<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 June 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
incorporation or organization) Identification No.)
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 August 12, 1998, there were 43,469,103 shares of the Registrant's Common
Stock outstanding, par value $0.0001.
This quarterly report on Form 10-Q/A consists of 36 pages of which this is
page 1. The Exhibit Index appears on page 36.
<PAGE>
AMENDED FILING OF FORM 10-Q FOR THE QUARTER ENDED JUNE 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 June 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 purchase price
related to the acquisition of the Cylink Wireless Group. This adjustment reduced
the charge to operations for in-process technology from $33.9 million to $15.4
million and the 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 six month periods ended June 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. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997.................................................................. 4
Condensed Consolidated Statements of Operations for the three
and six month periods ended June 30, 1998 and 1997..................................... 5
Condensed Consolidated Statements of Cash Flows for the
six month periods ended June 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.............................................................. 13
Part II. Other Information
-----------------
Item 1. Legal Proceedings...................................................................... 31
Item 2. Changes in Securities.................................................................. 31
Item 3. Defaults Upon Senior Securities........................................................ 31
Item 4. Submission of Matters to a Vote of Security Holders.................................... 31
Item 5. Other Information...................................................................... 31
Item 6. Exhibits and Reports on Form 8-K....................................................... 31
Signatures............................................................................. 33
</TABLE>
3
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM I
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------- ---------------
ASSETS (restated)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 24,988 $ 88,145
Accounts receivable, net 79,422 70,883
Notes receivable 1,370 205
Inventory 78,618 58,003
Prepaid expenses and other current assets 19,517 12,329
--------------- ---------------
Total current assets 203,915 229,565
Property and equipment, net 45,868 32,313
Deferred income taxes 6,950 1,697
Goodwill and other assets 75,905 41,946
=============== ===============
$ 332,638 $ 305,521
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,570 $ 38,043
Accrued employee benefits 4,165 3,930
Other accrued liabilities 6,260 6,255
Income taxes payable 5,756 6,409
Notes payable 38,693 293
--------------- ---------------
Total current liabiltities 82,444 54,930
--------------- ---------------
Long-term debt 102,643 101,690
--------------- ---------------
Minority interest - 604
--------------- ---------------
Stockholders' equity:
Preferred stock - -
Common Stock 4 4
Additional paid-in capital 135,248 131,735
Retained earnings 13,073 18,380
Accumulated other comprehensive income (774) (1,822)
--------------- ---------------
Total stockholders' equity 147,551 148,297
--------------- ---------------
$ 332,638 $ 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 June 30, Six Months Ended June 30,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(restated) (restated)
Sales
<S> <C> <C> <C> <C>
Product $ 54,549 $ 46,961 $ 105,970 $ 85,554
Service 8,910 8,097 16,126 13,731
--------------- --------------- --------------- ---------------
Total Sales $ 63,459 $ 55,058 $ 122,096 $ 99,285
--------------- --------------- --------------- ---------------
Cost of sales
Product 32,788 27,938 61,635 51,079
Service 5,952 4,437 10,617 8,748
--------------- --------------- --------------- ---------------
Total cost of sales 38,740 32,375 72,252 59,827
--------------- --------------- --------------- ---------------
Gross profit 24,719 22,683 49,844 39,458
--------------- --------------- --------------- ---------------
Operating expenses:
Research and development 10,192 7,051 17,920 13,825
Selling and marketing 6,438 4,008 10,663 6,923
General and administrative 4,871 4,032 8,762 7,469
Goodwill amortization 2,094 565 2,792 911
Acquired in-process research and
development - - 15,442 -
--------------- --------------- --------------- ---------------
Total operating expenses 23,595 15,656 55,579 29,128
--------------- --------------- --------------- ---------------
Income (loss) from operations 1,124 7,027 (5,735) 10,330
Interest expense (1,833) (712) (3,599) (1,008)
Interest income 346 240 1,228 620
Other income (expense) 45 372 65 217
--------------- --------------- --------------- ---------------
Interest (loss) before income taxes (318) 6,927 (8,041) 10,159
Provision (benefit) for income taxes (108) 1,816 (2,734) 3,369
=============== =============== =============== ===============
Net income (loss) $ (210) $ 5,111 $ (5,307) $ 6,790
=============== =============== =============== ===============
Net income (loss) per share:
Basic $ 0.00 $ 0.12 $ (0.12) $ 0.16
=============== =============== =============== ===============
Diluted $ 0.00 $ 0.12 $ (0.12) $ 0.16
=============== =============== =============== ===============
Shares used in per share computation:
Basic 43,201 42,174 43,077 41,772
=============== =============== =============== ===============
Diluted 44,253 43,771 43,077 43,504
=============== =============== =============== ===============
</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>
Six Months Ended June 30,
1998 1997
--------------- ---------------
Cash flows from operating activities: (restated)
<S> <C> <C>
Net income (loss) $ (5,307) $ 6,790
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 5,793 1,868
Amortization of goodwill 2,792 913
Change in minority interest (604) 33
Deferred income taxes (5,253) 14
Acquired in-process research and development 15,442 -
Change in assets and liabilities (net of acquisition balances):
Accounts receivable (13,974) (5,743)
Notes receivable (1,165) 1,814
Inventory (15,506) (7,054)
Prepaid expenses (7,188) (5,804)
Goodwill and other assets (1,495) (819)
Accounts payable (11,828) (5,223)
Accrued employee benefits 235 1,278
Other accrued liabilities 5 (3,096)
Income taxes payable (653) 1,731
--------------- ---------------
Net cash used in operating activities (38,706) (13,298)
--------------- ---------------
Cash flows from investing activities:
Acquisition of property and equipment (18,887) (3,226)
Acquisitions, net of cash acquired (49,478) (10,855)
--------------- ---------------
Net cash used in investing activities (68,365) (14,081)
--------------- ---------------
Cash flows from financing activities:
Proceeds from notes payable 39,353 4,562
Proceeds from stock issuances, net of expenses 3,513 1,720
--------------- ---------------
Net cash provided by financing activities 42,866 6,282
--------------- ---------------
Effect of exchange rate changes on cash 1,048 (550)
--------------- ---------------
Net decrease in cash and cash equivalents (63,157) (21,647)
Cash and cash equivalents at the beginning of the period 88,145 42,226
--------------- ---------------
Cash and cash equivalents at the end of the period $ 24,988 $ 20,579
=============== ===============
Supplemental cash flow disclosures:
Cash paid for income taxes $ 1,902 $ 1,510
=============== ===============
Cash paid for interest $ 3,839 $ 459
=============== ===============
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
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 June 30, 1998, and the results of its operations for the three
and six-month periods ended June 30, 1998 and 1997 and its cash flows for the
six months ended June 30, 1998 and 1997. These financial statements should be
read in conjunction with the Company's audited 1997 financial statements,
including the notes thereto, and the other information set forth therein,
included in the Company's Annual Report on Form 10-K/A (File No. 0-25356).
Operating results for the three and six-month periods ended June 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 contains forward-looking statements that
involve numerous risks and uncertainties. The statements contained in this
Quarterly Report on Form 10-Q/A that are not purely historical are forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934, as
amended, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the factors affecting operating results contained in this Quarterly
Report on Form 10-Q/A.
