<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q/A
Amendment No. 3
To Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-25356
_______________
P-Com, Inc.
(Exact name of Registrant as specified in its charter)
_______________
Delaware 77-0289371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3175 S. Winchester Boulevard, Campbell, California 95008
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 866-3666
_______________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
As of August 3, 1999, there were 64,265,631 shares of the Registrant's Common
Stock outstanding, par value $0.0001.
This quarterly report on Form 10-Q consists of 45 pages of which this is page 1.
The Exhibit Index appears on page 44.
1
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P-COM, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I. Financial Information Number
--------------------- ------
<S> <C> <C>
Item 1 Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998................................................ 3
Condensed Consolidated Statements of Operations for the three and six
month periods ended June 30, 1999 and 1998........................... 4
Condensed Consolidated Statements of Cash Flows for the six month
periods ended June 30, 1999 and 1998................................. 6
Notes to Condensed Consolidated Financial Statements................. 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 16
Item 3 Quantitative and Qualitative Disclosures About Market Risk........... 45
PART II. Other Information
-----------------
Item 1 Legal Proceedings.................................................... 47
Item 2 Changes in Securities................................................ 47
Item 3 Defaults Upon Senior Securities...................................... 47
Item 4 Submission of Matters to a Vote of Security Holders.................. 47
Item 5 Other Information.................................................... 47
Item 6 Exhibits and Reports on Form 8-K..................................... 47
Signatures ..................................................................... 50
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1.
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited) (restated)
-------------------------- ----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 47,601 $ 29,241
Accounts receivable, net of allowance of $7,495 and $4,600, respectively 35,339 51,392
Inventory 60,609 79,026
Prepaid expenses and notes receivable 17,756 21,949
-------------------------- ----------------------
Total current assets 161,305 181,608
Property and equipment, net 45,382 52,086
Deferred income taxes 9,678 9,678
Goodwill and other assets 66,682 71,845
-------------------------- ----------------------
$ 283,047 $315,217
========================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,865 $ 39,618
Accrued employee benefits 3,986 3,345
Other accrued liabilities 13,961 10,318
Deferred contract obligation 5,500 3,000
Notes payable 49,800 46,360
-------------------------- ----------------------
Total current liabilities 104,112 102,641
-------------------------- ----------------------
Other long-term liabilities. 11,071 12,119
-------------------------- ----------------------
Convertible subordinated notes 60,061 85,650
-------------------------- ----------------------
Series B Mandatorily Redeemable Convertible Preferred Stock - 13,559
-------------------------- ----------------------
Mandatorily Redeemable Common Stock 23,749 -
-------------------------- ----------------------
Mandatorily Redeemable Common Stock Warrants 3,839 1,839
-------------------------- ----------------------
Commitment and contingent liabilities (note 1)
Stockholders' equity:
Series A Preferred Stock - -
Common Stock 6 5
Additional paid-in capital 190,416 145,246
Accumulated deficit (107,190) (45,924)
Accumulated other comprehensive income (3,017) 82
-------------------------- ----------------------
Total stockholders' equity 80,215 99,409
-------------------------- ----------------------
$ 283,047 $315,217
========================== ======================
</TABLE>
3
<PAGE>
The accompanying notes are an integral part of these consolidated financial
statements.
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,
Sales: 1999 1998 1999 1998
----------- ------------- ----------- -----------
(Restated) (Restated)
(See Note 1) (See Note 1)
<S> <C> <C> <C> <C>
Product $ 26,489 $ 41,503 $ 49,984 $ 87,642
Broadcast 599 6,993 3,879 12,275
Service 8,954 8,910 19,368 16,126
----------- ------------- ----------- -----------
Total sales 36,042 57,406 73,231 116,043
----------- ------------- ----------- -----------
Cost of sales:
Product 42,803 28,903 59,585 54,865
Broadcast 449 3,885 2,742 6,770
Service 5,825 5,952 13,398 10,617
----------- ------------- ----------- -----------
Total cost of sales 49,077 38,740 75,725 72,252
----------- ------------- ----------- -----------
Gross profit (loss) (13,035) 18,666 (2,494) 43,791
----------- ------------- ----------- -----------
Operating expenses:
Research and development 9,579 10,192 19,219 17,920
Selling and marketing 5,745 6,438 10,880 10,663
General and administrative 21,576 4,871 27,277 8,762
Goodwill amortization 2,054 2,094 4,108 2,792
Acquired in-process research and development - - - 15,442
----------- ------------- ----------- -----------
Total operating expenses 38,954 23,595 61,484 55,579
----------- ------------- ----------- -----------
Income (loss) from operations (51,989) (4,929) (63,978) (11,788)
Interest expense (2,425) (1,833) (4,743) (3,599)
Other income (expense), net 51 391 423 1,293
----------- ------------- ----------- -----------
Loss before income taxes and extraordinary item (54,363) (6,371) (68,298) (14,094)
Provision (benefit) for income taxes 252 (108) 252 (2,734)
----------- ------------- ----------- -----------
Loss before extraordinary item (54,615) (6,263) (68,550) (11,360)
Extraordinary item: gain on retirement of Notes - - 7,284 -
----------- ------------- ----------- -----------
Net loss $(54,615) $(6,263) $(61,266) $(11,360)
Charge related to conversion of Preferred Stock
to Common Stock (12,190) - (12,190) -
----------- ------------- ----------- -----------
Net loss applicable to holders of Common Stock $(66,805) $(6,263) $(73,456) $(11,360)
=========== ============= =========== ===========
Basic net loss applicable to Common Stock per share:
Loss before extraordinary item $(1.29) $(0.14) $ (1.41) $(0.26)
Extraordinary item - - 0.15 -
----------- ------------- ----------- -----------
Net loss $(1.29) $(0.14) $ (1.26) $(0.26)
=========== ============= =========== ===========
Diluted net loss applicable to holders of Common Stockholders
per share:
Loss before extraordinary item $(1.29) $(0.14) $ (1.41) $(0.26)
Extraordinary item - - 0.15 -
----------- ------------- ----------- -----------
Net loss $(1.29) $(0.14) $ (1.26) $(0.26)
=========== ============= =========== ===========
Shares used in per share computations:
Basic 51,872 43,201 48,584 43,077
=========== ============= =========== ===========
Diluted 51,872 43,201 48,584 43,077
=========== ============= =========== ===========
</TABLE>
4
<PAGE>
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,
1999 1998
---------- -----------
(Restated) (Restated)
(See Note 1) (See Note 1)
<S> <C> <C>
Net loss $(61,266) $(11,360)
Adjustments to reconcile net loss to net
cash used in operating activities: - net of effect of acquisition
Depreciation 8,202 5,793
Amortization of goodwill - and other intangible assets 4,108 2,792
Loss on sale of property and equipment 2,507 -
Change in minority interest - (604)
Deferred income taxes - (5,253)
Restructuring charges 3,300 -
Inventory charges 11,800 -
Accounts receivable charge 21,400 -
Acquired in-process research and development - 15,442
Gain on exchange of notes (7,284) -
Change in assets and liabilities (net of acquisition balances):
Accounts receivable 3,381 (13,974)
Inventory (2,960) (15,506)
Prepaid expenses and notes receivable 4,192 (8,353)
Other assets 1,056 (1,495)
Accounts payable (8,753) (11,828)
Accrued employee benefits 641 235
Deferred contract obligation - 6,053
Other accrued liabilities 5,217 (648)
---------- -----------
Net cash used in operating activities (14,459) (38,706)
---------- -----------
Acquisition of property and equipment (3,910) (18,887)
Cash paid in business combinations, net of cash acquired - (49,478)
---------- -----------
Net cash used in investing activities (3,910) (68,365)
---------- -----------
Proceeds (Payments) of notes payable (35) 39,353
Proceeds from the issuance of common stock, net of issuance costs 39,107 3,513
Proceeds from long-term debt 1,778 -
Payments under capital lease obligation (258) -
---------- -----------
Net cash provided by financing activities 40,592 42,866
---------- -----------
Effect of exchange rate changes on cash (3,863) 1,048
---------- -----------
Net increase (decrease) in cash and cash equivalents 18,360 (63,157)
Cash and cash equivalents at the beginning of the period 29,241 88,145
---------- -----------
Cash and cash equivalents at the end of the period $ 47,601 $ 24,988
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands, unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---------- -----------
<S> <C> <C>
Cash paid for income taxes $ 331 $1,902
========== ===========
Cash paid for interest $ 4,804 $3,839
========== ===========
Promissory note issued in connection with the acquisition of Cylink,
net of amount withheld $ - $9,682
========== ===========
Exchange of Convertible Subordinated Notes for Common Stock $25,539 $ -
========== ===========
Equipment purchased under capital lease $ 95 $ -
========== ===========
Repricing of Warrants $ 2,000 $ -
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<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
unaudited consolidated financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of P-Com, Inc.'s (referred to herein, together
with its wholly owned and partially owned subsidiaries, as "P-Com" or the
"Company") financial condition as of June 30, 1999, and the results of its
operations for the three and six month periods ended June 30, 1999 and 1998 and
its cash flows for the six month periods ended June 30,1999 and 1998. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited 1998 consolidated financial statements, including the
notes thereto, and the other information set forth therein, included in the
Company's Annual Report on Form 10-K/A (File No. 0-25356). Operating results for
the six-month period ended June 30, 1999 are not necessarily indicative of the
operating results that may be expected for the year ending December 31, 1999.
This Quarterly Report on Form 10-Q/A may contain forward-looking statements
that may involve numerous risks and uncertainties. The statements contained in
this Quarterly Report on Form 10-Q/A that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the factors affecting operating results contained in this Quarterly
Report on Form 10-Q/A.
Revision of financial statements and changes to certain information
The Company has revised its 1998 and first quarter of 1999 financial statements,
as reflected in this filing, to revise the accounting treatment of certain
contracts with a major customer. Under a joint license and development contract,
the Company recognized $10.5 million of revenue in 1998 and $1.5 million in the
first quarter of 1999 of this $12 million contract on a percentage of completion
basis. As previously disclosed, the Company determined that a related Original
Equipment Manufacturer ("OEM") agreement which provided for subsequent payments
of $8 million to this customer specifically earmarked for marketing the
Company's products manufactured for this customer, should have offset a portion
of the revenue recognized previously. As of December 31, 1999, payment
obligations of $8 million under this contract remained outstanding. The net
effect of this restatement was to reduce 1998 revenue and increase pretax loss
by $7.1 million and to reduce the first quarter of 1999 revenue and increase
1999 pretax loss by $0.9 million.
In March 1998, the Company recorded a charge for purchased in-process research
and development (IPR&D) in a manner consistent with widely recognized appraisal
practices at the date of acquisition. In the fourth quarter 1998 the Company
became aware of new information which brought into question the traditional
appraisal methodology and revised its purchase price allocation based upon a
more current and preferred methodology. As a result, the 1998 first quarter
charge for acquired IPR&D was decreased from $33.9 to $15.4 million. The result
of this restatement was a decrease of $18.5 million in IPR&D charge with a
corresponding increase in goodwill and other intangible assets.
The effect of this revision to previously reported condensed consolidated
financial statements as of December 31, 1998 and for the six month period ended
June 30, 1999 is as follows (in thousands except per share amounts, unaudited):
<TABLE>
<CAPTION>
Three months ended Six months ended Three months ended Six months ended
June 30, 1999 June 30, 1999 June 30, 1998 June 30, 1998
Statements of Operations: As Reported As reported Restated As reported Restated As reported Restated
------------------ ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 36,042 $ 74,090 $ 73,231 $ 63,459 $ 57,406 $122,096 $116,043
Income (loss) from operatios $(51,989) $(65,119) $(63,978) $ 1,965 $ (4,929) $ (5,735) $(11,788)
Net income (loss) $(54,615) $(60,407) $(61,266) $ 346 $ (6,263) $ (5,307) $(11,360)
Net loss per share
Basic and diluted $ (1.29) $ (1.24) $ (1.26) $ 0.01 $ (0.14) $ (0.12) $ (0.26)
December 31, 1998
Balance Sheets: As reported Restated
--------------- --------------
Other accrued liabilities $ 10,318 $ 9,459
Deferred contract obligation $ - $ 3,000
Other long term liabilities $ 3,199 $ 12,199
Total liabilities $192,410 $200,410
Retained earnings (accumulated deficit) $(38,783) $(45,924)
Total stockholder's equity $106,550 $ 99,409
Accounts receivable 50,533 51,392
Total assets 316,358 315,217
</TABLE>
2. NET LOSS PER SHARE
For purpose of computing diluted loss per share, weighted average common
share equivalents do not include
8
<PAGE>
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, 1999, options to
purchase approximately 2,740,316 and 1,846,749 shares of Common Stock were
excluded from the computation, respectively. For the six months ended June 30,
1999, the assumed conversion of the 4 1/4% Convertible Subordinated Notes
("Notes") into 2,472,246 shares of Common Stock was not included in the
computation of diluted loss per share because the effect would be antidilutive.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in a consolidated financial statement
that is displayed with the same prominence as other consolidated financial
statements. Comprehensive income as defined includes all changes in equity (net
assets) during a period from non-owner sources. Examples of items to be included
in comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gain/loss on available-for-sale
securities. The Company's total comprehensive net income (loss) was as follows
(in thousands, unaudited):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net loss $(54,615) $(6,263) $(61,266) $(11,360)
Other comprehensive income (expense) (1,978) 1,231 (3,099) 1,048
--------------- ----------------- --------------- ---------------
Total comprehensive income (loss) $(56,593) $(5,032) $(64,365) $(10,312)
=============== ================= =============== ===============
</TABLE>
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP No. 98-1
requires that entities capitalize certain costs related to internal-use software
once certain criteria have been met. The Company is required to implement SOP
No. 98-1 for the year ending December 31, 1999. Adoption of SOP No. 98-1 is not
expected to have a material impact on the Company's financial position or
results of operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," effective beginning in the first quarter of
2000. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting under SFAS No. 133. The
Company is currently evaluating the impact of SFAS No. 133 on its financial
position and results of operations.
4. BORROWING ARRANGEMENTS
The Company entered into a new revolving line-of-credit agreement on May 15,
1998, as amended, that provides for borrowings of up to $50.0 million. At June
30, 1999, the Company had been advanced approximately $46.3 million and had used
the remaining $3.7 million to secure letters of credit under such line. In July
1999, the Company repaid $20.0 million of this indebtedness, reducing the
principal balance to $30.0 million. The revolving commitment, as amended, is
reduced to $30.0 million until maturity on January 15, 2000. Borrowings under
the line are secured by the assets of the Company and bear interest at either a
base interest rate or a variable interest rate. The agreement requires the
Company to comply with certain financial covenants, including the maintenance of
specific minimum ratios. Amendments to the bank credit agreement have allowed
the Company to remain in compliance with the debt covenants through June 30,
1999. Non-compliance could cause the Company to be in default under the bank
credit agreement. If a default is declared by the lenders, cross defaults will
be triggered on the Company's outstanding Notes and other debt instruments
resulting in accelerated repayments of such debts.
The remaining borrowings consist of bank loans and notes payable of $4.9
million, and amounts drawn under lines of credit available to the Company's
foreign subsidiaries, with interest rates ranging from 8% to 12%. The
9
<PAGE>
Company's foreign subsidiaries had lines of credit available from various
financial institutions. At June 30, 1999, $3.5 million had been drawn down under
these facilities. Generally, these foreign credit lines do not require
commitment fees or compensating balances and are cancelable at the option of the
Company or the financial institutions.
In 1998, the Company retired approximately $14.4 million of its Convertible
Subordinated Notes through the issuance of approximately 2,467,000 shares of
Common Stock. In 1999, the Company retired approximately $25.5 million of its
Convertible Subordinated Notes through the issuance of approximately 2,812,000
shares of Common Stock.
In June 1999, the Company received net proceeds of $38.3 million from the sale
10,068,000 shares of Common Stock sold at a 7.5% discount from the market price.
In June 1999, the Company exchanged all 15,000 shares of the Series B
Convertible Preferred Stock (the "Series B") for 5,135,000 shares of mandatorily
redeemable Common Stock. As a result of this exchange, the Company recorded a
$10.2 million charge to loss attributable to Common Stockholders representing
the difference between the book value of the Series B and the market value of
the mandatorily redeemable common stock net of incurred premiums and penalties
relating to the non-registration of the Series B. Upon the occurrence of certain
events outside the Company's control, each share of Common Stock was redeemable
at the holder's option at the greater of $4.00 per share or the highest closing
price during the period beginning on the date of the holder's notice to redeem
to the date on which the Company redeems the stock. In connection with the
exchange agreements, each holder of the Series B agreed to waive all premiums
which had been accrued and penalties which had been incurred in connection with
the Series B as of the date of exchange.
