<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 September 30, 1998.
OR
[__] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-25356
_______________
P-Com, Inc.
(Exact name of Registrant as specified in its charter)
_______________
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 November 9, 1998, there were 43,531,805 shares of the Registrant's
Common Stock outstanding, par value $0.0001.
This quarterly report on Form 10-Q/A consists of 38 pages of which this is
page 1. The Exhibit Index appears on page 38.
<PAGE>
AMENDED FILING OF FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 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 September 30, 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 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 for the quarter
ended March 31, 1998, which was filed 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 in-
process research and development ("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 and nine month periods ended September
30, 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 Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997...................................................... 4
Condensed Consolidated Statements of Operations for the three and
nine month periods ended September 30, 1998 and 1997................... 5
Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 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.................................... 14
PART II. Other Information
-----------------
Item 1 Legal Proceedings...................................................... 35
Item 2 Changes in Securities.................................................. 35
Item 3 Defaults Upon Senior Securities........................................ 35
Item 4 Submission of Matters to a Vote of Security Holders.................... 35
Item 5 Other Information...................................................... 35
Item 6 Exhibits and Reports on Form 8-K....................................... 35
Signatures.............................................................................. 37
</TABLE>
3
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM I
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,600 $ 88,145
Accounts receivable, net 49,906 70,883
Notes receivable 426 205
Inventory 83,227 58,003
Prepaid expenses and other current assets 16,917 12,329
-------- --------
Total current assets 174,076 229,565
Property and equipment, net 47,319 32,313
Deferred income taxes 15,526 1,697
Goodwill and other assets 70,493 41,946
-------- --------
$307,414 $305,521
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,879 $ 38,043
Accrued employee benefits 2,983 3,930
Other accrued liabilities 10,723 6,255
Income taxes payable 4,140 6,409
Notes payable 45,967 293
-------- --------
Total current liabilities 96,692 54,930
-------- --------
Long-term debt 104,922 101,690
-------- --------
Minority interest -- 604
-------- --------
Stockholders' equity:
Preferred Stock -- --
Common Stock 4 4
Additional paid-in capital 136,174 131,735
Retained earnings (27,623) 18,380
Accumulated other comprehensive income (2,755) (1,822)
-------- --------
Total stockholders' equity $105,800 $148,297
-------- --------
$307,414 $305,521
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
(restated) (restated)
<S> <C> <C> <C> <C>
Sales
Product $ 20,366 $ 50,417 $126,336 $135,971
Service 9,874 6,774 26,000 20,505
-------- -------- -------- --------
Total sales 30,240 57,191 152,336 156,476
-------- -------- -------- --------
Cost of sales
Product $ 32,581 $ 28,752 $ 94,216 $ 79,831
Service 9,120 4,322 19,737 13,070
-------- -------- -------- --------
Total cost of sales 41,701 33,074 113,953 92,901
-------- -------- -------- --------
Gross profit (loss) (11,461) 24,117 38,383 63,575
-------- -------- -------- --------
Operating expenses:
Research and development 12,005 7,081 29,925 20,906
Selling and marketing 6,288 4,070 16,951 10,993
General and administrative 10,771 4,689 19,541 12,158
Goodwill amortization 1,946 614 4,738 1,525
Restructuring charge 4,332 -- 4,332 --
Acquired in-process research and development -- -- 15,442 --
-------- -------- -------- --------
Total operating expenses 35,350 16,454 90,929 45,582
-------- -------- -------- --------
Income (loss) from operations (46,811) 7,663 (52,546) 17,993
Interest expense (2,194) (246) (5,793) (1,254)
Interest income 185 243 1,413 863
Other income (expense) (643) (96) (578) 121
-------- ------- -------- --------
Income (loss) before income taxes (49,463) 7,564 (57,504) 17,723
Provision (benefit) for income taxes (8,767) 3,528 (11,501) 6,897
-------- -------- -------- --------
Net income (loss) $(40,696) $ 4,036 $(46,003) $ 10,826
======== ======== ======== ========
Net income (loss) per share:
Basic $ (0.94) $ 0.10 $ (1.06) $ 0.26
======== ======== ======== ========
Diluted $ (0.94) $ 0.09 $ (1.06) $ 0.25
======== ======== ======== ========
Shares used in per share computation:
Basic 43,459 42,435 43,204 41,993
======== ======== ======== ========
Diluted 43,459 44,604 43,204 43,871
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
--------- --------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (46,003) $ 10,826
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation 8,541 3,240
Amortization of goodwill 4,738 1,527
Change in minority interest (604) 34
Deferred income taxes (13,829) 14
Acquired in-process research and development expenses 15,442 --
Change in assets and liabilities (net of acquisition balances):
Accounts receivable 25,224 (15,300)
Notes receivable (221) 1,811
Inventory (20,115) (14,890)
Prepaid expenses (4,588) (2,388)
Goodwill and other assets (847) (1,010)
Accounts payable (633) (6,099)
Accrued employee benefits (947) 929
Other accrued liabilities 4,015 (2,767)
Income taxes payable (2,269) 3,460
--------- ---------
Net cash used in operating activities (32,096) (20,613)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (23,427) (6,487)
Acquisitions, net of cash acquired (61,742) (10,855)
--------- ---------
Net cash used in investing activities (85,169) (17,342)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable 47,715 4,431
Proceeds from stock issuances, net of expenses 4,439 3,886
Proceeds from sale leaseback transaction 1,557 --
Payment of sale leaseback obligation (58) --
--------- ---------
Net cash provided by financing activities 53,563 8,317
--------- ---------
Effect of exchange rate changes on cash (933) (576)
--------- ---------
Net decrease in cash and cash equivalents (64,545) (30,214)
Cash and cash equivalents at the beginning of the period 88,145 42,226
--------- ---------
Cash and cash equivalents at the end of the period $ 23,600 $ 12,012
========= =========
Supplemental cash flow disclosures:
Cash paid for income taxes $ 1,922 $ 2,288
========= =========
Cash paid for interest $ 5,306 $ 501
========= =========
Stock issued in connection with the acquisition of CSM and ACS $ -- $ 14,500
========= =========
Promissory Note issued in connection with the acquisition of Cylink,
net of amount withheld $ 9,682 $ --
========= =========
</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
consolidated financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of P-Com, Inc.'s (referred to herein, together
with its wholly owned and partially owned subsidiaries, as "P-Com" or the
"Company") financial condition as of September 30, 1998, and the results of its
operations and its cash flows for the nine months ended September 30, 1998 and
1997. These consolidated financial statements should be read in conjunction with
the Company's audited 1997 consolidated financial statements, including the
notes thereto, and the other information set forth therein, included in the
Company's Annual Report on Form 10-K/A (File No. 0-25356). Operating results for
the three and nine-month periods ended September 30, 1998 are not necessarily
indicative of the operating results that may be expected for the year ending
December 31, 1998.
This Quarterly Report on Form 10-Q/A may contain forward-looking statements
that may 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 September
30, 1998 and for the three and nine month periods then ended have been restated
to reflect a change in the original accounting for the purchase price allocation
related to the March 31, 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 $19.2
million and $53.8 million, respectively, to $15.5 million and $70.5 million,
respectively. The effect of this reallocation on previously reported condensed
consolidated financial statements as of and for the three and nine month periods
ended September 30, 1998 is as follows (in thousands except per share amounts,
unaudited):
7
<PAGE>
<TABLE>
<CAPTION>
The months ended Nine months ended
September 30, 1998 September 30, 1998
Statement of Operations: As reported Restated As reported Restated
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Goodwill amortization $ 1,109 $ 1,950 $ 2,927 $ 4,609
Acquired in-process research and development expenses $ - $ - $ 33,856 $ 15,442
Loss from operations $ (45,970) $ (46,811) $ (69,278) $ (52,546)
New income (loss) $ (42,122) $ (40,696) $ (59,025) $ (46,003)
Net loss per share
Basic and diluted $ (0.97) $ (.94) $ (1.37) $ (1.06)
<CAPTION>
September 30, 1998
Balance Sheets: As reported Restated
----------- --------
<S> <C> <C>
Deferred income taxes $ 19,236 $ 15,526
Goodwill and other assets $ 53,761 $ 70,493
Total assets $ 294,392 $ 307,414
Retained earnings $ (40,645) $ (27,623)
Total stockholders' equity $ 92,778 $ 105,800
</TABLE>
2. NET INCOME (LOSS) PER SHARE
Following is a reconciliation of the numerators and denominators of the basic
and diluted earnings (loss) per share computations for the periods presented
below (unaudited; in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
(restated) (restated)
<S> <C> <C> <C> <C>
Numerator - net income (loss) $ (40,696) $ 4,036 $ (46,003) $ 10,826
========= ========= ========= =========
Denominator for basic net income (loss)
per common share 43,459 42,435 43,204 41,993
Effect of dilutive securities:
Stock options -- 2,169 -- 1,878
--------- --------- --------- ---------
Denominator for diluted net income (loss) per
common share 43,459 44,604 43,204 43,871
========= ========= ========= =========
Net income (loss) per share:
Basic $ (0.94) $ 0.10 $ (1.06) $ 0.26
========= ========= ========= =========
Diluted $ (0.94) $ 0.09 $ (1.06) $ 0.25
========= ========= ========= =========
</TABLE>
For purpose of computing diluted earnings (loss) per share, weighted average
common share equivalents do not include stock options with an exercise price
that exceeds the average fair market value of the Company's Common Stock for the
period because the effect would be antidilutive. For the three and nine-months
ended September 30, 1998, options to purchase approximately 2,095,779 and
743,689 shares of Common Stock, respectively, were excluded from the
computation. For the three and nine-months ended September 30, 1998, the assumed
conversion of Convertible Subordinated Notes into 3,641,661 shares of Common
Stock was not included in the computation of diluted earnings (loss) per share
because the effect would be antidilutive.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." SFAS
130 establishes standards
8
<PAGE>
for reporting comprehensive income and its components in a consolidated
financial statement that is displayed with the same prominence as other
consolidated financial statements. Comprehensive income as defined includes all
changes in equity (net assets) during a period from non-owner sources. Examples
of items to be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments and unrealized
gain/loss on available-for-sale securities. The Company's total comprehensive
net income (loss) was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(restated) (restated)
<S> <C> <C> <C> <C>
Net income (loss) $ (40,696) $ 4,036 $ (46,003) $ 10,826
Other comprehensive charges (1,981) (28) (933) (577)
--------- --------- --------- ---------
Total comprehensive income (loss) $ (42,677) $ 4,008 $ (46,936) $ 10,249
========= ========= ========= =========
</TABLE>
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
consolidated financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The disclosures prescribed by SFAS 131 are effective in 1998, and are not
required for interim periods. The Company does not expect this pronouncement to
have a material effect on its consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company is required to implement SOP 98-1
for the year ending December 31, 1999. Adoption of SOP 98-1 is not expected to
have material impact on the Company's financial position or results of
operations.
In April, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The Company has expensed these
costs historically; therefore, the adoption of this standard is not expected to
have a material impact on the Company's financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued SFAS 133
"Accounting for Derivative Instruments and Hedging Activities," effective
beginning in the first quarter of 2000. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
companies to recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting under SFAS 133. The Company is currently evaluating the impact of
SFAS 133 on its financial position and results of operations.
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 Company has
withheld approximately $4.8 million of the short-term promissory note due to the
Company's belief that Cylink Corporation breached various provisions of the
acquisition agreement. In the Asset Purchase Agreement between the Company and
Cylink Corporation, Cylink Corporation agreed to sell certain assets to the
Company, including a specific list of accounts receivable. Subsequent to the
purchase and before the $14.5 million note was due, the Company determined that
approximately $4.8 million of accounts receivable were uncollectible. The Cylink
Wireless Group designs, manufactures and markets spread spectrum radio products
for voice and data applications in both domestic and international markets. The
acquisition of the accounts receivable on April 1, 1998 was recorded in the
second quarter of 1998.