The accompanying condensed consolidated financial statements as of June 30,
1998 and for the three and six 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 June 30, 1998, from $12.9
million and $58.3 million, respectively, to $7.7 million and $75.9 million,
respectively. The effect of this reallocation on previously reported condensed
consolidated financial statements as of and for the three and six month periods
ended June 30,1998 is as follows (in thousands except per share amounts,
unaudited):
7
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1998 June 30, 1998
Statements of Operations: As reported Restated As reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Goodwill amortization $ 1,187 $ 2,028 $ 1,818 $ 2,659
Acquired in-process research and development expenses $ - $ - $ 33,856 $ 15,442
Income (loss) from operations $ 1,965 $ 1,124 $ (23,308) $ (5,735)
Net income (loss) $ 523 $ (210) $ (25,614) $ (5,307)
Net loss per share
Basic and diluted $ 0.01 $ - $ (0.39) $ (0.12)
June 30, 1998
Balance Sheets: As reported Restated
----------- --------
Deferred income taxes $ 12,927 $ 6,950
Goodwill and other assets $ 58,332 $ 75,905
Total assets $ 321,042 $ 332,638
Retained earnings $ 1,477 $ 13,073
Total stockholders' equity $ 135,955 $ 147,551
</TABLE>
2. NET INCOME (LOSS) PER SHARE
Following is a reconciliation of the numerators and denominators of the Basic
and Diluted EPS computations for the periods presented below (in thousands
except per share data):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
------------ ------------- ------------- ------------
(restated) (restated)
<S> <C> <C> <C> <C>
Numerator - net income(loss) $ (210) $ 5,111 $ (5,307) $ 6,790
============ ============= ============= ============
Denominator for basic income (loss) per common share 43,201 42,174 43,077 41,772
Effect of dilutive securities:
Stock options 1,052 1,597 - 1,732
------------ ------------- ------------- ------------
Denominator for diluted net income (loss) per common share 44,253 43,771 43,077 43,504
============ ============= ============= ============
Income (loss) per share:
Basic $ - $ 0.12 $ (0.12) $ 0.16
============ ============= ============= ============
Diluted $ - $ 0.12 $ (0.12) $ 0.16
============ ============= ============= ============
</TABLE>
For purpose of computing diluted earnings 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 six-months
ended June 30, 1998, options to purchase approximately 2,257,624 and 2,669,314
shares of Common Stock, respectively, were excluded from computation. For the
three and six-months ended June 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 per share because the effect would be
antidilutive.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income". SFAS
130 establishes standards for reporting comprehensive income and its components
in a financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income as defined includes all changes in
equity (net assets) during a period from nonowner sources. Examples of items to
be included in comprehensive income, which
8
<PAGE>
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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------- -------------- ------------- -------------
(restated) (restated)
<S> <C> <C> <C> <C>
Net income (loss) $ (210) $ 5,111 $ (5,307) $ 6,790
Other comprehensive income 1,231 1,623 1,048 1,346
------------- -------------- ------------- -------------
Total comprehensive income (loss) $ 1,021 $ 6,734 $ (4,259) $ 8,136
============= ============== ============= =============
</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
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
disclosures prescribed by SFAS 131 are effective in 1998, and are not required
for interim periods. The Company does not expect this pronouncement to have a
material effect on its financial statements.
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 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 and were not material to the Company's results of operations for the
three month period ended March 31, 1998.
The total purchase price of the acquisition was as follows (in thousands):
<TABLE>
<CAPTION>
<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 six months ended June 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>
Six Months Ended Twelve Months Ended
June 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 $122,096 $ 4,508 $ 126,604 $220,702 $ 27,957 $248,659
Net income (loss) (5,307) (4,706) (10,013) 18,891 (3,443) 15,448
Net income (loss) per share:
Basic (0.12) (0.11) (0.23) 0.45 (0.08) 0.37
Diluted (0.12) (0.11) (0.23) 0.43 (0.08) 0.35
</TABLE>
- -------------
(1) All Cylink Corporation financial information presented in this table has
been amended to reflect certain adjustments made by Cylink Corporation. In
November 1998, Cylink Corporation publicly announced that it and its
independent accountants had initiated a review of revenue recognition
practices, which resulted in a restatement of previously issued first
quarter 1998 results, as well as annual 1997 results.
After consideration of recent guidance from the SEC, the Company has adjusted
the allocation of the purchase price related to the acquisition of the Cylink
Wireless Access Group, which included decreasing the IPR&D charge from $33.9
million as originally reported in the Company's Quarterly Report on Form 10-Q
for its quarter ended
10
<PAGE>
March 31, 1998 to $15.4 million. The result of this restatement is a lesser
charge to operations for IPR&D and a higher recorded value of goodwill and other
intangible assets, resulting in increased amortization of such goodwill and
other intangible assets in future periods.
IPR&D had no alternative future use at the date of acquisition and
technological feasibility had not been established.
Among the various factors considered in determining the amount of the
allocation of the purchase price to IPR&D were estimating the stage of
development of each IPR&D project at the date of acquisition, estimating cash
flows resulting from the expected revenues generated from such projects, and
discounting the net cash flows, in addition to other assumptions. Developed
technology of $6.3 million will be amortized over the period of the expected
revenue stream of the developed products of approximately four years. The value
of the acquired workforce, $1.8 million will be amortized on a straight-line
basis over three years, and the remaining identified intangible assets,
including core technology of $2.7 million and goodwill of $23.5 million will be
amortized on a 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 June 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-multipoint product, a faster, less expensive more flexible point-to-point
product, and the development of enhanced Airlink products, consisting of a Voice
Extender, Data Metro II, and RLL Encoding products.
If none of these projects are successfully developed, the Company's sales and
profitability may be adversely affected in future periods. Additionally, the
failure of any particular individual project in process could impair the value
of other intangible assets acquired. The Company expects to begin to benefit
from the purchased in-process technology in 1999.
During the second quarter of 1998, due to limited staff and facilities, the
Company delayed the research project for the new narrowband point-to-multipoint
project acquired from the Cylink Wireless Group and focused available resources
on the broadband point-to-multipoint project which is targeted for a larger
addressable market. The narrowband point-to-multipoint project has a total
remaining expected development cost of approximately $2.4 million and, due to
the allocation of resources discussed above, is not expected to be completed
prior to the Year 2000. The point-to-point project, discussed above, which was
acquired from the Cylink Wireless Group, is scheduled to be 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 that provides for borrowings of up to $50 million. 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 June 30, 1998.
6. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(unaudited)
------------- ------------
<S> <C> <C>
Raw materials $12,374 $ 9,695
Work-in-process 40,559 32,472
Finished goods 25,685 15,836
------- -------
$78,618 $58,003
======= =======
</TABLE>
11
<PAGE>
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(unaudited)
------------- -------------
<S> <C> <C>
Tooling and test equipment $ 39,726 $ 31,603
Computer equipment 7,252 4,950
Furniture and fixtures 6,895 4,979
Land and buildings 1,403 1,389
Construction-in-process 10,287 3,294
------------- -------------
65,563 46,215
Less - accumulated depreciation
and amortization (19,695) (13,902)
------------- -------------
$ 45,868 $ 32,313
============= =============
</TABLE>
12
<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 IPR&D. Although the Company believes that its original accounting
treatment, based on an independent appraisal, was in accordance with generally
accepted accounting principles and the Company's appraisal, it has accepted the
SEC's view with respect to these matters and adopted the application of the
recent SEC guidance. As such, the Company has adjusted the allocation of the
purchase price related to the acquisition of the Cylink Wireless Group. The
result is a lesser charge to income for IPR&D and a higher recorded value of
goodwill and other intangible assets.
Among the various factors considered in determining the amount of the
allocation of the purchase price to IPR&D were estimating the stage of
development of each IPR&D project at the date of acquisition, estimating cash
flows resulting from the expected revenues generated from such projects, and
discounting the net cash flows, in addition to other assumptions. Developed
technology will be amortized over the period of the expected revenue stream of
the developed products of approximately four years. The value of the acquired
workforce will be amortized on a straight-line basis over three years, and the
remaining identified intangibles, including goodwill and core technology will be
amortized on a straight-line basis over ten years. Amortization expense related
to the acquisition of the Cylink Wireless Group was $1.2 million during the
quarter ended June 30, 1998.
