<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
Amendment No.2
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-25356
_______________
P-Com, Inc.
(Exact name of Registrant as specified in its charter)
_______________
Delaware 77-0289371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3175 S. Winchester Boulevard, Campbell, California 95008
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 866-3666
_______________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of October 16, 2000, there were 80,373,358 shares of the Registrant's Common
Stock outstanding, par value $0.0001 per share.
This quarterly report on Form 10-Q consists of 20 pages of which this is page 1.
The Exhibit Index appears on page 20.
1
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P-COM, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I. Financial Information Number
--------------------- ------
<S> <C>
Item 1 Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999............................................................... 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2000 and 1999................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999................................................... 5
Notes to Condensed Consolidated Financial Statements................................ 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................. 12
Item 3 Quantative and Qualitative Disclosure about Market Risk............................. 17
PART II. Other Information
-----------------
Item 1 Legal Proceedings................................................................... 17
Item 2 Changes in Securities............................................................... 18
Item 3 Defaults Upon Senior Securities..................................................... 18
Item 4 Submission of Matters to a Vote of Security Holders................................. 18
Item 5 Other Information................................................................... 18
Item 6 Exhibits and Reports on Form 8-K.................................................... 18
Signatures.................................................................................... 19
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1.
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 34,176 $ 11,629
Accounts receivable, net 43,924 38,935
Inventory 62,470 46,849
Prepaid expenses and notes receivable 10,109 15,987
Notes receivable 1,034 -
Net assets of discontinued operations - 3,151
------------ -------------
Total current assets 151,713 116,551
Property and equipment, net 27,328 36,626
Deferred income taxes - 9,858
Goodwill and other assets 27,459 50,605
------------ -------------
$ 206,500 $ 213,640
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,679 $ 34,275
Accrued employee benefits 2,621 2,894
Other accrued liabilities 21,572 15,841
Deferred contract obligation 8,000 8,000
Notes payable 10,647 23,557
------------ -------------
Total current liabilities 79,519 84,567
------------ -------------
Other long-term liabilities 1,924 3,542
------------ -------------
Convertible Subordinated Notes 29,700 36,316
------------ -------------
Stockholders' equity:
Common Stock 8 7
Additional paid-in capital 315,998 238,721
Accumulated deficit (219,147) (148,973)
Accumulated other comprehensive income (1,502) (540)
------------ -------------
Total stockholders' equity 95,357 89,215
------------ -------------
$ 206,500 $ 213,640
============ =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
2000 1999 2000 1999
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Sales:
Product $46,693 $ 30,012 $123,172 $ 79,996
Service 12,842 10,046 36,251 29,414
----------- ------------ ----------- -----------
Total sales 59,535 40,058 159,423 109,410
----------- ------------ ----------- -----------
Cost of sales:
Product 34,864 22,536 114,251 82,121
Service 9,280 6,705 26,410 20,103
----------- ------------ ----------- -----------
Total cost of sales 44,144 29,241 140,661 102,224
----------- ------------ ----------- -----------
Gross profit 15,391 10,817 18,762 7,186
----------- ------------ ----------- -----------
Operating expenses:
Research and development 4,026 7,623 15,592 25,763
Selling and marketing 3,270 3,690 9,950 13,468
General and administrative 5,247 5,325 20,946 26,810
Goodwill amortization 711 2,054 18,887 6,162
Restructuring charges - (167) - 3,118
----------- ------------ ----------- -----------
Total operating expenses 13,254 18,525 65,375 75,321
----------- ------------ ----------- -----------
Income (loss) from continuing operations 2,137 (7,708) (46,613) (68,135)
Interest expense (1,368) (2,717) (4,148) (6,849)
Other income (expense), net (2,895) (3,288) (6,266) (3,342)
----------- ------------ ----------- -----------
Loss from continuing operations before
income taxes and extraordinary items (2,126) (13,713) (57,027) (78,326)
Provision for income taxes (55) 228 11,037 479
----------- ------------ ----------- -----------
Loss from continuing operations before (2,071) (13,941) (68,064) (78,805)
extraordinary item
Loss on discontinued operations - (22,458) (4,000) (26,144)
Extraordinary item: retirement of Notes - - 1,890 7,284
Charge related to conversion of Preferred
Stock to Common Stock - - - (12,190)
----------- ------------ ----------- -----------
Net loss $(2,071) $(36,399) $(70,174) $(109,855)
=========== ============ =========== ===========
Basic and diluted loss per share:
Loss from continuing operations before
extraordinary item $ (0.03) $ (0.21) $ (0.88) $ (1.41)
Discontinued operations - (0.34) (0.05) (0.49)
Extraordinary item - - 0.02 0.13
Conversion of Preferred Stock - - - (0.22)
----------- ------------ ----------- -----------
Net loss $ (0.03) $ (0.55) $ (0.91) $ (1.99)
=========== ============ =========== ===========
Shares used in per share computation:
Basic and diluted 78,935 65,330 77,198 55,133
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (70,174) $ (71,521)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 8,945 11,680
Amortization of goodwill 3,839 6,162
Loss on disposal of property and equipment 2,924 4,753
Compensation expense related to stock options 216 -
Valuation adjustment to deferred income taxes 9,858
Restructuring and other charges - 33,190
Inventory charges 17,053
Accrued liability charges 4,318
Write off of goodwill 15,000
Gain on exchange of convertible notes (1,890) -
Loss on sale of subsidiary 855 -
Loss on disposal of discontinued operations 4,000 -
Amortization of stock warrants 1,428 -
Non Cash effect of retirement of notes - (7,284)
Change in assets and liabilities:
Accounts receivable (7,073) (12,231)
Inventory (36,264) 4,651
Prepaid expenses and notes receivable 4,355 5,231
Goodwill and other assets 1,430 127
Accounts payable 6,995 (5,238)
Accrued employee benefits 768 351
Other accrued liabilities 1,192 5,594
------------- -------------
Net cash used in operating activities (32,225) (24,535)
------------- -------------
Cash flows from investing activities:
Acquisition of property and equipment (7,162) (6,312)
Cash paid on disposal of discontinued operations (2,000) -
Proceeds from sale of subsidiary 6,860 -
Proceeds from sale of property and equipment 700 -
------------- -------------
Net cash used in investing activities (1,602) (6,312)
------------- -------------
Cash flows from financing activities:
Borrowings (payments) under capital lease obligation 767 (276)
Proceeds (payments) of notes payable (13,498) (19,803)
Proceeds from long term debt 71
Proceeds from the issuance of common stock, net of expenses 62,276 36,472
Proceeds from exercise of stock options 8,041 -
Issuance of note receivable to officer (250) -
------------- -------------
Net cash provided by financing activities 57,336 16,464
------------- -------------
Effect of exchange rate changes on cash (962) (616)
------------- -------------
Net increase (decrease) in cash and cash equivalents 22,547 (14,999)
Cash and cash equivalents at the beginning of the period 11,629 29,033
------------- -------------
Cash and cash equivalents at the end of the period $ 34,176 $ 14,034
============= =============
</TABLE>
5
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONTINUED
(In thousands, unaudited)
<TABLE>
<S> <C> <C>
Supplemental cash flow disclosures:
Cash paid for income taxes $ 435 $ 346
---------------- ----------------
Cash paid for interest $ 1,726 $ 6,665
---------------- ----------------
Exchange of Convertible Subordinated Notes for Common Stock $ 7,017 $ 25,539
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete consolidated financial statements.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair presentation of P-
Com, Inc.'s (referred to herein, together with its wholly-owned subsidiaries, as
"P-Com" or the "Company") financial condition as of September 30, 2000, and the
results of its operations and its cash flows for the nine months ended September
30, 2000 and 1999. These consolidated financial statements should be read in
conjunction with the Company's audited 1999 consolidated financial statements,
including the notes thereto, and the other information set forth therein,
included in the Company's Annual Report on Form 10-K/A. Operating results for
the nine-month period ended September 30, 2000 are not necessarily indicative of
the operating results that may be expected for the year ending December 31,
2000.
