. Accordingly, there can be no assurance that the Company will achieve
profitability in future periods. The Company is subject to all of the risks
inherent in the operation of a new business enterprise, and there can be no
assurance that the Company will be able to successfully address these risks.
Significant Customer Concentration
To date, approximately one hundred customers accounted for substantially
all of the Company's sales, and two customers, each of which individually
accounted for over 10% of the Company's 1997 sales, accounted for over 27% of
the Company's 1997 sales. During the first quarter of 1998, five customers
accounted for 63% of the Company's sales and as of March 31, 1998, four
customers accounted for 56% of the Company's backlog scheduled for shipment in
the twelve months subsequent to March 31, 1998. The Company anticipates that it
will continue to sell its products and services to a changing but still
relatively small group of customers. Several of the Company's subsidiaries are
dependent on one or a few customers. Some companies implementing new networks
are at early stages of development and may require additional capital to fully
implement their planned networks. The Company's ability to achieve sales in the
future will depend in significant part upon its ability to obtain and fulfill
orders from, maintain relationships with and provide support to existing and new
customers, to manufacture systems in volume on a timely and cost-effective basis
and to meet stringent customer performance and other requirements and shipment
delivery dates, as well as the condition, working capital availability and
success of its customers. As a result, any cancellation, reduction or delay in
orders by or shipments to any customer, as a result of manufacturing or supply
difficulties or otherwise, or the inability of any customer to finance its
purchases of the Company's products or services, as has been the case with
certain customers historically, may materially adversely affect the Company's
business, financial condition and results of operations. In addition, financial
difficulties of any existing or potential customers may limit the overall demand
for the Company's products and services (for example, certain
17
<PAGE>
potential customers in the telecommunications industry have been reported to
have undergone financial difficulties and may therefore limit their future
orders). In addition, acquisitions in the communications industry are common,
which further concentrates the customer base and may cause orders to be delayed
or cancelled. There can be no assurance that the Company's sales will increase
in the future or that the Company will be able to support or attract customers.
See "Results of Operations".
Significant Fluctuations in Results of Operations
The Company has experienced and will in the future continue to experience
significant fluctuations in sales, gross margins and operating results. The
procurement process for most of the Company's current and potential customers is
complex and lengthy, and the timing and amount of sales is difficult to predict
reliably. The sale and implementation of the Company's products and services
generally involves a significant commitment of the Company's senior management,
sales force and other resources. The sales cycle for the Company's products and
services typically involves a significant technical evaluation and commitment of
cash and other resources, with the attendant delays frequently associated with,
among other things: (i) existing and potential customers' seasonal purchasing
and budgetary cycles; (ii) educating customers as to the potential applications
of, and product-life cost savings associated with, using the Company's products
and services; (iii) complying with customers' internal procedures for approving
large expenditures and evaluating and accepting new technologies that affect key
operations; (iv) complying with governmental or other regulatory standards; (v)
difficulties associated with each customer's ability to secure financing; and
(vi) negotiating purchase and service terms for each sale. Orders for the
Company's products have typically been strongest towards the end of the calendar
year, with a reduction in shipments occurring during the summer months, as
evidenced in the third quarter of fiscal year 1997, due primarily to the
inactivity of the European market, the Company's major current customer base, at
such time. To the extent that this trend continues, the Company's results of
operations will fluctuate from quarter to quarter.
In addition, a single customer's order scheduled for shipment in a quarter
can represent a significant portion of the Company's potential sales for such
quarter. There can be no assurance that the Company will be able to obtain such
large orders from single customers in the future. The Company has at times
failed to receive expected orders, and delivery schedules have been deferred as
a result of changes in customer requirements and commitments, among other
factors. As a result, the Company's operating results for a particular period
have in the past been and will in the future be materially adversely affected by
a delay, rescheduling or cancellation of even one purchase order. Much of the
anticipated growth in telecommunications infrastructure, if any, is expected to
result from the entrance of new service providers, many of which do not have the
financial resources of the existing service providers. To the extent these new
service providers are unable to adequately finance their operations, they may
cancel orders. Moreover, purchase orders are often received and accepted
substantially in advance of shipment, and the failure to reduce actual costs to
the extent anticipated or an increase in anticipated costs before shipment could
materially adversely affect the gross margins for such orders, and as a result,
the Company's results of operations. Moreover, most of the Company's backlog
scheduled for shipment in the twelve months subsequent to March 31, 1998 can be
canceled since orders are often made substantially in advance of shipment, and
the Company's contracts typically provide that orders may be canceled with
limited or no penalties. As a result, backlog is not necessarily indicative of
future sales for any particular period. In addition, the Company's customers
have increasingly been requiring shipment of products at the time of ordering
rather than submitting purchase orders far in advance of expected dates of
product shipment. Furthermore, most of the Company's sales in recent quarters
have been realized near the end of each quarter. Accordingly, a delay in a
shipment near the end of a particular quarter, as the Company has been
experiencing recently, due to, for example, an unanticipated shipment
rescheduling, a cancellation or deferral by a customer, competitive or economic
factors, unexpected manufacturing or other difficulties, delays in deliveries of
components, subassemblies or services by suppliers, or the failure to receive an
anticipated order, may cause sales in a particular quarter to fall significantly
below the Company's expectations and may materially adversely affect the
Company's operating results for such quarter.