In connection with the conversion of the Series B to Common Stock, the
mandatorily redeemable warrants were exchanged for 1,242,000 non-mandatorily
redeemable warrants having an exercise price of $3.00. As a result of the
exchange and repricing of warrants, the Company recorded a $2.0 million charge
to loss attributable to Common Stockholders representing the difference in fair
value of the warrants before and after the exchange and repricing. The warrants
are immediately exercisable until the earlier of: (1) December 22, 2002, or (2)
the date on which the closing of a consolidation, merger of other business
combination with or into another entity pursuant to which the Company does not
survive. In the event the Company merges or consolidates with any other company,
the warrant holders are entitled to similar choices as to the consideration they
will receive in such merger or consolidation as are provided to the holders of
the Series B. In addition, the number of shares issuable upon exercise of the
warrants is subject to an anti-dilution adjustment if the Company sells Common
Stock or securities convertible into or exercisable for Common Stock (excluding
certain issuances such as Common Stock issued under employee, director or
consultant benefit plans) at a price per share less than $3.47 (subject to
adjustment).
6. BALANCE SHEET COMPONENTS
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited)
-------------------- ------------------
<S> <C> <C>
Raw materials $14,421 $16,395
Work-in-process 22,828 42,995
Finished goods 23,360 19,636
-------------------- ------------------
$60,609 $79,026
==================== ==================
Property and equipment consist of the following (in thousands):
June 30, December 31,
1999 1998
(unaudited)
-------------------- ------------------
Tooling and test equipment $ 51,800 $ 52,718
Computer equipment 10,357 9,210
Furniture and fixtures 6,873 7,220
Land and buildings 3,119 3,506
Construction-in-process 4,249 4,878
------------------- ------------------
76,398 77,532
Less - accumulated depreciation and amortization (31,016) (25,446)
------------------- ------------------
$ 45,382 $ 52,086
=================== ==================
</TABLE>
10
<PAGE>
7. RESTRUCTURING AND OTHER UNUSUAL CHARGES
During 1998, the Company's management approved restructuring plans, which
included initiatives to integrate the operations of acquired companies,
consolidate duplicate facilities, and reduce overhead. Accrued restructuring
costs of $4.3 million were recorded in 1998 relating to these initiatives
including severance and benefits of approximately $0.6 million, facilities and
fixed assets impairments of approximately $0.9 million, and goodwill write-off
of approximately $2.9 million. In addition, we recorded accounts receivable
reserves of $5.4 million and inventory reserves of $16.9 million (including
$14.5 million in inventory write downs related to our existing core business and
$2.4 million in other charges to inventory relating to the elimination of
product lines).
In the second quarter of 1999, the Company determined that there was a need to
reevaluate the Company's sales forecasts, and to size the business to meet this
decrease in forecasted sales over the next twelve months. The change in forecast
was prompted by the slower than expected recovery in the telecommunications
industry, and resulted in total charges of $36.5 million during the second
quarter of 1999. These charges consisted of $11.8 million in accounts receivable
write-offs and reserves, $3.3 million in facility and fixed asset write-offs and
other related charges, and an increase to inventory reserves and related charges
of approximately $21.4 million.
The Company determined that accounts receivable write-offs and reserves,
totaling $11.8 million, were necessary after a customer-by-customer review of
all accounts more than 90 days outstanding. This charge is included general and
administrative expenses. All of the accounts reserved or written-off were in the
Product business segment and the majority of these accounts were for customers
of the Company's Tel-Link product lines. For the six months ended June 30, 1999,
sales of the Tel-Link product line totaled $260 million. These customers were
located predominantly in the emerging markets of Africa and Asia, which
experienced significant economic turmoil beginning in the third quarter of 1998.
The write-off of a single customer receivable related to $11.6 million and 3.2
million in South Africa accounted for more than half of the charge in 1999. At
June 30, 1999, the Company had accounts receivable of $11.6 million and $3.2
million related to Tel-Link product line sales to customers in South Africa and
Asia, respectively. The Company will continue to pursue collection efforts with
all of the reserved accounts and is attempting to recover its inventory from the
South African customer. The Company recognizes revenue upon shipment of the
product provided no significant obligations remain and collectibility is
probable. The Company subsequently continues to monitor the collectibility of
accounts receivable and provides an allowance for doubtful accounts when it
determines that collectibility is in doubt.
The write-offs and charges for facilities and fixed assets, which were recorded
in general and administrative expenses, resulted from the closure of sales
offices in Mexico and the United Arab Emirates and the consolidation from three
to two facilities in Campbell, California. As a result, certain fixed assets
became idle and leased buildings were abandoned. Approximately $3.0 million of
the charge comprises the write-off of the remaining book value of fixed assets
that became idle and were not recoverable, and lease termination payments
associated with the abandoned facilities. This amount does not include expenses,
such as moving expenses or lease payments that will benefit future operations.
Additionally, approximately $0.3 million was recorded for severance costs due to
the elimination of 30 positions through an involuntary reduction in
workforce.
11
<PAGE>
The increase in inventory and related reserves totaled approximately $21.4
million and was charged to Product Cost of Sales. Of this total, approximately
$15.4 million was required for excess and obsolete inventory primarily in the
Company's Tel-Link product lines. Furthermore, the reserves were required
primarily for excess and obsolete inventory based on our revised sales forecasts
and product demand. As of June 30, 1999, the Company had net inventories of
approximately $52 million related to the Tel-Link product line, which will
continue to be the core product line. The Company makes no distinction between
excess and obsolete inventory at this time. Also, included in the reserve for
excess and obsolete inventory was $0.8 million for the rework of excess semi-
custom finished goods that were configured for specific customer applications or
geographic regions. The Company believes that in some cases it can be less
expensive to rework semi-custom finished goods than to purchase new parts and it
can reduce cash outlays for inventory and improve cash flows. The costs required
to perform rework include costs for material, assembly, and re-testing of
inventory by the Company's suppliers.
Accrued liabilities were increased by $6.0 million for a charge to Product Cost
of Sales for non-cancelable excess inventory purchase commitments, also related
primarily to the Company's Tel-Link product lines. As customer demand is not
anticipated to consume the inventory on hand within the next twelve months, the
Company will continue to attempt to sell the inventory and will dispose of it
when it is deemed to be unsaleable.
The Company has embarked on a program to find buyers for excess and obsolete
inventory at prices below cost and consequently, has scrapped or sold
approximately $3.5 million of this inventory. The Company also is in the process
of attempting to renegotiate the non-cancelable purchase commitments with its
suppliers.
The accrued restructuring and other charges and amounts charged against the
accrual as of June 30, 1999 are as follows (in thousands, unaudited):
<TABLE>
<CAPTION>
Beginning Expenditures Remaining
Accrual Additions and Write-offs Accrual
------------- ------------- ---------------- -------------
<S> <C> C> C> C>
Severance and benefits $ 596 $ 300 $ (569) $ 327
Facility and fixed asset write-offs 879 3,000 (551) 3,328
Goodwill impairment 2,884 - (2,884) -
------------- ------------- ---------------- -------------
Total restructuring charges 4,359 3,300 (4,004) 3,655
------------- ------------- ---------------- -------------
Inventory reserve 16,922 15,400 (11,718) 20,604
Non-cancellable purchase commitments reserves - 6,000 - 6,000
------------- ------------- ---------------- -------------
Total inventory and other related charges 16,922 21,400 (11,718) 42,059
------------- ------------- ---------------- -------------
Accounts receivable reserve 5,386 11,800 (5,386) 11,800
------------- ------------- ---------------- -------------
Total accrued restructuring and other charges $26,667 $36,500 $(21,108) $42,059
============= ============= ================ =============
</TABLE>
8. 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 three reportable
segments: Product Sales, Broadcast 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
Broadcast Sales segment consists of an organization located in Italy which
develops, manufactures, and markets broadcast equipment for use in the worldwide
wireless telecommunications market. Since the Broadcast segment was acquired in
1997, there were no Broadcast segment sales recorded in 1996. The Service
Sales segment consists of an organization primarily located in the United
States, the United Kingdom, and Italy which provides comprehensive network
services including system and program planning and management, path design, and
installation for the wireless communications market.
The accounting policies of the operating segments are the same as those
described in the "Summary of Significant Accounting Policies" included in the
Company's Annual Report on Form 10-K. The Company evaluates performance based on
operating income. Capital expenditures for long-lived assets are not reported to
management by segment and are excluded as presenting such information is not
practical. The following tables show the operations of the Company's operating
segments (in thousands, unaudited):
12
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended Product Broadcast Service
June 30, 1999 Sales Sales Sales Total
------------------------------------- --------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Sales $ 26,489 $ 599 $ 8,954 $ 36,042
Income (loss) from operations $(49,999) $(2,947) $ 957 $(51,989)
Depreciation $ 2,994 $ 797 $ 210 $ 4,001
Total Assets $234,329 $27,446 $21,272 $283,047
Interest expense $ (2,217) $ (111) $ (97) $ (2,425)
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended Product Broadcast Service
June 30, 1998 Sales Sales Sales Total
------------------------------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Sales $ 41,503 $ 6,993 $ 8,910 $ 57,406
Income (loss) from operations $ (7,608) $ 1,287 $ 1,392 $ (4,929)
Depreciation $ 2,467 $ 383 $ 20 $ 2,870
Total Assets $284,942 $33,828 $13,868 $332,638
Interest expense $ (1,652) $ (170) $ (11) $ (1,833)
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended Product Broadcast Service
June 30, 1999 Sales Sales Sales Total
------------------------------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Sales $ 49,984 $ 3,879 $19,368 $ 73,231
Income (loss) from operations $(61,891) $(3,551) $ 1,464 $(63,978)
Depreciation $ 6,119 $ 1,363 $ 720 $ (8,202)
Total Assets $234,329 $27,446 $21,272 $283,047
Interest expense $ (4,370) $ (180) $ (193) $ (4,743)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended Product Broadcast Service
June 30, 1998 Sales Sales Sales Total
------------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Sales $ 87,642 $12,275 $16,126 $116,043
Income (loss) from operations $(16,621) $ 2,380 $ 2,453 $(11,788)
Depreciation $ 5,069 $ 64 $ 82 $ 5,793
Total Assets $284,942 $33,828 $13,868 $332,638
Interest expense $ (3,271) $ (307) $ (21) $ (3,599)
</TABLE>
A reconciliation of income (loss) from operations to loss before extraordinary
item and income taxes is as follows (in thousands, unaudited):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Loss from operations $(51,989) $(4,929) $(63,978) $(11,788)
Interest expense (2,425) (1,833) (4,743) (3,599)
Interest income 180 346 401 1,228
Other income (expense), net (129) 45 22 65
--------------- --------------- --------------- ---------------
Loss before extraordinary item and income taxes $(54,363) $(6,371) $(68,298) $(14,094)
=============== =============== =============== ===============
</TABLE>
The Company's product and service sales by category are as follows (in
thousands, unaudited):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Microwave radio transmission equipment $26,009 $38,825 $46,041 $ 83,857
Broadcast equipment 599 6,993 3,879 12,275
Network monitoring equipment 480 2,678 3,943 3,785
Service 8,954 8,910 19,368 16,126
--------------- --------------- --------------- ---------------
$36,042 $57,406 $73,231 $116,043
=============== =============== =============== ===============
</TABLE>
The breakdown of sales by geographic customer destination and property and
equipment, net, are as follows (in thousands, unaudited):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Sales: 1999 1998 1999 1998
----------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
United States $ 8,759 $24,444 $20,335 $ 34,353
United Kingdom 13,407 7,068 27,972 29,990
Europe 12,056 13,083 18,018 23,805
Africa -- 4,076 178 14,921
Asia 1,370 3,379 2,688 8,321
Other geographic regions 450 5,356 4,040 4,653
----------------- --------------- -------------- --------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
$36,042 $57,406 $73,231 $116,043
================= =============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
At June 30,
Property and equipment, net: 1999 1998
----------------- ---------------
<S> <C> <C>
United States $27,252 $27,920
United Kingdom 10,860 9,512
Italy 7,154 8,283
Other geographic regions 116 153
----------------- ---------------
$45,382 $45,868
================= ===============
</TABLE>
9. CONTINGENCIES
The Company is a defendant in a consolidated 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. The Company believes the action is without merit and intends to
defend this action vigorously. This proceeding is at a very early stage and the
Company is unable to speculate on its ultimate outcome. However, the ultimate
result of the matter described above could have a material adverse effect on the
Company's results of operations or financial position either through the defense
or result of such litigation.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements which
involve numerous risks and uncertainties. The statements contained in this
Quarterly Report on Form 10-Q that are not purely historical may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including without limitation, statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Certain Factors Affecting the Company" contained in this Item 2 and
elsewhere in this Quarterly Report on Form 10-Q. Additional factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in the Company's 1998 Annual Report on Form 10-K as amended, and other
documents filed by the Company with the Securities and Exchange Commission.
Overview
P-Com, Inc. (the "Company") supplies equipment and services for access to
worldwide telecommunications and broadcast networks. All financial information
presented in this Quarterly Report on Form 10-Q has been presented to include
the operating results of Control Resources Corporation ("CRC"), RT Masts Limited
("RT Masts") and Telematics, Inc. ("Telematics"), which were acquired in 1997.
Currently, the Company ships 2.4 GHz and 5.7 GHz spread spectrum radio systems,
as well as 7 GHz, 13 GHz, 14 GHz, 15 GHz, 18 GHz, 23 GHz, 26 GHz, 38 GHz and 50
GHz radio systems, and the Company also provides software and related services
for these products. Additionally, the Company offers turnkey microwave
relocation services, engineering, path design, program management, installation
and maintenance of communication systems to network service providers. The
Company is currently field testing and further developing a range of point-to-
multipoint radio systems for use in both the telecommunications and broadcast
industries.
The Company was founded in August 1991 to develop, manufacture, market and
sell millimeter wave radio systems for wireless networks. The Company has an
accumulated deficit of approximately $107.2 million. The decrease in retained
earnings from $18.4 million at December 31, 1997 to an accumulated deficit of
$107.2 million at June 30, 1999 reflects the net losses of $62.4 million in 1998
and $61.3 million during the first six months of 1999.
The net loss in the second quarter of 1999 included unusual charges of $36.5
million which were related to the Company's Product Business Segment. The net
loss in the first quarter of 1998 included acquired in-process research and
development expenses of approximately $15.4 million related to the acquisition
of the assets of the Cylink Wireless Group from Cylink Corporation. See further
discussion in the analysis of results of operations.
The net loss in 1998 and 1999 was primarily due to the worldwide downturn in
the telecommunications equipment market as a whole, which began in the second
half of 1998, in part due to the exonomic turmoil which began in Asia. The
Company experienced a sharp decrease in its sales beginning in September 1998,
and began a cost reduction program shortly thereafter. The Company laid off a
portion of its workforce in September, October and November of 1998, as well as
in June of 1999, and increased its inventory reserves and wrote down
uncollectible accounts receivable, and certain of its facilities, fixed assets
and goodwill in the third quarter of 1998 as well as in the second quarter of
1999.
During the third quarter of 1998, the Company's management approved
restructuring plans, which included initiatives to integrate the operations of
acquired companies, consolidate duplicate facilities, and reduce overhead.
Accrued restructuring costs of $4.3 million were recorded in the third quarter
of 1998 relating to these initiatives. The $4.3 million restructuring charge
consisted primarily of severance and benefits of approximately $0.6 million,
facilities and fixed assets impairments of approximately $0.9 million, and
goodwill write-off of approximately $2.9 million. In addition, the Company
recorded inventory reserves of $16.9 million (including $14.5 million in
inventory write downs related to the Company's existing core business and $2.4
million in other one-time charges to inventory relating to the elimination of
product lines).
16
<PAGE>
In the second quarter of 1999, the Company determined that there was a need to
reevaluate the Company's sales forecasts, and to size the business to meet this
decrease in forecasted sales over the next twelve months. The change in
forecast was prompted by the slower than expected recovery in the
telecommunications industry, and resulted in total charges of $36.5 million
during the second quarter of 1999. These charges consisted of $11.8 million in
accounts receivable write-offs and reserves, $3.3 million in facility and fixed
asset write-offs and other related charges, and an increase to inventory
reserves and related charges of approximately $21.4 million. The need for the
decrease in the sales forecast was evidenced by the Company's sales trends for
the first two quarters of 1999 which did not meet management's initial
expectations for recovery and renewed growth throughout the telecommunications
industry and is further evidenced by the modest growth in the revenues of
several of the Company's competitors. See further discussion in the analysis of
results of operations.