In addition, other factors were considered in determining the value assigned
to purchased IPR&D such as research projects in areas supporting products which
address the growing third world markets by offering a new point to multi-point
product, a faster, less expensive more flexible point-to-point product, and the
development of enhanced Airlink products, consisting of a Voice Extender, Data
Metro II, and RLL Encoding products. At the time of acquisition, these projects
were estimated to be 60%, 85%, and 50% complete, respectively. The Company
expects to begin to benefit from these projects in 1999.
If none of these projects are successfully developed, the Company's sales and
profitability may be adversely affected in future periods. Additionally, the
failure of any particular individual project in process could impair the value
of other intangible assets acquired. The Company expects to begin to benefit
from the purchased in-process technology in 1999.
During the second quarter of 1998, due to limited staff and facilities, the
Company delayed the research project for the new narrowband point-to-multipoint
project acquired from the Cylink Wireless Group and focused available resources
on the broadband point-to-multipoint project which is targeted for a larger
addressable market. The narrowband point-to-multipoint project has a total
remaining expected development cost of approximately $2.4 million and, due to
the allocation of resources discussed above, is not expected to be completed
prior to the year 2000. The point-to-point project, discussed above, which was
acquired from the Cylink Wireless Group, is scheduled to be 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.
13
<PAGE>
The following table sets forth items from the Consolidated Condensed Income
Statements as a percentage of sales for the periods indicated. In addition, this
Quarterly Report on Form 10-Q/A may contain forward-looking statements that
involve numerous risks and uncertainties. The statements contained in this
Quarterly Report on Form 10-Q/A that are not purely historical may be forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, including without limitation, statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the factors affecting operating results contained in this Quarterly
Report on Form 10-Q/A.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed in the Company's 1997 Annual Report on Form 10-
K/A, Quarterly Report on Form 10-Q/A for the period ended March 31, 1998 and
other documents filed by the Company with the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------ ----------- ----------- -----------
(restated) (restated)
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 61.0 58.8 59.2 60.3
------------ ----------- ----------- -----------
Gross profit 39.0 41.2 40.8 39.7
------------ ----------- ----------- -----------
Operating expenses:
Research and development 16.1 12.8 14.7 13.9
Selling and marketing 10.1 7.3 8.7 7.0
General and administrative 7.8 7.3 7.3 7.5
Goodwill amortization 3.2 1.0 2.2 0.9
Acquired in-process
research and development - - 12.6 -
------------ ----------- ----------- -----------
Total operating expenses 37.2 28.4 45.5 29.3
------------ ----------- ----------- -----------
Income (loss) from operations 1.8 12.8 (4.7) 10.4
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Interest and other income (expense), net (2.3) (0.2) (1.9) (0.2)
------------ ----------- ----------- -----------
Income (loss) before income taxes (0.5) 12.6 (6.6) 10.2
Provision (benefit) for income taxes (1.7) 3.3 (2.2) 3.4
------------ ----------- ----------- -----------
Net income (loss) (3.3%) 9.3% (4.4%) 6.8%
============ =========== =========== ===========
</TABLE>
Results of Operations for the Three and Six Months Ended June 30, 1998 and 1997
Sales. Sales for the three months ended June 30, 1998 and 1997 were
approximately $63.5 million and $55.1 million, respectively, an increase of
15.1%. Sales for the six months ended June 30, 1998 and 1997 were approximately
$122.1 million and $99.3 million, respectively, an increase of 23.0%. The sales
increase for the three and six month periods in 1998 as compared to the same
periods in 1997 was due to increased sales from existing customers and sales
from acquired companies. Sales to new customers in the first and second quarter
of 1998 (excluding companies recently acquired) were less than 10% of total
sales. The Company recently acquired three companies, including the assets of
the Cylink Wireless Group, which were acquired on March 28, 1998 and April 1,
1998. Sales for the Cylink Wireless Group in the second quarter of 1998 were
approximately $8.7 million. RT Masts and Telematics were acquired on November
27, 1997 and accounted for as poolings-of-interest. Under the pooling-of-
interest method of accounting, prior period financial statements are restated to
present the results of the combined companies as if they had been combined since
inception. Sales for RT Masts in the second quarter of 1998 and 1997 were
approximately $5.3 million and $2.6 million, respectively. Sales for Telematics
in the second quarter of 1998 and 1997 were approximately $3.0 million and $2.2
million, respectively. For the six months ended June 30, 1998, five customers
accounted for 55.1% of the sales of the Company. For the six months ended June
30, 1997, seven customers accounted for 54.1% of the sales of the Company.
Product sales for the three months ended June 30, 1998 were approximately
$54.5 million or 86% of total sales, and service sales were approximately $8.9
million or 14% of total sales. Product sales for the six months ended June 30,
1998 were approximately $106.0 million or 87% of total sales, and service sales
were approximately $16.1 million or 13% of total sales. Product sales for the
three months ended June 30, 1997 were
14
<PAGE>
approximately $47.0 million or 85% of total sales, and service sales were
approximately $8.1 million or 15% of total sales. Product sales for the six
months ended June 30, 1997 were approximately $85.6 million or 86% of total
sales, and service sales were approximately $13.7 million or 14% of total sales.
Historically, the Company has generated a majority of its sales outside of the
United States. For the three months ended June 30, 1998, the Company generated
approximately $14.9 million or 23% of its sales in the US and approximately
$48.5 or 77% internationally. For the six months ended June 30, 1998, the
Company generated approximately $24.8 million or 20% of its sales in the U.S.
and approximately $97.3 million or 80% internationally.
Gross Profit. For the three months ended June 30, 1998 and 1997, gross
profit was approximately $24.7 million, or 39.0% of sales, and approximately
$22.7 million, or 41.2% of sales, respectively. For the six months ended June
30, 1998 and 1997, gross profit was approximately $49.8 million or 40.8% of net
sales, and approximately $39.5 million, or 39.7% of net sales, respectively. The
decline in gross profit in the second quarter of 1998 compared to the
corresponding period in 1997 was primarily due to declines in prices.
Research and Development. For the three months ended June 30, 1998 and 1997,
research and development expenses were approximately $10.2 million and $7.1
million, respectively. The increase in research and development expenses during
the three months ended June 30, 1998 as compared to the corresponding period in
1997 was due primarily to increased staffing. As a percentage of sales, research
and development expenses increased from 12.8% in the three months ended June 30,
1997 to 16.1% 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 including point-to-multipoint
development and also due to slower growth in sales relative to R&D.
Research and development expenses for the six months ended June 30, 1998 and
1997 were approximately $17.9 million and $13.8 million, respectively. The
increase in research and development during the six months ended June 30, 1998,
as compared to the corresponding period in 1997 was due primarily to increased
staffing. As a percentage of sales, research and development expenses increased
from 13.9% in the six months ended June 30, 1997 to 14.7% 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, also due to slower growth in sales relative to R&D. 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 June 30, 1998 and 1997,
selling and marketing expenses were approximately $6.4 million and $4.0 million,
respectively. The increase in selling and marketing expenses in the three months
ended June 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 7.3% in the
three months ended June 30, 1997 to 10.1% 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 Company's expansion of its
international market.
Selling and marketing expenses for the six months ended June 30, 1998 and 1997
were approximately $10.7 million and $6.9 million, respectively. The increase in
selling and marketing during the six months ended June 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 six months ended June 30, 1997 to
8.7% 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. 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 June 30, 1998 and 1997,
general and administrative expenses were $4.9 million and $4.0 million,
respectively. The increase was principally due to increased staffing and other
costs resulting from the Company's expansion of its operations. As a percentage
of sales, general and administrative expenses increased from 7.3% in the three
months ended June 30, 1997 to 7.8% in the corresponding period in 1998. This
increase in general and administrative expenses as a percentage of sales during
the three months
15
<PAGE>
ended June 30, 1998 as compared to the corresponding period in 1997 was due
primarily to the costs relating to the expansion of the Company's operations.