9
<PAGE>
The Company accounted for this acquisition as a purchase business combination.
The results of the Cylink Wireless Group have been included since the date of
acquisition.
The total purchase price of the acquisition was as follows (in thousands):
<TABLE>
<S> <C>
Cash Payment $ 46,000
Short-term promissory note 14,500
Amount of note withheld (4,818)
Expenses 2,483
--------
Total $ 58,165
========
</TABLE>
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,
and as previously reported, was as follows (in thousands):
<TABLE>
<CAPTION>
(As reported) (Restated)
-------------- --------------
<S> <C> <C>
Accounts receivable, net $ 4,247 $ 4,247
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 $ 58,165 $ 58,165
======== ========
</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 nine months ended September 30, 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 Cylink Wireless Group
acquisition, 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>
Nine Months Ended Twelve Months Ended
September 30, 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 $ 152,336 $ 4,508 $ 156,844 $220,702 $ 27,957 $248,659
Net income (loss) (46,003) (4,706) (50,709) 18,891 (3,443) 15,448
Net income (loss) per share:
Basic (1.06) (0.11) (1.17) 0.45 0.08 0.37
Diluted (1.06) (0.11) (1.17) 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 Access Group, which included decreasing the IPR&D charge from $33.9
million as 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 operations for IPR&D technology 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
10
<PAGE>
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 straight-line basis over ten years. Amortization expense related
to the acquisition of the Cylink Wireless Group was $1.2 million during the
quarter ended September 30, 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 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.
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 Y2K. The point-to-point project, discussed above, which was
acquired from the Cylink Wireless Group, was completed during the third quarter
of 1998 at an estimated total cost of $2.0 million. The enhanced Airlink
projects are scheduled to be completed during the first quarter of 1999 at an
estimated total cost of $0.6 million.
5. BORROWING ARRANGEMENTS
The Company entered into a new revolving line-of-credit agreement on May 15,
1998 as amended on July 31, 1998 and October 21, 1998 that provides for
borrowings of up to $50 million. At September 30, 1998, the Company had been
advanced approximately $45.9 million under such line. The maturity date of the
line-of-credit agreement is April 30, 2001. Borrowings under the line are
secured and bear interest at either a base interest rate or a variable interest
rate. The agreement requires the Company to comply with certain financial
covenants including the maintenance of specific minimum ratios. The Company was
in compliance with such covenants as of September 30, 1998.
6. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
-------------- -------------
<S> <C> <C>
Raw materials $ 18,227 $ 9,695
Work-in-process 46,544 32,472
Finished goods 18,456 15,836
--------- ---------
$ 83,227 $ 58,003
========= =========
</TABLE>
11
<PAGE>
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
------------- ------------
<S> <C> <C>
Tooling and test equipment $ 48,605 $ 31,603
Computer equipment 7,730 4,950
Furniture and fixtures 7,033 4,979
Land and buildings 1,679 1,389
Construction-in-process 4,715 3,294
--------- ---------
$ 69,762 $ 46,215
Less-accumulated depreciation and amortization (22,443) (13,902)
--------- ---------
$ 47,319 $ 32,313
========= =========
</TABLE>
8. RESTRUCTURING AND OTHER ONE-TIME CHARGES
During the quarter ended September 30, 1998, the Company incurred
restructuring and other one-time charges of $4.3 million, consisting of
severance benefits, and impairments of facilities, fixed assets, and goodwill.
These restructuring and other one-time charges resulted from the consolidation
of certain of the Company's facilities.
In addition, the Company recorded inventory reserves of $16.9 million
(including $14.5 million in inventory write downs related to the Company's
existing core business and $2.4 million in other one-time charges to inventory
relating to the elimination of product lines) which were charged to costs of
goods sold, and accounts receivable reserves of $5.4 million which were charged
to general and administrative expenses. The Company recorded these charges in
the third quarter of 1998 primarily in response to a marked slowdown in the
telecommunications industry as a whole during the third quarter of 1998.
The $4.3 million restructuring charge consisted primarily of severance and
benefits of approximately $0.6 million, facilities and fixed assets impairments
of approximately $0.9 million, and goodwill write-offs of approximately $2.9
million.
To attempt to offset the decrease in sales, the Company laid off approximately
121 employees from the Campbell facilities and 16 employees from its Redditch,
UK facilities during September and October 1998, incurring costs of
approximately $0.6 million. All employees were properly notified of the
impending layoff in advance and were given severance pay. Each functional vice
president submitted a list of eligible employees for the reduction in force to
the Human Resources Department where a summary list was prepared. Between
November 1998 and February 1999, the Company laid off approximately 35
additional employees from the Campbell, California facilities.
Due to the slowdown in sales, the Company combined certain operations and
closed its Telesys and Advanced Wireless facilities, incurring costs of
approximately $0.9 million. Some of the employees were transferred to other
business units while others were included in the reduction in force. Facilities
expenses, such as rent expense, were expensed and certain fixed assets at closed
locations were written down. In addition, goodwill created through acquisitions
of these business units was written off in the restructuring charge. During the
third quarter of 1998, the Company's operations in Florida were moved into more
suitable facilities and the Company expensed the remaining lease payments on the
original building.
The Company sold a segment of its Geritel operations to a former owner and
wrote off the remaining goodwill created in the original purchase, approximately
$1.6 million. The Company continues to operate its Geritel facility, but does
not use the technology purchased during the acquisition. The Company also wrote
off the remaining goodwill of ACS because the designs were superseded by the
overlap of product families acquired in the Cylink Wireless Group acquisition.
The remaining goodwill created in the ACS acquisition, approximately $1.2
million, was written off.
The Company responded to a weakness in sales for the industry, which began in
the third quarter, by reviewing its inventory and increasing its reserve by
approximately $16.9 million. The inventory reserve included an excess and
obsolete reserve of approximately $4.5 million, a $2.0 million reserve for the
write-off relating to the overlap of
12
<PAGE>
product families resulting from the Cylink Wireless Group acquisition, rework
charges of approximately $4.3 million for the rework of excess semi-custom
finished goods that were configured for specific customers or for frequencies
developed for specific geographical regions, approximately $1.1 million for
products that have been redesigned and are old revisions, and a general
inventory reserve of approximately $5.0 million for potential excess inventory
caused by a slowdown in the industry.
During the second half of 1998, the Company experienced cancelled purchase
orders due to currency fluctuations, and the stronger dollar caused the
Company's customers to delay payments on equipment that had already been
shipped. As such, the Company increased its accounts receivable reserves by $5.4
million during the third quarter of 1998.
The Company expects to benefit from these restructuring and other one-time
charges in future quarters by reducing fixed costs and future cash requirements.
The accrued restructuring and other one-time charges and amounts charged
against the accrual as of September 30, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Beginning Expenditures and Remaining
Accrual Write-Offs Accrual
---------- --------------- -----------
<S> <C> <C> <C>
Severance and benefits $ 568 $ (378) $ 190
Facilities and fixed assets impairment 879 (487) 392
Goodwill impairment 2,884 (2,884) --
Inventory reserve 16,922 -- 16,922
Accounts receivable reserve 5,386 -- 5,386
-------- -------- --------
Total accrued restructuring and other one-time charges $ 26,639 $ (3,749) $ 22,890
======== ======== ========
</TABLE>
9. CONTINGENCIES
The Company is a defendant in several class action lawsuits in which the
plaintiffs are alleging various federal and state securities laws violations by
the Company and certain of its officers and directors. The plaintiffs seek
unspecified damages based upon the decrease in market value of shares of the
Company's Common Stock. While management believes the actions are without merit
and intends to defend these actions vigorously, all of these proceedings are at
the very early stage and the Company is unable to speculate on their ultimate
outcomes. However, the ultimate results of the matters described above could
have a material adverse effect on the Company's results of operations or
financial position either through the defense or results of such litigation.
13
<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 $58.2 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 in-process research and development. 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. Amortization expense related
to the acquisition of the Cylink Wireless Group was $1.2 million during the
quarter ended September 30, 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 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 Y2K. The point-to-point project, discussed above, which was
acquired from the Cylink Wireless Group, was completed during the third quarter
of 1998 at an estimated total cost of $2.0 million. The enhanced Airlink
projects 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
14
<PAGE>
10-Q/A that are not purely historical may be considered forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
including without limitation, statements regarding the Company's expectations,
beliefs, intentions or strategies regarding the future. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
factors affecting operating results contained in this Quarterly Report on Form
10-Q/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, Quarterly Report on Form 10-Q/A for the period ended June 30, 1998 and other
documents filed by the Company with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------- --------------- ------------
(restated) (restated)
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 137.9 57.8 74.8 59.4
------------- ------------- --------------- ------------
Gross profit (37.9) 42.2 25.2 40.6
------------- ------------- --------------- ------------
Operating expenses:
Research and development 39.7 12.4 19.6 13.4
Selling and marketing 20.8 7.1 11.1 7.0
General and administrative 35.6 8.1 12.9 7.6
Goodwill amortization 6.4 1.2 3.0 1.1
Restructuring charge 14.3 -- 2.8 --
Acquired in-process
research and development expenses -- -- 10.1 --
------------- ------------- --------------- ------------
Total operating expenses 116.8 28.8 59.6 29.1
------------- ------------- --------------- ------------
Income (loss) from operations (154.7) 13.4 (34.4) 11.5
------------- ------------- --------------- ------------
Interest and other income
(expense), net (8.8) (0.2) (3.3) (0.2)
------------- ------------- --------------- ------------
Income (loss) before income taxes (163.5) 13.2 (37.7) 11.3
Provision (benefit) for income taxes (29.0) 6.2 (7.5) 4.4
------------- ------------- --------------- ------------
Net income (loss) (134.5%) 7.1% (30.2%) 6.9%
============= ============= =============== ============
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997
Overview During the third quarter of 1998, the Company incurred
restructuring and other one-time charges of $4.3 million, consisting of
severance benefits, facilities and fixed assets impairments and goodwill
impairments. These restructuring and other one-time charges resulted from the
consolidation of the Company's facilities and were related to severance facility
consolidation expense, and write-downs of impaired assets and goodwill. In
addition, the Company recorded inventory reserves of $16.9 million (including
$14.5 million in inventory write downs related to the Company's existing core
business and $2.4 million in other one-time charges to inventory relating to the
elimination of product lines) which were charged to costs of goods sold, and
accounts receivable reserves of $5.4 million which were charged to general and
administrative expenses. The Company recorded these charges in the third quarter
of 1998 primarily in response to a marked slowdown in the telecommunications
industry as a whole during the third quarter of 1998.
The restructuring and other one-time charges consisted primarily of severance
and benefits of approximately $0.6 million, facilities and fixed assets
impairments of approximately $0.9 million, and goodwill write-offs of
approximately $2.8 million.
To attempt to offset the decrease in sales, the Company laid off approximately
121 employees from the Campbell, California facilities and 16 employees from its
Redditch, UK facilities during September and October 1998. All employees were
properly notified of the impending layoff in advance and were given severance
pay. Each functional vice president submitted a list of eligible employees for
the reduction in force to the Human Resources Department where a summary list
was prepared. Between November 1998 and February 1999, the Company laid off
approximately 35 additional employees from its Campbell, California facilities.
15
<PAGE>
Due to the slowdown in sales, the Company combined certain operations and
closed its Telesys and Advanced Wireless facilities. Some of the employees were
transferred to other business units while others were included in the reduction
in force. Facilities expenses, such as rent expense, were expensed and certain
fixed assets at closed locations were written down. In addition, goodwill
created through acquisitions of these business units was written off in the
restructuring charge. The Company's operations in Florida moved into more
suitable facilities and the Company expensed the remaining lease payments on the
original building.