During 1997 and the first half of 1998, both the Company's sales and operating
expenses increased rapidly. During the remainder of 1998 and the first half of
1999, the Company's operating expenses continued to increase, while the
Company's sales declined significantly. There can be no assurance that the
Company's sales will return to the levels experienced in 1997 or in the first
half of 1998 or that sales will not continue to decline. The Company has not
recovered from the downturn and sales have remained sluggish in the first half
of 1999. In recent quarters, the Company has been experiencing higher than
normal price declines. The declines in prices have had a downward impact on the
Company's gross margin. There can be no assurance that such pricing pressure
will not continue in future quarters. Although the Company is taking measures to
reduce operating expenses, the Company intends to continue to invest in its
operations, particularly to support product development and the marketing and
sales of recently introduced products. As such, there can be no assurance that
operating expenses will not continue to increase in 1999 as compared to 1998, or
that the operating expense cuts will prove effective. If the Company's sales do
not correspondingly increase, the Company's business, financial condition, and
results of operations would continue to be materially adversely affected.
Accordingly, there can be no assurance that the Company will achieve
profitability in future periods.
During the second half of 1997 and the first half of 1998, the Company
significantly expanded the scale of its operations to support potential market
opportunities and to address critical infrastructure and other requirements.
This expansion included the opening of sales offices in the United Arab Emirates
(since closed), Singapore, China and Mexico (since closed), the acquisition of
the assets of the Cylink Wireless Group, significant investments in research and
development to support product development and services, and the hiring of
additional personnel in all functional areas, including sales and marketing,
finance, manufacturing and operations. Because the Company's sales did not
correspondingly increase, the Company's results of operations were materially
adversely affected and a cost reduction program was initiated.
In 1998, the Company retired approximately $14.4 million of its Convertible
Subordinated Notes through the issuance of approximately 2,467,000 shares of
Common Stock. In 1999, the Company retired approximately $25.5 million of its
Convertible Subordinated Notes through the issuance of approximately 2,812,000
shares of Common Stock.
In June 1999, the Company received net proceeds of $38.3 million from the sale
10,068,000 shares of Common Stock sold at a 7.5% discount from the market price.
In June 1999, the Company exchanged all 15,000 shares of the Series B
Convertible Preferred Stock (the "Series B") for 5,135,000 shares of mandatorily
redeemable Common Stock. As a result of this exchange, the Company recorded a
$10.2 million charge to loss attributable to Common Stockholders representing
the difference between the book value of the Series B and the market value of
the mandatorily redeemable common stock net of incurred premiums and penalties
relating to the non-registration of the Series B. Upon the occurrence of certain
events outside the Company's control, each share of Common Stock was redeemable
at the holder's option at the greater of $4.00 per share or the highest closing
price during the period beginning on the date of the holder's notice to redeem
to the date on which the Company redeems the stock. In connection with the
exchange agreements, each holder of the Series B agreed to waive all premiums
which had been accrued and penalties which had been incurred in connection with
the Series B as of the date of exchange.
In connection with the conversion of the Series B to Common Stock, the
manditorily redeemable warrants were exchanged for 1,242,000 non-mandatorily
redeemable warrants having an exercise price of $3.00. As a result of the
exchange and repricing of warrants, the Company recorded a $2.0 million charge
to loss attributable to Common Stockholders representing the difference in fair
value of the warrants before and after the exchange and repricing. The warrants
are immediately exercisable until the earlier of: (1) December 22, 2002, or (2)
the date on which the closing of a consolidation, merger of other business
combination with or into another entity pursuant to which the Company does not
survive. In the event the Company merges or consolidates with any other company,
the warrant holders are entitled to similar choices as to the consideration they
will receive in such merger or consolidation as are provided to the holders of
the Series B. In addition, the number of shares issuable upon exercise of the
warrants is subject to an anti-dilution adjustment if the Company sells Common
Stock or securities convertible into or exercisable for Common Stock (excluding
certain issuances such as Common Stock issued under employee, director or
consultant benefit plans) at a price per share less than $3.47 (subject to
adjustment).
17
<PAGE>
In 1998, the Company retired approximately $14.4 million of its Convertible
Subordinated Notes through the issuance of approximately 2,467,000 shares of
Common Stock. In 1999, the Company retired approximately $25.5 million of its
Convertible Subordinated Notes through the issuance of approximately 2,812,000
shares of Common Stock.
In June 1999, the Company received net proceeds of $38.3 million from the sale
10,068,000 shares of Common Stock sold at a 7.5% discount from the market price.
In June 1999, the Company exchanged all 15,000 shares of the Series B
Convertible Preferred Stock (the "Series B") for 5,135,000 shares of mandatorily
redeemable Common Stock. As a result of this exchange, the Company recorded a
$10.2 million charge to loss attributable to Common Stockholders representing
the difference between the book value of the Series B and the market value of
the mandatorily redeemable common stock net of incurred premiums and penalties
relating to the non-registration of the Series B. Upon the occurrence of certain
events outside the Company's control, each share of Common Stock was redeemable
at the holder's option at the greater of $4.00 per share or the highest closing
price during the period beginning on the date of the holder's notice to redeem
to the date on which the Company redeems the stock. In connection with the
exchange agreements, each holder of the Series B agreed to waive all premiums
which had been accrued and penalties which had been incurred in connection with
the Series B as of the date of exchange.
In connection with the conversion of the Series B to Common Stock, the
manditorily redeemable warrants were exchanged for 1,242,000 non-mandatorily
redeemable warrants having an exercise price of $3.00. As a result of the
exchange and repricing of warrants, the Company recorded a $2.0 million charge
to loss attributable to Common Stockholders representing the difference in fair
value of the warrants before and after the exchange and repricing. The warrants
are immediately exercisable until the earlier of: (1) December 22, 2002, or (2)
the date on which the closing of a consolidation, merger of other business
combination with or into another entity pursuant to which the Company does not
survive. In the event the Company merges or consolidates with any other company,
the warrant holders are entitled to similar choices as to the consideration they
will receive in such merger or consolidation as are provided to the holders of
the Series B. In addition, the number of shares issuable upon exercise of the
warrants is subject to an anti-dilution adjustment if the Company sells Common
Stock or securities convertible into or exercisable for Common Stock (excluding
certain issuances such as Common Stock issued under employee, director or
consultant benefit plans) at a price per share less than $3.47 (subject to
adjustment).
RESULT OF OPERATIONS FOR THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
The following table sets forth items from the Consolidated Condensed Statement
of Operations as a percentage of sales for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales:
Product 73.5% 72.3% 68.3% 75.5%
Broadcast 1.7 12.2 5.3 10.6
Service 24.8 15.5 26.4 13.9
Total sales 100.0 100.0 100.0 100.0
--------------- --------------- --------------- ---------------
Cost of sales:
Product 118.8 50.3 81.4 47.3
Broadcast 1.2 6.8 3.7 5.8
Service 16.2 10.4 18.3 9.1
Total cost of sales 136.2 67.5 103.4 62.3
--------------- --------------- --------------- ---------------
Gross profit (loss) (36.2) 32.5 (3.4) 37.7
--------------- --------------- --------------- ---------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Operating expenses:
Research and development 26.6 17.8 26.2 15.4
Selling and marketing 15.9 11.2 14.9 9.2
General and administrative 59.8 8.5 37.2 7.6
Goodwill amortization 5.7 3.6 5.6 2.4
Acquired in-process
research and development -- -- -- 13.3
--------------- --------------- --------------- ---------------
Total operating expenses 108.0 41.1 84.0 47.9
--------------- --------------- --------------- ---------------
Income (loss) from operations (144.2) (8.6) (87.4) (10.2)
Interest expense (6.7) (3.2) (6.5) (3.1)
Interest income 0.6 0.5 1.1
--------------- --------------- --------------- ---------------
Loss before income taxes (150.9) (11.1) (93.3) (12.1)
Provision (benefit) for income taxes 0.7 (0.2) 0.3 (2.4)
Loss before extraordinary item (151.6) (10.9) (93.6) (9.8)
Extraordinary item: retirement of Notes
-- -- 9.8 --
--------------- --------------- --------------- ---------------
Net loss (151.5%) (10.9%) (83.7%) (9.8%)
=============== =============== =============== ===============
</TABLE>
During 1997, the Tel-Link product line contributed approximately $154.9 million
or 70.2% of the Company's total sales of approximately $220.7 million. During
the first half of 1998, the Tel-Link product line contributed approximately
$78.1 million or 67.3% of the Company's total sales of approximately $116.0
million. Tel-Link product line sales decreased by 1.9% from approximately $26.4
million in the second quarter of 1998 to approximately $25.9 million in the
second quarter of 1999. The slowdown in the market is attributable to the lower
demand for the product due in part to the economic turmoil, which began in Asia,
and increased competition and downward pricing pressure.
In August 1999, the Company announced that it had determined that CRC and
Technosystem S.p.A were not a part of the Company's long-term strategic focus,
and that accordingly it was evaluating alternatives for those two subsidiaries,
including possible disposition.
Sales. Sales for the three months ended June 30, 1999 were approximately
$36.0 million, compared to $57.4 million for the same period in the prior year,
a decrease of $21.4 million or 37.3% Sales for the six months ended June 30,
1999 and 1998 were approximately $73.2 million and $116 million, respectively,
a decrease of 37.1%. The decrease was primarily due to the market slowdown for
the Company's Tel-Link product line. Sales for the Tel-Link product line for
the three months ended June 30, 1999 and 1998 were approximately $25.9 million
and $24.6 million, respectively. For the six months ended June 30, 1999 and
1998, sales for the Tel-Link product line were approximately $44.1 million and
$60.5 million, respectively, a decrease of 27.1%. The slowdown in the market is
attributable to the lower demand for the product due in part to the economic
turmoil which began in the Pacific Rim countries, and increased competition and
downward pricing pressure. Sales for the non-Tel-Link product lines for the
three months ended June 30, 1999 and 1998 decreased approximately 67.9% from
approximately $31.5 million in the three months ended June 30, 1998 to
approximately $10.1 million for the three months ended June 30, 1999. Sales to
new customers during second quarter of 1999 and for the first six months of 1999
were less than 20% of total sales. For the corresponding periods in 1998, sales
to new customers were less than 10% of total sales. For the three months ended
June 30, 1999, four customers accounted for 52.1% of the sales of the Company.
For the three months ended June 30,1998, one customer accounted for 66.4% of the
sales of the Company. For the six months ended June 30, 1999, two customers
accounted for 41.2% of the sales of the Company. For the six months ended June
30, 1998, four customers accounted for 36.1% of the sales of the Company.
19
<PAGE>
Product sales for the three months ended June 30, 1999 were approximately
$26.5 million or 73.5% of total sales, broadcast sales were approximately $0.6
million or 1.7% of total sales, and service sales were approximately $9.0
million or 24.8% of total sales. For the corresponding period in 1998, product
sales were $41.5 million or 72.3% of total sales, broadcast sales were $7.0
million or 12.2% of total sales, and service sales were $8.9 million or 15.5% of
total sales.
Product sales for the six months ended June 30, 1999 were approximately $50.0
million or 68.3% of total sales, broadcast sales were approximately $3.9 million
or 5.3% of total sales, and service sales were approximately $19.3 million or
26.4% of total sales. For the corresponding period in 1998, product sales were
$87.6 million or 75.5% of total sales, broadcast sales were $12.3 million or
10.6% of total sales, and service sales were $16.1 million or 13.9% of total
sales.
For the three and six month periods ended June 30, 1999, the decrease in
product sales was primarily due to lower demand due in part to the economic
turmoil in the Pacific Rim countries, and a general slowdown in the
telecommunication equipment industry, which resulted in declining prices and
surplus capacity. The decrease in broadcast sales is due to the existing and
potential customers being located in emerging markets with struggling economies
combined with an unwillingness by customers to commit to a long-term investment
in analog equipment when digital systems are on the verge of becoming available
in may markets. The increase in service sales was primarily due to increased
presence in international markets through acquisitions in the United Kingdom and
Italy and from introductions to new customers by the sales force, which offset
the effect of the industry-wide slowdown.
Historically, the Company has generated a majority of its sales outside of the
United States. For the three months ended June 30, 1999, the Company generated
approximately $8.8 million or 24.0% of its sales in the U.S. and approximately
$27.3 million or 76.0% internationally. For the three months ended June 30,
1998, the Company generated approximately $24.4 million or 43% of its sales in
the U.S. and approximately $33.0 million or 57% internationally. For the six
months ended June 30, 1999, the Company generated approximately $20.3 million or
28.0% of its sales in the U.S. and approximately $52.8 million or 72.0%
internationally. For the six months ended June 30, 1998, the Company generated
approximately $34.4 million or 30% of its sales in the U.S. and approximately
$81.7 million or 70% internationally. Many of the Company's largest customers
use the Company's products and services to build telecommunication network
infrastructures. These purchases represent significant investments in capital
equipment and the amounts purchased depend on the phase of the rollout in a
geographic area or a market. Consequently, the customer may have different
purchasing requirements from quarter to quarter, and may continue to vary the
amount purchased from the Company accordingly.
The Company acquired the assets of the Cylink Wireless Group on March 28, 1998
and April 1, 1998. Sales for the Cylink Wireless Group for the second quarter of
1999 and 1998 were $3.3 million and $8.7 million, respectively. Sales for the
Cylink Wireless Group in the first two quarters of 1998 were approximately $10.7
million, as compared with approximately $ 6.5 million during the first two
quarters of 1999. The decline in Cylink Wireless Group's sales is attributed
primarily to saturation of the airwaves by spectrally inefficient radios.
Customers are now looking to replace the higher capacity models. As such, the
decline is the result of the Cylink Wireless Group offering these older
generation products combined with the Company's decision to divert resources to
complete research and development on new generation products. As discussed more
fully in this Quarterly Report on Form 10-Q under "In-Process Research and
Development", several research projects acquired in the Cylink Wireless Group
acquisition have been delayed as the Company focused available resources on
commercializing the broadband point-to-multipoint project. Once the broadband
point-to-multipoint project is completed, the Company will reprioritize its
delayed research and development projects, including those projects acquired in
the Cylink Wireless Group acquisition. However, sales for the Cylink Wireless
Group are not expected to rebound until the year 2000. There can be no
assurance that sales for the Cylink Wireless Group will ever rebound.
The Company provides its customers with significant volume price discounts,
which would lower the average selling price of a particular product line as more
units are sold. In addition, the Company expects that the average selling price
of a particular product line will also decline as such product matures, and as
competition increases in the future. Accordingly, the Company's ability to
maintain or increase sales will depend upon many factors, including its ability
to increase unit sales volumes of its systems and to introduce and sell new
systems at prices
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sufficient to compensate for reduced revenues resulting from declines in the
average selling price of the Company's more mature products.
Gross Profit. For the three months ended June 30, 1999 and 1998, gross
profit (loss) was approximately $(13.0) million, or (36.2)% of sales, and
approximately $18.7 million, or 32.5% of sales, respectively. For the six months
ended June 30, 1999 and 1998, gross profit (loss) was approximately $(2.5)
million or (3.4)% of net sales, and approximately $43.8 million, or 37.7% of net
sales, respectively. The decline in gross margin in the second quarter of 1999
compared to the corresponding period in 1998 was primarily due to additional
provisions for inventory-related issues and other non-recurring costs of
approximately $21.4 million. In the second quarter of 1999, the Company
determined that there was a need to reevaluate the Company's sales forecasts,
and to size the business to meet this decrease in forecasted sales over the next
twelve months. The change in forecast was prompted by the slower than expected
recovery in the telecommunications industry which required a review of the
Company's inventory on hand and on order resulted in an increase in inventory
and other related reserves of approximately $21.4 million.
The inventory reserve charges included a charge for excess and obsolete
inventory of approximately $15.4 million to inventories in the Company's Tel-
Link product line. The Company's Air-Link product line did not require a
significant increase in reserves as there is less inventory on hand for this
product line. The Company makes no distinction or categorization between excess
and obsolete inventory at this time. The Company's inventory levels were driven
based upon forecasted sales expectations worldwide. The subsequent downturn in
the telecommunications industry resulted in decreased forecasted international
sales to Europe, Africa and Asia.