General and administrative expenses for the six months ended June 30, 1998 and
1997 were approximately $8.8 million and $7.5 million, respectively. This
increase was due primarily to increased staffing and other costs resulting from
the Company's expansion of its operations. As a percentage of sales, general and
adminsitrative expenses decreased from 7.5% in the six months ended June 30,
1997 to 7.3% in the corresponding period in 1998. This decrease in general and
administrative expenses as a percentage of sales during the six months ended
June 30, 1998 as compared to the corresponding period in 1997 was primarily due
to a higher level of sales. The Company expects that general and administrative
expenses will 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 June 30, 1998 and 1997, goodwill amortization was $2.1 million and
$0.6 million, respectively. The increase in goodwill amortization in the three
months ended June 30, 1998 as compared to the corresponding period in 1997 was
due primarily to the acquisition of the Cylink Wireless Group March 1998.
Goodwill amortization for the six months ended June 30, 1998 and 1997 was $2.8
million and $0.9 million, respectively. The increase in goodwill amortization in
the six months ended June 30, 1998 as compared to the corresponding period in
1997 was due to the acquisitions using the purchase method of accounting, for
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 and April 1998,
respectively.
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 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 IPR&D in 1999. At the time of acquisition, technological feasibility
had not been established and no alternative future uses existed.
16
<PAGE>
Interest and Other Income (Expense). The Company incurred interest expense of
$1.8 million and $3.6 million during the three-month and six-month periods ended
June 30, 1998, respectively, as compared to $0.7 million and $1.0 million during
the corresponding period in 1997.
For the second 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 finance charges related to the
Company's receivables purchase agreements. For the second quarter of 1997,
interest expense consisted primarily of interest and fees incurred on borrowings
under the Company's bank line of credit.
The Company generated interest income of $0.3 million and $1.2 million during
the three-month and six-month periods ended June 30, 1998 as compared to $0.2
million and $0.6 million during the corresponding period in 1997.
Interest income consisted primarily of interest generated from the Company's
cash in its interest bearing bank accounts.
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. Other income and expenses were not material in the
first and second quarters of 1998. In the second quarter of 1997, the Company
recorded other income and expenses of $0.4 million, and for the six-month period
ended June 30, 1998 the Company recorded other income net of other expenses of
$0.2 million.
Liquidity and Capital Resources
The Company used approximately $38.7 million in operating activities during
the six months ended June 30, 1998, primarily due to an increase in inventory,
prepaid expenses, and other assets of $14.0 million, $15.5 million, $7.2
million, and $1.5 million, respectively, and a decrease in accounts payable of
$11.8 million and deferred income taxes of $5.3 million. These uses of cash were
partially offset by net income (excluding non-cash charges for acquired in-
process research and development expense of $15.4 million) of $10.1 million, and
depreciation and amortization expense of $5.8 million and $2.8 million,
respectively.
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 $68.4 million in investing activities during
the six months ended June 30, 1998 consisting of approximately $49.5 million for
acquisitions, including the assets of the Cylink Wireless Group, and $18.9
million to acquire capital equipment.
The Company generated approximately $42.9 million in its financing activities
during the six months ended June 30, 1998. The Company received approximately
$39.4 million from borrowings under its bank line of credit and under other
banking relationships, principally with the Company's subsidiaries in Italy, and
approximately $3.5 million from the issuance of the Company's Common Stock
pursuant to the Company's stock option and employee stock purchase plans.
At June 30, 1998 and December 31, 1997, net accounts receivable were
approximately $79.4 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. These sales have no recourse to the
Company. The Company plans to
17
<PAGE>
continue to utilize this facility as part of managing its overall liquidity
and/or third-party financing programs. At June 30, 1998 and December 31, 1997,
inventory was approximately $78.6 million and $58.0 million, respectively. Of
the $20.6 million increase that occurred in the six months ended June 30, 1998,
$5.1 million was due to the acquisition of inventory from the Cylink Wireless
Group acquisition.
At June 30, 1998, the Company had working capital of approximately $121.5
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 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 June 30, 1998 consisted of
approximately $25.0 million of cash and cash equivalents. In addition, the
Company entered into a new revolving line of credit agreement on May 15, 1998
that provides for borrowings of up to $50.0 million. As of June 30, 1998, the
Company had been advanced $31 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 June 30, 1998
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
newly acquired entities including Geritel S.p.A. ("Geritel"), Atlantic
Communication Sciences, Inc. ("ACS"), Technosystem, Control Resources
Corporation ("CRC"), Columbia Spectrum Management LP ("CSM") and Cylink Wireless
Group, the progress of the Company's research and development efforts, expansion
of the Company's marketing and sales efforts, the Company's results of
operations and the status of competitive products. The Company believes that
cash and cash equivalents on hand, 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,
Technosystem, CRC, CSM or Cylink Wireless Group will be profitable after the
acquisitions. Moreover, there can be no assurance that the anticipated benefits
of the ACS, Geritel, Technosystem, CRC, CSM and Cylink Wireless Group
acquisitions will be realized. The ongoing process of integrating the operations
of ACS, Geritel, Technosystem, CRC, CSM and Cylink Wireless Group into the
Company's operations may result in unforeseen operating difficulties and could
absorb significant management attention, expenditures and reserves that would
otherwise be available for the ongoing development of the Company's business.
Certain Factors Affecting Operating Results
Limited Operating History
P-Com was founded in August 1991 and was in the development stage until
October 1993 when it began commercial shipments of its first product. From
inception to the end of the second quarter of fiscal 1998, the Company generated
a cumulative net profit of approximately $13.1 million. The decrease in
cumulative net profit from 1997 to the second quarter of 1998 was due to the one
time in-process research and development charge of approximately $15.4 million
related to the acquisition of the assets of the Cylink Wireless Group. From
October 1993 through June 30, 1998, the Company generated sales of approximately
$577.0 million, of which $342.8 million, or 59.4% of such amount, was generated
in the year ended December 31, 1997 and the first half 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
18
<PAGE>
significant revenues on a quarterly or annual basis will occur in the future.
During 1997 and the first half of 1998, both the Company's sales and operating
expenses increased more rapidly than the Company had anticipated. There can be
no assurance that the Company's revenues will continue to remain at or increase
from the levels experienced in 1997 or in the first half of 1998 or that sales
will not decline. In fact, during the second quarter of 1998, the company
experienced of its lowest rate of sequential sales growth since it became a
public company. In the recent quarters, the Company has been experiencing higher
than normal price declines. The declines in prices have a 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 intends to continue to invest
significant amounts in its operations, particularly to support product
development and the marketing and sales of recently introduced products, and
operating expenses will continue to increase significantly in absolute dollars.
If the Company's sales do not correspondingly increase, the Company's results of
operations would be materially adversely affected. Accordingly, there can be no
assurance that the Company will achieve profitability in future periods. The
Company is subject to all of the risks inherent in the operation of a new
business enterprise, and there can be no assurance that the Company will be able
to successfully address these risks.
Significant Customer Concentration
To date, approximately 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 half of 1998, five customers accounted
for 55% of the Company's sales and as of June 30, 1998, seven customers
accounted for 50% of the Company's backlog scheduled for shipment in the twelve
months subsequent to June 30, 1998. The Company anticipates that it will
continue to sell its products and services to a changing but still relatively
small group of customers. Several of the Company's subsidiaries are dependent on
one or a few customers. Some companies implementing new networks are at early
stages of development and may require additional capital to fully implement
their planned networks. The Company's ability to achieve sales in the future
will depend in significant part upon its ability to obtain and fulfill orders
from, maintain relationships with and provide support to existing and new
customers, to manufacture systems in volume on a timely and cost-effective basis
and to meet stringent customer performance and other requirements and shipment
delivery dates, as well as the condition, working capital availability and
success of its customers. As a result, any cancellation, reduction or delay in
orders by or shipments to any customer, as a result of manufacturing or supply
difficulties or otherwise, or the inability of any customer to finance its
purchases of the Company's products or services, as has been the case with
certain customers historically, may materially adversely affect the Company's
business, financial condition and results of operations. In addition, financial
difficulties of any existing or potential customers may limit the overall demand
for the Company's products and services (for example, certain potential
customers in the telecommunications industry have been reported to have
undergone financial difficulties and may therefore limit their future orders).