The Company sold a segment of its Geritel operations to a former owner and
wrote off the remaining goodwill created in the original purchase, approximately
$1.6 million. The Company continues to operate its Geritel facility, but does
not use the technology originally purchased. The Company also wrote off the
remaining goodwill of ACS, approximately $1.2 million, because the designs were
superseded by the overlap of product families acquired in the Cylink Wireless
Group acquisition.
The Company responded to a weakness in sales for the industry during the
second and third quarters of 1998 by reviewing its inventory and increasing its
reserve by approximately $16.9 million. The inventory reserve included an excess
and obsolete reserve of approximately $4.5 million, $2.0 million reserve for the
write-off relating to the overlap of product families resulting from the Cylink
Wireless Group acquisition, rework charges of approximately $4.3 million for the
rework of excess semi-custom finished goods that were configured for specific
customers or for frequencies developed for specific geographical regions,
approximately $1.1 million for products that have been redesigned and are old
revisions, and a general inventory reserve of approximately $5.0 million to
protect against the marked slowdown in the industry.
Additionally, receipt of payments from sales to customers located in Asia
became increasingly difficult to collect as a result of the economic turmoil in
Asia. The Company experienced cancelled purchase orders due to currency
fluctuations, and the stronger dollar caused the Company's customers to delay
payments on equipment that had already shipped. As such the Company increased
its reserve for doubtful accounts by approximately $5.4 million. Over the
subsequent quarters, the Company elected to write off approximately $3.6 million
of uncollectible accounts.
The Company expects to benefit from these restructuring and other one-time
charges in future quarters by reducing fixed costs and future cash
disbursements.
Sales. Sales for the three months ended September 30, 1998 and 1997 were
approximately $30.2 million and $57.2 million, respectively, a decrease of
47.2%. Sales for the nine months ended September 30, 1998 and 1997 were
approximately $152.3 million and $156.5 million, respectively, a decrease of
2.7%. The decrease was primarily due to the market slowdown for the Company's
Tel Link product line. For the nine months ended September 30, 1998, four
customers accounted for 44.7% of the sales of the Company. For the nine months
ended September 30, 1997, seven customers accounted for 52.5% of the sales of
the Company. Sales to new customers in the third quarter of 1998 (excluding
companies recently acquired) were less than 10% of total sales.
Sales for the Tel-Link product line for the three months ended September 30,
1998 and 1997 were approximately $4.9 million and $42.8 million, respectively.
Sales for the Tel-Link product line for the nine months ended September 30, 1998
and 1997 were approximately $83.0 million and $113.3 million, respectively. The
slow down in the market is attributable to the lower demand for the product due
in part to the economic turmoil in Asia, and increased competition and downward
pricing pressure.
Sales for the Cylink Wireless Group product line for the three months and nine
months ended September 30, 1998 were approximately $6.2 million and $16.9
million, respectively. The Company acquired the Cylink Wireless Group product
line in 1998, and no sales were attributable to this product line in 1997.
Product sales for the three months ended September 30, 1998 and 1997 were
approximately $19.1 million and $49.7 million, respectively, or 63% and 87% of
total sales, respectively. Product sales for the nine months ended September
30, 1998 and 1997 were approximately $152.3 million and $156.5 million,
respectively, or 82% and 87% of total sales, respectively.
Service sales for the three months ended September 30, 1998 and 1997 were
approximately $9.9 million and $6.8 million, respectively. Service sales for the
nine months ended September 30, 1998 and 1997 were approximately $26.0 million
and $20.5 million, respectively. The increase in service sales from year to year
is primarily due to the expansion into international markets through
acquisitions in the United Kingdom and Italy.
16
<PAGE>
Historically, the Company has generated a majority of its sales outside of the
United States. For the three months ended September 30, 1998, the Company
generated approximately $9.8 million or 32% of its sales in the US and
approximately $20.5 million or 68% internationally. For the nine months ended
September 30, 1998, the Company generated approximately $34.6 million or 23% of
its sales in the US and approximately $117.8 million or 77% internationally.
Gross Profit. For the three months ended September 30, 1998, the gross
profit was approximately $(11.5) million, or (37.9)% of sales. For the three
months ended September 30, 1997, gross profit was approximately $24.1 million,
or 42.2% of sales. For the nine months ended September 30, 1998 and 1997, gross
profit was approximately $38.4 million or 25.2% of net sales, and approximately
$63.6 million, or 40.6% of net sales, respectively. As discussed above, the
decline in gross profit in the third quarter of 1998 compared to the
corresponding period in 1997 was primarily due to one time inventory write-downs
of $16.9 million.
Research and Development. For the three months ended September 30, 1998 and
1997, research and development expenses were approximately $12.0 million and
$7.1 million, respectively. The increase in research and development expenses
during the three months ended September 30, 1998 as compared to the
corresponding period in 1997 was due primarily to increased staffing and new
product development. As a percentage of sales, research and development expenses
increased from 12.4% in the three months ended September 30, 1997 to 39.7% in
the corresponding period in 1998. The increase in research and development
expenses as a percentage of sales was primarily due to a lower level of sales in
the three months ended September 30, 1998 as compared to the corresponding
period in 1997.
Research and development expenses for the nine months ended September 30, 1998
and 1997 were approximately $29.9 million and $20.9 million, respectively. The
increase in research and development during the nine months ended September 30,
1998, as compared to the corresponding period in 1997 was due primarily to
increased staffing and new product development. As a percentage of sales,
research and development expenses increased from 13.4% in the nine months ended
September 30, 1997 to 19.6% in the corresponding period in 1998. The increase in
research and development expenses as a percentage of sales was primarily due to
increased expenses related to new product development and slower growth in
sales. The Company expects that research and development expenses will continue
to increase significantly in absolute dollars during the remainder of 1998
compared to the 1997 fiscal year.
Selling and Marketing. For the three months ended September 30, 1998 and
1997, selling and marketing expenses were approximately $6.3 million and $4.1
million, respectively. The increase in selling and marketing expenses in the
three months ended September 30, 1998, as compared to the corresponding period
in 1997, was primarily due to increased staffing and increased expenses relating
to the Company's expansion of its international sales and marketing
organization. As a percentage of sales, selling and marketing expenses increased
from 7.1% in the three months ended September 30, 1997 to 20.8% in the
corresponding period in 1998. The increase in selling and marketing expenses as
a percentage of sales was primarily due a lower level of sales in the three
months ended September 30, 1998, as compared to the corresponding period in
1997.
Selling and marketing expenses for the nine months ended September 30, 1998
and 1997 were approximately $17.0 million and $11.0 million, respectively. The
increase in selling and marketing during the nine months ended September 30,
1998, as compared to the corresponding period in 1997 was due primarily to
increased staffing, and increased expenses relating to the Company's expansion
of its international sales and marketing organization. As a percentage of sales,
selling and marketing expenses increased from 7.0% in the nine months ended
September 30, 1997 to 11.1% in the corresponding period in 1998. The increase in
selling and marketing expenses as a percentage of sales was primarily due to the
costs relating to the expansion of the Company's international sales force. The
Company expects that selling and marketing expenses will continue to increase
significantly in absolute dollars during the remainder of 1998.
General and Administrative. For the three months ended September 30, 1998 and
1997, general and administrative expenses were $10.8 million and $4.7 million,
respectively. The increase was principally due to increased staffing, other
costs resulting from the Company's expansion of its operations and a $5.4
million increase in the allowance for doubtful accounts in 1998. As a percentage
of sales, general and administrative expenses increased from 8.1% in the three
months ended September 30, 1997 to 35.6% in the corresponding period in 1998.
This increase in general and administrative expenses as a percentage of sales
was due primarily to the increase in the allowance for doubtful accounts and to
a lower level of sales in the three months ended September 30, 1998 as compared
to the corresponding period in 1997. The Company expects that general and
administrative expenses may
17
<PAGE>
continue to increase significantly in absolute dollars during the remainder of
1998.
General and administrative expenses for the nine months ended September 30,
1998 and 1997 were approximately $19.5 million and $12.2 million, respectively.
This increase was due primarily to increased staffing, other costs resulting
from the Company's expansion of its operations and a $5.4 million increase in
the allowance for doubtful accounts. As a percentage of sales, general and
administrative expenses increased from 7.6% in the nine months ended September
30, 1997 to 12.9% in the corresponding period in 1998. This increase in general
and administrative expenses as a percentage of sales during the nine months
ended September 30, 1998 as compared to the corresponding period in 1997 was
primarily due to increased staffing and the increase in the allowance for
doubtful accounts. The Company expects that general and administrative expenses
may continue to increase significantly in absolute dollars during the remainder
of 1998.
Goodwill Amortization. Goodwill amortization consists of the charge to income
that results from the allocation over the estimated useful life of the component
of the cost of the Company's acquisitions accounted for by the purchase method
which is greater than the fair value of the net assets acquired. For the three
months ended September 30, 1998 and 1997, goodwill amortization was $1.9 million
and $0.6 million, respectively. The increase in goodwill amortization in the
three months ended September 30, 1998 as compared to the corresponding period in
1997 was due primarily to the acquisition of the Cylink Wireless Group in March
1998.
Goodwill amortization for the nine months ended September 30, 1998 and 1997
was $4.7 million and $1.5 million, respectively. The increase in goodwill
amortization in the nine months ended September 30, 1998 as compared to the
corresponding period in 1997 was due to the acquisitions of Technosystem S.p.A.
("Technosystem") a Rome, Italy-based company, Columbia Spectrum Management LP
("CSM") a Vienna, Virginia-based company, and the Cylink Wireless Group in
February 1997, March 1997, and March 1998, respectively
Restructuring and Other One-time Charges. During the third quarter of 1998,
the Company incurred restructuring and other one-time charges of $4.3 million,
consisting of severance benefits, and impairments of facilities, fixed assets,
and goodwill. These restructuring and other one-time charges resulted from the
consolidation of certain of the Company's facilities.
In addition, the Company recorded inventory reserves of $16.9 million
(including $14.5 million in inventory write downs related to the Company's
existing core business and $2.4 million in other one-time charges to inventory
relating to the elimination of product lines) which were charged to costs of
goods sold, and accounts receivable reserves of $5.4 million which were charged
to general and administrative expenses. The Company recorded these charges in
the third quarter of 1998 primarily in response to a marked slowdown in the
telecommunications industry as a whole during the third quarter of 1998.
The $4.3 million restructuring charge consisted primarily of severance and
benefits of approximately $0.6 million, facilities and fixed assets impairments
of approximately $0.9 million, and goodwill write-offs of approximately $2.9
million.
To attempt to offset the decrease in sales, the Company laid off approximately
121 employees from the Campbell facilities and 16 employees from its Redditch,
UK facilities during September and October 1998, incurring costs of
approximately $0.6 million. All employees were properly notified of the
impending layoff in advance and were given severance pay. Each functional vice
president submitted a list of eligible employees for the reduction in force to
the Human Resources Department where a summary list was prepared. Between
November 1998 and February 1999, the Company laid off approximately 35
additional employees form the Campbell facilities.
Due to the slowdown in sales, the Company combined certain operations and
closed its Telesys and Advanced Wireless facilities, incurring costs of
approximately $0.9 million. Some of the employees were transferred to other
business units while others were included in the reduction in force. Facilities
expenses, such as rent expense, were expensed and certain fixed assets at closed
locations were written down. In addition, goodwill created through acquisitions
of these business units was written off in the restructuring charge. During the
third quarter of 1998, the Company's operations in Florida were moved into more
suitable facilities and the Company expensed the remaining lease payments on the
original building.
The Company sold a segment of its Geritel operations to a former owner and
wrote off the remaining goodwill created in the original purchase, approximately
$1.6 million. The Company continues to operate its Geritel facility, but does
not use the overlap of product families acquired in the Cylink Wireless Group
acquisition. The remaining goodwill created in the ACS acquisition,
approximately $1.2 million, was written off.