2. NET LOSS PER SHARE
For purpose of computing basic and diluted loss per share, weighted average
common share equivalents do not include stock options, warrants, or shares to be
issued upon the assumed conversion of the 4 1/4% Convertible Subordinated Notes
("Notes") into Common Stock because the effect would be antidilutive.
For the three months ended September 30, 2000 and 1999, average Options to
purchase approximately 6,759,870 and 7,787,014 shares of Common Stock were
excluded from the computation, respectively. For the nine months ended
September 30, 2000 and 1999, average options to purchase approximately 7,724,033
and 6,404,694 shares of Common Stock were excluded from the computation,
respectively.
For the three months ended September 30, 2000 and 1999, average Warrants to
purchase approximately 2,970,517 and 1,332,257 shares of Common Stock were
excluded from the computation, respectively. For the nine months ended
September 30, 2000 and 1999 average Warrants to purchase 2,668,763 and 1,332,257
shares of Common Stock were excluded from the computation.
For the three and nine months ended September 30, 2000 and 1999 the assumed
conversion of the Notes into 1,173,000 and 2,812,257 shares of Common Stock were
not included in the computation.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," effective beginning in the first quarter of
2000. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. SFAS 133 is effective
for fiscal years beginning after June 15, 2000 and cannot be applied
retroactively. The Company is currently evaluating the impact of SFAS No. 133
on its financial position and results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
7
<PAGE>
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. SAB 101 must be adopted
by the Company for the fiscal quarter beginning October 1, 2000. The Company has
not yet determined if the impact, if any, will have a material effect on the
consolidated financial statements.
4. CAPITAL STOCK
In January 2000, the Company sold approximately 7,531,000 shares of common
stock at a per share price of $5.71, for an aggregate purchase price of $43.8
million. The unregistered shares were priced at a 15% discount to the average
closing sale prices of the Company's Common Stock for the 60 consecutive trading
days prior to the signing of the agreement. The shares have subsequently been
registered.
In connection with a new loan agreement (see Note 5), the Company issued
warrants to purchase 200,000 shares of common stock at $5.71 per share. The
warrants, which are immediately exercisable and are subject to anti-dilution
clauses, expire on January 31, 2005.
In August 2000, the Company sold 3,000,000 shares of common stock at a per
share price of $6.11, for an aggregate purchase price of $18.3 million. The
unregistered shares were priced at a 7.2% discount to the average closing sale
price of the Company's Common Stock for the 60 consecutive trading days prior
to the signing of the agreement. The shares have subsequently been registered.
5. BORROWING ARRANGEMENTS
The Company entered into a new revolving line of credit agreement in
January 2000 for $12 million. A portion of the proceeds of the January 2000
equity (see Note 4) and this debt financing was used to repay the company's
outstanding indebtedness of approximately $27 million under its previous
revolving line-of-credit agreement. The loan matures on January 31, 2001,
subject to automatic one-year renewals at the option of both parties. Borrowings
under the line bear interest at the greater of either prime rate plus 2% or 8%
per annum. The Company's U.S. cash deposits, receivables, inventory, equipment,
investment property and intangibles secure borrowings under the new agreement.
The maximum borrowings under the agreement are limited to 85% of eligible
accounts receivable, not to exceed $12 million.
In connection with the loan agreement the Company issued warrants to
purchase 200,000 shares of common stock and recorded a discount to amounts
recorded under the line of credit agreement of approximately $2 million, which
represents the fair value of the warrants. Such discount is being amortized to
interest expense over the term of the loan agreement. During the nine-month
period ended September 30, 2000, the Company recorded $1.4 million of interest
expense related to these warrants.
6. BALANCE SHEET COMPONENTS
Inventory consists of the following (in $000):
September 30, December 31,
2000 1999
(unaudited)
------------------ ----------------
Raw materials $ 17,040 $ 22,484
Work-in-process 24,293 16,019
Finished goods 21,137 8,346
------------------ ----------------
$ 62,470 $ 46,849
================== ================
8
<PAGE>
7. RESTRUCTURING
In the second quarter of 2000, the Company determined that there was a need to
reevaluate its inventory levels and related accrued liabilities in light of
recent changes in product and customer mix. The evaluation was prompted by a
change in customer mix away from the UK and other European markets and toward
the U.S. market, and the resultant anticipated decrease in demand for certain of
its lower speed and lower frequency Tel-Link Point-to-Point product line, and
resulted in total charges of approximately $21.3 million during the second
quarter of 2000. These charges consisted of increases to inventory reserves of
approximately $17.0 million and accrued liabilities of approximately $4.3
million. In addition, the Company performed a review of the carrying value and
remaining life of long-lived assets and recorded write-downs of approximately
$15.0 million of goodwill, and an approximately $9.9 million increase in the
valuation allowance against the carrying value of deferred tax assets. (See
Notes 8 and 9)
The increase in inventory reserves and related purchases liabilities was charged
to product cost of sales in the second quarter of 2000. Of the $17 million
charge for additional reserves, $15.4 million related to the aforementioned Tel-
Link Point-to-Point product line, revising the projected carrying value in the
markets served, particularly in the U.K. and Europe. Based on current year sales
order sourcing and forecast sales levels, the overall carrying value of the Tel-
Link Point-to-Point product line, net of reserves was adjusted to $32 million.
An additional reserve of approximately $1.0 million was added in the second
quarter to adjust carrying value of certain modules of the Point-to-Multipoint
radio line. Total carrying value of the Point-to-Multipoint product line was
approximately $8.0 million at June 30, 2000 and $12.0 million at September 30,
2000.
During 1999 and 1998, the Company's management approved restructuring plans,
which included initiatives to integrate the operations of acquired companies,
consolidate duplicate facilities, and reduce overhead. Total accrued
restructuring and other charges of approximately $36.5 million and approximately
$26.6 million were recorded in 1999 and 1998, respectively, relating to these
initiatives.
Analysis of Restructuring Charges-9/00
Unaudited (in $000):
Beginning Additions to Expenditures Remaining
Accrual Reserves and Write-offs Accrual
--------- ------------ -------------- ---------
Inventory Reserves $ 16,180 17,000 7,443 $ 25,737
Non-cancellable purchase
commitments reserve 2,947 3,200 157 5,990
--------- ------------ -------------- ---------
Total inventory and other
related charges 19,127 20,200 7,600 31,727
Accounts Receivable Reserve 9,669 9,669
--------- ------------ -------------- ---------
Total Accrued restructuring
and other charges $ 28,796 20,200 17,269 $ 31,727
========= ============ ============== =========
8. GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets of acquired companies accounted for as purchase business
combinations. Goodwill is amortized on a straight-line basis over the period of
expected benefit, ranging from 4.5 to 20 years. Management continues to evaluate
and revise its business plan for the Cylink product line, and based on changes
to the related expected revenue stream, determined in the second quarter of 2000
that an evaluation analysis of the recoverability of the goodwill related to
this acquisition was required. Management's evaluation indicated that the
goodwill balance was impaired, and the Company therefore recorded a charge of
$15.0 million for the impairment of goodwill in the second quarter of 2000. The
remaining balance of goodwill related to the Cylink acquisition will be
amortized over the remaining estimated useful life of 4.5 years.