In addition, acquisitions in the communications industry are common, which
further concentrates the customer base and may cause orders to be delayed or
cancelled. There can be no assurance that the Company's sales will increase in
the future or that the Company will be able to support or attract customers. See
"Results of Operations".
Significant Fluctuations in Results of Operations
The Company has experienced and will in the future continue to experience
significant fluctuations in sales, gross margins and operating results. The
procurement process for most of the Company's current and potential 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
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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 year 1997, due primarily to the inactivity of the
European market, the Company's major current customer base, at such time. To the
extent such seasonality continues, the Company's results of operations will
fluctuate from quarter to quarter.
In addition, a single customer's order scheduled for shipment in a quarter
can represent a significant portion of the Company's potential sales for such
quarter. There can be no assurance that the Company will be able to obtain such
large orders from single customers in the future. The Company has at times
failed to receive expected orders, and delivery schedules have been deferred as
a result of changes in customer requirements and commitments, among other
factors. As a result, the Company's operating results for a particular period
have in the past been and will in the future be materially adversely affected by
a delay, rescheduling or cancellation of even one purchase order. Much of the
anticipated growth in telecommunications infrastructure, if any, is expected to
result from the entrance of new service providers, many of which do not have the
financial resources of existing service providers. To the extent these new
service providers are unable to adequately finance their operations, they may
cancel orders. Moreover, purchase orders are often received and accepted
substantially in advance of shipment, and the failure to reduce actual costs to
the extent anticipated or an increase in anticipated costs before shipment could
materially adversely affect the gross margins for such orders, and as a result,
the Company's results of operations. Moreover, most of the Company's backlog
scheduled for shipment in the twelve months subsequent to June 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 be
adversely affected from time-to-time due to short-term inefficiencies associated
with the addition of equipment and inventory, personnel or facilities, and that
each cost category may increase as a percentage of revenues from time-to-time on
a periodic basis. In addition, as the Company's customers increasingly require
shipment of products at the time of ordering, the Company must forecast demand
for each quarter and build up inventory accordingly. Such increases in inventory
could materially adversely affect the Company's operations, if such inventory
were not utilized or becomes obsolete. In the second quarter of 1998, the
Company wrote off $1.4 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; customers 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,
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especially outside of the United States; changes in pricing by the Company, its
customers or suppliers; inventory write-offs, as the Company recently
experienced in several recent quarters, which the Company may experience again
in the future; inventory obsolescence; natural disasters; market acceptance by
the Company's customers and the timing of availability of new products and
services by the Company or its competitors; acquisitions, including costs and
expenses; usage of different distribution and sales channels; fluctuations in
foreign currency exchange rates; delays or changes in regulatory approval of its
systems and services; warranty and customer support expenses; customization of
systems; and general economic and political conditions. In addition, the
Company's results of operations have been and will continue to be influenced
significantly by competitive factors, including the pricing and availability of,
and demand for, competitive products and services. All of the above factors are
difficult for the Company to forecast, and these or other factors could
materially adversely affect the Company's business, financial condition and
results of operations. As a result, the Company believes that period-to-period
comparisons are not necessarily meaningful and should not be relied upon as
indications of future performance. Due to all of the foregoing factors, it is
likely that in some future quarter the Company's operating results will be below
the expectations of public market analysts and investors, as was recently the
case. In such event, the price of the Company's Common Stock may be materially
adversely affected.
Acquisitions
Since April 1996, the Company has acquired nine complementary companies and
businesses. Integration of these companies into the Company's business is
currently ongoing, and no assurance may be made that the Company will be able to
successfully complete this process. Risks commonly encountered in such
transactions include the difficulty of assimilating the operations and personnel
of the combined companies, the potential disruption of the Company's ongoing
business, the inability to retain key technical and managerial personnel, the
inability of management to maximize the financial and strategic position of the
Company through the integration of acquired businesses, additional expenses
associated with amortization of acquired intangible assets, dilution of existing
stockholders, the maintenance of uniform standards, controls, procedures, and
policies, the impairment of relationships with employees and customers as a
result of any integration of new personnel, risks of entering markets in which
the Company has no or limited direct prior experience, and operating companies
in different geographical locations with different cultures. All of the
Company's acquisitions to date (the "Acquisitions"), except the acquisitions of
CRC, RT Masts Limited ("RT Masts") and Telematics, Inc. ("Telematics") have been
accounted for under the purchase method of accounting, and as a result, a
significant amount of goodwill is being amortized as set forth in the Company's
consolidated financial statements. This amortization expense may have a
significant effect on the Company's financial results. There can be no assurance
that the Company will be successful in overcoming these risks or any other
problems encountered in connection with such acquisitions, or that such
transactions will not materially adversely affect the Company's business,
financial condition, or results of operations.
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., and 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
is currently pursuing numerous acquisitions; however no material acquisition is
currently the subject of any definitive agreement, letter of intent or agreement
in principle. The Company is unable to predict whether and when any prospective
acquisition candidate will become available or the likelihood that any
acquisition will be completed. The Company competes for acquisition and
expansion opportunities with many entities that have substantially greater
resources than the Company. There can be no assurance that the Company will be
able to successfully identify suitable acquisition candidates, 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
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acquisitions. Many business acquisitions must be accounted for as a purchase
for financial reporting purposes. Most of the businesses that might become
attractive acquisition candidates for the Company are likely to have significant
goodwill and intangible assets, and acquisition of these businesses, if
accounted for as a purchase, as was the case with Cylink Wireless Group, would
typically result in substantial amortization of goodwill charges to the Company.
The occurrence of any of these events could have a material adverse effect on
the Company's workforce, business, financial condition and results of
operations.
Dependence on Contract Manufacturers; Reliance on Sole or Limited Sources of
Supply
The Company's internal manufacturing capacity is very limited. The Company
utilizes contract manufacturers such as Remec, Inc., Sanmina Corporation, SPC
Electronics Corp., GSS Array Technology, Celeritek, Inc. and Senior Systems
Technology, Inc. to produce its systems, components and subassemblies and
expects to rely increasingly on these and other manufacturers in the future. The
Company also relies on outside vendors to manufacture certain other components
and subassemblies. There can be no assurance that the Company's internal
manufacturing capacity and that of its contract manufacturers will be sufficient
to fulfill the Company's orders. Failure to manufacture, assemble and ship
systems and meet customer demands on a timely and cost-effective basis could
damage relationships with customers and have a material adverse effect on the
Company's business, financial condition and operating results. Certain necessary
components, subassemblies and services necessary for the manufacture of the
Company's systems are obtained from a sole supplier or a limited group of
suppliers. In particular, Eltel Engineering S.r.L. and Associates, Milliwave,
Scientific Atlanta and Xilinx, Inc. each are sole source or limited source
suppliers for critical components used in the Company's radio systems.
The Company's reliance on contract manufacturers and on sole suppliers or a
limited group of suppliers and the Company's increasing reliance on contract
manufacturers and suppliers involves several risks, many of which the Company
has been experiencing, including an inability to obtain an adequate supply of
finished products and required components and subassemblies, and reduced control
over the price, timely delivery, reliability and quality of finished products,
components and subassemblies. The Company does not have long-term supply
agreements with most of its manufacturers or suppliers. Manufacture of the
Company's products and certain of these components and subassemblies is an
extremely complex process, and the Company has from time to time experienced and
may in the future continue to experience problems in the timely delivery and
quality of products and certain components and subassemblies from vendors.