18
<PAGE>
The Company responded to a weakness in sales for the industry during the third
quarter by reviewing its inventory and increasing its reserve by approximately
$16.9 million. The inventory reserve included an excess and obsolete reserve of
approximately $4.5 million, $2.0 million reserve for the write-off relating to
the overlap of product families resulting from the Cylink Wireless Group
acquisition, rework charges of approximately $4.3 million for the rework of
excess semi-custom finished goods that were configured for specific customers or
for frequencies developed for specific geographical regions, approximately $1.1
million for products that have been redesigned and are old revisions, and a
general inventory reserve of approximately $5.0 million for potential excess
inventory caused by a slowdown in the industry.
During the third quarter of 1998, the Company experienced cancelled purchase
orders due to currency fluctuations, and the stronger dollar caused the
Company's customers to delay payments on equipment that had already been
shipped. As such, the Company increased its accounts receivable reserves by $5.4
million during the third quarter of 1998.
The Company expects to benefit from these restructuring and other one-time
charges in future quarters by reducing fixed costs and future cash requirements.
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 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 40%, 80%, and 50% complete, respectively.
The Company expects to begin to benefit from these projects in early 1999. If
none of these projects are successfully developed, the Company's sales and
profitability may be materially 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 IPR&D 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
$2.2 million and $5.8 million during the three-month and nine-month periods
ended September 30, 1998, respectively, as compared to $0.2 million and $1.3
million during the corresponding period in 1997.
For the third 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 Promissory Notes ("Notes") due 2002, and equipment leases and
finance charges related to the Company's receivables purchase agreements. For
the third quarter of 1997, interest expense consisted primarily of interest and
fees incurred on borrowings under the Company's bank line of credit. For the
third quarter of 1997, interest income consisted primarily of interest generated
from the Company's cash in its interest bearing bank accounts.
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The Company generated interest income of $0.2 million and $1.5 million during
the three-month and nine-month periods ended September 30, 1998, respectively,
as compared to $0.2 million and $0.9 million during the corresponding period in
1997.
Interest income consisted primarily of interest income generated from the
Company's cash in its interest bearing bank accounts.
The Company incurred other income and expenses, resulting in net expenses of
$0.7 million during the three-month period ended September 30, 1998 as compared
to net expenses of $0.1 million during the corresponding period in 1997. The
Company incurred other income and expenses, resulting in net expenses of $0.6
million during the nine-month period ended September 30, 1998 as compared to net
other income of $0.1 million during the corresponding period in 1997.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company used approximately $32.1 million in operating activities during
the nine months ended September 30, 1998, primarily due to the net loss
(excluding non-cash charges for acquired in-process research and development
expense of $15.4 million) of $30.6 million and an increase in inventory,
deferred taxes, and prepaid expenses of $20.1 million, $13.8 million, and $4.6
million, respectively, and a decrease in income taxes payable of $2.3 million.
These uses of cash were partially offset by a decrease in accounts receivable of
$25.2 million, and depreciation and amortization expense of $8.5 million and
$4.7 million, respectively, and an increase in other accrued liabilities of $4.0
million.
On March 28 and April 1, 1998, the Company acquired substantially all of the
assets of the Cylink Wireless Group, for $46.0 million in cash and $14.5 million
in a short term, non-interest bearing unsecured subordinated promissory note due
July 6, 1998. The Company has withheld approximately $4.8 million of the short-
term promissory note due to the Company's belief that Cylink Corporation
breached various provisions of the acquisition agreement. In the Asset Purchase
Agreement between the Company and Cylink Corporation, Cylink Corporation agreed
to sell certain assets to the Company, including a specific list of accounts
receivable. Subsequent to the purchase and before the $14.5 million note was
due, the Company determined that approximately $4.8 million of accounts
receivable were uncollectible. The Cylink Wireless Group designs, manufactures
and markets spread spectrum radio products for voice and data applications in
both domestic and international markets. The Company incurred a one time
research and development charge of approximately $15.4 million in the first
quarter of 1998. In connection with the acquisition of the assets of the Cylink
Wireless Group, the Company purchased the net accounts receivable balance of
$4.2 million on April 1, 1998. The consideration for these accounts receivable
was included in the total purchase price of $58.2 million in cash and debt
mentioned above.
The Company used approximately $85.2 million in investing activities during
the nine months ended September 30, 1998 consisting of approximately $61.7
million for acquisitions, including the assets of the Cylink Wireless Group and
$23.4 million to acquire capital equipment.
The Company generated approximately $53.6 million in its financing activities
during the nine months ended September 30, 1998. The Company received
approximately $45.7 million from borrowings under its bank line of credit, and
approximately $2.0 million under other banking relationships, principally with
the Company's subsidiaries in Italy, approximately $1.6 million from the
proceeds of a sale leaseback transaction, and approximately $4.4 million from
the issuance of the Company's Common Stock pursuant to the Company's stock
option and employee stock purchase plans.
At September 30, 1998 and December 31, 1997, net accounts receivable were
approximately $49.9 million and $70.9 million, respectively. The Company has
established a receivables purchase agreement that allows the Company to sell up
to $25 million in accounts receivable to two banks. As of September 30, 1998,
$24.5 million of the Company's accounts receivable have been sold pursuant to
such contract. These sales have no recourse to the Company. The Company plans to
continue to utilize this facility as part of managing its overall liquidity
and/or third-party financing programs. At September 30, 1998 and December 31,
1997, inventory was approximately $83.2 million and $58.0 million, respectively.
Of the $25.2 million increase that occurred in the nine months ended September
30, 1998, $5.1 million was due to the acquisition of inventory from the Cylink
Wireless Group acquisition.
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At September 30, 1998, the Company had working capital of approximately $77.4
million, compared to $174.6 million at December 31, 1997. In recent quarters,
most of the Company's sales have been realized near the end of each quarter,
resulting in a significant investment in accounts receivable at the end of the
quarter. In addition, the Company expects that its investments in accounts
receivable and inventories will continue to be significant and will continue to
represent a significant portion of working capital. Significant investments in
accounts receivable and inventories will continue to subject the Company to
increased risks that have and could continue to materially adversely affect the
Company's business, prospects, financial condition and results of operations.
The Company's principal sources of liquidity as of September 30, 1998
consisted of approximately $23.6 million of cash and cash equivalents. In
addition, the Company entered into a new revolving line-of-credit agreement on
May 15, 1998, as amended July 31, 1998 and October 21, 1998, that provides for
borrowings of up to $50.0 million. As of September 30, 1998, the Company had
been advanced approximately $45.9 million under such line. The maturity date of
the line of credit is April 30, 2001. Borrowings under the line are secured and
bear interest at either a base interest rate or a variable interest rate. The
agreement requires the Company to comply with certain financial covenants,
including the maintenance of specific minimum ratios. The Company was in
compliance with such covenants as of September 30, 1998. Management has
implemented plans to reduce the Company's cash requirement, through a
combination of reductions in working capital, equipment purchases and operating
expenditures. Management believes that such plans, combined with existing cash
balances and other sources of liquidity, should enable the Company to meet its
cash requirements through fiscal year 1999. However, there can be no assurance
that the Company will be able to implement these plans or that it will be able
to do so without a material adverse effect on the Company's business, financial
results or results of operations.
At present, the Company does not have any material commitments for capital
equipment purchases. However, the Company's future capital requirements will
depend upon many factors, including the development of new radio systems and
related software tools, potential acquisitions, the extent and timing of
acceptance of the Company's radio systems in the market, requirements to
maintain adequate manufacturing facilities, working capital requirements for its
acquired entities including Geritel S.p.A. ("Geritel"), Atlantic Communication
Sciences, Inc. ("ACS"), Technosystem, Control Resources Corporation ("CRC"),
Columbia Spectrum Management ("CSM"), RT Masts Limited ("RT Masts"), Advanced
Wireless Engineering LLC ("Advanced"), Telesys (UK) Limited ("Telesys"), Cemetel
S.p.A. ("Cemetel"), Telematics, Inc. ("Telematics") and Cylink Wireless Group,
the progress of the Company's research and development efforts, expansion of the
Company's marketing and sales efforts, the Company's results of operations and
the status of competitive products. The Company believes that cash and cash
equivalents on hand, anticipated cash flow from operations, if any, and funds
available from the Company's bank line-of-credit will be adequate to fund its
ordinary operations for at least the next twelve months. There can be no
assurance, however, that the Company will not require additional financing prior
to such date to fund its operations or for acquisitions. For a discussion of
risk factors associated with the Company's future capital requirements, please
see "Certain Factors Affecting Operating Results--Future Capital Requirements"
and "Acquisitions."
There can be no assurance that any of the operations of ACS, Geritel, RT
Masts, Advanced, Telematics, Telesys, Technosystem, CRC, CSM or Cylink Wireless
Group will be profitable after the acquisitions. Moreover, there can be no
assurance that the anticipated benefits of the ACS, Geritel, Technosystem, RT
Masts, Telematics, Telesys, CRC, Advanced, CSM and Cylink Wireless Group
acquisitions will be realized. The ongoing process of integrating the operations
of ACS, Geritel, Technosystem, RT Masts, Telematics, Telesys, Advanced, CRC, CSM
and Cylink Wireless Group into the Company's operations has resulted in
unforeseen operating difficulties and could continue to absorb significant
management attention, expenditures and reserves that would otherwise be
available for the ongoing development of the Company's business.
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CERTAIN FACTORS AFFECTING OPERATING RESULTS
Limited Operating History
P-Com was founded in August 1991 and was in the development stage until
October 1993 when it began commercial shipments of its first product. From
inception to the end of the third quarter of fiscal 1998, the Company generated
a cumulative net loss of approximately $27.6 million. The decrease in cumulative
net profit from the fourth quarter of 1997 through the third quarter of 1998 was
due primarily to the net loss of $40.7 million in the third quarter of 1998
which included restructuring and other charges of $26.6 million and the acquired
in-process research and development charge of approximately $15.4 million
related to the acquisition of the assets of the Cylink Wireless Group recorded
in the first quarter of fiscal 1998. From October 1993 through September 30,
1998, the Company generated sales of approximately $607.2 million, of which
$373.0 million, or 61.4% of such amount, was generated in the year ended
December 31, 1997 and the first three quarters of 1998. The Company does not
believe recent growth rates are indicative of future operating results. Due to
the Company's limited operating history and limited resources, among other
factors, there can be no assurance that profitability or significant revenues on
a quarterly or annual basis will occur in the future. During 1997 and the first
three quarters of 1998, the Company's operating expenses increased more rapidly
than the Company had anticipated. During the third quarter of 1998, the Company
has also experienced a decrease in revenue as compared to the first two quarters
of 1998 due principally to the market slowdown for the Company's Tel Link
product line. There can be no assurance that the Company's revenues will
continue to remain at or increase from the levels experienced in 1997 or in the
first half 1998 or that sales will not decline. In fact, during the first nine
months of 1998, the Company has experienced its lowest rates of sequential sales
growth since it became a public company. The Company's net sales for the third
quarter of 1998 (which included sales from many newly acquired businesses in
1998) were approximately 50% less than its sales for the comparable period in
1997. The Company expects its sales in the near future to be significantly below
recent comparable periods. In recent quarters, the Company has been experiencing
higher than historical price declines. The decline in prices has had a
significant downward impact on the Company's gross margin. There can be no
assurance that such pricing pressure will not continue in future quarters. The
Company expects its gross margins as a percentage of revenues to continue to be
below comparable periods for the next several quarters. The Company intends to
continue to invest significant amounts in its operations, particularly to
support product development and the marketing and sales of recently introduced
products, and, despite recent cost- cutting efforts, the Company will continue
to incur significant operating expenses. If the Company's sales do not
correspondingly increase, the Company's results of operations, business and
financial condition would be materially adversely affected. Accordingly, there
can be no assurance that the Company will achieve profitability in future
periods. The Company believes it will likely report an operating loss during the
fourth quarter of fiscal year 1998 and could report a net loss for such quarter.