In connection with its efforts to ramp-up production of products and
services, the Company expects to continue to make substantial capital
investments in equipment and inventory, recruit and train additional personnel
and possibly invest in additional manufacturing facilities. The Company
anticipates that these expenditures will be made in advance of, and in
anticipation of, increased sales and, therefore, that its gross margins will be
adversely
18
<PAGE>
affected from time-to-time due to short-term inefficiencies associated with the
addition of equipment and inventory, personnel or facilities, and that each cost
category may increase as a percentage of revenues from time-to-time on a
periodic basis. In addition, as the Company's customers increasingly require
shipment of products at the time of ordering, the Company must forecast demand
for each quarter and build up inventory accordingly. Such increases in inventory
could materially adversely affect the Company's operations, if such inventory
were not utilized or becomes obsolete.
A large portion of the Company's expenses are fixed and difficult to
reduce should revenues not meet the Company's expectations, thus magnifying the
material adverse effect of any revenue shortfall. Furthermore, announcements by
the Company or its competitors of new products, services and technologies could
cause customers to defer or cancel purchases of the Company's systems and
services, which would materially adversely affect the Company's business,
financial condition and results of operations. Additional factors that have
caused and will continue to cause the Company's sales, gross margins and results
of operations to vary significantly from period to period include: new product
introductions and enhancements, including related costs; the Company's ability
to manufacture and produce sufficient volumes of systems and meet customer
requirements; manufacturing capacity, efficiencies and costs; mix of sales
through direct efforts or through distributors or other third parties; mix of
systems and related software tools sold and services provided; operating and new
product development expenses; product discounts; accounts receivable collection,
in particular those acquired in recent acquisitions, especially outside of the
United States; changes in pricing by the Company, its customers or suppliers;
inventory write-offs, as the Company recently experienced in the second and
third quarters of 1997 for a relatively immaterial amount in each such quarter,
which the Company may experience again in the future; inventory obsolescence;
natural disasters; market acceptance by the Company's customers and the timing
of availability of new products and services by the Company or its competitors;
acquisitions, including costs and expenses; usage of different distribution and
sales channels; fluctuations in foreign currency exchange rates; delays or
changes in regulatory approval of its systems and services; warranty and
customer support expenses; customization of systems; and general economic and
political conditions. In addition, the Company's results of operations have been
and will continue to be influenced significantly by competitive factors,
including the pricing and availability of, and demand for, competitive products
and services. All of the above factors are difficult for the Company to
forecast, and these or other factors could materially adversely affect the
Company's business, financial condition and results of operations. As a result,
the Company believes that period-to-period comparisons are not necessarily
meaningful and should not be relied upon as indications of future performance.
Due to all of the foregoing factors, it is likely that in some future quarter
the Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
may be materially adversely affected.
Acquisitions
Since April 1996, the Company has acquired nine complementary companies
and businesses. Integration of these companies into the Company's business is
currently ongoing, and no assurance may be made that the Company will be able to
successfully complete this process. Risks commonly encountered in such
transactions include the difficulty of assimilating the operations and personnel
of the combined companies, the potential disruption of the Company's ongoing
business, the inability to retain key technical and managerial personnel, the
inability of management to maximize the financial and strategic position of the
Company through the integration of acquired businesses, additional expenses
associated with amortization of acquired intangible assets, dilution of existing
stockholders, the maintenance of uniform standards, controls, procedures, and
policies, the impairment of relationships with employees and customers as a
result of any integration of new personnel, risks of entering markets in which
the Company has no or limited direct prior experience, and operating companies
in different geographical locations with different cultures. All of the
Company's acquisitions to date (the "Acquisitions"), except the acquisitions of
CRC, RT Masts Limited ("RT Masts") and Telematics, Inc. ("Telematics") have been
accounted for under the purchase method of accounting, and as a result, a
significant amount of goodwill is being amortized as set forth in the Company's
consolidated financial statements. This amortization expense may have a
significant effect on the Company's financial results. There can be no assurance
that the Company will be successful in overcoming these risks or any other
problems encountered in connection with such acquisitions, or that such
transactions will not materially adversely affect the Company's business,
financial condition, or results of operations.
19
<PAGE>
As part of its overall strategy, the Company plans to continue to acquire
or invest in complementary companies, products or technologies and to enter into
joint ventures and strategic alliances with other companies. The Company is
currently pursuing numerous acquisitions; however, except with respect to the
Cylink Wireless Group, no material acquisition has become the subject of any
definitive agreement, letter of intent or agreement in principle. The Company is
unable to predict whether and when any prospective acquisition candidate will
become available or the likelihood that any acquisition will be completed. The
Company competes for acquisition and expansion opportunities with many entities
that have substantially greater resources than the Company. There can be no
assurance that the Company will be able to successfully identify suitable
acquisition candidates, complete acquisitions, or expand into new markets. Once
integrated, acquired businesses may not achieve comparable levels of revenues,
profitability, or productivity as the existing business of the Company or
otherwise perform as expected. In addition, as commonly occurs with mergers of
technology companies, during the pre-merger and integration phases, aggressive
competitors may undertake formal initiatives to attract customers and to recruit
key employees through various incentives. If the Company proceeds with one or
more significant acquisitions in which the consideration consists of cash, as
was the case with Cylink Wireless Group, a substantial portion of the Company's
available cash could be used to consummate the acquisitions. Many business
acquisitions must be accounted for as a purchase for financial reporting
purposes. Most of the businesses that might become attractive acquisition
candidates for the Company are likely to have significant goodwill and
intangible assets, and acquisition of these businesses, if accounted for as a
purchase, as was the case with Cylink Wireless Group, would typically result in
substantial amortization of goodwill charges to the Company. The occurrence of
any of these events could have a material adverse effect on the Company's
workforce, business, financial condition and results of operations.