Certain of the Company's suppliers have relatively limited financial and other
resources. Any inability to obtain timely deliveries of components and
subassemblies of acceptable quality or any other circumstance that would require
the Company to seek alternative sources of supply, or to manufacture its
finished products or such components and subassemblies internally, could delay
the Company's ability to ship its systems, which could damage relationships with
current or prospective customers and have a material adverse effect on the
Company's business, financial condition and results of operations.
No Assurance of Successful Expansion of Operations; Management of Growth
Recently, the Company has significantly expanded the scale of its operations
to support increased sales and to address critical infrastructure and other
requirements. This expansion has included the leasing of additional space, 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 $78.6 million at June 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, and has resulted
in significantly higher operating expenses. Currently, the Company is devoting
significant resources to the development of new products and technologies and is
conducting evaluations of these products and will continue to invest significant
additional resources in plant and equipment, inventory, personnel and other
items, to begin production of these products and to provide the marketing and
administration, if any, required to service and support these new products.
Accordingly, there can be no assurance that gross profit margin and inventory
levels will not be adversely impacted in the future by start-up costs associated
with the initial production and installation of these new products. These start-
up costs include, but are not limited to, additional manufacturing overhead,
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additional allowance for doubtful accounts, inventory and warranty reserve
requirements and the creation of service and support organizations. In addition,
the increases in inventory on hand for new product development and customer
service requirements increase the risk of inventory write-offs. As a result, the
Company anticipates that its operating expenses will continue to increase
significantly. If the Company's sales do not correspondingly increase, the
Company's results of operations would be materially adversely affected.
Expansion of the Company's operations and its acquisitions have caused and
are continuing to impose a significant strain on the Company's management,
financial, manufacturing and other resources and have disrupted the Company's
normal business operations. The Company's ability to manage the recent and any
possible future growth, should it occur, will depend upon a significant
expansion of its manufacturing, accounting and other internal management systems
and the implementation and subsequent improvement of a variety of systems,
procedures and controls, including improvements relating to inventory control.
For a number of reasons, the Company has not been able to fully consolidate and
integrate the operations of certain acquired businesses. This inability may
cause inefficiencies, additional operational complexities and expenses and
greater risks of billing delays, inventory write-offs and financial reporting
difficulties. The Company must establish and improve a variety of systems,
procedures and controls to more efficiently coordinate its activities in its
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 manufacturing personnel and significantly expanded its internal and external
manufacturing capacity, there can be no assurance that the Company will not
experience manufacturing or other delays or problems that could materially
adversely affect the Company's business, financial condition or results of
operations.
In this regard, any significant sales growth will be dependent in significant
part upon the Company's expansion of its marketing, sales, manufacturing and
customer support capabilities. This expansion will continue to require
significant expenditures to build the necessary infrastructure. There can be no
assurance that the Company's attempts to expand its marketing, sales,
manufacturing and customer support efforts will be successful or will result in
additional sales or profitability in any future period. As a result of the
expansion of its operations and the significant increase in its operating
expenses, as well as the difficulty in forecasting revenue levels, the Company
will continue to experience significant fluctuations in its revenues, costs, and
gross margins, and therefore its results of operations. See "Results of
Operations."
Declining Average Selling Prices
The Company believes that average selling prices and gross margins for its
systems and services will decline in the long term as such systems mature, as
volume price discounts in existing and future contracts take effect and as
competition intensifies, among other factors. To offset declining average
selling prices, the Company believes that it must successfully introduce and
sell new systems on a timely basis, develop new products that incorporate
advanced software and other features that can be sold at higher average selling
prices and reduce the costs of its systems through contract manufacturing,
design improvements and component cost reduction, among other actions. To the
extent that new products are not developed in a timely manner, do not achieve
customer acceptance or do not generate higher average selling prices, and the
Company is unable to offset declining average selling prices, the Company's
gross margins will decline, and such decline will have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Results of Operations."
Trade Account Receivables
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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 has in the past and may from time to time in the future 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
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
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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 is in
the process of acquiring another competitor, Innova International Corp.),
Ericsson Limited, Harris Corporation-Farinon Division, Larus Corporation, Nokia
Telecommunications, Philips T.R.T., Utilicom and Western Multiplex Corporation,
many of which have substantially greater installed bases, financial resources
and production, marketing, manufacturing, engineering and other capabilities
than the Company. The Cylink Wireless Group which the Company recently acquired
competes with a large number of companies in the wireless communications
markets, including U.S. local exchange carriers and foreign telephone companies.
The most significant competition for such group's products in the wireless
market is from telephone companies that offer leased line data services. The
Company faces actual and potential competition not only from these established
companies, but also from start-up companies that are developing and marketing
new commercial products and services. The Company may also face competition in
the future from new market entrants offering competing technologies. In
addition, the Company's current and prospective customers and partners, certain
of which have access to the Company's technology or under some circumstances are
granted the right to use the technology for purposes of manufacturing, have
developed, are currently developing or could develop the capability to
manufacture products competitive with those that have been or may be developed
or manufactured by the Company. Nokia and Ericsson have recently developed new
competitive radio systems. The Company's results of operations may depend in
part upon the extent to which these customers elect to purchase from outside
sources rather than develop and manufacture their own radio systems. There can
be no assurance that such customers will rely on or expand their reliance on the
Company as an external source of supply for their radio systems. The principal
elements of competition in the Company's market and the basis upon which
customers may select the Company's systems include price, performance, software
functionality, ability to meet delivery requirements and customer service and
support. Recently, certain of the Company's competitors have announced the
introduction of competitive products, including related software tools and
services, and the acquisition of other competitors and competitive technologies.
The Company expects its competitors to continue to improve the performance and
lower the price of their current products and services and to introduce new
products and services or new technologies that provide added functionality and
other features. New product and service offerings and
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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 may
materially adversely affect its gross margins and its business, financial
condition and results of operations. The Company believes that to be
competitive, it will continue to be required to expend significant resources on,
among other items, new product development and enhancements. In marketing its
systems and services, the Company will face competition from vendors employing
other technologies and services that may extend the capabilities of their
competitive products beyond their current limits, increase their productivity or
add other features. There can be no assurance that the Company will be able to
compete successfully in the future.
Requirement for Response to Rapid Technological Change and Requirement for
Frequent New Product Introductions
The communications market is subject to rapid technological change, frequent
new product introductions and enhancements, product obsolescence, changes in
end-user requirements and evolving industry standards. The Company's ability to
be competitive in this market will depend in significant part upon its ability
to successfully develop, introduce and sell new systems and enhancements and
related software tools, including its point-to-multipoint systems currently
under development, on a timely and cost-effective basis that respond to changing
customer requirements. Recently, the Company has been developing point-to-
multipoint radio systems. Any success of the Company in developing new and
enhanced systems, including its point-to-multipoint systems currently under
development, and related software tools will depend upon a variety of factors,
including new product selection, integration of the various elements of its
complex technology, timely and efficient completion of system design, timely and
efficient implementation of manufacturing and assembly processes and its cost
reduction program, development and completion of related software tools, system
performance, quality and reliability of its systems and development and
introduction of competitive systems by competitors. The Company has experienced
and is continuing to experience delays from time to time in completing
development and introduction of new systems and related software tools,
including products acquired in the acquisitions. Moreover, there can be no
assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new systems or enhancements or related software
tools. There can be no assurance that errors will not be found in the Company's
systems after commencement of commercial shipments, which could result in the
loss of or delay in market acceptance, as well as significant expenses
associated with re-work of previously delivered equipment. The inability of the
Company to introduce in a timely manner new systems or enhancements or related
software tools that contribute to sales could have a material adverse effect on
the Company's business, financial condition and results of operations.