The Company is subject to all of the risks inherent in the operation of a new
business enterprise, and there can be no assurance that the Company will be able
to successfully address these risks.
Significant Customer Concentration
To date, approximately four hundred customers accounted for substantially all
of the Company's sales, and two customers, each of which individually accounted
for over 10% of the Company's 1997 sales, accounted for over 27% of the
Company's 1997 sales. During the first three quarters of 1998, four customers
accounted for 44.7% of the Company's sales and as of September 30, 1998, seven
customers accounted for 46.1% of the Company's backlog scheduled for shipment in
the twelve months subsequent to September 30, 1998. The Company anticipates that
it will continue to sell its products and services to a changing but still
relatively small group of customers. Several of the Company's subsidiaries are
dependent on one or a few customers. Some companies implementing new networks
are at early stages of development and may require additional capital to fully
implement their planned networks. The Company's ability to achieve sales in the
future will depend in significant part upon its ability to obtain and fulfill
orders from, maintain relationships with and provide support to existing and new
customers, to manufacture systems in volume on a timely and cost-effective basis
and to meet stringent customer performance and other requirements and shipment
delivery dates, as well as the condition, working capital availability and
success of its customers. As a result, any cancellation, reduction or delay in
orders by or shipments to any customer, as a result of manufacturing or supply
difficulties or otherwise, or the inability of any customer to finance its
purchases of the Company's products or services, as has been the case with
certain customers historically, may materially adversely affect the Company's
business, financial condition and results of operations. In addition, financial
difficulties of any existing or potential customers may limit the overall demand
for the Company's products and services (for example, certain potential
customers in the telecommunications industry have been reported to have
undergone financial difficulties and may therefore limit their future orders).
In addition, acquisitions in the communications industry are common,
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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. There can be no assurance that profitability or significant revenue
growth on a quarterly or annual basis will occur in the future. The sale and
implementation of the Company's products and services generally involves a
significant commitment of the Company's senior management, sales force and other
resources. The sales cycle for the Company's products and services typically
involves a significant technical evaluation and commitment of cash and other
resources, with the attendant delays frequently associated with, among other
things: (i) existing and potential customers' seasonal purchasing and budgetary
cycles; (ii) educating customers as to the potential applications of, and
product-life cost savings associated with, using the Company's products and
services; (iii) complying with customers' internal procedures for approving
large expenditures and evaluating and accepting new technologies that affect key
operations; (iv) complying with governmental or other regulatory standards; (v)
difficulties associated with each customer's ability to secure financing; (vi)
negotiating purchase and service terms for each sale; and (vii) price decreases
required to secure purchase orders. Orders for the Company's products have
typically been strongest towards the end of the calendar year, with a reduction
in shipments occurring during the summer months, as evidenced in the third
quarter of fiscal years 1997 and 1998, due primarily to the inactivity of the
European market, the Company's major current customer base, at such time. To the
extent 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 existing service providers. To the extent these new
service providers are unable to adequately finance their operations, they may
cancel orders. Moreover, purchase orders are often received and accepted
substantially in advance of shipment, and the failure to reduce actual costs to
the extent anticipated or an increase in anticipated costs before shipment could
materially adversely affect the gross margins for such orders, and as a result,
the Company's results of operations. Moreover, most of the Company's backlog
scheduled for shipment in the twelve months subsequent to September 30, 1998 can
be canceled since orders are often made substantially in advance of shipment,
and the Company's contracts typically provide that orders may be canceled with
limited or no penalties. As a result, backlog is not necessarily indicative of
future sales for any particular period. In addition, the Company's customers
have increasingly been requiring shipment of products at the time of ordering
rather than submitting purchase orders far in advance of expected dates of
product shipment. Furthermore, most of the Company's sales in recent quarters
have been realized near the end of each quarter. Accordingly, a delay in a
shipment near the end of a particular quarter, as the Company has been
experiencing recently, due to, for example, an unanticipated shipment
rescheduling, pricing concessions to customers, a cancellation or deferral by a
customer, competitive or economic factors, unexpected manufacturing or other
difficulties, delays in deliveries of components, subassemblies or services by
suppliers, or the failure to receive an anticipated order, may cause sales in a
particular quarter to fall significantly below the Company's expectations and
may materially adversely affect the Company's operating results for such
quarter.
In connection with its efforts to ramp-up production of products and services,
the Company expects to continue to make substantial capital investments in
equipment and inventory, recruit and train additional personnel and possibly
invest in additional manufacturing facilities. The Company anticipates that
these expenditures will be made in advance of, and in anticipation of, increased
sales and, therefore, that its gross margins will continue to be adversely
affected from time-to-time due to short-term inefficiencies associated with the
addition of equipment and inventory, personnel or facilities, and that each cost
category may increase as a percentage of revenues from time-to-time on a
periodic basis. In addition, as the Company's customers increasingly require
shipment of products at the time of ordering, the Company must forecast demand
for each quarter and build up inventory accordingly. Such
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increases in inventory could materially adversely affect the Company's
operations, if such inventory were not utilized or becomes obsolete. In the
first three quarters of 1998, the Company wrote down $18.3 million of inventory.
A large portion of the Company's expenses are fixed and difficult to reduce
should revenues not meet the Company's expectations, thus magnifying the
material adverse effect of any revenue shortfall. Furthermore, announcements by
the Company or its competitors of new products, services and technologies could
cause customers to defer or cancel purchases of the Company's systems and
services, which would materially adversely affect the Company's business,
financial condition and results of operations. Additional factors that have
caused and will continue to cause the Company's sales, gross margins and results
of operations to vary significantly from period to period include new product
introductions and enhancements, including related costs; weakness in Asia over
capacity for microwave industry; the Company's ability to manufacture and
produce sufficient volumes of systems and meet customer requirements;
manufacturing capacity, efficiencies and costs; customer confusion due to the
impact of actions of competitors; mix of sales through direct efforts or through
distributors or other third parties; mix of systems and related software tools
sold and services provided; operating and new product development expenses;
product discounts; accounts receivable collection, in particular those acquired
in recent acquisitions, especially outside of the United States; changes in
pricing by the Company, its customers or suppliers; inventory write-offs, as the
Company has been experiencing in several recent quarters and which the Company
may experience again in the future; inventory obsolescence; natural disasters;
market acceptance by the Company's customers and the timing of availability of
new products and services by the Company or its competitors; acquisitions,
including costs and expenses; usage of different distribution and sales
channels; fluctuations in foreign currency exchange rates; delays or changes in
regulatory approval of its systems and services; warranty and customer support
expenses; severance costs; consolidation and other restructuring costs; the
pending stockholder class action litigation suits; the Company's potential need
for additional financing; customization of systems; and general economic and
political conditions. In addition, the Company's results of operations have been
and will continue to be influenced significantly by competitive factors,
including the pricing and availability of, and demand for, competitive products
and services. All of the above factors are difficult for the Company to
forecast, and these or other factors could continue to materially adversely
affect the Company's business, financial condition and results of operations. As
a result, the Company believes that period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indications of future
performance. Based on current market conditions, the Company presently expects
that net sales for the three month period ending December 31, 1998 will be
significantly lower than net sales in the comparable period in 1997. Due to lack
of order visibility and the current trend of order delays, deferrals and
cancellations, the Company can give no assurance that it will be able to achieve
o maintain its current sales levels. The Company believes it will likely report
an operating loss for the quarter ending December 31, 1998 and could report a
net loss for such quarter. Should current market conditions continue to
deteriorate, the Company may incur operating and net losses in subsequent
periods. Additionally, management continues to evaluate market conditions in
order to assess the need to take further action to more closely align its cost
structure with anticipated revenues. Any subsequent actions by the Company
could result in restructuring charges, inventory write-downs and provisions for
the impairment of long-lived assets, which could materially adversely affect the
Company's business, financial condition and results of operations. Due to all of
the foregoing factors, it is likely that the Company's operating results could
continue to be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock may continue to be
materially adversely affected.
Acquisitions
Since April 1996, the Company has acquired nine complementary companies and
businesses. Integration of these companies into the Company's business is
currently ongoing, and no assurance may be made that the Company will be able to
successfully complete this process. Risks commonly encountered in such
transactions include the difficulty of assimilating the operations and personnel
of the combined companies, the potential disruption of the Company's ongoing
business, the inability to retain key technical and managerial personnel, the
inability of management to maximize the financial and strategic position of the
Company through the integration of acquired businesses, additional expenses
associated with amortization of acquired intangible assets, dilution of existing
stockholders, the maintenance of uniform standards, controls, procedures, and
policies, the impairment of relationships with employees and customers as a
result of any integration of new personnel, risks of entering markets in which
the Company has no or limited direct prior experience, and operating companies
in different geographical locations with different cultures. All of the
Company's acquisitions to date (the "Acquisitions"), except the acquisitions of
CRC, RT Masts and Telematics have been accounted for under the purchase method
of
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accounting, and as a result, a significant amount of goodwill is being amortized
as set forth in the Company's consolidated financial statements. This
amortization expense may have a significant effect on the Company's financial
results. Additionally, although the Company believes the accounting for its
acquisitions has been appropriate, in general the Securities and Exchange
Commission has recently been reviewing more closely the accounting for
acquisitions and the resulting charges for "in-process" research and development
costs. Any resulting restatement of the "in-process" research and development
charge the Company recognized in conjunction with any of its acquisitions,
including the Cylink Wireless Group acquisition, could result in a lesser charge
to income for "in-process" technology and the creation of a higher value of
acquired technology, an intangible asset. The creation of additional intangible
assets would have the impact of increasing amortization expense, which could
have a material adverse affect on the Company's results of operations, business
and financial condition. There can be no assurance that the Company will be
successful in overcoming these risks or any other problems encountered in
connection with such acquisitions, or that such transactions will not materially
adversely affect the Company's business, financial condition, or results of
operations.
As part of its overall strategy, the Company plans to continue to acquire or
invest in complementary companies, products or technologies and to enter into
joint ventures and strategic alliances with other companies. In July 1998, the
Company acquired Cemetel S.p.A., an Italian limited liability company engaged in
the supply of engineering services to wireless telecommunication providers in
Italy, for an aggregate consideration of approximately $2.9 million. The Company
competes for acquisition and expansion opportunities with many entities that
have substantially greater resources than the Company. There can be no assurance
that the Company will be able to successfully identify suitable acquisition
candidates, pay for acquisitions, complete acquisitions, or expand into new
markets. Once integrated, acquired businesses may not achieve comparable levels
of revenues, profitability, or productivity as the existing business of the
Company, or the stand alone acquired company, or otherwise perform as expected.
In addition, as commonly occurs with mergers of technology companies, during the
pre-merger and integration phases, aggressive competitors may undertake formal
initiatives to attract customers and to recruit key employees through various
incentives. If the Company proceeds with one or more significant acquisitions in
which the consideration consists of cash, as was the case with Cylink Wireless
Group, a substantial portion of the Company's available cash could be used to
consummate the acquisitions. Many business acquisitions must be accounted for as
a purchase for financial reporting purposes. Most of the businesses that might
become attractive acquisition candidates for the Company are likely to have
significant goodwill and intangible assets, and acquisition of these businesses,
if accounted for as a purchase, as was the case with Cylink Wireless Group,
would typically result in substantial amortization of goodwill charges to the
Company. The occurrence of any of these events could have a material adverse
effect on the Company's workforce, business, financial condition and results of
operations.