Dependence on Contract Manufacturers; Reliance on Sole or Limited Sources
of Supply
The Company's internal manufacturing capacity is very limited. The Company
utilizes contract manufacturers such as Remec, Inc., Sanmina Corporation, SPC
Electronics Corp., GSS Array Technology, Celeritek, Inc. and Senior Systems
Technology, Inc. to produce its systems, components and subassemblies and
expects to rely increasingly on these and other manufacturers in the future. The
Company also relies on outside vendors to manufacture certain other components
and subassemblies. There can be no assurance that the Company's internal
manufacturing capacity and that of its contract manufacturers will be sufficient
to fulfill the Company's orders. Failure to manufacture, assemble and ship
systems and meet customer demands on a timely and cost-effective basis could
damage relationships with customers and have a material adverse effect on the
Company's business, financial condition and operating results. Certain necessary
components, subassemblies and services necessary for the manufacture of the
Company's systems are obtained from a sole supplier or a limited group of
suppliers. In particular, Eltel Engineering S.r.L. and Associates, Milliwave,
Scientific Atlanta and Xilinx, Inc. each are sole source or limited source
suppliers for critical components used in the Company's radio systems.
The Company's reliance on contract manufacturers and on sole suppliers or
a limited group of suppliers and the Company's increasing reliance on contract
manufacturers and suppliers involves several risks, many of which the Company
has been experiencing, including an inability to obtain an adequate supply of
finished products and required components and subassemblies, and reduced control
over the price, timely delivery, reliability and quality of finished products,
components and subassemblies. The Company does not have long-term supply
agreements with most of its manufacturers or suppliers. Manufacture of the
Company's products and certain of these components and subassemblies is an
extremely complex process, and the Company has from time to time experienced and
may in the future continue to experience problems in the timely delivery and
quality of products and certain components and subassemblies from vendors.
Certain of the Company's suppliers have relatively limited financial and other
resources. Any inability to obtain timely deliveries of components and
subassemblies of acceptable quality or any other circumstance that would require
the Company to seek alternative sources of supply, or to manufacture its
finished products or such components and subassemblies internally, could delay
the Company's ability to ship its systems, which could damage relationships with
current or prospective customers and have a material adverse effect on the
Company's business, financial condition and results of operations.
No Assurance of Successful Expansion of Operations; Management of Growth
Recently, the Company has significantly expanded the scale of its
operations to support increased sales and to address critical infrastructure and
other requirements. This expansion has included the leasing of additional space,
20
<PAGE>
the opening of branch offices and subsidiaries in the United Kingdom, Italy,
Germany and Singapore, the opening of design centers and manufacturing
operations throughout the world, the acquisition of a significant amount of
inventory (the Company's inventory increased from approximately $58.0 million at
December 31, 1997 to approximately $74.8 million at March 31, 1998) and accounts
receivable, nine acquisitions, significant investments in research and
development to support product development and services, including the recently
introduced products and the development of point-to-multipoint systems, and the
hiring of additional personnel in all functional areas, including in sales and
marketing, manufacturing and operations and finance, and has resulted in
significantly higher operating expenses. Currently, the Company is devoting
significant resources to the development of new products and technologies and is
conducting evaluations of these products and will continue to invest significant
additional resources in plant and equipment, inventory, personnel and other
items, to begin production of these products and to provide the marketing and
administration, if any, required to service and support these new products.
Accordingly, there can be no assurance that gross profit margin and inventory
levels will not be adversely impacted in the future by start-up costs associated
with the initial production and installation of these new products. These
start-up costs include, but are not limited to, additional manufacturing
overhead, additional allowance for doubtful accounts, inventory and warranty
reserve requirements and the creation of service and support organizations. In
addition, the increases in inventory on hand for new product development and
customer service requirements increase the risk of inventory write-offs. As a
result, the Company anticipates that its operating expenses will continue to
increase significantly. If the Company's sales do not correspondingly increase,
the Company's results of operations would be materially adversely affected.
Expansion of the Company's operations and its acquisitions have caused and
are continuing to impose a significant strain on the Company's management,
financial, manufacturing and other resources and have disrupted the Company's
normal business operations. The Company's ability to manage the recent and any
possible future growth, should it occur, will depend upon a significant
expansion of its manufacturing, accounting and other internal management systems
and the implementation and subsequent improvement of a variety of systems,
procedures and controls, including improvements relating to inventory control.
For a number of reasons, the Company has not been able to fully consolidate and
integrate the operations of certain acquired businesses. This inability may
cause inefficiencies, additional operational complexities and expenses and
greater risks of billing delays, inventory write-offs and financial reporting
difficulties. The Company must establish and improve a variety of systems,
procedures and controls to more efficiently coordinate its activities in its
acquired (and to be acquired) companies and their facilities in Rome and Milan,
Italy, France, Poland, the United Kingdom, New Jersey, Florida, Virginia,
Washington and elsewhere. There can be no assurance that significant problems in
these areas will not re-occur. Any failure to expand these areas and implement
and improve such systems, procedures and controls, including improvements
relating to inventory control, in an efficient manner at a pace consistent with
the Company's business could have a material adverse effect on the Company's
business, financial condition and results of operations. In particular, the
Company must successfully manage the transition to higher internal and external
volume manufacturing, including the establishment of adequate facilities, the
control of overhead expenses and inventories, the development, introduction,
marketing and sales of new products, the management and training of its employee
base, the integration and coordination of a geographically and ethnically
diverse group of employees and the monitoring of its third party manufacturers
and suppliers. Although the Company has substantially increased the number of
its manufacturing personnel and significantly expanded its internal and external
manufacturing capacity, there can be no assurance that the Company will not
experience manufacturing or other delays or problems that could materially
adversely affect the Company's business, financial condition or results of
operations.