Included in the reserve for excess and obsolete inventory was $0.8 million for
the rework of excess semi-custom finished goods that were configured for
specific customer applications or geographical regions. The Company believes
that in some cases it can be less expensive to rework semi-custom finished
goods, than purchasing new parts and it can reduce cash outlays for inventory
and improve cash flows. The costs required to perform rework include costs for
material, assembly, and re-testing of the inventory by the Company's
suppliers. Additionally, the Company incurred a purchase commitment loss for
non-cancelable excess inventory purchase commitments of approximately $6.0
million which was charged to accrued liabilities. This purchase commitment loss
also is related to the Company's Tel-Link product line. As customer demand is
not anticipated to consume the inventory on hand within the next twelve months,
the Company will continue to attempt to sell the inventory and will dispose of
it when it is deemed to be unsaleable.
Subsequent to the end of the second quarter of 1999, the Company embarked on a
program to find buyers for excess and obsolete inventory at prices below cost
and consequently, has scrapped or sold approximately $3.1 million of this
inventory. The Company also is in the process of renegotiating the non-
cancelable purchase commitments with its suppliers.
The remaining decline in gross margin for the period was due to lower point-
to-point equipment sales volumes and product rework charges which resulted in
additional unabsorbed manufacturing variances, and declining average selling
prices for the industry sector which generated lower margins.
For the second quarter of 1999 and 1998, product gross profit (loss) as a
percentage of product sales was approximately (61.6)% and 30.4%, respectively.
Approximately eighty-one percentage points of the ninety-two percentage point
decrease in product gross profit was due to the additional provisions for
inventory related issues and other non-recurring costs of approximately $21.4
million discussed above. The remaining decrease was due to manufacturing
variances and declining average selling prices for the industry sector which
generated lower margins. Broadcast gross profit as a percentage of broadcast
sales was approximately 25.0% and 44.4% for the second quarter of 1999 and 1998,
respectively. The decrease in broadcast gross profit percentage is due to
declining average selling prices and lower sales volumes. Service gross profit
as a percentage of service sales was approximately 34.9% and 33.2% for the
second quarter of 1999 and 1998, respectively. The increase in service gross
profit percentage was due to changes in the services provided related to changes
in the customer mix.
The Company has an ongoing program to reduce the costs of manufacturing its
radio systems. As part of this
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<PAGE>
program, the Company has been attempting to achieve cost reductions principally
through engineering and manufacturing improvements, production economies and
utilization of third party subcontractors for the manufacture of the Company's
radio systems and certain components and subassemblies used in the systems. The
Company is also implementing other cost reduction programs in an effort to re-
size its manufacturing capacity to better match current demand for the Company's
products. For example, the results of operations for the second quarter of 1999
include charges related to the consolidation from three to two facilities in
Campbell, CA. Since the abandoned facility primarily was used for manufacturing
activities, the Company's overhead structure will be reduced by over $0.2
million per quarter in future quarters. Furthermore, the Company initiated a
program in the third quarter of 1999 to dispose of excess manufacturing and test
equipment. The goal is to reduce manufacturing overhead by disposing of this
equipment at aggregate net book value. The Company reserved approximately $3.0
million for this program; however, it is possible that additional reserve is
required but not estimable at this time. Additionally, the Company reserved
approximately $6.0 million for another program to renegotiate prices and
delivery schedules with key suppliers for purchased parts and components. The
Company believes that as of June 30, 199 it has reserved for all know material
costs and expenses related to our cost reduction programs. There can be no
assurance that the Company's ongoing or future programs can be accomplished,
that they will increase gross profits or that will not be any future charges
related to these programs.
Research and Development. Expenses consist primarily of costs associated with
personnel and equipment. The Company's research and development activities
include the development of additional frequencies and varying operating features
and related software tools. The Company's software products are integrated into
its hardware products. Software development costs incurred prior to the
establishment of technological feasibility are expensed as incurred. Software
development costs incurred after the establishment of technological feasibility
and before general release to customers are capitalized, if material. To date,
all software development costs incurred after the establishment of technological
feasibility have been immaterial.
For the three months ended June 30, 1999 and 1998, research and development
expenses were approximately $9.6 million and $10.2 million, respectively. As a
percentage of sales, research and development expenses increased from 17.8% in
the three months ended June 30, 1998 to 26.6% in the corresponding period in
1999. The percentage increase in research and development expenses during the
three months ended June 30, 1999 as compared to the corresponding period in 1998
was primarily due to the Company's sales decline and the significant investment
in engineering efforts to develop a new point-to-multipoint product.
For the six months ended June 30, 1999 and 1998 research and development
expenses were approximately $19.2 million and $17.9 million, respectively. As a
percentage of sales, research and development expenses increased from 15.4% in
the six months ended June 30, 1998 to 26.2% in the corresponding period in 1999.
The increase in research and development during the six months ended June 30,
1999, as compared to the corresponding period in 1998 was due primarily to the
Company's sales decline and the significant investment in research and
development to support product development and services, including the costs
associated with new product development due to the acquisition of the Cylink
Wireless Group in March 1998, and the Company's engineering efforts to develop a
point-to-multipoint product.
Though the Company is taking measures to reduce expenses where appropriate,
the Company intends to continue investing resources for the development of new
systems and enhancements (including additional frequencies and various operating
features and related software tools). Research and development expenses for the
point-to-multipoint product will wind down with the launch of the product later
in 1999, reducing overall research and development expenses.
Selling and Marketing. Expenses consist of salaries, investments in
international operations, sales commissions, travel expenses, customer service
and support expenses, and costs related to advertising and trade shows. For the
three months ended June 30, 1999 and 1998, selling and marketing expenses were
approximately $5.7 million and $6.4 million, respectively. As a percentage of
sales, selling and marketing expenses increased from 11.2% in the three months
ended June 30, 1998 to 15.9% in the corresponding period in 1999. The increase
in selling and marketing expenses as a percentage of sales was primarily due to
the lower level of sales in the second quarter of 1999 compared to the
corresponding period in 1998.
Selling and marketing expenses for the six months ended June 30, 1999 and 1998
were approximately $10.9 million and $10.7 million, respectively. As a
percentage of sales, selling and marketing expenses increased from 9.2% in the
six months ended June 30, 1998 to 14.9% in the corresponding period in 1999. The
increase in selling and marketing expenses as a percentage of sales was
primarily due to the lower level of sales in the first half of 1999, and the
expansion and start-up of the Company's international sales organization,
including opening sales offices in the United Arab Emirates, Singapore, China,
and Mexico. During July 1999, as part of a cost reduction program, the Company
closed its sales offices in the United Arab Emirates and Mexico.
General and Administrative. Expenses consist primarily of salaries and other
expenses for management,
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<PAGE>
finance, accounting, legal and other professional services. For the three months
ended June 30, 1999 and 1998, general and administrative expenses were $21.6
million and $4.9 million, respectively. As a percentage of sales, general and
administrative expenses increased from 8.5% in the three months ended June 30,
1998 to 59.8% in the corresponding period in 1999. This increase in general and
administrative expense was due primarily to a charge for accounts receivable
write-offs and reserves of $11.8 million in the second quarter of 1999. This
amount was determined after a customer-by-customer review of all accounts more
than 90 days outstanding. All of the accounts written-off or reserved
were in the Company's Product Business Segment and a single South African
customer's inability to pay Accounted for more than half of the increase during
the quarter. The Company's credit policy on customers both domestically and
internationally requires letters of credit and down payments for those customers
deemed to be a high risk and open credit for customers which are deemed credit
worthy and have a history of timely payments with the Company. The Company's
credit policy typically allows payment terms between 30 and 90 days depending
upon the customer and the cultural norms of the region. The Company's collection
process escalates from the collections department to the sales force to senior
management within the Company as needed. Outside collection agencies and legal
resources are also utilized where appropriate. The Company will continue to
pursue collection efforts with all of the reserved accounts and is attempting to
recover its inventory from the South African customer.
Additionally, the Company combined its three Campbell, CA locations, which
resulted in the abandonment of one of its leased facilities in Campbell, CA,
incurring charges of approximately $3.3 million in the second quarter of 1999.
Some of the employees were transferred to other business units while 30 others
were laid off. Each functional vice president submitted a list of the eligible
employees for the reduction in force to the Human Resources Department where a
summary list was prepared. These layoffs affected most business functions and
job classes. As a result of the facilities closure, certain fixed assets became
idle, and leased buildings were abandoned. Approximately $3.0 million of the
charge comprises the write-off of the remaining book value of fixed assets that
became idle and were not recoverable, and lease termination payments associated
with abandoned leased facilities. This amount does not include any expenses,
such as moving expenses or lease payments, that will benefit future operations.
Additionally, the charge includes approximately $0.3 million for severance
costs. In addition, the Company sold the sales office located in the Dubai,
United Arab Emirates. All employees were given severance pay.
Additionally, the increase in general and administrative expenses as a
percentage of sales was due in part to a lower level of sales in the three
months ended June 30, 1999 compared to the corresponding period in 1998.
General and administrative expenses for the six months ended June 30, 1999 and
1998 were approximately $27.3 million and $8.8 million, respectively. As a
percentage of sales, general and administrative expenses increased from 7.6% in
the six months ended June 30, 1998 to 37.2% in the corresponding period in 1999.
This increase in general and administrative expense was due primarily to the
charge for accounts receivable write-offs and reserves and the Campbell,
California facilities consolidation in the second quarter of 1999.
Additionally, the increase in general and administrative expenses as a
percentage of sales was due in part to a lower level of sales in the six months
ended June 30, 1999 compared to the corresponding period in 1998, increased
staffing and other costs resulting from the Company's international expansion,
primarily in its services segment, and the acquisition of the Cylink Wireless
Group in March of 1998. Though the Company is taking measures to reduce
expenses where appropriate, the Company expects to continue to incur additional
significant ongoing expenses as a publicly owned company relating to legal,
accounting and other administrative services and expenses, including its class
action litigation. The Company expects general and administrative expenses to
increase in absolute dollars in 1999 as compared to 1998.
Goodwill Amortization. Goodwill represents the excess of the purchase price
over the fair value of the net assets of acquired companies accounted for as
purchase business combinations. Goodwill is amortized based on the expected
revenue stream or on a straight-line basis over the period of expected benefit,
ranging from 3 to 20 years. For the three months ended June 30, 1999 and 1998,
goodwill amortization was $2.1 million per quarter.
Goodwill amortization for the six months ended June 30, 1999 and 1998 was $4.1
million and $2.8 million, respectively. The increase in goodwill amortization
in the six months ended June 30, 1999 as compared to the corresponding period in
1998 was due to the Company recording amortization expense relating to the
acquisition of the assets of the Cylink Wireless Group on March 28 and April 1,
1998.
Restructuring and Other Unusual Charges. The net loss in the second quarter of
1999 included restructuring and unusual charges of $36.5 million which were
related to the Company's Product Business Section. The Company had no charges
related to restructuring and other unusual charges in the second quarter of
1998.
In the second quarter of 1999, the Company determined that there was a need to
reevaluate the Company's sales forecasts, and to size the business to meet this
decrease in forecasted sales over the next twelve months. The change in
forecast was prompted by the slower than expected recovery in the
telecommunications industry, and resulted in total charges of $36.5 million
during the second quarter of 1999. These charges consisted of $11.8 million in
accounts receivable write-offs and reserves, $3.3 million in facility and fixed
asset write-offs and other related charges, and an increase to inventory
reserves and related charges of approximately $21.4 million. The need for the
decrease in the sales forecast was evidenced by the Company's sales trends for
the first two quarters of 1999 which did not meet management's initial
expectations for recovery and renewed growth throughout the telecommunications
industry and is further evidenced by the modest growth in the revenues of
several of the Company's competitors.
The accrued restructuring and other charges and amounts charged against the
accrual as of June 30, 1999 are as follows (in thousands, unaudited):
<TABLE>
<CAPTION>
Beginning Expenditures Remaining
Accrual Additions and Write-offs Accrual
------------- ------------- ---------------- -------------
<S> <C> C> C> C>
Severance and benefits $ 596 $ 300 $ (569) $ 327
Facility and fixed asset write-offs 879 3,000 (551) 3,328
Goodwill impairment 2,884 - (2,884) -
------------- ------------- ---------------- -------------
Total restructuring charges 4,359 3,300 (4,004) 3,655
------------- ------------- ---------------- -------------
Inventory reserve 16,922 15,400 (11,718) 20,604
Non-cancellable - 6,000 - 6,000
------------- ------------- ---------------- -------------
Total inventory and other related charges 16,922 21,400 (11,718) 26,604
------------- ------------- ---------------- -------------
Accounts receivable reserve 5,386 11,800 (5,386) 11,800
------------- ------------- ---------------- -------------
Total accrued restructuring and other charges $26,667 $36,500 $(21,108) $42,059
============= ============= ================ =============
</TABLE>
The Company determined that accounts receivable write-offs and reserves,
totaling $11.8 million, were necessary after a customer-by-customer review of
all accounts more than 90 days past stated payment terms. This charge is
included general and administrative expenses. All of the accounts reserved or
written-off were in the Product business segment and the majority of these
accounts were for customers of the Company's Tel-Link product lines. These
customers were located predominantly in the emerging markets of Africa and Asia,
which experienced significant economic turmoil beginning in the third quarter of
1998. The write-off of a single customer receivable in South Africa accounted
for more than half of the charge in 1999. The Company will continue to pursue
collection efforts with all of the reserved accounts and is attempting to
recover its inventory from the South African customer. The Company recognizes
revenue upon shipment of the product provided no significant obligations remain
and collectibility is probable. The Company subsequently continues to monitor
the collectibility of accounts receivable and provides an allowance for doubtful
accounts when it determines that collectibility is in doubt.
The write-offs and charges for facilities and fixed assets, which were
recorded in general and administrative expenses, resulted from the closure of
sales offices in Mexico and the United Arab Emirates and the consolidation from
three to two facilities in Campbell, California. As a result, certain fixed
assets became idle and leased buildings were abandoned. Approximately $3.0
million of the charge comprises the write-off of the remaining book value of
fixed assets that became idle and were not recoverable, and lease termination
payments associated with the abandoned facilities. This amount does not include
expenses, such as moving expenses or lease payments that will benefit future
operations. Additionally, approximately $0.3 million was recorded for severance
costs due to the elimination of 30 positions through an involuntary reduction in
workforce.
The increase in inventory and related reserves totaled approximately $21.4
million and was charged to Product Cost of Sales. Of this total, approximately
$15.4 million was required for excess and obsolete inventory primarily in the
Company's Tel-Link product lines. Furthermore, the reserves were required
primarily for excess and obsolete inventory based on our revised sales forecasts
and product demand. As of June 30, 1999, the Company had net inventories of
approximately $52 million related to the Tel-Link product line, which will
continue to be the core product line. The Company makes no distinction between
excess and obsolete inventory at this time. Also, included in the reserve for
excess and obsolete inventory was $0.8 million for the rework of excess semi-
custom finished goods that were configured for specific customer applications or
geographic regions. The Company believes that in some cases it can be less
expensive to rework semi-custom finished goods than to purchase new parts and it
can reduce cash outlays for inventory and improve cash flows. The costs required
to perform rework include costs for material, assembly, and re-testing of
inventory by the Company's suppliers.
In-Process Research and Development. The Company has had no expenses for
acquired in-process research and development in 1999. The net loss in the first
quarter of 1998 included acquired in-process research and development expenses
of $15.4 million. On March 28, 1998, the Company acquired substantially all of
the assets, and on April 1, 1998, the accounts receivable, of the Cylink
Wireless Group. The acquisition was accounted for as a purchase business
combination. Under the purchase method of accounting, the purchase price is
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of the acquisition with any excess
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<PAGE>
recorded as goodwill. Results of operations for the Cylink Wireless Group have
been included with those of the Company for periods subsequent to the date of
acquisition.
The total purchase price of the acquisition was $63.0 million including
acquisition expenses of $2.5 million. Of the purchase price, $15.4 million has
been assigned to in-process research and development ("IPR&D") and expensed upon
the consummation of the acquisition. In-process research and development had
no future use at the date of acquisition and technological feasibility had not
been established.
Among the factors considered in determining the amount of the allocation of
the purchase price to IPR&D were various factors such as estimating the stage of
development of each IPR&D project at the date of acquisition, estimating cash
flows resulting from the expected revenues generated from such projects, and
discounting the net cash flows, in addition to other assumptions. Developed
technology is being amortized over the expected revenue stream of the developed
products. The value of the acquired workforce is being amortized on a straight-
line basis over three years, and the remaining identified intangibles, including
core technology and other intangibles are being amortized on a straight-line
basis over ten years. Due to the timing of the acquisition, there was no
amortization expense related to the acquisition of the Cylink Wireless Group
during the quarter ended March 31, 1998.