9. INCOME TAXES
Management regularly assesses the realizability of deferred tax assets based
upon the weight of available evidence, including such factors as the recent
earnings history and expected future taxable income. The methodology used by
management to determine the amount of deferred tax assets that are more likely
than not to be realized is based upon the Company's recent earnings and
estimated future taxable income for the next year. Management believes that,
based on these factors it is more likely than not that the Company may not
realize deferred tax assets, and accordingly, an additional valuation allowance
of $9.9 million was reserved in the quarter ended June 30, 2000. No additional
tax receivable was recorded for the quarter ended September 30, 2000.
9
<PAGE>
10. COMPREHENSIVE LOSS
Comprehensive loss is comprised of net loss and the currency translation
adjustment. Comprehensive loss was $2.3 million and $8.6 million for the three
months ended September 30, 2000 and 1999, respectively. Comprehensive loss was
$71.1 million and $72.1 million for the nine months ended September 30, 2000 and
1999. The currency translation losses are primarily the result of the increased
strength of the U.S. Dollar relative to the Euro and the British Pound.
11. SEGMENT REPORTING
For purposes of segment reporting, the Company aggregates operating
segments that have similar economic characteristics and meet the aggregation
criteria of SFAS No. 131. The Company has determined that there are two
reportable segments: Product Sales and Service Sales. The Product Sales segment
consists of organizations located primarily in the United States, the United
Kingdom, and Italy, which develop, manufacture, and/or market network access
systems for use in the worldwide wireless telecommunications market. The Service
Sales segment consists of an organization primarily located in the United States
and the United Kingdom, which provides comprehensive network services including
system and program planning and management, path design, and system installation
for the wireless communications market.
The accounting policies of the operating segments are the same as those
described in the "Summary of Significant Accounting Policies" included in the
Company's Annual Report on Form 10-K/A The Company evaluates performance based
on operating income. Capital expenditures for long-lived assets are not reported
to management by segment and are excluded from presentation, as such information
is not significant.
10
<PAGE>
The following tables show the operations of the Company's
operating segments (in $000):
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
September 30 September 30
--------------------------------------- -----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales
Product $ 46,693 $ 30,012 $123,172 $ 79,996
Service 12,842 10,046 36,251 29,414
------------- -------------- -------------- --------------
Total $ 59,535 $ 40,058 $159,423 $109,410
============= ============== ============== =============
Income (loss) from continuing operations:
Product $(3,569) $ (15,511) $(70,942) $(81,839)
Service 1,498 1,570 2,878 3,034
------------- -------------- -------------- --------------
Total $ (2,071) $ (13,941) $(68,064) $(78,805)
============= ============== ============== =============
</TABLE>
The breakdowns of sales by geographic customer destination are (in $000):
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
September 30 September 30
--------------------------------------- -----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
United States $37,335 $11,404 $ 86,887 $ 30,548
United Kingdom 13,920 12,346 47,255 39,614
Europe 1,985 7,331 6,923 22,161
Africa 320 - 320 -
Asia 3,245 5,204 9,300 6,294
Other Geographic Region 2,730 3,773 8,738 10,793
---------- ------------ ------------ ------------
$59,535 $40,058 $159,423 $109,410
========== ============ ============ ============
</TABLE>
12. CONTINGENCIES
The Company is a defendant in consolidated state-court class action lawsuit
in which the plaintiffs are alleging various securities laws violations by the
Company and certain of its officers and directors. The plaintiffs seek
unspecified damages based upon the decrease in market value of shares of the
Company's Common Stock. While management believes the actions are without merit
and is defending these actions vigorously, all of these proceedings are at the
very early stage and the Company is unable to speculate on their ultimate
outcomes. However, the ultimate results could have a material adverse effect on
the Company's results of operations or financial position either through the
defense or results of such litigation.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q/A contains forward-looking statements,
which involve numerous risks and uncertainties. The statements contained in this
Quarterly Report on Form 10-Q/A that are not purely historical may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including without limitation, statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Certain Factors Affecting the Company" contained in this Item 2 and
elsewhere in this Quarterly Report on Form 10-Q/A. Additional factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in the Company's 1999 Annual Report on Form 10-K/A, Form S-3
Registration statements declared effective by the Securities and Exchange
Commission in 2000, and other documents filed by the Company with the Securities
and Exchange Commission.
Overview
The Company supplies equipment and services to access worldwide
telecommunications networks. Currently, the Company ships 2.4 GHz and 5.7 GHz
spread spectrum radio systems, as well as 7 GHz, 13 GHz, 14 GHz, 15 GHz, 18 GHz,
23 GHz, 26 GHz, 38 GHz and 50 GHz radio systems. The Company also provides
software and related services for these products. Additionally, the Company
offers program management, engineering, procurement, installation and
maintenance elements of the telecommunications networks between central office
and customer premise locations over physical and wireless facilities. Our Point-
to-MultiPoint (PMP) radio system for use in the telecommunications industry
reached the production stage and shipments resulted in production revenues
beginning in the fourth quarter of 1999.
In January 2000, we received approximately $43.8 million in net proceeds
from a private placement of Common Stock. In addition, we entered into a new
loan agreement for $12 million in January 2000. The loan matures on January 31,
2001, subject to annual renewals. Borrowings under the line are secured by cash
deposits, receivables, inventory, equipment, investment property, and
intangibles. The maximum borrowings under the agreement will be limited to 85%
of eligible accounts receivable, not to exceed $12 million. We issued the lender
warrants to purchase 200,000 shares of common stock at $5.71 per share. The
warrants, which are immediately exercisable and are subject to anti-dilution
clauses, expire on January 31, 2005.
In February 2000, we completed the divestiture of Technosystems S.p.A. and
Cemetel S.r.l, two of our Italian subsidiaries, resulting in additional losses
for the first quarter 2000 of approximately $4.0 and $3.5 million, respectively.
In April of 2000, we sold Control Resource Corporation for $7.5 million,
resulting in a gain of approximately $2.6 million.
In August 2000, we completed a private placement of 3,000,000 shares of
Common Stock for $6.11 per share, receiving $18.3 million net cash proceeds.
12
<PAGE>
Sales.
For the three months ended September 30, 2000, sales were approximately
$59.5 million, compared to $40 million for the same period in the prior year.
The 49% increase in total sales was primarily due to shipments under new
contracts received in second and third quarter of 2000 for Point-to-Point radio
units, as well as increased contract work received by the Company's US based
service unit. For the nine months ended September 30, 2000, total sales were
approximately $159.4 million, as compared to $109.4 million for the same period
in the prior year. The 46% increase was primarily due to the same reasons as
noted above.
Product sales for the third quarter 2000 increased approximately $16.7
million or 56% compared to the third quarter 1999. Product sales represented
approximately 78% and 75% of sales in the three months ended September 30, 2000
and 1999, respectively. Point-to-Point product sales increased by approximately
$14.2 million or 62% from approximately $22.9 in the third quarter of 1999 to
approximately $37.1 million in the third quarter 2000 due to an increase in
domestic point to point unit shipments.