In this regard, any significant sales growth will be dependent in
significant part upon the Company's expansion of its marketing, sales,
manufacturing and customer support capabilities. This expansion will continue to
require significant expenditures to build the necessary infrastructure. There
can be no assurance that the Company's attempts to expand its marketing, sales,
manufacturing and customer support efforts will be successful or will result in
additional sales or profitability in any future period. As a result of the
expansion of its operations and the significant increase in its operating
expenses, as well as the difficulty in forecasting revenue levels, the Company
will continue to experience significant fluctuations in its revenues, costs, and
gross margins, and therefore its results of operations. See "Results of
Operations."
Declining Average Selling Prices
21
<PAGE>
The Company believes that average selling prices and gross margins for its
systems and services will decline in the long term as such systems mature, as
volume price discounts in existing and future contracts take effect and as
competition intensifies, among other factors. To offset declining average
selling prices, the Company believes that it must successfully introduce and
sell new systems on a timely basis, develop new products that incorporate
advanced software and other features that can be sold at higher average selling
prices and reduce the costs of its systems through contract manufacturing,
design improvements and component cost reduction, among other actions. To the
extent that new products are not developed in a timely manner, do not achieve
customer acceptance or do not generate higher average selling prices, and the
Company is unable to offset declining average selling prices, the Company's
gross margins will decline, and such decline will have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Results of Operations."
Trade Account Receivables
The Company is subject to credit risk in the form of trade account
receivables. The Company may in certain circumstances be unable to enforce a
policy of receiving payment within a limited number of days of issuing bills,
especially in the case of customers that are in the early phases of business
development. In addition, many of the Company's foreign customers are granted
longer payment terms than those typically existing in the United States. The
Company has experienced difficulties in the past in receiving payment in
accordance with the Company's policies, particularly from customers awaiting
financing to fund their expansion and from customers outside of the United
States and the days outstanding of receivables have increased recently. There
can be no assurance that such difficulties will not continue in the future,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company typically does not require
collateral or other security to support customer receivables. The Company 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. See
"Results of Operations."
No Assurance of Product Quality, Performance and Reliability
The Company has limited experience in producing and manufacturing its
systems and contracting for such manufacture. The Company's customers require
very demanding specifications for quality, performance and reliability. There
can be no assurance that problems will not occur in the future with respect to
the quality, performance and reliability of the Company's systems or related
software tools. If such problems occur, the Company could experience increased
costs, delays in or cancellations or reschedulings of orders or shipments,
delays in collecting accounts receivable and product returns and discounts, any
of which would have a material adverse effect on the Company's business,
financial condition or results of operations. In addition, in order to maintain
its ISO 9001 registration, the Company periodically must undergo a
recertification assessment. Failure to maintain such registration could
materially adversely affect the Company's business, financial condition and
results of operations. The Company completed ISO 9001 registration for its
United Kingdom sales and customer support facility, its Geritel facility in
Italy in 1996, and its Technosystem facility in Italy in 1997 and other
facilities will also be attempting ISO 9001 registration. There can be no
assurance that such registration will be achieved.
Uncertainty of Market Acceptance
The future operating results of the Company depend to a significant extent
upon the continued growth and increased availability and acceptance of
microcellular, PCN/PCS and wireless local loop access telecommunications
services in the United States and internationally. There can be no assurance
that the volume and variety of wireless telecommunications services or the
markets for and acceptance of such services will continue to grow, or that such
services will create a demand for the Company's systems. Because these markets
are relatively new, it is difficult to predict which segments of these markets
will develop and at what rate these markets will grow, if at all. If the
short-haul millimeter wave or spread spectrum microwave wireless radio market
and related services for the Company's systems fails to grow, or grows more
slowly than anticipated, the Company's business, financial condition and results
of operations would be materially adversely affected. In addition, the Company
has invested a significant amount of time and resources in the development of
point-to-multipoint radio systems. Should the point-to-multipoint radio market
fail to develop, or should the Company's products fail to gain market
acceptance, the
22
<PAGE>
Company's business, financial condition and results of operations could be
materially adversely affected. Certain sectors of the communications market will
require the development and deployment of an extensive and expensive
communications infrastructure. In particular, the establishment of PCN/PCS
networks will require very large capital expenditures. There can be no assurance
that communications providers have the ability to or will make the necessary
investment in such infrastructure or that the creation of this infrastructure
will occur in a timely manner. Moreover, one potential application of the
Company's technology, use of the Company's systems in conjunction with the
provision by wireless telecommunications service providers of alternative
wireless access in competition with the existing wireline local exchange
providers, is dependent on the pricing of wireless telecommunications services
at rates competitive with those charged by wireline telephone companies. Rates
for wireless access are currently substantially higher than those charged by
wireline companies, and there can be no assurance that rates for wireless access
will generally be competitive with rates charged by wireline companies. If
wireless access rates are not competitive, consumer demand for wireless access
will be materially adversely affected. If the Company allocates its resources to
any market segment that does not grow, it may be unable to reallocate its
resources to other market segments in a timely manner, which may curtail or
eliminate its ability to enter such market segments.