In addition, other factors were considered in determining the value assigned
to purchased IPR&D, which consisted of research projects in areas supporting
products which address the growing third world markets by offering a new point-
to-multipoint product, a faster, less expensive and more flexible point-to-point
product, and the development of enhanced Airlink products, consisting of a Voice
Extender, Data Metro II, and RLL Encoding products. At the time of acquisition,
these projects were estimated to be 60%, 85%, and 50% complete, respectively.
During the second quarter of 1998, due to limited staff and facilities, the
Company delayed the research project for the new narrowband point-to-multipoint
project acquired from the Cylink Wireless Group and focused available resources
on the broadband point-to-multipoint project which is targeted for a larger
addressable market. The narrowband point-to-multipoint project has a total
remaining expected development cost of approximately $2.4 million and, due to
the allocation of resources discussed above, is not expected to be completed
prior to the year 2000. The point-to-point project, discussed above, which was
acquired from the Cylink Wireless Group, was completed during the third quarter
of 1998 at an estimated total cost of $2.0 million. The enhanced Airlink
projects were completed during the first quarter of 1999 at an estimated total
cost of $0.6 million.
If the remaining projects are not successfully developed, the Company's sales
and profitability may be adversely affected in future periods. Additionally, the
failure of any particular individual project in-process could impair the value
of other intangible assets acquired. The Company expects to begin to benefit
from the purchased in-process technology in 1999.
Interest and Other Income (Expense). For the second quarter of 1999, interest
expense consisted primarily of interest and fees incurred on borrowings under
the Company's bank line of credit, interest on the principal amount of the
Company's Notes, and finance charges and fees related to the Company's
receivables purchase agreements. For the 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 due 2002 ("Notes"), and
finance charges and fees related to the Company's receivables purchase
agreements.
The Company incurred interest expense of $2.4 million during the three-month
period ended June 30, 1999 compared to $1.8 million during the corresponding
period in 1998. Additionally, the Company incurred interest expense of $4.7
million during the six-month period ended June 30, 1999 compared to $3.6 million
during the corresponding period in 1998. The increase in interest expense during
the first two quarters of 1999 compared to the same period in 1998 was due to an
increase in borrowings under the Company's bank line of credit, partially offset
by a reduction in the principal balance of the Notes.
The Company generated interest income of $0.1 million during the three-month
period ended June 30, 1999 compared to $0.4 million during the corresponding
period in 1998. The Company generated interest income of $0.4 million during the
six-month period ended June 30, 1999 compared to $1.3 million during the
corresponding period in 1998. Interest income consisted primarily of interest
generated from the Company's cash in its interest bearing bank accounts. Other
income and expense consist primarily of translation gains and losses relating to
the financial statements of the Company's international subsidiaries, and trade
discounts taken.
During 1998 and the first and second quarters of 1999, contracts negotiated in
foreign currencies were limited to British pound sterling contracts and Italian
lira contracts, and the Company experienced payment delays on equipment that had
already been shipped due in part to currency fluctuations. The Company may in
the future be exposed to the risk of foreign currency gains or losses depending
upon the magnitude of a change in the value of a
24
<PAGE>
local currency in an international market. The Company has entered into foreign
currency hedging transactions to reduce exposure to foreign exchange risks. As
of June 30, 1999, the Company had forward exchange contracts valued at
approximately $13.5 million. The forward contracts generally have maturities of
six months or less.
Extraordinary Item. In January and February of 1999, the Company exchanged an
aggregate of $25.5 million of its Notes for an aggregate of 2,792,257 shares of
its Common Stock with a fair market value of $18.3 million and recorded an
extraordinary gain of $7.3 million in the first quarter of 1999.
Provision (Benefit) for Income Taxes. The Company's effective tax rates for
the first and second quarters of 1999 and the year ended December 31, 1998 were
0.0% and 16.9%, respectively. The Company's effective tax rate is less than the
combined federal and state statutory rate, principally due to net operating
losses and loss credit carry forwards available to offset taxable income.
The Company accounts for income taxes under the liability method, which
recognizes deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, the Company can not determine will more
likely than not be realized.
Though most of the Company's sales are to foreign customers, the majority of
the Company's pre-tax income is domestic as most sales take place in the United
States and then title transfers to the foreign customers.
Conversion of Preferred Stock. In June 1999, the Company exchanged all 15,000
shares of the Series B Convertible Preferred Stock (the "Series B") for
5,135,000 shares of mandatorily redeemable Common Stock. As a result of this
exchange, the Company recorded a $10.2 million charge to loss attributable to
Common Stockholders representing the difference between the book value of the
Series B and the market value of the mandatorily redeemable common stock net of
incurred premiums and penalties relating to the non-registration of the Series
B. Upon the occurrence of certain events outside the Company's control, each
share of Common Stock was redeemable at the holder's option at the greater of
$4.00 per share or the highest closing price during the period beginning on the
date of the holder's notice to redeem to the date on which the Company redeems
the stock. In connection with the exchange agreements, each holder of the Series
B agreed to waive all premiums which had been accrued and penalties which had
been incurred in connection with the Series B as of the date of exchange.
This resulted in a $12.2 million charge to stockholders' equity in the second
quarter, increasing the loss applicable to holders' Common Stock when computing
earnings per share by $0.24 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
The Company used approximately $14.5 million to finance operating activities
during the six months ended June 30, 1999, primarily due to the net loss
(excluding an extraordinary gain on the retirement of Notes of $7.3 million) of
$68.6 million. This net loss included non-cash charges for depreciation,
amortization, loss on disposals of assets restructuring changes, inventory
change and accounts receivable change of $8.2 million, $4.1 million, $2.5
million, $3.3 million, $11.8 million and $21.4 million respectively. The
remaining uses of cash were due to the increase in inventory of $3.0 million,
and the decrease in accounts payable of $8.8 million. These uses of cash were
partially offset by a decrease in accounts receivable of $3.4 million, prepaid
expenses and notes receivable of $4.2 million, and other assets of $1.1 million,
and an increase in accrued employee benefits, and other accrued liabilities of
$0.6 million and $5.2 million, respectively.
The Company used approximately $3.9 million in investing activities during the
six months ended June 30, 1999 to acquire capital equipment.
The Company generated approximately $40.6 million in its financing activities
during the six months ended June 30, 1999. The Company received $1.8 million
from banking relationships, principally with the Company's subsidiaries in
Italy, and approximately $39.1 million from the issuance of 10.1 million newly
issued shares of the Company's Common Stock, net of issuance costs, which was
sold to a group of institutional investors, and Common Stock issued pursuant to
the Company's stock option and employee stock purchase plans. These proceeds
were offset by payments of approximately $0.3 million for a sale lease-back
transaction and the repayment of notes payable.
At June 30, 1999 and December 31, 1998, net accounts receivable were
approximately $35.3 million and $51.3 million, respectively. This decrease in
accounts receivable was due primarily to the charge for accounts receivable
write-offs and reserves of $11.8 million in the second quarter of 1999. The need
for these write-offs and reserves in the second quarter of 1999 was due
primarily to the slower than expected recovery throughout the
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<PAGE>
telecommunications industry, which required management to reevaluate the
Company's ability to collect several past due accounts receivable balances from
foreign customers. The Company has over 200 customers worldwide with business
requirements ranging from a few thousand to millions of dollars annually. The
Company's credit policy for both domestic and international customers requires
letters of credit and down payments from those customers deemed to be a high
risk and open credit for customers which are deemed credit worthy and have a
history of timely payments to the Company. The Company's credit policy allows
payment terms ranging from 30 to 90 days depending upon the customer and the
cultural norms of the region. The Company's collection process escalates within
the company from the collections department to the sales force to senior
management as needed. Outside collection agencies and legal resources are also
utilized where appropriate.
The Company has entered into a receivables purchase agreement which permits
the Company to sell up to $14 million in accounts receivable to two banks. For
this service, the banks received a fee of between 0.5% and 1.0% plus interest of
between 6% and 10% per annum. During July 1999, the Company cancelled one of
the purchase agreements with one of the banks. The remaining agreement allows
the Company to sell up to $7.0 million in accounts receivable to the remaining
bank. In 1999 and 1998, there were no material gains or losses on accounts
receivable sold without recourse. During the first quarter of 1999, $13.6
million of the Company's accounts receivable were sold pursuant to such
contract. No accounts receivable balances were sold during the second quarter of
1999. These sales have no recourse to the Company. The Company may continue to
utilize this facility as part of managing its overall liquidity and/or third-
party financing programs.
At June 30, 1999 and December 31, 1998, inventory was approximately $60.6
million and $79.0 million, respectively. The decrease in inventory was primarily
due to the $21.4 million added to reserves for excess and obsolete inventory on
hand and on order. Included in the reserve for excess and obsolete inventory
was $0.8 million to be spent for the rework of excess semi-custom finished goods
that were configured for specific customer applications or geographical regions.
The second quarter 1999 inventory write-down, accounts receivable write-offs
and reserves, and operating losses adversely affected working capital. At June
30, 1999, the Company had working capital of approximately $56.4 million,
compared to $79.0 million at December 31, 1998. In recent quarters, most of the
Company's sales have been realized near the end of each quarter, resulting in a
significant investment in accounts receivable at the end of the quarter. In
addition, the Company expects that its investments in accounts receivable and
inventories will continue to be significant and will continue to represent a
significant portion of working capital. Significant investments in accounts
receivable and inventories will continue to subject the Company to increased
risks that have and could continue to materially adversely affect the Company's
business prospects, financial condition and results of operations.
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The Company raised gross proceeds of $40.0 million from the private placement
of 10,067,958 newly issued shares of Common Stock in June 1999 which were sold
to seven institutional investors in June 1999 at a 7.5% discount of the average
closing sale prices of Common Stock for the fifteen day period ended June 17,
1999. These gross proceeds benefited the Company's working capital and cash
position as of June 30, 1999. As of June 30, 1999, the Company had
approximately $47.6 million in cash and cash equivalents.
In addition, the Company entered into a revolving line-of-credit agreement on
May 15, 1998, which provided for borrowings of up to $50.0 million. At June 30,
1999, the Company had borrowed or had used as security for letters of credit,
the entire amount available under the line-of-credit. In July 1999, the Company
repaid $20.0 million of this indebtedness, reducing the principal balance to
$30.0 million. The maximum revolving commitment, as amended, has been reduced
to $30.0 million until maturity on January 15, 2000. Borrowings under the line
are secured by all of the assets of the Company and its subsidiaries and bear
interest at a fluctuating interest rate per annum that is 3% above Union Bank of
California's announced commercial lending rate as in effect from time to time.
This rate is subject to adjustment under certain circumstances as provided in
the line-of-credit agreement. This interest rate may increase an additional 5%
in the event any default has occurred and is continuing under the line of credit
agreement. The agreement requires that the Company comply with certain
financial covenants, which include maintaining (i) minimum tangible net worth,
(ii) minimum profitability, (iii) minimum consolidated EBITDA, (iv) maximum
consolidated capital expenditures and (v) minimum ratio of consolidated quick
assets to consolidated current liabilities. Amendments to the bank credit
agreement have allowed the Company to remain in compliance with these covenants
through June30, 1999. While the amendments to the covenants contained in the
bank credit agreement have been structured based on the Company's business plan
to permit the Company to continue to be in compliance with such covenants,
should the Company not meet its business plan or should the Company not be able
to raise adequate capital, it is possible that an event of default will occur
under the line-of-credit agreement. If a default is declared by the lenders,
cross defaults will be triggered on the Company's outstanding Notes and other
debt instruments resulting in accelerated repayments of such debts.
In addition to the revolving line of credit, the Company's foreign
subsidiaries have lines of credit available from various financial institutions
with interest rates ranging from 8% to 12%. The Company guarantees a line-of-
credit, which is used by Technosystem, S.p.A. At June 30, 1999 and December 31,
1998, $3.3 million and $3.5 million had been drawn down under these facilities.
On June 4, 1999, the Company exchanged 5,134,795 shares of its Common Stock
for all 15,000 shares of its outstanding Series B Convertible Preferred Stock
pursuant to certain exchange agreements. Should certain events occur, the
former holders of Series B Convertible Preferred Stock have the right under the
exchange agreements to cause the Company to redeem the common stock issued in
the exchange for a cash payment that is larger than the original issue price.
The redemption price per share is equal to the higher of $4.00 or the highest
closing bid price for our common stock during the period beginning on the date
of the redemption notice and ending on the redemption date. If all the common
stock issued in the exchange remains outstanding for redemption and applicable
limits under our credit agreement and Section 160 of the Delaware General
Corporation Law do not limit redemptions, the aggregate amount of redemption
payments would be at leaset $20,539,180, but could be much higher if the market
price of our stock significantly exceeds $4.00. Making redemption payments
would divert funds away from, and thus adversely affect, the Company's business,
financial condition and results of operations. Pursuant to the registration
rights agreements, the Company is required to make cash payments to the exchange
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stockholders because their resale registration statement was not declared
effective on or before July 19, 1999. As of July 19, 1999, the penalty amount
was $405,000, of which $135,000 was paid in July 1999, and is continuing to
accrue at a rate of $10,000 for each day after July 19, 1999. Previously, $14.4
million of Notes had been retired.
On November 5, 1997, the Company issued $100 million in Notes due November 1,
2002. The Notes are convertible at the option of the holder into shares of the
Company's Common Stock. On January 4 and February 2, 1999, the Company issued
2,792,257 shares of Common Stock in exchange for $25.5 million of Notes and
recorded an extraordinary gain of $7.3 million in the first quarter of 1999.
Previously, $14.4 million of Notes had been retired.
The Company is seeking alternative liquidity sources in view of the maturity
of its line-of-credit on January 15, 2000 because its current lender has
advised the Company that it does not wish to extend the line-of-credit
agreement. Alternatives for liquidity sources may include borrowingsfrom other
financial institutions and additional capital infusions through the sale of
stock,the licensing of technology or the divestiture of certain business units.
The Company is pursuing the possibility of entering into a new line-of-credit
agreement to replace the existing line of credit agreement prior to its
expiration on January 15, 2000, and has recently opened negotiations with two
separate banks in order to pursue this possibility. Given the Company's
obligations to repay its bank and other debt obligations and its need for
working capital to fulfill its business plan, the Company is seeking to sell
Technosystem and CRC and may consider other dispositions, and/or raising
additional equity capital. There can be no assurance that any additional
financing will be available to the Company on acceptable terms, or at all, when
required by the Company.
The Company does not have any material commitments for capital equipment
purchases. However, the Company's future capital requirements will depend upon
many factors.
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ITEM 3. CERTAIN RISK FACTORS AFFECTING THE COMPANY
Risks Related to the Agreements Under Which We Repurchased the Series B
Convertible Preferred Stock
Please note that on June 4, 1999, the Company exchanged 5,134,795 shares of its
Common Stock for all 15,000 shares of our outstanding Series B Convertible
Preferred Stock pursuant to certain exchange agreements.
The Company may be required to redeem the common stock issued in the exchange,
which might force it to raise funds through asset sales or additional financings
or, failing that, render it insolvent
If any of the following three events occur, the former holders of Series B
Convertible Preferred Stock have the right under the exchange agreements to
cause the Company to redeem the common stock issued in the exchange for a cash
payment that is larger than the original issue price:
. the Company fails to remove any restrictive legend from the stock
certificates representing the common stock owned by a holder,
. a resale registration statement is not effective by September 12, 1999, or
. a resale registration statement cannot be used by a holder to resell its
common stock for 10 consecutive business days or for a total of more than 20
days in any twelve month period.
The redemption price per share is equal to the higher of $4.00 or the highest
closing bid price for our common stock during the period beginning on the date
of the redemption notice and ending on the redemption date. If all of the
common stock issued in the exchange remains outstanding for redemption and
applicable limits under our credit agreement and Section 160 of the Delaware
General Corporation Law do not limit redemptions, the aggregate amount of
redemption payments would be at least $20,539,180, but could be much higher if
the market price of our stock significantly exceeds $4.00. Making redemption
payments would divert funds away from, and thus adversely affect, the Company's
business, financial condition and results of operations. If the Company does
not have the funds available to make redemption payments, it may have to sell
key operational assets or find additional financing or, if it is unable or
unwilling to do that, it may become insolvent. Any of those events could have a
material adverse effect on its business, financial condition, prospects and
stock price.
If the Company's credit agreement or Section 160 of the Delaware General
Corporation Law ("DGCL") prevents redemptions, the Company may be required to
turn fixed or financial assets into liquid assets or otherwise obtain additional
capital, which would materially adversely affect its business, financial
condition and results of
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operations.