Dependence on Contract Manufacturers; Reliance on Sole or Limited Sources of
Supply
The Company's internal manufacturing capacity is very limited. The Company
utilizes contract manufacturers such as Remec, Inc., Sanmina Corporation, SPC
Electronics Corp., GSS Array Technology, Celeritek, Inc. and Senior Systems
Technology, Inc. to produce its systems, components and subassemblies and
expects to rely increasingly on these and other manufacturers in the future. The
Company also relies on outside vendors to manufacture certain other components
and subassemblies. There can be no assurance that the Company's internal
manufacturing capacity and that of its contract manufacturers will be sufficient
to fulfill the Company's orders. Failure to manufacture, assemble and ship
systems and meet customer demands on a timely and cost-effective basis could
damage relationships with customers and have a material adverse effect on the
Company's business, financial condition and operating results. Certain necessary
components, subassemblies and services necessary for the manufacture of the
Company's systems are obtained from a sole supplier or a limited group of
suppliers. In particular, Eltel Engineering S.r.L. and Associates, Milliwave,
Scientific Atlanta and Xilinx, Inc. each are sole source or limited source
suppliers for critical components used in the Company's radio systems.
The Company's reliance on contract manufacturers and on sole suppliers or a
limited group of suppliers and the Company's increasing reliance on contract
manufacturers and suppliers involves several risks, many of which the Company
has been experiencing, including an inability to obtain an adequate supply of
finished products and required components and subassemblies, and reduced control
over the price, timely delivery, reliability and quality 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
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financial and other resources. Any inability to obtain timely deliveries of
components and subassemblies of acceptable quality or any other circumstance
that would require the Company to seek alternative sources of supply, or to
manufacture its finished products or such components and subassemblies
internally, could delay the Company's ability to ship its systems, which could
damage relationships with current or prospective customers and have a material
adverse effect on the Company's business, financial condition and results of
operations.
No Assurance of Successful Expansion of Operations; Management of Growth
Recently, in response to market declines generally and lower than expected
performance over the last few quarters, the Company has introduced measures to
reduce operating expenses, including reductions in the Company's workforce in
July and September 1998. However, prior to such cost reduction measures, the
Company had significantly expanded the scale of its operations to support then
anticipated continuing increased sales and to address critical infrastructure
and other requirements. This expansion included the leasing of additional space,
the opening of branch offices and subsidiaries in the United Kingdom, Italy,
Germany, Singapore, Mexico and Dubai, the opening of design centers and
manufacturing operations throughout the world, the acquisition of a significant
amount of inventory (the Company's inventory increased from approximately $58.0
million at December 31, 1997 to approximately $83.2 million at September 30,
1998) and accounts receivable, nine acquisitions, significant investments in
research and development to support product development and services, including
the recently introduced products and the development of point-to-multipoint
systems, and the hiring of additional personnel in all functional areas,
including in sales and marketing, manufacturing and operations and finance. Such
expansion resulted in significantly higher operating expenses for the Company
than in prior years, most of which are significant fixed costs which the Company
must maintain despite cost-cutting initiatives. In addition, in order to prepare
for the future, the Company is required to continue to invest resources in its
acquired and new businesses. Currently, the Company is devoting significant
resources to the development of new products and technologies and is conducting
evaluations of these products and will continue to invest significant additional
resources in plant and equipment, inventory and other items, to begin production
of these products and to provide the marketing and administration, if any,
required to service and support these new products. Accordingly, there can be no
assurance that gross profit margin and inventory levels will not continue to be
materially adversely impacted in the future by the Company's recent and future
performance, as well as start-up costs associated with initial production and
installation of new products. These start-up costs include, but are not limited
to, additional manufacturing overhead, additional allowance for doubtful
accounts, inventory and warranty reserve requirements and the creation of
service and support organizations. In addition, the increases in inventory on
hand for new product development and customer service requirements has
significantly increased the risk and occurrence of inventory write-offs. As a
result, the Company anticipates that it will continue to incur significant
operating expenses. If the Company's sales do not correspondingly increase, the
Company's results of operations will continue to be materially adversely
affected.
Expansion of the Company's operations and its acquisitions have caused and are
continuing to impose a significant strain on the Company's management,
financial, manufacturing and other resources and have disrupted the Company's
normal business operations. The Company's ability to manage the recent and any
possible future growth, should it occur, will depend upon a significant
expansion of its manufacturing, accounting and other internal management systems
and the implementation and subsequent improvement of a variety of systems,
procedures and controls, including improvements relating to inventory control.
For a number of reasons, the Company has not been able to fully consolidate and
integrate the operations of certain acquired businesses. This inability may
continue to cause inefficiencies, additional operational complexities and
expenses and greater risks of billing delays, inventory write-offs and financial
reporting difficulties. The Company must establish and improve a variety of
systems, procedures and controls to more efficiently coordinate its activities
in its companies and their facilities in Rome and Milan, Italy, France, Poland,
the United Kingdom, Mexico, Dubai, New Jersey, Florida, Virginia, Washington and
elsewhere. There can be no assurance that significant problems in these areas
will not re-occur. Any failure to expand these areas and implement and improve
such systems, procedures and controls, 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
26
<PAGE>
manufacturing personnel and significantly expanded its internal and external
manufacturing capacity, there can be no assurance that the Company will not
experience manufacturing or other delays or problems that could materially
adversely affect the Company's business, financial condition or results of
operations.
In this regard, any significant sales growth, should it occur, will be
dependent in significant part upon the Company's expansion of its marketing,
sales, manufacturing and customer support capabilities. This expansion will
continue to require significant expenditures to build the necessary
infrastructure. There can be no assurance that the Company's attempts to expand
its marketing, sales, manufacturing and customer support efforts will be
successful or will result in additional sales or profitability in any future
period. As a result of the expansion of its operations and the significant
increase in its operating expenses, as well as the difficulty in forecasting
revenue levels, the Company will continue to experience significant fluctuations
in its revenues, costs, and gross margins, and therefore its results of
operations. See "Results of Operations."
Declining Average Selling Prices
The Company believes that average selling prices and gross margins for its
systems and services will continue to decline in the long term as such systems
mature, as volume price discounts in existing and future contracts take effect
and as competition intensifies, among other factors. To offset declining average
selling prices, the Company believes that it must successfully introduce and
sell new systems and additional features on a timely basis, develop new products
that incorporate advanced software and other features that can be sold at higher
average selling prices and reduce the costs of its systems through contract
manufacturing, design improvements and component cost reduction, among other
actions. To the extent that new products and additional features are not
developed in a timely manner, do not achieve customer acceptance or do not
generate higher average selling prices, and the Company is unable to offset
declining average selling prices, the Company's gross margins will decline, and
such decline will have a material adverse effect on the Company's business,
financial condition and results of operations. See "Results of Operations."
Trade Account Receivables
The Company is subject to credit risk in the form of trade account
receivables. The Company may in certain circumstances be unable to enforce a
policy of receiving payment within a limited number of days of issuing bills,
especially in the case of customers that are in the early phases of business
development. In addition, many of the Company's foreign customers are granted
longer payment terms than those typically existing in the United States. The
Company has experienced difficulties in the past in receiving payment in
accordance with the Company's policies, particularly from customers awaiting
financing to fund their expansion and from customers outside of the United
States and the days sales outstanding of receivables have increased recently.
There can be no assurance that such difficulties will not continue in the
future, which could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company typically does not
require collateral or other security to support customer receivables. The
Company is currently party to a contract pursuant to which it is permitted to
sell up to $25 million of its receivables. The Company may from time to time in
the future continue to sell its receivables, as part of an overall customer
financing program. There can be no assurance that the Company will be able to
locate parties to purchase such receivables on acceptable terms, or at all. See
"Results of Operations."
No Assurance of Product Quality, Performance and Reliability
The Company has limited experience in producing and manufacturing its systems
and contracting for such manufacture. The Company's customers require very
demanding specifications for quality, performance and reliability. There can be
no assurance that problems will not occur in the future with respect to the
quality, 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
27
<PAGE>
The future operating results of the Company depend to a significant extent
upon the continued growth and increased availability and acceptance of
microcellular, PCN/PCS and wireless local loop access telecommunications
services in the United States and internationally. There can be no assurance
that the volume and variety of wireless telecommunications services or the
markets for and acceptance of such services will continue to grow, or that such
services will create a demand for the Company's systems. Because these markets
are relatively new, it is difficult to predict which segments of these markets
will develop and at what rate these markets will grow, if at all. If the short-
haul millimeter wave or spread spectrum microwave wireless radio market and
related services for the Company's systems fails to grow, or grows more slowly
than anticipated, the Company's business, financial condition and results of
operations would be materially adversely affected. In addition, the Company has
invested a significant amount of time and resources in the development of point-
to-multipoint radio systems. Should the point-to-multipoint radio market fail to
develop, or should the Company's products fail to gain market acceptance, the
Company's business, financial condition and results of operations could be
materially adversely affected. Certain sectors of the communications market will
require the development and deployment of an extensive and expensive
communications infrastructure. In particular, the establishment of PCN/PCS
networks will require very large capital expenditures. There can be no assurance
that communications providers have the ability to or will make the necessary
investment in such infrastructure or that the creation of this infrastructure
will occur in a timely manner. Moreover, one potential application of the
Company's technology, use of the Company's systems in conjunction with the
provision by wireless telecommunications service providers of alternative
wireless access in competition with the existing wireline local exchange
providers, is dependent on the pricing of wireless telecommunications services
at rates competitive with those charged by wireline telephone companies. Rates
for wireless access are currently substantially higher than those charged by
wireline companies, and there can be no assurance that rates for wireless access
will generally be competitive with rates charged by wireline companies. If
wireless access rates are not competitive, consumer demand for wireless access
will be materially adversely affected. If the Company allocates its resources to
any market segment that does not grow, it may be unable to reallocate its
resources to other market segments in a timely manner, which may curtail or
eliminate its ability to enter such market segments.
Certain of the Company's current and prospective customers are currently
delivering products and technologies which utilize competing transmission media
such as fiber optic and copper cable, particularly in the local loop access
market. To successfully compete with existing products and technologies, the
Company must, among many actions, offer systems with superior price/performance
characteristics and extensive customer service and support, supply such systems
on a timely and cost-effective basis in sufficient volume to satisfy such
prospective customers' requirements and otherwise overcome any reluctance on the
part of such customers to transition to new technologies. Any delay in the
adoption of the Company's systems may result in prospective customers utilizing
alternative technologies in their next generation of systems and networks, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that prospective
customers will design their systems or networks to include the Company's
systems, that existing customers will continue to include the Company's systems
in their products, systems or networks in the future, or that the Company's
technology will to any significant extent replace existing technologies and
achieve widespread acceptance in the wireless telecommunications market. Failure
to achieve or sustain commercial acceptance of the Company's currently available
radio systems or to develop other commercially acceptable radio systems would
materially adversely affect the Company's business, financial condition and
results of operations. In addition, there can be no assurance that industry
technical standards will remain the same or, if emerging standards become
established, that the Company will be able to conform to these new standards in
a timely and cost-effective manner.
Intensely Competitive Industry
The wireless communications market is intensely competitive. The Company's
wireless-based radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media, including copper
and fiber optic cable. The Company has experienced increasingly intense
competition worldwide from a number of leading telecommunications companies that
offer a variety of competitive products and services and broader
telecommunications product lines, including Adtran, Inc., Alcatel Network
Systems, California Microwave, Inc., Digital Microwave Corporation (which has
recently acquired other competitors, including Innova International Corp. and
MAS Technology, Ltd.), Ericsson Limited ("Ericsson"), Harris Corporation-Farinon
Division, Larus Corporation, Nokia Telecommunications ("Nokia"), Philips T.R.T.,
Utilicom and Western Multiplex Corporation, many of which have substantially
greater installed bases, financial resources and production, marketing,
manufacturing, engineering and other capabilities than the Company. The Cylink
Wireless Group which the Company acquired in early 1998, competes with a large
number of companies in the wireless communications
<PAGE>
markets, including U.S. local exchange carriers and foreign telephone companies.