Certain of the Company's current and prospective customers are currently
delivering products and technologies which utilize competing transmission media
such as fiber optic and copper cable, particularly in the local loop access
market. To successfully compete with existing products and technologies, the
Company must, among many actions, offer systems with superior price/performance
characteristics and extensive customer service and support, supply such systems
on a timely and cost-effective basis in sufficient volume to satisfy such
prospective customers' requirements and otherwise overcome any reluctance on the
part of such customers to transition to new technologies. Any delay in the
adoption of the Company's systems may result in prospective customers utilizing
alternative technologies in their next generation of systems and networks, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that prospective
customers will design their systems or networks to include the Company's
systems, that existing customers will continue to include the Company's systems
in their products, systems or networks in the future, or that the Company's
technology will to any significant extent replace existing technologies and
achieve widespread acceptance in the wireless telecommunications market. Failure
to achieve or sustain commercial acceptance of the Company's currently available
radio systems or to develop other commercially acceptable radio systems would
materially adversely affect the Company's business, financial condition and
results of operations. In addition, there can be no assurance that industry
technical standards will remain the same or, if emerging standards become
established, that the Company will be able to conform to these new standards in
a timely and cost-effective manner.
Intensely Competitive Industry
The wireless communications market is intensely competitive. The Company's
wireless-based radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media, including copper
and fiber optic cable. The Company has experienced increasingly intense
competition worldwide from a number of leading telecommunications companies that
offer a variety of competitive products and services and broader
telecommunications product lines, including Adtran, Inc., Alcatel Network
Systems, California Microwave, Inc., Digital Microwave Corporation, Ericsson
Limited, Harris Corporation-Farinon Division, Innova International Corp., Larus
Corporation, Nokia Telecommunications, Philips T.R.T., Utilicom and Western
Multiplex Corporation, many of which have substantially greater installed bases,
financial resources and production, marketing, manufacturing, engineering and
other capabilities than the Company. The Cylink Wireless Group which the Company
recently acquired competes with a large number of companies in the wireless
communications markets, including U.S. local exchange carriers and foreign
telephone companies. The most significant competition for such group's products
in the wireless market is from telephone companies that offer leased line data
services. The Company faces actual and potential competition not only from these
established companies, but also from start-up companies that are developing and
marketing new commercial products and services. The Company may also face
competition in the future from new market entrants offering competing
technologies. In addition, the Company's current and prospective customers and
partners, certain of which have access to the Company's technology or under some
circumstances are granted the right to use the technology for purposes of
manufacturing, have developed, are currently developing or could develop the
capability to manufacture products competitive with
23
<PAGE>
those that have been or may be developed or manufactured by the Company. The
Company's results of operations may depend in part upon the extent to which
these customers elect to purchase from outside sources rather than develop and
manufacture their own radio systems. There can be no assurance that such
customers will rely on or expand their reliance on the Company as an external
source of supply for their radio systems. The principal elements of competition
in the Company's market and the basis upon which customers may select the
Company's systems include price, performance, software functionality, ability to
meet delivery requirements and customer service and support. Recently, certain
of the Company's competitors have announced the introduction of competitive
products, including related software tools and services, and the acquisition of
other competitors and competitive technologies. The Company expects its
competitors to continue to improve the performance and lower the price of their
current products and services and to introduce new products and services or new
technologies that provide added functionality and other features. New product
and service offerings and enhancements by the Company's competitors could cause
a significant decline in sales or loss of market acceptance of the Company's
systems, or make the Company's systems, services or technologies obsolete or
noncompetitive. The Company has experienced significant price competition, and
expects such competition to intensify, which may materially adversely affect its
gross margins and its business, financial condition and results of operations.
The Company believes that to be competitive, it will continue to be required to
expend significant resources on, among other items, new product development and
enhancements. In marketing its systems and services, the Company will face
competition from vendors employing other technologies and services that may
extend the capabilities of their competitive products beyond their current
limits, increase their productivity or add other features. There can be no
assurance that the Company will be able to compete successfully in the future.
Requirement for Response to Rapid Technological Change and
Requirement for Frequent New Product Introductions
The communications market is subject to rapid technological change,
frequent new product introductions and enhancements, product obsolescence,
changes in end-user requirements and evolving industry standards. The Company's
ability to be competitive in this market will depend in significant part upon
its ability to successfully develop, introduce and sell new systems and
enhancements and related software tools, including its point-to-multipoint
systems currently under development, on a timely and cost-effective basis that
respond to changing customer requirements. Recently, the Company has been
developing point-to-multipoint radio systems. Any success of the Company in
developing new and enhanced systems, including its point-to-multipoint systems
currently under development, and related software tools will depend upon a
variety of factors, including new product selection, integration of the various
elements of its complex technology, timely and efficient completion of system
design, timely and efficient implementation of manufacturing and assembly
processes and its cost reduction program, development and completion of related
software tools, system performance, quality and reliability of its systems and
development and introduction of competitive systems by competitors. The Company
has experienced and is continuing to experience delays from time to time in
completing development and introduction of new systems and related software
tools, including products acquired in the acquisitions. Moreover, there can be
no assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new systems or enhancements or related software
tools. There can be no assurance that errors will not be found in the Company's
systems after commencement of commercial shipments, which could result in the
loss of or delay in market acceptance, as well as significant expenses
associated with re-work of previously delivered equipment. The inability of the
Company to introduce in a timely manner new systems or enhancements or related
software tools that contribute to sales could have a material adverse effect on
the Company's business, financial condition and results of operations.