In the event the Company's credit agreement or DGCL Section 160 prevents
redemption of the common stock issued in the exchange, the Company is required
under the exchange agreements to use its best efforts to take all reasonably
necessary actions not prohibited by its credit agreement and the exchange
agreement to permit further redemptions. To fulfill these requirements, the
Company may need to alter its capital structure by turning fixed or financial
assets into liquid assets or otherwise obtaining additional capital. Those
liquid assets would augment the Company's capital for purposes of DGCL Section
160 and may permit it to amend its credit agreement to permit additional
payments to the exchange stockholders. Any actions to accomplish these purposes
could materially adversely affect the Company's business, financial condition,
and results of operations.
The Company is required to make cash payments to the exchange stockholders
because the resale registration statement was not declared effective before July
19, 1999.
Pursuant to the registration rights agreement the Company entered into in
connection with the issuance of the Series B Convertible Preferred Stock, as
amended by the exchange agreements, the Company is required to make cash
payments to the exchange stockholders because their resale registration
statement was not declared effective on or before July 19, 1999. As of July 19,
1999, the penalty amount was $405,000, of which $135,000 was paid in July 1999,
and is continuing to accrue at a rate of $10,000 for each day after July 19,
1999 until the registration statement is declared effective.
History of Losses
From inception to June 30, 1999, the Company had generated an accumulated
deficit of approximately $107.2 million. The decrease in retained earnings from
$18.4 million at December 31, 1997 to an accumulated deficit of $107.2 million
at June 30, 1999 was due primarily to the net loss of $62.5 million in 1998, as
well as a net loss of $54.6 million in the second quarter of 1999.
The net loss in the second quarter of 1998 included restructuring and other
charges of $26.6 million and acquired in-process research and development
expenses of approximately $15.4 million related to the acquisition of the assets
of the Cylink Wireless Group from Cylink Corporation. The net loss in the
second quarter of 1999 included unusual charges of $36.5 million. The net loss
in 1998 and 1999 was primarily due to a downturn and slowdown in the
telecommunications equipment industry as a whole which began in the second half
of 1998, in part due to the economic turmoil which began in Asia. The Company
experienced a sharp decrease in its sales beginning in June 1998, as compared to
prior quarters, and began a cost reduction program shortly thereafter. The
Company laid off a portion of its work force in September, October and November
of 1998, as well as in June of 1999, and increased its inventory reserves and
wrote down uncollectible accounts receivable, certain of its facilities, fixed
assets and goodwill in the third quarter of 1998 and in the second quarter of
1999.
From October 1993 through June 30, 1999, the Company generated sales of
approximately $715.8 million, of which $260.9 million or 36.4% was generated in
the eighteen months ended June 30, 1999. However, the Company does not believe
such growth rates are indicative of future operating results. During the six
months ended June 30, 1999, the Company experienced a significant decrease in
sales. This decrease in revenue was principally the result of the market
slowdown for the Company's Tel-Link product line and for the Company's industry
segment in general, as a result of the economic turmoil which began in Asia.
There can be no assurance that the Company's revenues will return to or increase
from the levels experienced in 1997 or in the first half of 1998 or that sales
will not decline. The Company's net sales for the second quarter of 1999 (which
included sales from many recently acquired businesses) were approximately 37.2%
less than its sales for the comparable period in 1998. The Company expects its
sales in the near future to be significantly below recent comparable periods. In
recent quarters, the Company has been experiencing higher than historical price
declines. The decline in prices has had a significant downward impact on the
Company's gross margin. The Company expects pricing pressures to continue for
the next several quarters and also expects gross margins as a percentage of
revenues to continue to be below comparable periods for the next several
quarters.
During 1997 and 1998, operating expenses increased more rapidly than the
Company had anticipated, and these increases also contributed to net losses.
Customer Concentration
For 1998 and the first and second quarters of 1999, approximately two hundred
customers accounted for substantially all of the Company's sales, and one
customer individually accounted for over 10% of the Company's 1998 sales. In the
second quarter of 1999, the Company had two customers which each individually
accounted for over 10% of the Company's sales. Sales to one customer accounted
for approximately 24% and 26% of the
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Company's sales in 1998 and the first two quarters of 1999, respectively. Many
of the Company's major customers are located in foreign countries, primarily in
the United Kingdom and Continental Europe. Some of these customers are
implementing new networks and are themselves in the early stages of development.
They may require additional capital to fully implement their planned networks,
which may be unavailable to them on an as-needed basis.
If the Company's customers cannot finance their purchases of the Company's
products or services, then this may materially adversely affect the Company's
business, operations and financial condition. Financial difficulties of existing
or potential customers may also limit the overall demand for the Company's
products and services. Specifically, both current customers and potential future
customers in the telecommunications industry have reportedly undergone financial
difficulties and may therefore limit their future orders. Any cancellation,
reduction or delay in orders or shipments, for example, as a result of
manufacturing or supply difficulties or a customer's inability to finance its
purchases of the Company's products or services, may materially adversely affect
the Company's business. Some difficulties of this nature have occurred in the
past and the Company believes they will occur in the future.
Finally, acquisitions in the communications industry are common, which further
concentrates the customer base and may cause some orders to be delayed or
cancelled.
Fluctuations in Operating Results
The Company has experienced and will continue to experience significant
fluctuations in sales, gross margins and operating results. The procurement
process for most of its current and potential customers is complex and lengthy.
As a result, the timing and amount of sales is often difficult to predict
reliably. The sale and implementation of its products and services generally
involves a significant commitment of senior management, as well as its sales
force and other resources. The sales cycle for its products and services
typically involves technical evaluation and commitment of cash and other
resources and delays often occur. Delays are frequently associated with, among
other things:
. customers' seasonal purchasing and budgetary cycles;
. education of customers as to the potential applications of its products
and services, as well as related product-life cost savings;
. compliance with customers' internal procedures for approving large
expenditures and evaluating and accepting new technologies;
. compliance with governmental or other regulatory standards;
. difficulties associated with customers' ability to secure financing;
. negotiation of purchase and service terms for each sale; and
. price negotiations required to secure purchase orders.
A single customer's order scheduled for shipment in a quarter can represent a
large portion of the Company's potential sales for such quarter. The Company has
at times failed to receive expected orders, and delivery schedules have been
deferred as a result of changes in customer requirements and commitments, among
other factors. As a result, the Company's operating results for a particular
period have been and could in the future be materially adversely affected by a
delay, rescheduling or cancellation of even one purchase order. In addition, the
Company's operating results may be affected by an inability to obtain such large
orders from single customers in the future.
Uncertainty in Telecommunications Industry
Although much of the anticipated growth in the telecommunications
infrastructure is expected to result from the entrance of new service providers,
many new providers do not have the financial resources of existing service
providers. If these new service providers are unable to adequately finance their
operations, they may cancel or delay orders. Moreover, purchase orders are often
received and accepted far in advance of shipment and, as a result, the Company
typically permits orders to be modified or canceled with limited or no
penalties. Any failure to reduce actual costs to the extent anticipated when an
order is received substantially in advance of shipment or an increase in
anticipated costs before shipment could materially adversely affect the
Company's gross margin for such orders.
Inventory
The Company's customers have increasingly been requiring product shipment upon
ordering rather than submitting purchase orders far in advance of expected
shipment dates. This practice requires the Company to keep inventory on hand for
immediate shipment. Given the variability of customer need and purchasing power,
it is hard to predict the amount of inventory needed to satisfy customer demand.
If the Company over- or under-estimates
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inventory requirements, its results of operations could continue to be adversely
affected. In particular, increases in inventory could materially adversely
affect operations if such inventory is not used or becomes obsolete. This risk
was realized in the large inventory write-downs in the second quarter of 1999.
Shipment delays
Most of the Company's sales in recent quarters have been realized near the end
of each quarter. Accordingly, a delay in a shipment near the end of a particular
quarter for any reason may cause sales in a particular quarter to fall
significantly below the Company's and stock market analysts' expectations. Such
delays have occurred in the past due to, for example, unanticipated shipment
rescheduling, cancellations or deferrals by customers, competitive and economic
factors, unexpected manufacturing or other difficulties, delays in deliveries of
components, subassemblies or services by suppliers and failure to receive
anticipated orders. The Company cannot determine whether similar or other delays
might occur in the future, but expect that some or all of such problems might
recur.
Expenses
Magnifying the effects of any revenue shortfall, a material portion of the
Company's expenses are fixed and difficult to reduce should revenues not meet
expectations.
Volatility of Operating Results
If the Company or its competitors announce new products, services and
technologies, it could cause customers to defer or cancel purchases of its
systems and services. Additional factors have caused and will continue to cause
the Company's performance to vary significantly from period to period. These
factors include:
. new product introductions and enhancements and related costs;
. weakness in emerging-country markets, resulting in overcapacity;
. ability to manufacture and produce sufficient volumes of systems and meet
customer requirements;
. manufacturing efficiencies and costs;
. customer confusion due to the impact of actions of competitors;
. variations in the mix of sales through direct efforts or through
distributors or other third parties;
. variations in the mix of systems and related software tools sold and
services provided, as margins from service revenues are typically lower
than margins from product sales;
. operating and new product development expenses;
. product discounts;
. accounts receivable collection;
. changes in its pricing or customers' or suppliers' pricing;
. inventory write-downs and obsolescence;
. market acceptance by customers and timing of availability of new products
and services provided by the Company or its competitors;
. acquisitions, including costs and expenses thereof;
. use of different distribution and sales channels;
. fluctuations in foreign currency exchange rates;
. delays or changes in regulatory approval of systems and services;
. warranty and customer support expenses;
. severance costs;
. consolidation and other restructuring costs;
. the pending stockholder class action lawsuit;
. the need for additional financing;
. customization of systems;
. general economic and political conditions; and
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. natural disasters.
The Company's results of operations have been and will continue to be
influenced by competitive factors, including pricing, availability and demand
for competitive products and services. All of the above factors are difficult
for the Company to forecast, and any of them could materially adversely affect
its business, financial condition and results of operations.
Because of all of the foregoing factors, in some future quarter or quarters
the Company's operating results may continue to be below those projected by
public market analysts, and the price of its common stock may continue to be
materially adversely affected. Because of lack of order visibility and the
current trend of order delays, deferrals and cancellations, the Company cannot
assure that it will be able to achieve or maintain its current or recent
historical sales levels.
The Company incurred a net loss for each of the quarters in 1998, and for the
first two quarters of 1999. The Company may also incur operating and net losses
in subsequent periods, especially if current market conditions continue to
deteriorate. Additionally, management continues to evaluate market conditions
in order to assess the need to take further action to more closely align the
Company's cost structure with anticipated revenues. Any subsequent actions could
result in further restructuring charges, inventory write-downs and provisions
for the impairment of long-lived assets.
Nasdaq Delisting Risk
If the Company's stock price falls below $1.00 per share, its stock may be
delisted from the Nasdaq National Market.
Acquisition Related Risks
The Company may be unable to realize the full value of its past acquisitions
Since April 1996, the Company has acquired nine complementary companies and
businesses. Integration and management of these companies into the Company's
business is ongoing. Many of these acquisitions have not resulted in the
benefits originally anticipated. The Company has encountered or expects to
encounter the following problems relating to such transactions:
. difficulty of assimilating operations and personnel of combined companies;
. potential disruption of ongoing business;
. inability to retain key technical and managerial personnel;
. inability of management to maximize financial and strategic position
through integration of acquired businesses;
. additional expenses associated with amortization of acquired intangible
assets;
. difficulty in maintaining uniform standards, controls, procedures and
policies;
. impairment of relationships with employees and customers as a result of
integration of new personnel;
. risks of entering markets in which it has no or limited direct prior
experience; and
. operation of companies in different geographical locations with different
cultures.
The Company may not be successful in overcoming any or all of these risks or
any other problems encountered in connection with such acquisitions, and such
transactions may materially adversely affect its business, financial condition
and results of operations or require divestment of one or more business units or
a charge due to impairment of assets including, in particular, goodwill.
The Company may have to acquire new businesses
As part of its overall strategy, the Company plans to continue acquisitions of
or investments in complementary companies, products or technologies and to
continue entering into joint ventures and strategic alliances with other
companies. Its success in future acquisition transactions may, however, be
limited. The Company competes for acquisition and expansion opportunities
against many entities that have substantially greater resources. The Company may
not be able to successfully identify suitable candidates, pay for or complete
acquisitions, or expand into new markets. Certain of the Company's acquisitions
have not produced the benefits originally anticipated by the Company and such
acquired entity. Once integrated, acquired businesses may not achieve
comparable levels of revenues, profitability, or productivity to the Company's
existing business, or the stand alone acquired company, or
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otherwise perform as expected. Also, as commonly occurs with mergers of
technology companies during the pre-merger and integration phases, aggressive
competitors may also undertake formal initiatives to attract customers and to
recruit key employees through various incentives. Moreover, if the Company
proceeds with acquisitions in which the consideration consists of cash, a
substantial portion of its limited cash could be used to consummate its
acquisitions. The occurrence of any of these events could have a material
adverse effect on the Company's workforce, business, financial condition and
results of operations. See "-Management of Growth."
Accounting Issues Related to Acquisitions
It is anticipated that beginning in late 2000, all business acquisitions must
be accounted for under the purchase method of accounting for financial reporting
purposes. Many attractive acquisition candidates are technology companies which
tend to have insignificant amounts of tangible assets and significant intangible
assets, and the acquisition of these businesses would typically result in
substantial charges related to the amortization of such intangible assets. For
example, all of the Company's past acquisitions to date, except the acquisitions
of CRC, RT Masts and Telematics have been accounted for under the purchase
method of accounting, and as a result, a significant amount of goodwill is being
amortized. This amortization expense may have a significant effect on the
Company's financial results.
Contract Manufacturers and Limited Sources of Supply
The Company's internal manufacturing capacity is very limited. The Company
uses contract manufacturers to produce its systems, components and subassemblies
and expects to rely increasingly on these manufacturers in the future. The
Company also relies on outside vendors to manufacture certain other components
and subassemblies. Its internal manufacturing capacity and that of its contract
manufacturers may not be sufficient to fulfill its orders. The Company's failure
to manufacture, assemble and ship systems and meet customer demands on a timely
and cost-effective basis could damage relationships with customers and have a
material adverse effect on its business, financial condition and results of
operations.
In addition, certain components, subassemblies and services necessary for the
manufacture of its systems are obtained from a sole supplier or a limited group
of suppliers. In particular, Eltel Engineering S.r.L. and Associates, Xilinx,
Inc. are sole source or limited source suppliers for critical components used in
its radio systems.
The Company's reliance on contract manufacturers and on sole suppliers or a
limited group of suppliers involves risks. The Company has experienced an
inability to obtain an adequate supply of finished products and required
components and subassemblies. As a result, the Company has reduced control over
the price, timely delivery, reliability and quality of finished products,
components and subassemblies. The Company does not have long-term supply
agreements with most of its manufacturers or suppliers. The Company has
experienced problems in the timely delivery and quality of products and certain
components and subassemblies from vendors. Some suppliers have relatively
limited financial and other resources. Any inability to obtain timely deliveries
of components and subassemblies of acceptable quality or any other circumstance
would require the Company to seek alternative sources of supply, or to
manufacture finished products or components and subassemblies internally. As
manufacture of its products and certain of its components and subassemblies is
an extremely complex process, finding and educating new vendors could delay the
Company's ability to ship its systems, which could damage relationships with
current or prospective customers and materially adversely affect its business,
financial condition and results of operations.
Management of Growth
Recently, in response to market declines and poor performance in its sector
generally and its lower than expected performance over the last several
quarters, the Company introduced measures to reduce operating expenses,
including reductions in its workforce in July, September and November 1998 and
June 1999. However, prior to such measures, the Company had significantly
expanded the scale of its operations to support then anticipated continuing
increased sales and to address critical infrastructure and other requirements.
This expansion included leasing additional space, opening branch offices and
subsidiaries in the United Kingdom, Italy, Germany, Mexico, United Arab
Emirates, China and Singapore, opening design centers in the United Kingdom and
the United States, acquiring a large amount of inventory and funding accounts
receivable, and acquiring nine businesses. The Company has since closed the
offices in Mexico and the United Arab Emirates. The Company had also invested
significantly in research and development to support product development and
services. Further, the Company had hired additional personnel in all functional
areas, including in sales and marketing, manufacturing and operations and
finance. The Company experienced significantly higher operating expenses than in
prior years as a result of this expansion. A material portion of these expenses
remain fixed costs.