In addition, product sales from the recently released Tel-Link Point-to-
MultiPoint (PMP) product for the third quarter of 2000 were approximately $3.1
million, compared to none in the third quarter of 1999. Sales of PMP were
attributable to two major customers. Sales for Spread Spectrum product lines for
the three months ended September 30, 2000 and 1999 were approximately $6.0
million and $5.9 million, respectively.
Product sales for the nine months ended September 30, 2000 increased
approximately $43.2 million or 54% as compared to the same period in 1999.
Product sales represented approximately 77% and 73% of total sales in the nine
months ended September 30, 2000 and 1999, respectively. The new PMP product line
sales for the nine months ended September 30, 2000 were approximately $13.8
million. As the product line was introduced in the fourth quarter of 1999, there
were no comparable sales for the comparable nine month period in 1999. Sales of
Point-to-Point and Spread Spectrum product lines were stronger beginning in the
second quarter of 2000 due primarily to sales of these products under new
contracts with United States based CLEC operators and systems integrators.
Point-to-Point sales for the nine months ended September 30, 2000 were
approximately $87.1 million compared to $63.0 million for the comparable period
in 1999.
Service sales for the three months ended September 30, 2000 increased
approximately $2.8 million or 28% from the comparable period in the prior year.
Services sales represented 22 % and 25% of total sales in the third quarter 2000
and 1999, respectively. Service sales for the nine months ended September 30,
2000 increased approximately $6.8 million or 23% from the same period in the
prior year. The increased sale levels were primarily due to expanding markets
for our United States based service group for installation of P-COM radio units
and system design and installation for wireline telephone service providers. The
decrease in services sales as a percentage of total sales for the nine months
ended September 30, 2000 was primarily due to product group sales increasing
faster than service sales levels.
During the three-month periods ended September 30, 2000 and 1999, four and
three customers accounted for a total of 61.9% and 44.4% of our sales,
respectively. During the nine months ended September 30, 2000 and 1999, three
customers accounted for a total of 44.8% and 48.4% of our sales, respectively.
We expect to experience an increased concentration of sales to a small number of
major customers in the fourth quarter of 2000.
During the three months ended September 30, 2000, we generated approximately
62.7% of our sales in the United States and approximately 37.3% internationally.
During the same period in 1999, we generated 28.4% of our sales in the United
States and 71.6% internationally. The primary factors in the overall shift of
sales to the domestic market were (1) a significant order for Point-to-Point
products received from our single largest customer at the end of the second
quarter for delivery in the third and fourth quarters, (2) steadily increasing
revenue during the 2000 year for the United States based service group for
installation and systems design work, and (3) a decline during the period in
sales in Continental Europe to wireless telephone service providers.
Many of our largest customers use our product and services to build
telecommunication network infrastructures. These purchases represent
significant investments in capital equipment and are required for a phase of the
rollout in a geographic area or a market. Consequently, the customer may have
different requirements from year to year and may vary its purchase levels from
us accordingly.
Gross Profit. For the three months ended September 30, 2000 and 1999,
gross profits as a percentage of product sales were $15.4 million and $10.8
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million, respectively, or 26% and 27% of sales, respectively. For both three
month periods ended September 30, 2000 and 1999, product gross profits were 25%.
Service gross profits as a percentage of service sales were approximately
28% and 33% for the three months ended September 30, 2000 and 1999,
respectively. Service gross profits as a percentage of service sales were
approximately 27% and 32% for the nine months ended September 30, 2000 and 1999,
respectively. Gross profit margins on work for the largest United Kingdom based
customer were reduced based on a renegotiated turnkey sales and service
agreement.
Research and Development. For the three months ended September 30, 2000 and
1999, research and development (R&D) expenses were approximately $4 million and
$7.6 million, respectively. As a percentage of sales, research and development
expenses decreased from 19% for the three months ended September 30, 1999 to 7%
for the three months ended September 30, 2000. The percentage decrease is
affected by both the decrease in overall R&D spending, and the increase in sales
levels in fiscal 2000. The R&D cost decrease is primarily due to our PMP
development project, which was completed in the fourth quarter of 1999; new
product programs in 2000 have not been as comprehensive. For the nine months
ended September 30, 2000, compared to the corresponding period in 1999, the
reduction of over all expenditures for research and development relate to the
heavy expenditures in the Point-to-Multipoint project in 1999 and the
expenditure levels for product development which were included in the operating
expenses of the sold Technosystem S.p.A. subsidiary in early 2000.
Selling and Marketing. For the three months ended September 30, 2000 and
1999, sales and marketing expenses were $3.3 million and $3.7 million,
respectively. The decrease in expenses reflects the refocus to domestic sales
compared to international sales in the first nine months of 2000. As a
percentage of sales, selling and marketing expense decreased from 9% for the
three months ended September 30, 1999 to 5% for the three months ended September
30, 2000. We have begun in the third quarter of 2000 increasing international
marketing efforts specifically in the Pacific Rim and the Indian subcontinent.
During 1999, the Company went through a significant personnel reduction in mid-
year, including sales and sales support personnel. The Company has not as yet
rehired to the levels of personnel in 2000 that were inherent prior to the 1999
restructuring. Also, part of the cost control procedures implemented in 1999,
certain international sales offices were closed in the fourth quarter, resulting
in a lower year to date comparable expenditure level in fiscal 2000.
General and Administrative. For the three months ended September 30, 2000
and 1999, general and administrative expenses were $5.2 million and $5.3
million, respectively. As a percentage of sales, general and administrative
expenses decreased from 13% to 9.0% for the three months ended September 30,
1999 and 2000, respectively. The percent of sales decline was caused by
increased sales in 2000, as costs remained fairly constant between the periods.
A significant percentage of general and administrative expenses, particularly
for facility costs and depreciation, are fixed when viewed on a quarter-to-
quarter basis. Year to date general and administrative levels for 2000 were
below those of the 1999 nine month period due in part to the mid 1999 staff
reductions, the sale of the subsidiary companies in the first half of 2000 and
lower levels of receivable account write-offs in fiscal 2000.
Goodwill Amortization. Goodwill represents the excess of the purchase price
over the fair value of the net assets of acquired companies accounted for as
purchase business combinations. Goodwill is amortized on a straight-line basis
over the period of expected benefit, ranging from 4.5 to 20 years. For the three
months ended September 30, 2000 and 1999, goodwill amortization was
approximately $0.7 and $2.0 million, respectively. The reduction relates to
lower intangible asset levels carried on the Company's balance sheets following
the sale of non-core subsidiary businesses in early 2000, and write-offs of
excess goodwill taken in the second quarter of 2000.
For the nine months ended September 30, 2000 and 1999 goodwill amortization
was $18.9 million and $6.2 million, respectively. The increase in goodwill
amortization for the period ending September 30, 2000 was due to a write off of
goodwill which management determined was impaired associated with Cylink
Wireless Group (approximately $15 million), and that resulting from the sale of
Technosystem S.p.A. and Cemetel S.r.l. The remaining goodwill associated with
the Cylink acquisition will be amortized over the estimated remaining useful
life of 4.5 years. Goodwill related to the Columbia Spectrum acquisition (P-Com
Network Services) is being amortized over a 20-year period.
Interest Expense. For the three months ended September 30, 2000 and 1999,
interest expense was $1.4 million and $2.7 million, respectively. For the nine
months ended September 30, 2000 and 1999, interest expense was $4.1 million and
$6.8 million, respectively. Interest expense for the nine months ended September
30, 2000 and under 1999 consisted primarily of interest and fees incurred on
borrowings under our bank line of credit and interest on the principal amount of
our subordinated 4 1/4% convertible promissory Notes due 2002 (the "Notes"),
plus $1.4 million expense related to warrant amortization. The reduction in
interest expense was primarily due to the reduced amounts of bank debt and notes
over the past twelve months. There was no significant change in our underlying
interest rates between periods.