International Operations; Risks of Doing Business in Developing Countries
Most of the Company's sales to date have been made to customers located
outside of the United States. In addition, to date, the Company has acquired two
Italy-based companies and two United Kingdom-based companies and two U.S.
companies with substantial international operations. These companies currently
sell their products and services primarily to customers in Europe, the Middle
East and Africa. The Company anticipates that international sales will continue
to account for a majority of its sales for the foreseeable future. Historically
the Company's international sales have been denominated in British pounds
sterling or United States currencies. With recent acquisitions of foreign
companies, certain of the Company's international sales may be denominated in
other foreign
24
<PAGE>
currencies. A decrease in the value of foreign currencies relative to the United
States dollar could result in losses from transactions denominated in foreign
currencies. With respect to the Company's international sales that are United
States dollar-denominated, such a decrease could make the Company's systems less
price-competitive and could have a material adverse effect upon the Company's
business, financial condition and results of operations. The Company has in the
past mitigated its currency exposure to the British pound sterling through
hedging measures. However, any future hedging measures may be limited in their
effectiveness with respect to the British pound sterling and other foreign
currencies. Additional risks inherent in the Company's international business
activities include changes in regulatory requirements, costs and risks of
localizing systems in foreign countries, delays in receiving components and
materials, availability of suitable export financing, timing and availability of
export licenses, tariffs and other trade barriers, political and economic
instability, difficulties in staffing and managing foreign operations, branches
and subsidiaries, difficulties in managing distributors, potentially adverse tax
consequences, foreign currency exchange fluctuations, the burden of complying
with a wide variety of complex foreign laws and treaties and the difficulty in
accounts receivable collections. Many of the Company's customer purchase and
other agreements are governed by foreign laws, which may differ significantly
from U.S. laws. Therefore, the Company may be limited in its ability to enforce
its rights under such agreements and to collect damages, if awarded. There can
be no assurance that any of these factors will not have a material adverse
effect on the Company's business, financial condition and results of operations.
International telephone companies are in many cases owned or strictly
regulated by local regulatory authorities. Access to such markets is often
difficult due to the established relationships between a government owned or
controlled telephone company and its traditional indigenous suppliers of
telecommunications equipment. The successful expansion of the Company's
international operations in certain markets will depend on its ability to
locate, form and maintain strong relationships with established companies
providing communication services and equipment in targeted regions. The failure
to establish regional or local relationships or to successfully market or sell
its products in international markets could significantly limit the Company's
ability to expand its operations and would materially adversely affect the
Company's business, financial condition and results of operations. The Company's
inability to identify suitable parties for such relationships, or even if such
parties are identified, to form and maintain strong relationships with such
parties could prevent the Company from generating sales of its products and
services in targeted markets or industries. Moreover, even if such relationships
are established, there can be no assurance that the Company will be able to
increase sales of its products and services through such relationships.
Some of the Company's potential markets consist of developing countries
that may deploy wireless communications networks as an alternative to the
construction of a limited wired infrastructure. These countries may decline to
construct wireless telecommunications systems or construction of such systems
may be delayed for a variety of reasons, in which event any demand for the
Company's systems in those countries will be similarly limited or delayed. In
doing business in developing markets, the Company may also face economic,
political and foreign currency fluctuations that are more volatile than those
commonly experienced in the United States and other areas.
Extensive Government Regulation
Radio communications are subject to extensive regulation by the United
States and foreign laws and international treaties. The Company's systems must
conform to a variety of domestic and international requirements established to,
among other things, avoid interference among users of radio frequencies and to
permit interconnection of equipment. Each country has a different regulatory
process. Historically, in many developed countries, the unavailability of
frequency spectrum has inhibited the growth of wireless telecommunications
networks. In order for the Company to operate in a jurisdiction, it must obtain
regulatory approval for its systems and comply with different regulations in
each jurisdiction. Regulatory bodies worldwide are continuing the process of
adopting new standards for wireless communications products. The delays inherent
in this governmental approval process may cause the cancellation, postponement
or rescheduling of the installation of communications systems by the Company and
its customers, which in turn may have a material adverse effect on the sale of
systems by the Company to such customers. The failure to comply with current or
future regulations or changes in the interpretation of existing regulations
could result in the suspension or cessation of operations. Such regulations or
such changes in interpretation could require the Company to modify its products
and services and incur substantial
25
<PAGE>
costs to comply with such time-consuming regulations and changes. In addition,
the Company is also affected to the extent that domestic and international
authorities regulate the allocation and auction of the radio frequency spectrum.
Equipment to support new services can be marketed only if permitted by suitable
frequency allocations, auctions and regulations, and the process of establishing
new regulations is complex and lengthy. To the extent PCS operators and others
are delayed in deploying these systems, the Company could experience delays in
orders. Failure by the regulatory authorities to allocate suitable frequency
spectrum could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, delays in the radio
frequency spectrum auction process in the United States could delay the
Company's ability to develop and market equipment to support new services. These
delays could have a material adverse effect on the Company's business, financial
condition and results of operations.
The regulatory environment in which the Company operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly impact the Company's
operations by restricting development efforts by the Company and its customers,
making current systems obsolete or increasing the opportunity for additional
competition. Any such regulatory changes, including changes in the allocation of
available spectrum, could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company might deem
it necessary or advisable to modify its systems and services to operate in
compliance with such regulations. Such modifications could be extremely
expensive and time-consuming.
Future Capital Requirements
The Company's future capital requirements will depend upon many factors,
including the development of new products and related software tools, potential
acquisitions, requirements to maintain adequate manufacturing facilities and
contract manufacturing agreements, the progress of the Company's research and
development efforts, expansion of the Company's marketing and sales efforts, and
the status of competitive products. There can be no assurance that additional
financing will be available to the Company on acceptable terms, or at all. As a
result of the issuance of the Notes (as defined below), the Company may be
limited in its ability to raise additional debt financing. If additional funds
are raised by issuing equity securities, further dilution to the existing
stockholders will result. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate its research and development,
acquisition or manufacturing programs or obtain funds through arrangements with
partners or others that may require the Company to relinquish rights to certain
of its technologies or potential products or other assets. Accordingly, the
inability to obtain such financing could have a material adverse effect on the
Company's business, financial condition and results of operations.