International Operations; Risks of Doing Business in Developing Countries
Most of the Company's sales to date have been made to customers located
outside of the United States. In addition, to date, the Company has acquired two
Italy-based companies and two United Kingdom-based companies and two U.S.
companies with substantial international operations. These companies currently
sell their products and services primarily to customers in Europe, the Middle
East and Africa. The Company anticipates that international sales will continue
to account for a majority of its sales for the foreseeable future. Historically,
the Company's international sales have been denominated in British pounds
sterling or United States 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
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foreign operations, branches and subsidiaries, difficulties in managing
distributors, potentially adverse tax consequences, foreign currency exchange
fluctuations, the burden of complying with a wide variety of complex foreign
laws and treaties and the difficulty in accounts receivable collections. Many of
the Company's customer purchase and other agreements are governed by foreign
laws, which may differ significantly from U.S. laws. Therefore, the Company may
be limited in its ability to enforce its rights under such agreements and to
collect damages, if awarded. There can be no assurance that any of these factors
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
International telephone companies are in many cases owned or strictly
regulated by local regulatory authorities. Access to such markets is often
difficult due to the established relationships between a government owned or
controlled telephone company and its traditional indigenous suppliers of
telecommunications equipment. The successful expansion of the Company's
international operations in certain markets will depend on its ability to
locate, form and maintain strong relationships with established companies
providing communication services and equipment in targeted regions. The failure
to establish regional or local relationships or to successfully market or sell
its products in international markets could significantly limit the Company's
ability to expand its operations and would materially adversely affect the
Company's business, financial condition and results of operations. The Company's
inability to identify suitable parties for such relationships, or even if such
parties are identified, to form and maintain strong relationships with such
parties could prevent the Company from generating sales of its products and
services in targeted markets or industries. Moreover, even if such relationships
are established, there can be no assurance that the Company will be able to
increase sales of its products and services through such relationships.
Some of the Company's potential markets consist of developing countries that
may deploy wireless communications networks as an alternative to the
construction of a limited wired infrastructure. These countries may decline to
construct wireless telecommunications systems or construction of such systems
may be delayed for a variety of reasons, in which event any demand for the
Company's systems in those countries will be similarly limited or delayed. In
doing business in developing markets, the Company may also face economic,
political and foreign currency fluctuations that are more volatile than those
commonly experienced in the United States and other areas.
Extensive Government Regulation
Radio communications are subject to extensive regulation by the United States
and foreign laws and international treaties. The Company's systems must conform
to a variety of domestic and international requirements established to, among
other things, avoid interference among users of radio frequencies and to permit
interconnection of equipment. Each country has a different regulatory process.
Historically, in many developed countries, the unavailability of frequency
spectrum has inhibited the growth of wireless telecommunications networks. In
order for the Company to operate in a jurisdiction, it must obtain regulatory
approval for its systems and comply with different regulations in each
jurisdiction. Regulatory bodies worldwide are continuing the process of adopting
new standards for wireless communications products. The delays inherent in this
governmental approval process may cause the cancellation, postponement or
rescheduling of the installation of communications systems by the Company and
its customers, which in turn may have a material adverse effect on the sale of
systems by the Company to such customers. The failure to comply with current or
future regulations or changes in the interpretation of existing regulations
could result in the suspension or cessation of operations. Such regulations or
such changes in interpretation could require the Company to modify its products
and services and incur substantial 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.
27
<PAGE>
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 debt
financing. If additional funds are raised by issuing equity securities and as a
result of the significant decline in its stock price, further dilution to the
existing stockholders will result. If adequate funds are not available, the
Company may be required to delay, scale back or eliminate its research and
development, acquisition or manufacturing programs or obtain funds through
arrangements with partners or others that may require the Company to relinquish
rights to certain of its technologies or potential products or other assets.
Accordingly, the inability to obtain such financing could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Uncertainty Regarding Protection of Proprietary Rights
The Company relies on a combination of patents, trademarks, trade secrets,
copyrights and a variety of other measures to protect its intellectual property
rights. The Company generally enters into confidentiality and nondisclosure
agreements with its service providers, customers and others, and attempts to
limit access to and distribution of its proprietary rights. The Company also
enters into software license agreements with its customers and others. However,
there can be no assurance that such measures will provide adequate protection
for the Company's trade secrets or other proprietary information, that disputes
with respect to the ownership of its intellectual property rights will not
arise, that the Company's trade secrets or proprietary technology will not
otherwise become known or be independently developed by competitors or that the
Company can otherwise meaningfully protect its intellectual property rights.
There can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. Furthermore, there can be no assurance
that others will not develop similar products or software, duplicate the
Company's products or software or design around the patents owned by the Company
or that third parties will not assert intellectual property infringement claims
against the Company. In addition, there can be no assurance that foreign
intellectual property laws will adequately protect the Company's intellectual
property rights abroad. The failure of the Company to protect its proprietary
rights could have a material adverse effect on its business, financial condition
and results of operations.
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
28
<PAGE>
under a third party's intellectual property rights. There can be no assurance,
however, that a license will be available under reasonable terms or at all. In
addition, should the Company decide to litigate such claims, such litigation
could be extremely expensive and time consuming and could materially adversely
affect the Company's business, financial condition and results of operations,
regardless of the outcome of the litigation.
Dependence on Key Personnel
The Company's future operating results depend in significant part upon the
continued contributions of its key technical and senior management personnel,
many of whom would be difficult to replace. The Company's future operating
results also depend in significant part upon its ability to attract and retain
qualified management, manufacturing, quality assurance, engineering, marketing,
sales and support personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting or
retaining such personnel. There may be only a limited number of persons with the
requisite skills to serve in these positions and it may be increasingly
difficult for the Company to hire such personnel over time. The loss of any key
employee, the failure of any key employee to perform in his or her current
position, the Company's inability to attract and retain skilled employees as
needed or the inability of the officers and key employees of the Company to
expand, train and manage the Company's employee base could materially adversely
affect the Company's business, financial condition and results of operations.
The Company has experienced and may continue to experience employee turnover
due to several factors, including an expanding economy within the geographic
area in which the Company maintains its principal business offices, making it
more difficult for the Company to retain its employees. Due to this and other
factors, the Company has experienced and may continue to experience high levels
of employee turnover, which could adversely impact the Company's business,
financial condition and results of operations. The Company is presently
addressing these issues and will pursue solutions designed to retain its
employees and to provide performance incentives.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such Year 2000 ("Y2K") requirements. The Company
has commenced, for all its information systems and software contained in the
products it sells, a Y2K date conversion project to address necessary code
changes, testing and implementation. Significant uncertainty exists concerning
the potential effects associated with such compliance. The Company expects such
modifications will be made on a timely basis and does not believe that the cost
of such modifications will have a material effect on the Company's operating
results. There can be no assurance, however, that the Company and/or its vendors
will be able to modify timely and successfully such products, services and
systems to comply with Y2K requirements, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Volatility of Stock Price
The Company believes that factors such as announcements of developments
related to the Company's business, announcements of technological innovations or
new products or enhancements by the Company or its competitors, developments in
the Asia/Pacific region, sales by competitors, including sales to the Company's
customers, sales of the Company's Common Stock into the public market, including
by members of management, 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 cause the price of the Company's Common Stock to fluctuate,
perhaps substantially. In recent years the stock market in general, and the
market for shares of small capitalization and technology stocks in particular,
have experienced extreme price fluctuations, which have often been unrelated to
the operating performance of affected companies. Many companies in the
telecommunications industry, including the Company, have recently experienced
historic highs in the market price of their Common Stock. There can be no
assurance that the market price of the Company's Common Stock will not decline
substantially from its historic highs, or otherwise continue
29
<PAGE>
to experience significant fluctuations in the future, including fluctuations
that are unrelated to the Company's performance. Such fluctuations could
materially adversely affect the market price of the Company's Common Stock.