Other income (expense), net. For the three-month period ended September 30,
2000 other expense, net, totaling $2.9 million compared to $3.3 million in the
comparable three month period in 1999. In both years, the expenses are
primarily driven by foreign currency translation losses. In 2000 these are the
result of the increased strength of the U.S. dollar to the Euro and the British
Pound.
Sales contracts negotiated in foreign currencies have been primarily
limited to British pound sterling contracts and Italian lira contracts. We may
be exposed to the risk of foreign currency gains and losses depending upon the
magnitude of a change in the value of a local currency in an international
market and our actions to hedge such potential losses.
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Discontinued operations. In August of 1999, the Company's Board of
Directors decided to divest its broadcast equipment business, Technosystem.
Accordingly, beginning in the third quarter of 1999, this business was reported
as a discontinued operation and financial statement information related to this
business has been presented on one line in the December 31, 1999 Consolidated
Balance Sheet, "net assets of discontinued operation", and in the "Loss on
discontinued operations" line of the Condensed Consolidated Statements of
Operations. The "net assets of discontinued operations" represented the assets
to be sold offset by the liabilities to be assumed by the buyers of the
business. In February 2000, we completed the disposal of Technosystem and
recorded an additional loss of $4 million.
Extraordinary Item. In January of 2000, we exchanged an aggregate of $7.0
million of our Notes for an aggregate of 677,000 shares of our Common Stock with
a fair market value of $5.1 million. This transaction resulted in an
extraordinary gain of $ 1.9 million. In the first quarter of 1999, the Company
exchanged an aggregate of $25.5 million of its Notes for an aggregate of
2,792,257 shares of its Common Stock with a fair market value of $18.3 million
and recorded an extraordinary gain of $7.3 million, in the first quarter of
1999.
Provision (Benefit) for Income Taxes. The Company's provision for income
tax for the three months ended September 30, 2000 and 1999 were $(0.1) and $0.2
million, respectively. The provision for income taxes for the nine months ended
September 30, 2000 and 1999 were $11.0 and $0.5 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended September 30, 2000, we used
approximately $32.2 million of cash in operating activities, primarily due to
the net loss of $70.2 million and the non-cash gain on exchange of Notes of $1.9
offset by non-cash charges including $9.9 million of valuation allowances
against deferred tax benefits receivable which were considered not recoverable,
$15.0 million write-off of goodwill, $17.0 million of inventory charges, and
$4.3 million of accrued excess liability charges, as well as the net loss on
disposal of subsidiaries and discontinued operations of $4.0 million and net
losses of $2.9 million resulting from dispositions and write-off of property and
equipment. Most of this activity was effected by June 30, 2000. In addition, we
experienced increases in operating cash flow from non-cash depreciation and
goodwill amortization of $12.8 million, an increase in accounts payable of $7.1
million, and a decrease in prepaid expenses of $4.4 million offset by an
increase in inventories carried of $36.3 million, primarily finished units of
our new Point-to-Multipoint radios. We experienced an increase in accounts
receivable of $7.1 million relative to higher sales levels achieved. In the
quarter ended September 30, 2000 receivables were reduced approximately $2.0
million through better collection effort results and shorter payment terms in
newer contracts. During the nine-month period ended September 30, 2000, we used
approximately $1.6 million through investing activities primarily for the
acquisition of property and equipment offset by proceeds from the disposal of
subsidiaries.
During the nine-month period ended September 30, 2000, we retired
approximately $7.0 million of our Notes through the issuance of approximately
677,000 shares of common stock. This non-cash exchange resulted in an
extraordinary gain of approximately $1.9 million. During the nine months
ended September 30, 2000, we generated approximately $57.0 million from
financing activities. Specifically we received approximately $62.3 million in
net proceeds from private placements of a total of approximately 10.5 million
shares of common stock in January 2000 and August 2000 and $8.0 million from the
exercise of stock options during the nine months ended September 30, 2000. In
the first quarter of 2000, we also repaid approximately $27.0 million of
borrowings under our bank line of credit and borrowed $10.5 million under a new
loan agreement secured by operating assets. The loan matures on January 31,
2001, subject to annual renewals. The maximum borrowings under the agreement are
limited to 85% of eligible accounts receivable, not to exceed $12.0 million.
At September 30, 2000, we had working capital of approximately $72.2
million, compared to $32.0 million at December 31, 1999. In recent years, we
have realized most of our sales near the end of each quarter, resulting in a
significant investment in accounts receivable at the end of the quarter.
However, in the third quarter 2000, our sales were more evenly spread month to
month, resulting in more accounts being created and collected within the
quarter. We expect that our investments in accounts receivable and inventories
will continue to represent a significant portion of working capital. Significant
investments in accounts receivable and inventories will continue to subject us
to risks that have and continue to materially adversely affect our business
prospects, financial condition and results of operations.
At of September 30, 2000 our principal sources of liquidity consisted of
approximately $34.2 million of cash and cash equivalents. At December 31, 1999,
we had approximately $11.6 million in cash and cash equivalents.
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The Company does not have any material commitments for capital equipment.
Additional future capital requirements will depend on many factors, including
our plans to increase manufacturing capacity, working capital requirements for
our operations, and our internal free cash flow from operations.
Existing working capital availability is expected to be sufficient to meet
our working capital needs through at least December 31, 2000. Several recent
quarters have resulted in large losses. We are evaluating various additional
alternatives to improve liquidity and working capital as required. These
alternatives include the sale of additional stock, increased working capital,
lines of credit and the divestiture of certain business assets. There can be no
assurance, however, that any additional financing will be available to us on
acceptable terms, or at all, when required.
CERTAIN FACTORS AFFECTING THE COMPANY
You should carefully consider the risks described below before making an
investment decision.
Due to our stage of development and industry, an investment in our stock is very
risky
We do not have the customer base or other resources of more established
companies, which makes it more difficult for us to address the liquidity
and other challenges we face
We have not developed a large installed base of our equipment or the kind
of close relationships with a broad base of customers of a type enjoyed by
older, more developed companies, which would provide a base of financial
performance from which to launch strategic initiatives and withstand business
reversals. In addition, we have not built up the level of capital often enjoyed
by more established companies, so from time to time we may face serious
challenges in financing our continued operation. We may not be able to
successfully address these risks, which would adversely affect our results of
operations and, ultimately, our stock price.
Our stock price is volatile, so you may not be able to sell our stock at
any particular time at a favorable price
The stock market in general, and the market for shares of small
capitalization and technology stocks in particular, have experienced extreme
price fluctuations in recent years. These fluctuations have often been unrelated
to the operating performance of affected companies. The market price of our
common stock may continue to decline substantially, or otherwise continue to
experience significant fluctuations in the future, sometimes reaching extreme
and unexpected lows, including fluctuations that are unrelated to our
performance. During the 52 week period ending October 18, 2000, the market price
of a share of our common stock was as low as $4.125 and as high as $28.50. These
fluctuations may mean that investors may not be able to sell our common stock at
a favorable price at any given time.