Uncertainty Regarding Protection of Proprietary Rights
The Company relies on a combination of patents, trademarks, trade secrets,
copyrights and a variety of other measures to protect its intellectual property
rights. The Company generally enters into confidentiality and nondisclosure
agreements with its service providers, customers and others, and attempts to
limit access to and distribution of its proprietary rights. The Company also
enters into software license agreements with its customers and others. However,
there can be no assurance that such measures will provide adequate protection
for the Company's trade secrets or other proprietary information, that disputes
with respect to the ownership of its intellectual property rights will not
arise, that the Company's trade secrets or proprietary technology will not
otherwise become known or be independently developed by competitors or that the
Company can otherwise meaningfully protect its intellectual property rights.
There can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. Furthermore, there can be no assurance
that others will not develop similar products or software, duplicate the
Company's products or software or design around the patents owned by the Company
or that third parties will not assert intellectual property infringement claims
against the Company. In addition, there can be no assurance that foreign
intellectual property laws will adequately protect the Company's intellectual
property rights abroad. The failure of the Company to protect its proprietary
rights could have a material adverse effect on its business, financial condition
and results of operations.
26
<PAGE>
Litigation may be necessary to enforce the Company's patents, copyrights
and other intellectual property rights, to protect the Company's trade secrets,
to determine the validity of and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. The Company has, through
its acquisition of the Cylink Wireless Group, has been put on notice from a
variety of third parties that such Group's products may be infringing the
intellectual property rights of other parties. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that infringement, invalidity, right to use or
ownership claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future or that such assertions
will not materially adversely affect the Company's business, financial condition
and results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that a license
will be available under reasonable terms or at all. In addition, should the
Company decide to litigate such claims, such litigation could be extremely
expensive and time consuming and could materially adversely affect the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation.
Dependence on Key Personnel
The Company's future operating results depend in significant part upon the
continued contributions of its key technical and senior management personnel,
many of whom would be difficult to replace. The Company's future operating
results also depend in significant part upon its ability to attract and retain
qualified management, manufacturing, quality assurance, engineering, marketing,
sales and support personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting or
retaining such personnel. There may be only a limited number of persons with the
requisite skills to serve in these positions and it may be increasingly
difficult for the Company to hire such personnel over time. The loss of any key
employee, the failure of any key employee to perform in his or her current
position, the Company's inability to attract and retain skilled employees as
needed or the inability of the officers and key employees of the Company to
expand, train and manage the Company's employee base could materially adversely
affect the Company's business, financial condition and results of operations.
The Company has experienced and may continue to experience employee
turnover due to several factors, including an expanding economy within the
geographic area in which the Company maintains its principal business offices,
making it more difficult for the Company to retain its employees. Due to this
and other factors, the Company has experienced and may continue to experience
high levels of employee turnover, which could adversely impact the Company's
business, financial condition and results of operations. The Company is
presently addressing these issues and will pursue solutions designed to retain
its employees and to provide performance incentives.
Year 2000 Compliance
Many currently installed 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 need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such Year 2000 ("Y2K") requirements. The Company
has commenced, for all its information systems and software contained in the
products it sells, a Y2K date conversion project to address necessary code
changes, testing and implementation. Significant uncertainty exists concerning
the potential effects associated with such compliance. The Company expects such
modifications will be made on a timely basis and does not believe that the cost
of such modifications will have a material effect on the Company's operating
results. There can be no assurance, however, that the Company and/or its vendors
will be able to modify timely and successfully such products, services and
systems to comply with Y2K requirements, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Volatility of Stock Price
The Company believes that factors such as announcements of developments
related to the Company's business, announcements of technological innovations or
new products or enhancements by the Company or its competitors, developments in
the Asia/Pacific region, sales by competitors, including sales to the Company's
customers, sales of the Company's Common Stock into the public market, including
by members of management,
27
<PAGE>
developments in the Company's relationships with its customers, partners,
lenders, distributors and suppliers, shortfalls or changes in revenues, gross
margins, earnings or losses or other financial results that differ from
analysts' expectations (as recently experienced upon announcement of third
quarter results), regulatory developments, fluctuations in results of operations
and general conditions in the Company's market or the markets served by the
Company's customers or the economy, could cause the price of the Company's
Common Stock to fluctuate, perhaps substantially. In recent years the stock
market in general, and the market for shares of small capitalization and
technology stocks in particular, have experienced extreme price fluctuations,
which have often been unrelated to the operating performance of affected
companies. Many companies in the telecommunications industry, including the
Company, have recently experienced historic highs in the market price of their
Common Stock. There can be no assurance that the market price of the Company's
Common Stock will not decline substantially from its historic highs, or
otherwise continue to experience significant fluctuations in the future,
including fluctuations that are unrelated to the Company's performance. Such
fluctuations could materially adversely affect the market price of the Company's
Common Stock.
Substantial Leverage
In connection with the initial private placement of Notes due 2002 in
November 1997, the Company incurred $100 million of indebtedness. As a result,
the Company's total indebtedness including current liabilities, and
stockholders' equity, as of March 31, 1998, was approximately $163.3 million and
approximately $145.4 million, respectively. The Company's ability to make
scheduled payments of the principal of, or interest on, its indebtedness will
depend on its future performance, which is subject to economic, financial,
competitive and other factors beyond its control.