The most significant competition for such group's products in the wireless
market is from telephone companies that offer leased line data services. The
Company faces actual and potential competition not only from these established
companies, but also from start-up companies that are developing and marketing
new commercial products and services. The Company may also face competition in
the future from new market entrants offering competing technologies. In
addition, the Company's current and prospective customers and partners, certain
of which have access to the Company's technology or under some circumstances are
granted the right to use the technology for purposes of manufacturing, have
developed, are currently developing or could develop the capability to
manufacture products competitive with those that have been or may be developed
or manufactured by the Company. In addition, Nokia and Ericsson have recently
developed new competitive radio systems. The Company's results of operations
will depend in part upon the extent to which these customers elect to purchase
from outside sources rather than develop and manufacture their own radio
systems. There can be no assurance that such customers will rely on or expand
their reliance on the Company as an external source of supply for their radio
systems. The principal elements of competition in the Company's market and the
basis upon which customers may select the Company's systems include price,
performance, software functionality, ability to meet delivery requirements and
customer service and support. Recently, certain of the Company's competitors
have announced the introduction of competitive products, including related
software tools and services, and the acquisition of other competitors and
competitive technologies. The Company expects its competitors to continue to
improve the performance and lower the price of their current products and
services and to introduce new products and services or new technologies that
provide added functionality and other features. New product and service
offerings and enhancements by the Company's competitors could cause a
significant decline in sales or loss of market acceptance of the Company's
systems, or make the Company's systems, services or technologies obsolete or
noncompetitive. The Company is experiencing significant price competition
especially from large system integrators, and expects such competition to
intensify, which could continue to materially adversely affect its gross margins
and its business, financial condition and results of operations. The Company
believes that to be competitive, it will continue to be required to expend
significant resources on, among other items, new product development and
enhancements. In marketing its systems and services, the Company will face
competition from vendors employing other technologies and services that may
extend the capabilities of their competitive products beyond their current
limits, increase their productivity or add other features. There can be no
assurance that the Company will be able to compete successfully in the future.
Requirement for Response to Rapid Technological Change and Requirement for
Frequent New Product Introductions
The communications market is subject to rapid technological change, frequent
new product introductions and enhancements, product obsolescence, changes in
end-user requirements and evolving industry standards. The Company's ability to
be competitive in this market will depend in significant part upon its ability
to successfully develop, introduce and sell new systems and enhancements and
related software tools, including its point-to-multipoint systems currently
under development, on a timely and cost-effective basis that respond to changing
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
<PAGE>
addition, to date, the Company has acquired three Italy-based companies and two
United Kingdom-based companies and four U.S. companies with substantial
international operations. These companies currently sell their products and
services primarily to customers in Europe, the Middle East and Africa. The
Company anticipates that international sales will continue to account for a
majority of its sales for the foreseeable future. Historically, the Company's
international sales have been denominated in British pounds sterling or United
States dollars. With recent acquisitions of foreign companies, certain of the
Company's international sales may be denominated in other foreign currencies. A
decrease in the value of foreign currencies relative to the United States dollar
could result in losses from transactions denominated in foreign currencies. With
respect to the Company's international sales that are United States dollar-
denominated, such a decrease could make the Company's systems less price-
competitive and could have a material adverse effect upon the Company's
business, financial condition and results of operations. The Company has in the
past mitigated its currency exposure to the British pound sterling through
hedging measures. However, any future hedging measures may be limited in their
effectiveness with respect to the British pound sterling and other foreign
currencies. Additional risks inherent in the Company's international business
activities include changes in regulatory requirements, costs and risks of
localizing systems in foreign countries, delays in receiving components and
materials, availability of suitable export financing, timing and availability of
export licenses, tariffs and other trade barriers, political and economic
instability, difficulties in staffing and managing foreign operations, branches
and subsidiaries, difficulties in managing distributors, potentially adverse tax
consequences, foreign currency exchange fluctuations, the burden of complying
with a wide variety of complex foreign laws and treaties and the difficulty in
accounts receivable collections. Many of the Company's customer purchase and
other agreements are governed by foreign laws, which may differ significantly
from U.S. laws. Therefore, the Company may be limited in its ability to enforce
its rights under such agreements and to collect damages, if awarded. There can
be no assurance that any of these factors will not have a material adverse
effect on the Company's business, financial condition and results of operations.
International telephone companies are in many cases owned or strictly
regulated by local regulatory authorities. Access to such markets is often
difficult due to the established relationships between a government owned or
controlled telephone company and its traditional indigenous suppliers of
telecommunications equipment. The successful expansion of the Company's
international operations in certain markets will depend on its ability to
locate, form and maintain strong relationships with established companies
providing communication services and equipment in targeted regions. The failure
to establish regional or local relationships or to successfully market or sell
its products in international markets could significantly limit the Company's
ability to expand its operations and would materially adversely affect the
Company's business, financial condition and results of operations. The Company's
inability to identify suitable parties for such relationships, or even if such
parties are identified, to form and maintain strong relationships with such
parties could prevent the Company from generating sales of its products and
services in targeted markets or industries. Moreover, even if such relationships
are established, there 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
<PAGE>
of existing regulations could result in the suspension or cessation of
operations. Such regulations or such changes in interpretation could require the
Company to modify its products and services and incur substantial costs to
comply with such time-consuming regulations and changes. In addition, the
Company is also affected to the extent that domestic and international
authorities regulate the allocation and auction of the radio frequency spectrum.
Equipment to support new services can be marketed only if permitted by suitable
frequency allocations, auctions and regulations, and the process of establishing
new regulations is complex and lengthy. To the extent PCS operators and others
are delayed in deploying these systems, the Company could experience delays in
orders. Failure by the regulatory authorities to allocate suitable frequency
spectrum could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, delays in the radio
frequency spectrum auction process in the United States could delay the
Company's ability to develop and market equipment to support new services. These
delays could have a material adverse effect on the Company's business, financial
condition and results of operations.
The regulatory environment in which the Company operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly impact the Company's
operations by restricting development efforts by the Company and its customers,
making current systems obsolete or increasing the opportunity for additional
competition. Any such regulatory changes, including changes in the allocation of
available spectrum, could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company might deem
it necessary or advisable to modify its systems and services to operate in
compliance with such regulations. Such modifications could be extremely
expensive and time-consuming.
Future Capital Requirements
The Company's future capital requirements will depend upon many factors,
including the development of new products and related software tools, potential
acquisitions, requirements to maintain adequate manufacturing facilities and
contract manufacturing agreements, the progress of the Company's research and
development efforts, expansion of the Company's marketing and sales efforts, and
the status of competitive products. There can be no assurance that additional
financing will be available to the Company on acceptable terms, or at all. As a
result of the issuance of the Notes (as defined below) and the new bank line of
credit, the Company is severely limited in its ability to raise additional
financing. If additional funds are raised by issuing equity securities and as a
result of the significant decline in its stock price, further significant
dilution to the existing stockholders will result. If adequate funds are not
available, the Company may be required to restructure or refinance the debt or
delay, scale back or eliminate its research and development, acquisition or
manufacturing programs or obtain funds through arrangements with partners or
others that may require the Company to relinquish rights to certain of its
technologies or potential products or other assets. Accordingly, the inability
to obtain such financing could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
Pending Class Action Litigation
On September 23, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Leonard Vernon and Gayle
M. Wing on behalf of themselves and other stockholders of the Company who
purchased the Company's Common Stock between April 15, 1997 and September 11,
1998. The plaintiffs allege various state securities laws violations by the
Company and certain of its officers and directors. The complaint seeks
unquantified compensatory, punitive and other damages, attorneys' fees and
injunctive and/or equitable relief. On October 16, 1998, a putative class action
complaint was filed in the Superior Court of California, County of Santa Clara,
by Terry Sommer on behalf of herself and other stockholders of the Company who
purchased the Company's Common Stock between April 1, 1998 and September 11,
1998. The plaintiffs allege various state securities laws violations by the
Company and certain of its officers. The complaint seeks unquantified
compensatory and other damages, attorneys' fees and injunctive and/or equitable
relief. On October 20, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Leo Rubin on behalf of
himself and other stockholders of the Company who purchased the Company's Common
Stock between April 15, 1997 and September 11, 1998. On October 26, 1998, a
putative class action complaint was filed in the Superior Court of California,
County of Santa Clara, by Betty B. Hoigaard and Steve Pomex on behalf of
themselves and other stockholders of the Company who purchased the Company's
Common Stock between April 15, 1997 and September 11, 1998. On October 27,
1998, a putative class action complaint was filed in the Superior Court of
California, County of Santa Clara, by Judith Thurman on behalf of herself and
other stockholders of the Company who purchased the Company's Common Stock
between April 15, 1997 and September 11, 1998. These complaints
<PAGE>
are identical in all relevant respects to that filed on September 23, 1998 which
is described above, other than the fact that the plaintiffs are different.
These proceedings are at a very early stage and the Company is unable to
speculate as to their ultimate outcomes. However, the Company believes the
claims in the complaints are without merit and intends to defend against them
vigorously. An unfavorable outcome in any or all of them could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. In addition, even if the litigation is resolved in favor
of the Company, the defense of such litigation could entail considerable cost
and the significant diversion of efforts of management, either of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Uncertainty Regarding Protection of Proprietary Rights
The Company relies on a combination of patents, trademarks, trade secrets,
copyrights and a variety of other measures to protect its intellectual property
rights. The Company generally enters into confidentiality and nondisclosure
agreements with its service providers, customers and others, and attempts to
limit access to and distribution of its proprietary rights. The Company also
enters into software license agreements with its customers and others. However,
there can be no assurance that such measures will provide adequate protection
for the Company's trade secrets or other proprietary information, that disputes
with respect to the ownership of its intellectual property rights will not
arise, that the Company's trade secrets or proprietary technology will not
otherwise become known or be independently developed by competitors or that the
Company can otherwise meaningfully protect its intellectual property rights.
There can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. Furthermore, there can be no assurance
that others will not develop similar products or software, duplicate the
Company's products or software or design around the patents owned by the Company
or that third parties will not assert intellectual property infringement claims
against the Company. In addition, there can be no assurance that foreign
intellectual property laws will adequately protect the Company's intellectual
property rights abroad. The failure of the Company to protect its proprietary
rights could have a material adverse effect on its business, financial condition
and results of operations.
Litigation may be necessary to enforce the Company's patents, copyrights and
other intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. The Company has, through
its acquisition of the Cylink Wireless Group, has been put on notice from a
variety of third parties that the Group's products may be infringing the
intellectual property rights of other parties. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that infringement, invalidity, right to use or
ownership claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future or that such assertions
will not materially adversely affect the Company's business, financial condition
and results of operations. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that a license
will be available under reasonable terms or at all. In addition, should the
Company decide to litigate such claims, such litigation could be extremely
expensive and time consuming and could materially adversely affect the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation.
Dependence on Key Personnel
The Company's future operating results depend in significant part upon the
continued contributions of its key technical and senior management personnel,
many of whom would be difficult to replace. The Company's future operating
results also depend in significant part upon its ability to attract and retain
qualified management, manufacturing, quality assurance, engineering, marketing,
sales and support personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting or
retaining such personnel. There may be only a limited number of persons with the
requisite skills to serve in these positions and it may be increasingly
difficult for the Company to hire such personnel over time. The loss of any key
employee, the failure of any key employee to perform in his or her current
position, the Company's inability to attract and retain skilled employees as
needed or the inability of the officers and key employees of the Company to
expand, train and manage the Company's employee base could materially adversely
affect the Company's business, financial condition and results of operations.