In addition, to prepare for the future, the Company is required to continue to
invest resources in its acquired and new businesses. Currently, the Company is
devoting significant resources to the development of new products and
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technologies and is conducting evaluations of these products. The Company will
continue to invest additional resources in plant and equipment, inventory,
personnel and other items, to begin production of these products and to provide
any necessary marketing and administration to service and support these new
products. Accordingly, in addition to the effect its recent performance has had
on gross profit margin and inventory levels, its gross profit margin and
inventory management may be further adversely impacted in the future by start-up
costs associated with the initial production and installation of these new
products. Start-up costs may include additional manufacturing overhead,
additional allowance for doubtful accounts, inventory and warranty reserve
requirements and the creation of service and support organizations. Additional
inventory on hand for new product development and customer service requirements
also increases the risk of further inventory write-downs. Based on the
foregoing, if the Company's sales do not increase, its results of operations
will continue to be materially adversely affected.
Expansion of its operations and acquisitions in prior periods have caused and
continue to impose a significant strain on the Company's management, financial,
manufacturing and other resources and have disrupted its normal business
operations. The Company's ability to manage any possible future growth may
depend upon significant expansion of its executive, manufacturing, accounting
and other internal management systems and the implementation of a variety of
systems, procedures and controls, including improvements relating to inventory
control. In particular, the Company must successfully manage and control
overhead expenses and inventories, the development, introduction, marketing and
sales of new products, the management and training of its employee base, the
integration and coordination of a geographically and ethnically diverse group of
employees and the monitoring of third party manufacturers and suppliers. The
Company cannot be certain that attempts to manage or expand its marketing,
sales, manufacturing and customer support efforts will be successful or result
in future additional sales or profitability. The Company must also more
efficiently coordinate activities in its companies and facilities in Rome and
Milan, Italy, France, Poland, the United Kingdom, California, New Jersey,
Florida, Virginia, Washington and elsewhere. For a number of reasons, the
Company has in the past experienced and may continue to experience significant
problems in these areas. For example, the Company has experienced difficulties
due to the acquired businesses utilizing differing business and accounting
systems, currencies, and a variety of unique customs, cultures, and language
barriers. Additionally, the products and associated marketing and sales
processes differ for each acquisition. As a result of the foregoing, as well as
difficulty in forecasting revenue levels, the Company will continue to
experience fluctuations in revenues, costs, and gross margins.
Any failure to coordinate and improve systems, procedures and controls,
including improvements relating to inventory control and coordination with its
subsidiaries, at a pace consistent with the Company's business, could cause
continued inefficiencies, additional operational complexities and expenses,
greater risk of billing delays, inventory write-downs and financial reporting
difficulties. Such problems could have a material adverse effect on its
business, financial condition and results of operations.
A significant ramp-up of production of products and services could require the
Company to make substantial capital investments in equipment and inventory, in
recruitment and training additional personnel and possibly in investment in
additional manufacturing facilities. If undertaken, the Company anticipates
these expenditures would be made in advance of increased sales. In such event,
gross margins would be adversely affected from time-to-time due to short-term
inefficiencies associated with the addition of equipment and inventory,
personnel or facilities, and cost categories may periodically increase as a
percentage of revenues.
Decline in Selling Prices
The Company believes that average selling prices and possibly gross margins
for its systems and services will decline in both the near and the long term.
Reasons for such decline may include the maturation of such systems, the effect
of volume price discounts in existing and future contracts and the
intensification of competition. To offset declining average selling prices, the
Company believes it must take a number of steps, including:
. successfully introducing and selling new systems on a timely basis;
. developing new products that incorporate advanced software and other
features that can be sold at higher average selling prices; and
. reducing the costs of its systems through contract manufacturing, design
improvements and component cost reduction, among other actions.
If the Company cannot develop new products in a timely manner, fails to
achieve customer acceptance or does not generate higher average selling prices,
then the Company would be unable to offset declining average selling prices. If
the Company is unable to offset declining average selling prices, its gross
margins will decline.
Accounts Receivable
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The Company is subject to credit risk in the form of trade account
receivables. The Company is often unable to enforce a policy of receiving
payment within a limited number of days of issuing bills, especially for
customers in the early phases of business development. In addition, many of its
foreign customers are granted longer payment terms than those typically existing
in the United States. The Company's credit policy on customers both domestically
and internationally requires letters of credit and down payments for those
customers deemed to be a high risk and open credit for customers which are
deemed credit worthy and have a history of timely payments with the Company.
The Company's credit policy typically allows payment terms between 30 and 90
days depending upon the customer and the cultural norms of the region. The
Company has had difficulties in the past in receiving payment in accordance with
its policies, particularly from customers awaiting financing to fund their
expansion and from customers outside of the United States. Such difficulties
may continue in the future, which could have a further material adverse effect
on its business, financial condition and results of operations.
The Company's bank line of credit currently permits the Company to sell up to
$25 million of its accounts receivable at any one time to a limited group of
purchasers on a non-recourse basis. The Company has in the past utilized such
sales and may continue from time to time to sell its receivables, as part of an
overall customer financing program. However, the Company may not be able to
locate parties to purchase such receivables on acceptable terms or at all.
Product Quality, Performance and Reliability
Customers require very demanding specifications for quality, performance and
reliability. The Company has limited experience in producing and manufacturing
systems and contracting for such manufacture. As a consequence, problems may
occur 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 or cancellations or rescheduling of orders or
shipments, delays in collecting accounts receivable and product returns and
discounts. If any of these events occur, it would have a material adverse effect
on the Company's business, financial condition and results of operations.
In addition, to maintain its ISO 9001 registration, the Company must
periodically undergo certification assessment. Failure to maintain such
registration could materially adversely affect its business. The Company
completed ISO 9001 registration for its United Kingdom sales and customer
support facility in 1996, its Geritel facility in Italy in 1996, and its
Technosystem facility in Italy in 1997. Other facilities are also attempting to
obtain ISO 9001 registration. Such registrations may not be achieved and the
Company may be unable to maintain those registrations the Company has already
completed. Any such failure could have a material adverse effect on its
business, financial condition and results of operations.
Changes in Financial Accounting Standards
The Company prepares its financial statements in conformity with United States
generally accepted accounting principles ("GAAP"). GAAP is subject to
interpretation by the American Institute of Certified Public Accountants, the
Securities and Exchange Commission and various bodies formed to interpret and
create appropriate accounting policies. A change in these policies can have a
significant effect on the Company's reported results, and may even affect its
reporting of transactions completed before a change is announced. Accounting
policies affecting many other aspects of the Company's business, including rules
relating to software and license revenue recognition, purchase and pooling-of-
interests accounting for business combinations, employee stock purchase plans
and stock option grants have recently been revised or are under review by one or
more groups. Changes to these rules, or the questioning of current practices,
may have a material adverse effect on the Company's reported financial results
or in the way it conducts its business.
In addition, the preparation of financial statements in conformity with GAAP
requires the Company to make estimates and assumptions that affect the recorded
amounts of assets and liabilities, disclosure of those assets and liabilities at
the date of the financial statements and the recorded amounts of expenses during
the reporting period. A change in the facts and circumstances surrounding these
estimates could result in a change to the estimates and impact future operating
results.
Market Acceptance
The Company's future operating results depend upon the continued growth and
increased availability and acceptance of microcellular, PCN/PCS and wireless
local loop access telecommunications services in the United States and
internationally. The volume and variety of wireless telecommunications services
or the markets for and acceptance of such services may not continue to grow as
expected. The growth of such services may also fail to create anticipated demand
for its systems. Because these markets are relatively new, predicting which
segments of these markets will develop and at what rate these markets will grow
is difficult. In addition to its other products, the Company has recently
invested significant time and resources in the development of point-to-
multipoint radio
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systems. If the licensed millimeter wave, spread spectrum microwave radio or
point-to-multipoint microwave 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 will be
materially adversely affected.
Certain sectors of the communications market will require the development and
deployment of an extensive and expensive communications infrastructure. In
particular, the establishment of PCN/PCS networks will require very large
capital expenditures. Communications providers may not make the necessary
investment in such infrastructure, and the creation of this infrastructure may
not occur in a timely manner. Moreover, one potential application of the
Company's technology--use of its systems in conjunction with the provision of
alternative wireless access in competition with the existing wireline local
exchange providers--depends on the pricing of wireless telecommunications
services at rates competitive with those charged by wireline telephone
companies. Rates for wireless access must become competitive with rates charged
by wireline companies for this approach to be successful. If wireless access
rates are not competitive, consumer demand for wireless access will be
materially adversely affected. If the Company allocates resources to any market
segment that does not grow, it may be unable to reallocate resources to other
market segments in a timely manner, ultimately curtailing or eliminating its
ability to enter such segments.
Certain current and prospective customers are delivering services and features
that use competing transmission media such as fiber optic and copper cable,
particularly in the local loop access market. To successfully compete with
existing products and technologies, the Company must offer systems with superior
price/performance characteristics and extensive customer service and support.
Additionally, the Company must supply such systems on a timely and cost-
effective basis, in sufficient volume to satisfy such prospective customers'
requirements and otherwise overcome any reluctance on the part of such customers
to transition to new technologies. Any delay in the adoption of the Company's
systems may result in prospective customers using alternative technologies in
their next generation of systems and networks.
Prospective customers may not design their systems or networks to include the
Company's systems. Existing customers may not continue to include the Company's
systems in their products, systems or networks in the future. The Company's
technology may not replace existing technologies and achieve widespread
acceptance in the wireless telecommunications market. Failure to achieve or
sustain commercial acceptance of the Company's currently available radio systems
or to develop other commercially acceptable radio systems would materially
adversely affect it. Also, industry technical standards may change or, if
emerging standards become established, the Company may not be able to conform to
these new standards in a timely and cost-effective manner.
Intensely Competitive Industry
The wireless communications market is intensely competitive. The Company's
wireless-based radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media, including copper
and fiber optic cable. The Company is experiencing intense competition worldwide
from a number of leading telecommunications companies. Such companies offer a
variety of competitive products and services and broader telecommunications
product lines, and include Adtran, Inc., Alcatel Network Systems, Bosch Telekom,
Adaptive Broadband, Inc., Inc., Digital Microwave Corporation (which has
recently acquired other competitors, including Innova International Corp. and
MAS Technology, Ltd.), Ericsson Limited, Harris Corporation-Farinon Division,
Larus Corporation, Lucent T.R.T., NEC, Nokia Telecommunications, Nortel/BNI,
Philips T.R.T., SIAE, Siemens, Utilicom and Western Multiplex Corporation.
Many of these companies have greater installed bases, financial resources and
production, marketing, manufacturing, engineering and other capabilities than
the Company does. In early 1998, the Company acquired the Cylink Wireless Group
which competes with a large number of companies in the wireless communications
markets, including U.S. local exchange carriers and foreign telephone companies.
The most significant competition for Cylink Wireless Group's products in the
wireless market is from telephone companies that offer leased line data
services. The Company faces actual and potential competition not only from these
established companies, but also from start-up companies that are developing and
marketing new commercial products and services.
The Company may also compete in the future with other market entrants offering
competing technologies. Some of the Company's current and prospective customers
and partners have developed, are currently developing or could manufacture
products competitive with the Company's products. Nokia and Ericsson have
recently developed new competitive radio systems.
The principal elements of competition in its market and the basis upon which
customers may select the Company's systems include price, performance, software
functionality, ability to meet delivery requirements and customer service and
support. Recently, certain competitors have announced the introduction of new
competitive products, including related software tools and services, and the
acquisition of other competitors and competitive technologies. The Company
expects competitors to continue to improve the performance and lower the price
of their
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current products and services and to introduce new products and services or new
technologies that provide added functionality and other features. New product
and service offerings and enhancements by the Company's competitors could cause
a decline in sales or loss of market acceptance of its systems. New offerings
could also make the Company's systems, services or technologies obsolete or non-
competitive. In addition, the Company is experiencing significant price
competition and expects such competition to intensify.
The Company believes that to be competitive, it will need to expend
significant resources on, among other items, new product development and
enhancements. In marketing the Company's systems and services, the Company will
compete with vendors employing other technologies and services that may extend
the capabilities of their competitive products beyond their current limits,
increase their productivity or add other features. The Company may not be able
to compete successfully in the future.
Rapid Technological Change
Rapid technological change, frequent new product introductions and
enhancements, product obsolescence, changes in end-user requirements and
evolving industry standards characterize the communications market. The
Company's ability to compete in this market will depend upon successful
development, introduction and sale of new systems and enhancements and related
software tools, on a timely and cost-effective basis, in response to changing
customer requirements. Recently, the Company has been developing point-to-
multipoint radio systems. Any success in developing new and enhanced systems,
including point-to-multipoint systems, and related software tools will depend
upon a variety of factors. Such factors include:
. new product selection;
. integration of various elements of complex technology;
. timely and efficient implementation of manufacturing and assembly processes
and cost reduction programs;
. development and completion of related software tools, system performance,
quality and reliability of systems;
. development and introduction of competitive systems; and
. timely and efficient completion of system design.
The Company has experienced and continues to experience delays in customer
procurement and in completing development and introduction of new systems and
related software tools, including products acquired in acquisitions. Moreover,
the Company may not be successful in selecting, developing, manufacturing and
marketing new systems or enhancements or related software tools. Also, errors
could be found in the Company's systems after commencement of commercial
shipments. Such errors could result in the loss of or delay in market
acceptance, as well as expenses associated with re-work of previously delivered
equipment. The Company's inability to introduce in a timely manner new systems
or enhancements or related software tools that contribute to sales could have a
material adverse effect on its business, financial condition and results of
operations.
Uncertainty in International Operations
In doing business in international markets, the Company faces economic,
political and foreign currency fluctuations that are more volatile than those
commonly experienced in the United States and other areas. Most of the Company's
sales to date have been made to customers located outside of the United States.
In addition, to date, the Company has acquired three companies based in Italy,
Technosystem S.p.A., Cemetel S.p.A., and Geritel S.p.A., and two United Kingdom-
based companies, RT Masts and Telesys Limited, as well as the acquisition of the
assets of the Cylink Wireless Group, a division with substantial international
operations. Currently, the Company is exploring the possibility of disposing of
Technosystem S.p.A. and Control Resources Corporation. Many of these acquired
companies sell their products and services primarily to customers in Europe, the
Middle East and Africa. The Company anticipates that international sales will
continue to account for a majority of its sales for the foreseeable future.
Historically, the Company's international sales have been denominated in
British pounds sterling or United States dollars. With recent acquisitions of
foreign companies, certain of the Company's international sales are denominated
in other foreign currencies, including Italian lira. A decrease in the value of
foreign currencies relative to the United States dollar could result in
decreased margins from those transactions. For international sales that are
United States dollar-denominated, such a decrease could make its systems less
price-competitive and could have a material adverse effect upon its financial
condition. The Company has in the past mitigated currency exposure to the
British pound sterling through hedging measures. However, any future hedging
measures may be limited in their
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effectiveness with respect to the British pound sterling and other foreign
currencies. Additional risks are inherent in the Company's international
business activities. Such risks include:
. changes in regulatory requirements;
. costs and risks of localizing systems in foreign countries;
. delays in receiving components and materials;
. availability of suitable export financing;
. timing and availability of export licenses, tariffs and other trade
barriers;
. difficulties in staffing and managing foreign operations, branches and
subsidiaries;
. difficulties in managing distributors;
. potentially adverse tax consequences;
. foreign currency exchange fluctuations;
. the burden of complying with a wide variety of complex foreign laws and
treaties;
. difficulty in accounts receivable collections; and
. political and economic instability.
In addition, many of the Company's customer purchase and other agreements are
governed by foreign laws, which may differ significantly from U.S. laws.
Therefore, the Company may be limited in its ability to enforce its rights under
such agreements and to collect damages, if awarded.
In many cases, local regulatory authorities own or strictly regulate
international telephone companies. Established relationships between government-
owned or government-controlled telephone companies and their traditional
indigenous suppliers of telecommunications often limit access to such markets.
The successful expansion of the Company's international operations in certain
markets will depend on its ability to locate, form and maintain strong
relationships with established companies providing communication services and
equipment in targeted regions. The failure to establish regional or local
relationships or to successfully market or sell its products in international
markets could limit its ability to expand operations. The Company's inability to
identify suitable parties for such relationships, or even if such parties
identified to form and maintain strong relationships with them, could prevent
the Company from generating sales of products and services in targeted markets
or industries. Moreover, even if such relationships are established, the Company
may be unable to increase sales of products and services through such
relationships.
Some of the Company's potential markets include developing countries that may
deploy wireless communications networks as an alternative to the construction of
a limited wired infrastructure. These countries may decline to construct
wireless telecommunications systems or construction of such systems may be
delayed for a variety of reasons. If such events occur, any demand for the
Company's systems in these countries will be similarly limited or delayed. Also,
in developing markets, economic, political and foreign currency fluctuations may
be even more volatile than conditions in developed areas. Such volatility could
have a material adverse effect on its ability to develop or continue to do
business in such countries.