Limitations on Dividends
Since its incorporation in 1991, the Company has not declared or paid cash
dividends on its Common Stock, and the Company anticipates that any future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends.
Global Market Risks
Countries in the Asia/Pacific region have recently experienced weaknesses
in their currency, banking and equity markets. These weaknesses could adversely
affect demand for the Company's products, the availability and supply of product
components to the Company and, ultimately, the Company's consolidated results of
operations.
Control by Existing Stockholders; Effects of Certain Anti-Takeover
Provisions
Members of the Board of Directors and the executive officers of the
Company, together with members of their families and entities that may be deemed
affiliates of or related to such persons or entities, beneficially own
approximately 6% of the outstanding shares of Common Stock of the Company.
Accordingly, these stockholders are able to influence the election of the
members of the Company's Board of Directors and influence the outcome of
corporate actions requiring stockholder approval, such as mergers and
acquisitions. This level of ownership, together with the Company's stockholder
rights agreement, certificate of incorporation, equity incentive plans, bylaws
and Delaware law, may have a significant effect in delaying, deferring or
preventing a change in control of the Company and may adversely affect the
voting and other rights of other holders of Common Stock. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Although the Company has no present plans to issue shares
of Preferred Stock, the Board of Directors has pre-approved the terms of a
Series A Junior Participating Preferred Stock that may be issued pursuant to the
stockholder rights agreement upon the occurrence of certain triggering events.
In general, the stockholder rights agreement provides a mechanism by which the
Board of Directors and stockholders may act to substantially dilute the share
position of any takeover bidder that acquires 15% or more of the Common Stock.
28
<PAGE>
Possible Adverse Effect on Market Price for Common Stock of Shares
Eligible for Future Sale after the Offering
Sales of the Company's Common Stock into the market could materially
adversely affect the market price of the Company's Common Stock. Substantially
all of the shares of Common Stock of the Company eligible for immediate and
unrestricted sale in the public market at any time.
29
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
2.8(1) Asset Purchase Agreement dated March 13, 1998 by
and between P-Com, Inc. and Cylink Corporation
2.8A(1) Amendment to the Asset Purchase Agreement dated March 13,
1998 by and between P-Com, Inc. and Cylink Corporation
2.8B(1) Amendment No. 2 to the Asset Purchase Agreement dated
March 27, 1998 by and between P-Com, Inc. and Cylink
Corporation
2.8C(1) Unsecured Subordinated Promissory Note
27.1 Financial Data Schedule
- --------------------------
(1) Previously filed as an exhibit to the Company's current Report on
Form 8-K dated April 9, 1998 as filed with the Securities and Exchange
Commission on March 28, 1998.
(b) Reports on Form 8-K.
Report on Form 8-K dated January 23, 1998, regarding the Company's
earnings for the quarter and fiscal year ended December 31, 1997 as
filed with the Securities and Exchange Commission on January 22, 1998.
Report on Form 8-K dated March 16, 1998, regarding the Company's press
release announcing the execution of a definite purchase agreement to
acquire the assets of the Wireless Group of Cylink Corporation, as
filed with the Securities and Exchange Commission on March 13, 1998.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
P-COM, INC.
(Registrant)
Date: April 30, 1999
By: /S/ GEORGE P. ROBERTS
--------------------------------------
George P. Roberts
Chairman of the Board of Directors
and Chief Executive Officer
Date: April 30, 1999
By: /S/ ROBERT E. COLLINS
--------------------------------------
Robert E. Collins
Chief Financial Officer and Vice President
Finance and Administration
31
<PAGE>
EXHIBIT INDEX
Exhibit
No.
---
2.8(1) Asset Purchase Agreement dated March 13, 1998 by and between P-Com,
Inc. and Cylink Corporation 2.8A(1) Amendment to the Asset Purchase
Agreement dated March 13, 1998 by and between P-Com, Inc. and
Cylink Corporation
2.8B(1) Amendment No. 2 to the Asset Purchase Agreement dated March 27,
1998 by and between P-Com, Inc. and Cylink Corporation
2.8C(1) Unsecured Subordinated Promissory Note
27.1 Financial Data Schedule
(1) Previously filed as an exhibit to the Company's current Report on Form
8-K dated April 9, 1998 as filed with the Securities and Exchange
Commission on March 28, 1998.
(c) Reports on Form 8-K.
Report on Form 8-K dated January 23, 1998, regarding the Company's
earnings for the quarter and fiscal year ended December 31, 1997 as
filed with the Securities and Exchange Commission on January 22, 1998.
Report on Form 8-K dated March 16, 1998, regarding the Company's press
release announcing the execution of a definite purchase agreement to
acquire the assets of the Wireless Group of Cylink Corporation, as
filed with the Securities and Exchange Commission on March 13, 1998.
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE P-COM
INC. FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 15,100
<SECURITIES> 10,822
<RECEIVABLES> 75,551
<ALLOWANCES> (6,884)
<INVENTORY> 74,848
<CURRENT-ASSETS> 185,158
<PP&E> 56,481
<DEPRECIATION> (16,825)
<TOTAL-ASSETS> 309,423
<CURRENT-LIABILITIES> 61,016
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 145,443
<TOTAL-LIABILITY-AND-EQUITY> 309,423
<SALES> 51,421
<TOTAL-REVENUES> 58,637
<CGS> 28,847
<TOTAL-COSTS> 33,512
<OTHER-EXPENSES> 31,984
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,766)
<INCOME-PRETAX> (7,723)
<INCOME-TAX> (2,626)
<INCOME-CONTINUING> (5,097)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,097)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