Substantial Leverage
In connection with the private placement of Notes due 2002 in November 1997,
the Company incurred $100 million of indebtedness. As a result, the Company's
total indebtedness including current liabilities, and stockholders' equity, as
of June 30, 1998, was approximately $185.1 million and approximately $147.6
million, respectively. The Company recently borrowed $30 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.
Limitations on Dividends
Since its incorporation in 1991, the Company has not declared or paid cash
dividends on its Common Stock, and the Company anticipates that any future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends.
Global Market Risks
Countries in the Asia/Pacific region have recently experienced weaknesses in
their currency, banking and equity markets. These weaknesses could adversely
affect demand for the Company's products, the availability and supply of product
components to the Company and, ultimately, the Company's consolidated results of
operations.
Control by Existing Stockholders; Effects of Certain Anti-Takeover Provisions
Members of the Board of Directors and the executive officers of the Company,
together with members of their families and entities that may be deemed
affiliates of or related to such persons or entities, beneficially own
approximately 6% of the outstanding shares of Common Stock of the Company.
Accordingly, these stockholders are able to influence the election of the
members of the Company's Board of Directors and influence the outcome of
corporate actions requiring stockholder approval, such as mergers and
acquisitions. This level of ownership, together with the Company's stockholder
rights agreement, certificate of incorporation, equity incentive plans, bylaws
and Delaware law, may have a significant effect in delaying, deferring or
preventing a change in control of the Company and may adversely affect the
voting and other rights of other holders of Common Stock. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Although the Company has no present plans to issue shares
of Preferred Stock, the Board of Directors has pre-approved the terms of a
Series A Junior Participating Preferred Stock that may be issued pursuant to the
stockholder rights agreement upon the occurrence of certain triggering events.
In general, the stockholder rights agreement provides a mechanism by which the
Board of Directors and stockholders may act to substantially dilute the share
position of any takeover bidder that acquires 15% or more of the Common Stock.
Possible Adverse Effect on Market Price for Common Stock of Shares Eligible
for Future Sale after the Offering
Sales of the Company's Common Stock into the market could materially
adversely affect the market price of the Company's Common Stock. Substantially
all of the shares of Common Stock of the Company eligible for immediate and
unrestricted sale in the public market at any time.
30
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS. None.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
1 The following proposals were voted upon by the Company's
stockholders at the Annual Meeting of Stockholders held on May 28,
1998.
The following persons were elected as directors of the Company to
serve for a term ending upon the Annual Stockholders' Meeting
indicated beside their respective names and until their successors
are elected and qualified:
Term Ending Upon the
Annual Stockholders'
Meeting Votes For Votes Withheld
-------------------- --------- --------------
M. Bernard Puckett 2001 37,288,583 581,374
2 A proposal to approve the amendments to the Company's 1995 Stock
Option/Stock Issuance Plan to (the "1995 Plan") (i) increase the
maximum number of shares of Common Stock authorized for issuance
over the term of the 1995 Plan by an additional 3,500,000 shares to
12,719,625 shares.approved by a vote of 15,390,128 shares,
11,613,112 shares voted against the proposal and 127,262 votes were
withheld.
3 A proposal to approve an amendment to the Company's 1995 Employee
Stock Purchase Plan (the "Purchase Plan") to increase the number of
shares of Common Stock authorized for issuance over the term of the
Purchase Plan from 900,000 to 1,150,000 shares was approved by the
vote of 26,352,426 shares, 663,833 shares voted against the
proposal and 114,243 votes were withheld.
4 A proposal to ratify the appointment of Price Waterhouse LLP as
independent accountants of the Company for the fiscal year ending
December 31, 1998 was approved by the vote of 37,778,489 shares,
45,538 shares voted against the proposal and 45,930 votes were
withheld.
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.16(1) 1995 Stock Option/Stock Issuance Plan, as amended.
10.17(1) Employee Stock Purchase Plan, as amended.
10.31(2) Credit Agreement 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 hereto dated as of May 15, 1998.
10.32(2) Revolving Promissory Note in the principal amount of
$25,000,000 dated May 15, 1998.
10.33(2) Revolving Promissory Note in the principal amount of
$25,000,000 dated May 15, 1998.
10.34(2) Subsidiary Guarantee dated as of May 15, 1998.
31
<PAGE>
10.35* Joint Development and License Agreement between Siemens
Aktiengesellschaft and P-Com, Inc. dated June 30, 1998.
10.36(2) International Employee Stock Purchase Plan.
27.1 Financial Data Schedule.
*Confidential treatment requested as to certain portion of this exhibit.
(1) Incorporated by reference to the Company's Registration Statement on
Form S-8, as filed with the Securities and Exchange Commission on
July 24, 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 March 28, 1998 regarding the purchase of the
assets of the Wireless Group of Cylink Corporation, as filed with the
Securities and Exchange Commission on April 9, 1998.
Amendment filed on April 17, 1998 to Report on Form 8-K dated March 28,
1998 regarding the purchase of the assets of the Wireless Group of Cylink
Corporation, as filed with the Securities and Exchange Commission on
April 17, 1998.
Report on Form 8-K dated April 16, 1998 regarding the Company's press
release announcing its earnings for the quarter ended March 31, 1998 as
filed with the Securities and Exchange Commission on April 17, 1998.
Amendment No. 2 to Report on Form 8-K dated on 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 June 12, 1998.
32
<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
33
<PAGE>
EXHIBIT INDEX
Exhibit No.
-----------
10.16(1) 1995 Stock Option/Stock Issuance Plan, as amended.
10.17(1) Employee Stock Purchase Plan, as amended.
10.31(2) Credit Agreement 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 hereto dated as of May 15, 1998.
10.32(2) Revolving Promissory Note in the principal amount of
$25,000,000 dated May 15, 1998.
10.33(2) Revolving Promissory Note in the principal amount of
$25,000,000 dated May 15, 1998.
10.34(2) Subsidiary Guarantee dated as of May 15, 1998.
10.35* Joint Development and License Agreement between Siemens
Aktiengesellschaft and P-Com, Inc. dated June 30, 1998.
10.36(2) International Employee Stock Purchase Plan.
27.1 Financial Data Schedule.
*Confidential treatment requested as to certain portion of this exhibit.
(1) Incorporated by reference to the Company's Registration Statement on
Form S-8, as filed with the Securities and Exchange Commission on
July 24, 1998.
(2) Previously filed with the Company's original Quarterly Report on
Form 10-Q for the quarter ending March 31, 1998.
34
<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 JUNE 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 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 20,814 20,814
<SECURITIES> 4,174 4,174
<RECEIVABLES> 86,332 86,332
<ALLOWANCES> (6,910) (6,910)
<INVENTORY> 78,618 78,618
<CURRENT-ASSETS> 203,915 203,915
<PP&E> 65,833 65,833
<DEPRECIATION> (19,965) (19,965)
<TOTAL-ASSETS> 332,638 332,638
<CURRENT-LIABILITIES> 82,444 82,444
<BONDS> 0 0
0 0
0 0
<COMMON> 4 4
<OTHER-SE> 147,547 147,547
<TOTAL-LIABILITY-AND-EQUITY> 332,638 332,638
<SALES> 54,549 105,970
<TOTAL-REVENUES> 63,459 122,096
<CGS> 32,788 61,635
<TOTAL-COSTS> 38,740 38,740
<OTHER-EXPENSES> 23,595 55,579
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (1,833) (3,599)
<INCOME-PRETAX> (318) (8,041)
<INCOME-TAX> (108) (2,734)
<INCOME-CONTINUING> (210) (5,307)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (210) (5,307)
<EPS-PRIMARY> 0.00 (0.12)
<EPS-DILUTED> 0.00 (0.12)
</TABLE>