We do not pay dividends, so appreciation of our stock price is the only way
in which you will realize a return on your investment
Our bank line-of-credit agreement prohibits us from paying any dividends on
our common stock except dividends paid in shares of our common stock. Since our
incorporation in 1991, we have not declared or paid cash dividends on our common
stock, and we anticipate that any future earnings will be retained for
investment in our business. Thus, the return on an investment in our common
stock will likely be through resale of shares at a price higher than the price
paid for those shares. As indicated above, the market for our shares may not
provide an opportunity to sell our shares at a favorable price at any given
time.
We rely on our existing customers, and it will materially adversely affect our
operating results and financial condition if they do not support us
A substantial amount of our products and services are purchased by a
limited number of customers, so the loss of a large customer would
significantly affect our results of operations
If any of our important customers significantly reduce their purchases from
us, which has been the case during the last twelve months, this may materially
adversely affect the profitability of our business and our ability to remain in
business. During 1998 and 1999, one customer, Orange Personal Communications
Ltd., accounted for 28% and 20%, respectively, of our sales. During the third
quarter of 2000, two customers, Winstar and Mercury One-to-One, accounted for
46% and 13%, respectively, of our sales.
We place orders with suppliers based in part on customer non-binding
forecasts
Historically, we have built products based on non-binding forecasts from
customers. This practice has resulted in write-offs of excessive and obsolete
inventory for each of the past three years.
Our customers may cancel orders leaving us with unsaleable equipment or
idle capacity
Our customers often enter into purchase orders with us far in advance of
manufacture of the equipment ordered. We have experienced purchase order
cancellations and deferrals. Historically, we have chosen not to harm our
relationships with our customers by enforcing their obligations under purchase
orders when the customer wishes to cancel an order. Cancellations of orders by
customers may, depending upon the timing of the cancellation, leave us with
unsaleable equipment or idle capacity, which would adversely affect our
operating results and financial condition.
We may be unable to obtain additional capital needed to operate and grow our
business, which could damage our financial condition and further erode our stock
price
Our future capital requirements will depend upon many factors, including
development of new products and related software tools, potential acquisitions,
maintenance of adequate manufacturing facilities and contract manufacturing
agreements, progress of research and development efforts, expansion of marketing
and sales efforts, and status of competitive products. Additional financing may
not be available in the future on acceptable terms or at all. The continued
existence of a substantial amount of debt could also severely limit our ability
to raise additional financing. In addition, given the recent price for our
common stock, if we raise additional funds by issuing equity securities,
significant dilution to our stockholders could result.
If adequate working capital funds are not available, we may be required to
restructure or refinance our debt or delay, scale back or eliminate our research
and development, acquisition or manufacturing programs. We may also need to
obtain funds through arrangements with partners or others that may require us to
relinquish rights to certain of our technologies or potential products or other
assets. Our inability to obtain capital, or our ability to obtain additional
capital only upon onerous terms, could very seriously damage our business,
operating results and financial condition and further erode our stock price.
We may try to issue stock at a discount to the current market price, which would
dilute our existing stockholders
In order to raise the funds we need to execute our business plan and fund
operations generally, we may continue to issue stock at a discount to the
current market price. Transactions of that kind would result in dilution to our
existing stockholders.
We may be forced to incur additional costs to restructure our business to reduce
our expenses, which could materially adversely affect our results of operations
and stock price
During 1999, we generated net losses of approximately $103.0 million.
During the first nine months of 2000, we generated net losses of $70.2 million.
We may also incur net losses in future periods. In response to market declines
and poor performance in our sector generally and our lower than expected
performance over the last several quarters, we introduced measures to reduce
operating expenses. These measures included reductions in our workforce in 1999
and 1998. Additionally, management continues to evaluate market conditions to
assess the need to take further action to more closely align our cost structure
with anticipated revenues. Any subsequent actions could result in additional
restructuring charges, reductions of inventory carrying values and provisions
for the impairment of long-lived assets, which could materially adversely affect
our results of operations and stock price.
When our large fixed costs combine with significant fluctuations in our sales,
large fluctuations in our results of operations may occur which could adversely
affect our stock price
A material portion of our expenses are fixed and difficult to reduce
in the same period in which revenue levels might fall, which magnifies the
effects of any such revenue shortfall. In addition, to prepare for the future,
we may continue to heavily invest resources in:
. the development of new products and technologies,
. the evaluation of these products,
. expansion into new geographic markets, and
. our plant and equipment, inventory, personnel and other
items, in order to efficiently produce these products and to
provide necessary marketing and administrative service and
support.
As such, in addition to our fixed costs, our expenses will be increased by
non-capitalized start-up costs associated with the initial production and
installation of new products and technologies.
We experience significant fluctuations in sales, gross margins and
operating results. Our results of operations have also been and will continue to
be influenced by competitive factors, including pricing, availability and demand
for competitive products and services. These factors are difficult for us to
forecast, and have materially adversely affected our results of operations and
financial condition and may continue to do so. Because of our inability to
predict customer orders, delays, deferrals and cancellations, we may not be able
to achieve or maintain our current sales levels. We believe that period-to-
period comparisons are thus not necessarily meaningful and should not be relied
upon as indications of future performance. Because of all of the foregoing
factors, in some future quarter or quarters, revenues will be lower than
expected and our operating results and financial condition will be materially
adversely affected. In addition, to the extent our results of operations are
below those projected by public market analysts, the price of our common stock
may continue to be materially adversely affected by this discrepancy.
We may be unable to become profitable if the selling prices of our products
and services decline over time
We believe that average selling prices and possibly gross margins for our
systems and services will decline over time. This is occurring in our Point-to-
Point business. If we are unable to offset declining average selling prices by
comparable cost savings, our gross margins will decline, and our results of
operations and financial condition would be adversely affected. Reasons for the
decline in average selling prices include the maturation of our systems, the
effect of volume price discounts in existing and future contracts, contract
terms extended to add new customers and maintain existing ones, and the
intensification of competition. To offset declining average selling prices,
we believe we must take a number of steps, including:
. successfully introducing and selling new systems on a timely basis;
. developing new products that incorporate advanced software and other
features that can be sold at higher average selling prices; and
. reducing the costs of our systems through positive supply chain management,
design improvements and component cost reduction, among other actions.
Inability of the company to successfully execute the foregoing strategies,
or our inability to continue to provide significant value added resource to our
customer base could result in our inability to offset declining unit sales
prices as existing product lines mature.
If we cannot develop new products in a timely manner, or if our new
products fail to achieve customer acceptance or do not generate higher average
selling prices, then we would be unable to offset declining average selling
prices.
We depend on contract manufacturers and limited sources of supply and, if
these sources can not meet our current demands or are subject to significant
shortage of parts, production delays could damage our customer relationships
Our internal manufacturing capacity is very limited, and certain
components, subassemblies and services necessary for the manufacture and
production of our systems are obtained from a sole supplier or a small group of
suppliers. As a result, we have reduced control over the price, timely delivery,
reliability and quality of finished products, components and subassemblies. We
have experienced problems in the timely delivery and quantity of products and
certain components and subassemblies from vendors. We expect to rely
increasingly on these contract manufacturers and outside vendors in the future,
and they may prove undependable, stop doing business with us, or go out of
business. Due to the complexity of our products, finding and educating
additional or replacement vendors may be expensive and take considerable time.
Our internal manufacturing capacity and that of our contract manufacturers may
be insufficient to fulfill our orders, and we may be unable to obtain timely
deliveries of components and subassemblies of acceptable quality. Our failure to
manufacture, assemble and ship systems and meet customer demands on a timely and
cost-effective basis could damage relationships with customers and our business.