<PAGE>
The Company has experienced and may continue to experience employee turnover
due to several factors, including an expanding economy within the geographic
area in which the Company maintains its principal business offices, making it
more difficult for the Company to retain its employees. Due to this and other
factors, the Company has experienced and may continue to experience high levels
of employee turnover, which could adversely impact the Company's business,
financial condition and results of operations. The Company is presently
addressing these issues and will pursue solutions designed to retain its
employees and to provide performance incentives.
Year 2000 Compliance
Numerous computer systems and software products are coded to accept only two
digit entries in the date code field. Beginning in the year 2000, these date
code fields will have to distinguish 21st century dates from 20th century dates.
As a result, in less than two years, computer systems and/or software used by
many companies may need to be upgraded to comply with such ("Y2K")
requirements. The Company has embarked on a global program to address its
readiness for the century change. The Y2K readiness program involves the
assessment of products, services, internal systems and critical suppliers and,
if required, development of plans for upgrades to or replacement of products,
business systems, suppliers and services that impact the Company's Y2K readiness
and/or development of contingency plans. In November of 1998, corporate
headquarters initiated a new internal business system that is Y2K ready. The
cost of the upgrade was approximately $.3 million. Further business system
upgrades will occur in CRC and Technosystem subsidiaries by the end of the
second quarter of 1999. Based on evaluation performed to date, the Company
believes that all "mission critical" internal systems are stable and current, in
terms of Y2K readiness. However, the failure of any internal system to achieve
Y2K readiness could result in material disruption to the Company's operations.
Test and assessment of all P-Com products is expected to be completed by the end
of the fourth quarter of 1998 with the exception of Technosystem products. All
Technosystem products will complete their Y2K assessment and testing by the end
of the first quarter of 1999. To date, no P-Com products have been found non-
ready or in need of Y2K upgrade. However, the inability of any of the Company's
products to properly manage and manipulate data in the year 2000 could result in
increased warranty costs, customer satisfaction issues, potential lawsuits and
other material costs and liabilities. Critical suppliers will undergo Y2K site
evaluations between January 1, until the end of June 1999. In November of 1998,
the Company will request aY2K readiness statement and progress report from
critical suppliers. The Company is cognizant of the risk posed by single source
or large volume suppliers that may not be addressing their Y2K readiness. Even
where assurances are received from third parties there remains a risk that
failure of systems and products of other companies on which the Company relies
could have a material adverse effect on the Company. The Company's budget for
the Y2K Program is approximately 1% of the 1999 annual revenue. The foregoing
statements are based upon management's best estimates at the present time, which
were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third party modification plans and
other factors. There can be no guarantee that these estimates will be achieved
and actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, the nature and amount of
programming required to upgrade or replace each of the affected programs, the
rate and magnitude of related labor and consulting costs and the success of the
Company's external customers and suppliers in addressing the Y2K issue. The
Company's evaluation is on-going and it expects that new and different
information will become available to it as that evaluation continues.
Consequently, there is no guarantee that all material elements will be Y2K ready
in time.
Volatility of Stock Price
The Company believes that factors such as announcements of developments
related to the Company's business, announcements of technological innovations or
new products or enhancements by the Company or its competitors, developments in
the Asia/Pacific region, sales by competitors, including sales to the Company's
customers, sales of the Company's Common Stock into the public market, including
by members of management, developments in the Company's relationships with its
customers, partners, lenders, distributors and suppliers, shortfalls or changes
in revenues, gross margins, earnings or losses or other financial results that
differ from analysts' expectations (as recently experienced), regulatory
developments, fluctuations in results of operations and general conditions in
the Company's market or the markets served by the Company's customers or the
economy, could continue to cause the price of the Company's Common Stock to
fluctuate substantially. In recent years the stock market in general, and the
market for shares of small capitalization and technology stocks in particular,
have experienced extreme price fluctuations, which have often been unrelated to
the operating performance of affected companies. Many companies in the
telecommunications industry, including the Company, have experienced historic
highs in the market price of
<PAGE>
their Common Stock followed by extreme drops in the market price of such Common
Stock. There can be no assurance that the market price of the Company's Common
Stock will not continue to decline substantially, or otherwise continue to
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance. Such fluctuations could continue to
materially adversely affect the market price of the Company's Common Stock.
Substantial Leverage
In connection with the private placement of the Notes due 2002 in November
1997, the Company incurred $100 million of additional indebtedness. As a result,
the Company's total indebtedness including current liabilities, as of September
30, 1998 was approximately $201.6 million and its stockholders' equity was
approximately $105.8 million. The Company recently borrowed $45.9 million under
a new bank line of credit. The Company's ability to make scheduled payments of
the principal of, or interest on, its indebtedness will depend on its future
performance, which is subject to economic, financial, competitive and other
factors beyond its control. There can be no assurance that the Company will be
able to make the payments or restructure or refinance its debt, if necessary.
Limitations on Dividends
Since its incorporation in 1991, the Company has not declared or paid cash
dividends on its Common Stock, and the Company anticipates that any future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends.
Global Market Risks
Countries in the Asia/Pacific region have recently experienced weaknesses in
their currency, banking and equity markets. These weaknesses could continue to
adversely affect demand for the Company's products, the availability and supply
of product components to the Company and, ultimately, the Company's business,
financial condition and results of operations.
Control by Existing Stockholders; Effects of Certain Anti-Takeover Provisions
Members of the Board of Directors and the executive officers of the Company,
together with members of their families and entities that may be deemed
affiliates of or related to such persons or entities, beneficially own
approximately 6% of the outstanding shares of Common Stock of the Company.
Accordingly, these stockholders are able to influence the election of the
members of the Company's Board of Directors and influence the outcome of
corporate actions requiring stockholder approval, such as mergers and
acquisitions. This level of ownership, together with the Company's stockholder
rights agreement, certificate of incorporation, equity incentive plans, bylaws
and Delaware law, may have a significant effect in delaying, deferring or
preventing a change in control of the Company and may adversely affect the
voting and other rights of other holders of Common Stock. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. In this regard, the Board of Directors has pre-approved the terms of a
Series A Junior Participating Preferred Stock that may be issued pursuant to the
stockholder rights agreement upon the occurrence of certain triggering events.
In general, the stockholder rights agreement provides a mechanism by which the
Board of Directors and stockholders may act to substantially dilute the share
position of any takeover bidder that acquires 15% or more of the Common Stock.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company.
Possible Adverse Effect on Market Price for Common Stock of Shares Eligible
for Future Sale after the Offering
Sales of the Company's Common Stock into the market could materially adversely
affect the market price of the Company's Common Stock. Substantially all of the
shares of Common Stock of the Company are eligible for immediate and
unrestricted sale in the public market at any time.
<PAGE>
PART II - OTHER INFORMATION
- -----------------
ITEM 1. LEGAL PROCEEDINGS. On September 23, 1998, a putative class action
complaint was filed in the Superior Court of California, County of
Santa Clara, by Leonard Vernon and Gayle M. Wing on behalf of
themselves and other stockholders of the Company who purchased the
Company's Common Stock between April 15, 1997 and September 11, 1998.
The plaintiffs allege various state securities laws violations by the
Company and certain of its officers and directors. The complaint seeks
unquantified compensatory, punitive and other damages, attorneys' fees
and injunctive and/or equitable relief. On October 16, 1998, a putative
class action complaint was filed in the Superior Court of California,
County of Santa Clara, by Terry Sommer on behalf of herself and other
stockholders of the Company who purchased the Company's Common Stock
between April 1, 1998 and September 11, 1998. The plaintiffs allege
various state securities laws violations by the Company and certain of
its officers. The complaint seeks unquantified compensatory and other
damages, attorneys' fees and injunctive and/or equitable relief. On
October 20, 1998, a putative class action complaint was filed in the
Superior Court of California, County of Santa Clara, by Leo Rubin on
behalf of himself and other stockholders of the Company who purchased
the Company's Common Stock between April 15, 1997 and September 11,
1998. On October 26, 1998, a putative class action complaint was filed
in the Superior Court of California, County of Santa Clara, by Betty B.
Hoigaard and Steve Pomex on behalf of themselves and other stockholders
of the Company who purchased the Company's Common Stock between April
15, 1997 and September 11, 1998. On October 27, 1998, a putative class
action complaint was filed in the Superior Court of California, County
of Santa Clara, by Judith Thurman on behalf of herself and other
stockholders of the Company who purchased the Company's Common Stock
between April 15, 1997 and September 11, 1998. These complaints are
identical in all relevant respects to that filed on September 23, 1998
which is described above, other than the fact that the plaintiffs are
different.
These proceedings are at a very early stage and the Company is unable
to speculate as to their ultimate outcomes. However, the Company
believes the claims in the complaints are without merit and intends to
defend against them vigorously. An unfavorable outcome in any or all of
them could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. In addition,
even if the litigation is resolved in favor of the Company, the defense
of such litigation could entail considerable cost and the diversion of
efforts of management, either of which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
4.6(1) First Amendment to the Rights Agreement, dated as of
October 5, 1998, between the Company and BankBoston, N.A.
10.37(2) First Amendment to Credit Agreement by and among P-Com,
Inc., as the Borrower, Union Bank of California N.A., as
Administrative Agent, Bank of America National Trust and
Savings Association, as Syndication Agent, and the Lenders
party thereto, dated as of July 31, 1998.
27.1 Financial Data Schedule.
<PAGE>
(1) Incorporated by reference to the Company's
Registration Statement on Form 8-K, as filed with
the Securities and Exchange Commission on October
15, 1998.
(2) Previously filed with the Company's original
Quarterly Report on Form 10-Q for the quarter
ending March 31, 1998.
(b) Reports on Form 8-K.
Report on Form 8-K dated July 16, 1998 regarding the Company's press
release announcing its earnings for the quarter ended June 30, 1998
as filed with the Securities and Exchange Commission on July 17,
1998.
Amendment No. 3 to Report on Form 8-K dated April 9, 1998 regarding
the purchase of the assets of the Wireless Group of Cylink
Corporation, as filed with the Securities and Exchange Commission on
September 11, 1998.
Report on Form 8-K dated September 11, 1998 regarding the Company's
press release announcing a reduction in workforce and a
restructuring charge, as filed with the Securities and Exchange
Commission on September 11, 1998.
Report on Form 8-K dated September 24, 1998 regarding the Company's
press release announcing that a complaint alleging violations of
California state securities laws was filed against the Company on
September 23, 1998, as filed with the Securities and Exchange
Commission on September 25, 1998.
<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
<PAGE>
EXHIBIT INDEX
Exhibit No.
-----------
4.6(1) First Amendment to the Rights Agreement, dated as of October 5,
1998, between the Company and Bank Boston, N.A.
10.37(2) First Amendment to Credit Agreement by and among P-Com, Inc., as
the Borrower, Union Bank of California N.A., as Administrative
Agent, Bank of America National Trust and Savings Association,
as Syndication Agent, and the Lenders party thereto, dated as of
July 31, 1998.
27.1 Financial Data Schedule.
(1) Incorporated by reference to the Company's Registration
Statement on Form 8-K, as filed with the Securities and Exchange
Commission on October 15, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE P-COM
INC. FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 22,676 22,676
<SECURITIES> 924 924
<RECEIVABLES> 58,680 58,680
<ALLOWANCES> (8,774) (8,774)
<INVENTORY> 83,227 83,227
<CURRENT-ASSETS> 174,076 174,076
<PP&E> 69,762 69,762
<DEPRECIATION> (22,443) (22,443)
<TOTAL-ASSETS> 307,414 307,414
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0 0
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<OTHER-EXPENSES> 35,350 90,929
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<INTEREST-EXPENSE> (2,194) (5,793)
<INCOME-PRETAX> (49,463) (57,504)
<INCOME-TAX> (8,767) (11,501)
<INCOME-CONTINUING> (40,696) (46,003)
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<EXTRAORDINARY> 0 0
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<NET-INCOME> (40,696) (46,003)
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