If we are successful in growing our business, we may be unable to manage and
integrate the expanded operations associated with revenue growth, which may
increase costs and hurt profitability
Our prior expansion has strained and continues to strain our management,
financial resources, manufacturing capacity and other resources and has
disrupted our normal business operations. Our ability to manage any possible
future growth may depend upon significant expansion of our manufacturing,
accounting and other internal management systems and the implementation of a
variety of systems, procedures and controls, all of which would involve
expenditures in advance of increased sales. In particular, if our business
grows, we must successfully manage overhead expenses and inventories, develop,
introduce and market new products, manage and train our employee base, integrate
and coordinate our geographically and ethnically diverse workforce while
simultaneously monitoring third party manufacturers and suppliers. We have in
the past experienced and may continue to experience significant problems in
these areas.
If our business grows, any failure to efficiently coordinate and improve
systems, procedures and controls, including improved inventory control and
coordination with our subsidiaries, could cause continued inefficiencies,
additional operational complexities and expenses, greater risk of billing
delays, inventory write-downs and financial reporting difficulties. Those
problems could impact our profitability and our ability to effectively manage
our business.
We may have difficulty managing the businesses we have acquired, which may
increase our costs and divert resources from our business. We may continue to
encounter problems related to the management of companies which we have acquired
over the past several years. Overcoming existing and potential problems may
entail increased costs, additional investment and diversion of management
attention and other resources, or require divestment of one or more business
units, which may adversely affect our business, financial condition and
operating results. In this regard, in the first six months of 2000, we sold
three business units, Technosystem, Cemetel S.r.l., and Control Resources
Corporation, which primarily represented non-core business products, such
as broadcast equipment and network monitoring equipment. The negative impact on
the financial statements of the disposal of Technosystem was $30.9 million. The
impact on our future financial statements of the divestitures of Cemetel S.r.l.
and Control Resources Corporation is not expected to be material. In addition,
we have written off assets of several of our other acquired companies including
write-offs of $15 million of Cylink Wireless Group goodwill in the second
quarter of 2000.
Accounting charges related to acquisitions are amortized against future earnings
Many business acquisitions must be accounted for as purchase business
combinations under GAAP financial reporting rules. Our past acquisitions, except
for the acquisitions of Control Resources Corporation, RT Masts Limited and
Telematics, Inc., the creation of have been accounted for as asset purchase
transactions, resulting in the creation of significant amount of goodwill being
amortized. Amortization of such excess purchase costs have a dampening effect on
financial results over lenghty periods, depending on the overall levels of such
capitalized cost overtime.
If our results of operations are inadequate, we may have difficulty servicing
our debt, which could cause a default and acceleration of repayment of our debts
As of September 30, 2000, our total indebtedness including current
liabilities was approximately $111.1 million and our stockholders' equity was
approximately $95.4 million. Our ability to make scheduled payments of the
principal and interest on our indebtedness will depend on our future
performance, which is subject in part to economic, financial, competitive and
other factors beyond our control. We may be unable to make payments on or
restructure or refinance our debt in the future, if necessary, which could lead
to a default under our credit agreement and note indenture and acceleration of
repayments of the debts thereunder.
Our customers may not pay us on time, leaving us short of funds needed to
operate our business
We may be unable to enforce a policy of receiving payment within a limited
number of days of issuing billing. We have had difficulties in the past in
enforcing some customer payments in accordance with our policies, particularly
from customers in the early phases of business development which are awaiting
financing to fund their expansion and from customers outside of the United
States. Any inability to timely collect or sell our receivables could cause us
to be short of cash to fund operations and could have a material adverse effect
on our business, financial condition and results of operations.
We may experience problems with product quality, performance and reliability,
which may damage our customer relationships
We have limited experience in producing and manufacturing systems and
contracting for this manufacture. Our customers also require very demanding
specifications for quality, performance and reliability. As a consequence,
problems may occur with respect to the specifications for our systems or related
software tools. If those problems occur, we could experience increased costs,
delays, cancellations or reschedulings of orders or shipments, delays in
collections of accounts receivable and product returns and discounts. In
addition, the failure of any of our facilities to maintain or attain quality
certification by the International Standards Organization could adversely affect
our sales and sales growth. If any of these events occur, they might erode
customer confidence and cause them to reduce their purchases from us, which
would adversely impact our business and results of operations.
The market for our products may not grow fast enough to support our level of
investment, adversely affecting our results of operations
Our future operating results depend upon the continued growth and increased
availability and acceptance of advanced radio-based wireless telecommunications
systems and services in the United States and internationally. The volume and
variety of and the markets for and acceptance of wireless telecommunications
systems and services may not continue to grow as anticipated. Because these
markets are relatively new, predicting which market segments will develop and at
what rate they will grow is difficult. We have recently invested additional
significant time and resources in the development of new products. If the market
for these new products and the market for related services for our systems fail
to grow, or grow more slowly than anticipated, revenue will also fail to grow,
adversely affecting our results of operations.
We may be unable to compete successfully for customers with either competitors
offering technologies similar to ours or with alternative technologies, which
could adversely affect our business and results of operations
Our wireless-based radio systems compete with other wireless
telecommunications products and alternative telecommunications transmission
media, including copper and fiber optic cable. We are experiencing intense
competition worldwide from a number of leading telecommunications companies.
Those companies offer a variety of competitive products and services and broader
telecommunications product lines, which makes us more vulnerable to shifts in
technology and customer preferences. Many of these companies have much greater
installed bases, financial resources and production, marketing, manufacturing,
engineering and other capabilities than we do. We face 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.
Two of our primary competitors are Ericsson and DMC Stratex Networks.
Ericsson is a formidable competitor for us because they provide both consulting
services and equipment they manufacture to customers as complete
telecommunications solutions. Ericsson's combined consulting and product
approach insulates them from competition for sales of products because, in order
for customers to obtain the complete solution, Ericsson requires them to
purchase the product from Ericsson, which completely forecloses our opportunity
to sell products to the customer. In contrast, DMC Stratex Networks is a product
manufacturer like us, and competes directly against us for product sales to
customers, which leads to downward pressure on prices we can charge for our
products. With regard to our PMP product line, we also compete with Netro, who
is also a product manufacturer like us. If we are unable to successfully compete
for customers, future growth, revenues and profitability would be adversely
affected.
Failure to respond to rapid technological change or introduce new products in a
timely manner may limit our revenue growth and adversely impact our results of
operations
Rapid technological change, frequent new product introductions and
enhancements, product obsolescence, changes in end-user requirements and
evolving industry standards characterize the communications market. Our ability
to compete in this market will depend upon our successful development,
introduction and sale of new systems and enhancements and related software
tools, on a timely and cost-effective basis, in response to changing customer
requirements. We have experienced and continue to experience delays in customer
procurement and in completing development and introduction of new systems and
related software tools, including products acquired in acquisitions. Moreover,
we may not be successful in selecting, developing, manufacturing and marketing
new systems or enhancements or related software tools. Any inability to rapidly
introduce, in a timely manner, new systems, enhancements or related software
tools could have a material adverse effect on our results of operations and
limit future growth.
We have international operations in more volatile markets than the United
States, and changes in these markets may undermine our business there
In doing business in international markets, we face economic, political,
regulatory, logistical, legal, financial and business environments and foreign
currency fluctuations that are more volatile than those commonly experienced in
the United States. Until 2000, most of our sales were made to customers located
outside of the United States. Because of the more volatile nature of these
markets, the basis for our business in these markets may be frequently
jeopardized, materially and adversely affecting our operations in these
countries and our overall results of operations and growth.
We are subject to extensive government regulation, which may change and harm our
business
We operate in a constantly changing regulatory environment. Radio
communications are extensively regulated by the United States government, and we
also are subject to foreign laws and international treaties. Our 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. Regulatory changes, which are affected by
political, economic and technical factors, could significantly impact our
operations by restricting our development efforts and those of our customers.
Many of our competitors have broader telecommunications product lines, which
makes us more vulnerable than they are to regulatory changes that shift business
from one product to another. As a result, those regulatory changes could make
current systems obsolete, favor our competitors or increase competition. Any of
those regulatory changes, including changes in the allocation of available
spectrum or changes that require us to modify our systems and services, could
prove costly and thus materially adversely affect our business and results of
operations.
We are the subject of, and may be the subject of additional, class action suits,
which would divert significant resources away from our business
We are a defendant in a consolidated class action lawsuit in state court.
An unfavorable outcome could have a material adverse effect on our prospects and
financial condition. Even if the litigation is resolved in our favor, the
defense of that litigation will entail considerable cost and diversion of
efforts of management, either of which are likely to adversely affect our
results of operations.
We may be unable to protect our proprietary rights, permitting competitors to
duplicate our products and services or preventing us from selling our products
We rely on a combination of patents, trademarks, trade secrets, copyrights
and other measures to protect our intellectual property rights. However, these
measures may not provide adequate protection for our trade secrets or other
proprietary information. Any of our patents could be invalidated, circumvented
or challenged, or may not provide competitive advantages to us. In addition,
foreign intellectual property laws may not adequately protect our intellectual
property rights abroad. Any failure or inability to protect proprietary rights
could have a material adverse effect on our competitive market position and
business.
Litigation may also be necessary to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of
proprietary rights of others or to defend against claims of infringement. A
variety of third parties have sent correspondence to the former owner of the
Cylink Wireless Group in which they allege that the Cylink Wireless Group's
products may be infringing their intellectual property rights. We acquired
Cylink in 1998. Therefore, any intellectual property litigation based upon those
allegations could result in substantial costs and diversion of management
attention and resources, and could prevent us from selling certain products or
require us to license technology to continue selling those products. Licenses to
any of that technology may not be available on acceptable terms or at all.
Our results may suffer if we are unable to attract and retain qualified
management and technical personnel
Our highly technical business depends upon the continued contributions of
key technical and senior management personnel, many of whom would be difficult
to replace. Competition for qualified management, manufacturing, quality
assurance, engineering, marketing, sales and support personnel is intense in our
industry and geographic areas, and we may not be successful in attracting or
retaining those personnel. We experience high employee turnover, which is
disruptive and could adversely impact our business. The loss, or failure to
perform, of any key employee could materially adversely affect our customer
relations and results of operations.
Our board has the power to reject offers to acquire shares of our common stock
in a change of control transaction, which may prevent our stockholders from
having the opportunity to accept those offers and discourage certain offers for
shares of our common stock
The following factors give our board of directors the power to reject
acquisition proposals without any input or consideration of these proposals by
our stockholders:
. our stockholder rights agreement,
. our certificate of incorporation and bylaws,
. our equity incentive plans, and
. Delaware law.
As a result of these factors, our board of directors could significantly
delay, defer or prevent a change in control transaction involving P-Com, even if
holders of our common stock might want the transaction to occur. These factors
may adversely affect the voting and other rights of other holders of common
stock, and prevent stockholders from receiving and accepting offers to acquire
their shares that the board deems not to be in the best interest of our
stockholders. In addition, the power of the board to reject those offers may
discourage certain third parties from making these offers.
Relying on forward-looking statements could cause you to incorrectly assess the
risks and uncertainties in investing in our stock because our actual results
could differ materially from those anticipated in our forward-looking
statements.
This Report, our other SEC filings, our press releases and our other
statements contain "forward-looking" statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
the risks faced by us described above.
We may face other risks not described in the foregoing risk factors, which may
impair our business operations
The risks and uncertainties described in the foregoing risk factors may not be
the only ones facing us. Additional risks and uncertainties not presently known
to us may also impair our business operations. If any of the following risks
actually occur, our business, financial condition and results of operations
could be materially adversely affected. In this case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
16
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
For financial risk related to changes in interest rates and foreign currency
exchange rates, reference is made to Part II, item 7A, Quantitative and
Qualitative Disclosures About Market Risk. In our Annual Report on Form 10-K/A
for the year ended December 31, 1999 as well as the risks detailed above in the
present document.
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS.
No material developments in previously reported proceedings.
17
<PAGE>
ITEM 2. CHANGES IN SECURITIES.
On August 14, 2000, we sold 3,000,000 shares of Common Stock to
State of Wisconsin Investment Board for $18.3 million cash. There were
no underwriters involved or commissions paid. We relied on Securities
Act Section 4 (2) to exempt this private placement from registration.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Beginning August 22, 2000, we solicited written consents from our
Stockholders for an amendment to our Certificate of Incorporation to
increase the total authorized number of shares of Common Stock from 95
million to 145 million. Stockholder approval was secured in October
2000 and the Certificate of Incorporation was subsequently amended to
reflect the approval.
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.79(1) Letter of Cooperation between China PTIC and P-Com,
Inc., dated July 12, 2000.
10.80(2) Common Stock Pipes Purchase Agreement, dated August 11,
2000, by and between the Company and State of Wisconsin
Investment Board.
10.84 General Release and Settlement Agreement, dated as of
August 28, 2000 by and between the Company and Robert E.
Collins.
10.85 Letter of Offer, dated August 31, 2000, by and between
the Company and Leighton J. Stephenson.
27.1 Financial Data Schedule.
________________________
(1) Incorporated by reference to identically numbered exhibit to the Company's
Registration Statement on Form S-3/A filed with the Securities and Exchange
Commission on August 24, 2000.
(2) Incorporated by reference to identically numbered exhibit to the Company's
Current Report on Form 8-K for an event of August 11, 2000.
(b) Reports on Form 8-K.
Report on Form 8-K filed on August 16, 2000 with regard
to an event of August 11, 2000: The execution (and
subsequent closing) of an agreement for the sale of
3,000,000 shares of newly issued common stock to State
of Wisconsin Investment Board for $18.3 million cash.
18
<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.
Date: November 17, 2000
By: /s/ George P. Roberts
---------------------
George P. Roberts
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: November 17,2000
By: /s/ Leighton J. Stephenson
--------------------------
Leighton J. Stephenson
Chief Financial Officer and Vice
President, Finance and Administration
(Principal Financial Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit No.
-----------
10.79(1) Letter of Cooperation between China PTIC and P-Com,
Inc., dated July 12, 2000
10.80(2) Common Stock Pipes Purchase Agreement, dated August
11, 2000, by and between the Company and State of
Wisconsin Investment Board.
10.84 General Release and Settlement Agreement, dated as of
August 28, 2000 by and between the Company and Robert
E. Collins.
10.85 Letter of Offer, dated August 31, 2000, by and between
the Company and Leighton J. Stephenson.
27.1 Financial Data Schedule.
________________________
(1) Incorporated by reference to identically numbered exhibit to the Company's
Registration Statement on Form S-3/A filed with the Securities and Exchange
Commission on August 24, 2000.
(2) Incorporated by reference to identically numbered exhibit to the Company's
Current Report on Form 8-K for an event of August 11, 2000.
20