Countries in the Asia/Pacific, African, and Latin American regions have
recently experienced weaknesses in their currency, banking and equity markets.
These weaknesses have adversely affected and could continue to adversely affect
demand for products, the availability and supply of product components to the
Company and, ultimately, its consolidated results of operations.
Extensive Government Regulation
Radio communications are extensively regulated by the United States and
foreign laws as well as international treaties. The Company's systems must
conform to a variety of domestic and international requirements established to,
among other things, avoid interference among users of radio frequencies and to
permit interconnection of equipment. Historically, in many developed countries,
the limited availability of radio frequency spectrum has inhibited the growth of
wireless telecommunications networks.
Each country's regulatory process differs. To operate in a jurisdiction, the
Company must obtain regulatory approval for its systems and comply with
differing regulations. Regulatory bodies worldwide continue to adopt new
standards for wireless communications products. The delays inherent in this
governmental approval process may cause the cancellation, postponement or
rescheduling of the installation of communications systems by the Company and
its customers. The failure to comply with current or future regulations or
changes in the interpretation of
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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
regulations and changes.
In addition, the Company is also affected by domestic and international
authorities' regulation of the allocation and auction of the radio frequency
spectrum. Equipment to support new systems and services can be marketed only if
permitted by governmental regulations and if suitable frequency allocations are
auctioned to service providers. Establishing new regulations and obtaining
frequency allocation at auction is a complex and lengthy process. If PCS
operators and others are delayed in deploying new systems and services, the
Company could experience delays in orders. Similarly, failure by regulatory
authorities to allocate suitable frequency spectrum could have a material
adverse effect on the Company's results. 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.
The Company operates in a regulatory environment subject to significant
change. Regulatory changes, which are affected by political, economic and
technical factors, could significantly impact its operations by restricting its
development efforts and those of its customers, making current systems obsolete
or increasing competition. Any such regulatory changes, including changes in the
allocation of available spectrum, could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
may also find it necessary or advisable to modify its systems and services to
operate in compliance with such regulations. Such modifications could be
expensive and time-consuming.
Additional Capital Requirements
The precise extent of future capital requirements will depend upon many
factors, including the development of new products and related software tools,
potential acquisitions, maintenance of adequate manufacturing facilities and
contract manufacturing agreements, progress of research and development efforts,
expansion of marketing and sales efforts, and the status of competitive
products. Additional financing may not be available in the future on acceptable
terms, or at all. The continued existence of a substantial amount of
indebtedness incurred through the issuance of the Company's Notes and the
incurrence of debt under the Company's bank line of credit may affect the
Company's ability to raise additional financing. Given the recent price for the
Company's Common Stock, if additional funds are raised by issuing equity
securities, significant dilution to its stockholders could result.
The Company has, however, recently retired approximately $40.0 million of its
Notes in exchange for approximately 5.3 million shares of its Common Stock. By
retiring the debt at a significant discount from its face value, the Company
realized an immediate improvement to its balance sheet, and expects to improve
future cash flow by reducing interest expense. The Company may refinance or
exchange the remainder of the Notes and/or the bank debt or exchange the Notes
for other forms of securities. The Company also recently issued 15,000 shares of
Series B Convertible Preferred Stock and warrants to purchase up to 1,242,257
shares of its Common Stock in exchange for a $15 million investment, and then in
June 1999, exchanged 5,134,795 shares of Common Stock for all 15,000 shares of
Series B Convertible Preferred Stock. Later in June 1999, the Company issued
10,067,958 shares of Common Stock to institutional investors for $40.0 million.
These transactions have had and may continue to have a substantial dilutive
effect on its stockholders and may make it difficult for the Company to obtain
additional future financing, if needed.
Class Action Litigation
State Actions
A putative consolidated class action complaint in the Superior Court of
California, County of Santa Clara, on behalf of P-Com stockholders who purchased
or otherwise acquired its Common Stock between April 15, 1997 and September 11,
1998, alleges various state securities laws violations by P-Com and certain of
its officers and directors. The state court complaint seeks unquantified
compensatory, punitive and other damages, attorneys' fees and injunctive and/or
equitable relief.
Federal Actions
Similar putative class action complaints in the United States District Court,
Northern District of California on behalf of P-Com stockholders who purchased or
otherwise acquired its Common Stock between April 15, 1997 and September 11,
1998, alleged violations of the Securities Exchange Act of 1934 by P-Com and
certain of its officers and directors. The federal court complaints have been
dismissed without prejudice.
An unfavorable outcome in securities law class action litigation could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. Even if all of the litigation is resolved
in its favor, the defense of such litigation may entail considerable cost and
the significant diversion of efforts of
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management, either of which may have a material adverse effect on the Company's
business, financial condition and results of operations.
Protection of Proprietary Rights
The Company relies on a combination of patents, trademarks, trade secrets,
copyrights and other measures to protect its intellectual property rights. The
Company generally enters into confidentiality and nondisclosure agreements with
service providers, customers and others to limit access to and distribution of
proprietary rights. The Company also enters into software license agreements
with customers and others. However, such measures may not provide adequate
protection for its trade secrets or other proprietary information for a number
of reasons.
Any of the Company's patents could be invalidated, circumvented or challenged,
or the rights granted thereunder may not provide competitive advantages to the
Company. Any of the Company's pending or future patent applications might not be
issued within the scope of the claims sought, if at all. Furthermore, others may
develop similar products or software or duplicate the Company's products or
software. Similarly, others might design around the patents owned by the
Company, or third parties may assert intellectual property infringement claims
against the Company. In addition, foreign intellectual property laws may not
adequately protect the Company's intellectual property rights abroad. A failure
or inability to protect proprietary rights could have a material adverse effect
on the Company's business, financial condition and results of operations.
Even if the Company's intellectual property rights are adequately protected,
litigation may be necessary to enforce patents, copyrights and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of proprietary rights of others or to defend
against claims of infringement or invalidity. The Company has, through its
acquisition of the Cylink Wireless Group, been put on notice from a variety of
third parties that the Cylink Wireless Group's products may be infringing the
intellectual property rights of other parties. Any such intellectual property
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. Litigation, even if wholly without merit,
could result in substantial costs and diversion of resources, regardless of the
outcome. Infringement, invalidity, right to use or ownership claims by third
parties or claims for indemnification resulting from infringement claims could
be asserted in the future and such assertions may materially adversely affect
the Company. If any claims or actions are asserted against the Company, the
Company may seek a license under a third party's intellectual property rights.
However, such a license may not be available under reasonable terms or at all.
Dependence on Key Personnel
The Company's future operating results depend in significant part upon the
continued contributions of key technical and senior management personnel, many
of whom would be difficult to replace. Future operating results also depend upon
the ability to attract and retain such specially qualified management,
manufacturing, quality assurance, engineering, marketing, sales and support
personnel. Competition for such personnel is intense, and the Company may not be
successful in attracting or retaining such personnel. Only a limited number of
persons with the requisite skills to serve in these positions may exist and it
may be increasingly difficult for the Company to hire such personnel.
The Company has experienced and may continue to experience employee turnover
due to several factors, including an expanding economy within the geographic
area in which the Company maintains its principal business offices. Such
turnover could adversely impact its business. The Company is presently
addressing these issues and intends to pursue solutions designed to provide
performance incentives and thereby retain employees. The loss of any key
employee, the failure of any key employee to perform in his or her position, its
inability to attract and retain skilled employees as needed or the inability of
its officers and key employees to expand, train and manage the Company's
employee base could all materially adversely affect the Company's business.
Year 2000 Compliance
Numerous computer systems and software products are coded to accept only two
digit entries in the date code field. Beginning in the year 2000, these date
code fields will have to distinguish 21st Century dates from 20th Century dates.
As a result in less than six months, computer systems and/or software used by
many companies may need to be upgraded to comply with such Year 2000 ("Y2K")
requirements.
Year 2000 Project Management Plan
P-Com has utilized Y2K consultants to audit its revenue generating facilities
located in California, and Tortona, Italy and its subsidiaries CRC in New Jersey
and Technosystem in Rome, Italy. The consultants both reviewed P-Com's Y2K
compliance efforts to date and identified areas warranting further review. Based
on the consultants' recommendations, P-Com has embarked on a global program to
address its readiness for the century change. The
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Company has created a Y2K project management office. A project manager directs
the office and supervises its functions. The Y2K project manager and the
office's staff are responsible for, among other tasks, business and continuity
planning, vendor compliance management, creating and maintaining an inventory of
Y2K action items, establishing and publishing standards, and maintaining a
document archive. The Y2K project management office also is responsible for
creating and managing a contingency plan which is scheduled to be established
and implemented by the end of September 1999.
P-Com's compliance efforts to date have emphasized product and infrastructure
compliance. Vendor compliance has been addressed at several locations. To date,
the Company's business has been uninterrupted by, and the Company has not
delayed any projects as a result of Y2K related complications.
Products
The inability of any of the Company's products to properly manage and
manipulate data in the Year 2000 could result in increased warranty costs,
customer satisfaction issues, potential lawsuits and other material costs and
liabilities. The Company has completed testing of all products in its radio
products operations. Products were tested according to various product-specific
standards. Based on these tests, all products in the Tel-Link, Air-Link, and
Spread Spectrum product lines have been found to be compliant in all material
respects. At the CRC facility, all products in the current line of Net Path,
Rivets, Network Series and Recovery Series product lines have been tested and
found to be compliant in all material respects. There can be no assurance,
however, that its testing procedures detect every potential Y2K complication.
CRC supports several older modem systems. These systems have not been tested for
Y2K compliance because the modems do not contain date sensitive fields in the
man-machine interface. Therefore, the changeover to the Y2K date field will
have no effect on this system. Since the modems are not Y2K sensitive, there is
no need to pursue a potential remedy. Any complications which arise as a result
of an untested modem systems' potential Y2K failures could result in increased
warranty costs, customer satisfaction issues, potential lawsuits and other
material costs and liabilities.
Products produced at the Technosystem facility, including the radio and
television broadcast products and the one way point-to-multipoint products under
development, have been tested and are Y2K compliant in all material respects.
There can be no assurance that our testing procedures detect every potential Y2K
complication. The equipment manager utilized by the transmission equipment
manufactured at Technosystem is not Y2K compliant. The equipment manager is an
additional device which customers may purchase and attach to the transmission
system to verify that the transmission device is running properly. The
transmitters will continue to function properly even if the equipment manager
fails. However, if the equipment manager fails, it will not perform its error
detection function properly. The Y2K limitation contained in the equipment
manager can be corrected by shutting the device off on January 1, 2000 and
turning it on again. The Company has notified customers who have purchased the
equipment manager of its Y2K limitation and the remedial procedures which must
be implemented on January 1, 2000. Any complications which arise as a result of
the equipment manager's potential Y2K failures could result in increased
warranty costs, customer satisfaction issues, potential lawsuits and other
material costs and liabilities.
Infrastructure
The failure of any internal system to achieve Y2K readiness could result in a
material disruption to the Company's operations. While the Company has completed
evaluations of several of our internal systems and is in the process of
completing internal system review, it cannot be assured that its testing
procedures will detect every potential Y2K related failure at each of the
facilities listed below:
California, Florida, Italy, United Kingdom, Germany
In November 1998, the Company installed a new internal manufacturing resource
planning business system (MRP) that is Y2K ready. The cost of the upgrade was
approximately $250,000. The Company's MRP system facilitates accounting and
manufacturing functions at the Company's California sites and the Redditch, UK
site. At the Tortona, Italy location, the MRP system facilitates manufacturing
functions only. The November 1998 Y2K upgrade corrected Y2K limitations in the
MRP system at each site at which it is utilized. The Company's Florida,
Watford, UK, and Frankfurt, Germany sites do not utilize the MRP system. P-
Com's Tortona Italy facility utilizes an Italian business system for its
accounting operations. This system is not Y2K compliant. The Company has a new
mainframe in place and Y2K Compliant software has been installed. Data from the
old system will be transferred over by September 1999, when training which is in
progress has been completed. The cost of the new system is $80,000. The new
system should be fully operational by December 31, 1999. However, the Company
is devising a plan to ensure that accounting functions are performed manually in
the event the new system is not fully operational by December 31, 1999. Since
the Company is the only customer serviced by the Tortona, Italy site, and since
the Company is in the process of identifying an alternative source supplier in
the event the new accounting
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system is not installed by December 31, 1999, a failure in the present system
would have a minimal impact on the Company's customers.
Since November 1998, P-Com has completed an evaluation of many of its internal
systems. Most of its internal systems have been found to be compliant, however
we cannot guarantee that Y2K related complications will not arise. The HP UX
operating system received a Y2K patch in June 1999. The Server Operating Systems
(Novell) should receive Y2K patches by the end of September 1999. Y2K
verification procedures to determine the compliance status of the Company's
phone systems and ATE stations have been completed, and these systems have been
determined to be in compliance. Verification of the Company's personal
computers is estimated to be completed by the end of October 1999. The Company's
customer service database and QA database were upgraded during the second
quarter of 1999 and are Y2K compliant. Any unforeseen circumstances which cause
delay in upgrading any of the above systems could result in increased warranty
costs, potential customer dissatisfaction, delayed production and/or supply,
lawsuits and other material costs and liabilities.
Network Services (Vienna, VA)
The internal systems at Network Services in Vienna, Virginia have been tested
and found to be compliant in all material respects; however, there can be no
assurance that Y2K related complications will not arise. Verification of the Y2K
status of personal computers was completed during the second quarter of 1999.
Necessary upgrades to software were made in order to achieve Y2K compliance.
Control Resources Corporation (Fair Lawn, NJ)
Most of CRC's internal systems have been tested and many have been found to be
compliant; however, there can be no assurance that Y2K related complications
will not arise. The MRP Business System Proprietary Server (OS Novell 3.11)
Corporate Server and Mail System were replaced with Y2K compliant servers during
second quarter 1999. The Defect Control System is noncompliant and is scheduled
to be replaced by the end of September 1999. Verification of the compliance
status of personal computers was also completed in June 1999 and compliance
status has been achieved. Any unforeseen circumstances which cause delay in
upgrading any of the above systems could result in increased warranty costs,
potential customer dissatisfaction, delayed production and/or supply, lawsuits
and other material costs and liabilities.
Technosystem (Rome, Italy)
The ERP business system has been found to be compliant, however there can be
no assurance that Y2K related complications will not arise. Technosystem will
be sharing the same system as the Tortona, Italy facility, which has been
upgraded to meet Y2K compliance. Verification of the Y2K status of personal
computers is currently in progress and is estimated to be completed by December
1999. Any unforeseen circumstances which cause delay in upgrading any of the
above systems could result in increased warranty costs, potential customer
dissatisfaction, delayed production and/or supply, lawsuits and other material
costs and liabilities.
Vendors
The Company has identified two single source suppliers whose failure to obtain
Y2K compliance could potentially impact customers. Since the Company has not
yet obtained assurances of Y2K compliance from these suppliers, the impact of
potential Y2K limitations experienced by these companies is merely speculative
at this time. The potential impact will only become manifest, however, if both
the single source supplier and an alternative source supplier experience Y2K
related failures. One of the two identified suppliers provides a product which
the Company uses in production of DS-3 IDUs; if this supplier were to experience
a Y2K failure, production of the product would be slowed. Sales of DS-3 IDUs
make up 3-4% of the Company's sales revenue. The additional identified supplier
produces a product which will be utilized in the production of the Company's
Encore product which is scheduled to begin production in a limited capacity in
the third quarter of 1999; if this supplier experienced a Y2K related
complication, Encore production would be adversely affected.
The Company is cognizant of the risk posed by single source or large volume
suppliers that may not be addressing their Y2K readiness. The Company has
endeavored to minimize this risk by implementing a four phase plan. First, all
single source suppliers and large volume vendors were identified. Second, in
April 1999, the Company sent requests for Y2K compliance assurances to suppliers
so identified. Third, the Company will review suppliers' responses to its
requests. Last, the Company will continue to pursue assurances and/or receipt of
a remedy from noncompliant suppliers. Since the Company has always followed the
practice of alternative and multi-sourcing our single source and large volume
suppliers, we believe most products and services we order will be available from
an alternative source in the event a single source or large volume supplier
experiences a Y2K failure. However, the Company can offer no assurance that
reasonable alternative suppliers or contractors will be available.
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Even if assurances are received from third parties and/or alternative source
suppliers are identified, a risk remains that failures of systems and products
of other companies on which we rely could have a material adverse effect on our
business, financial condition and results of operations.
Critical suppliers are currently being identified at the California, Florida,
United Kingdom, Germany and Italy sites. Six critical suppliers have been
identified at Network Services in Vienna, Virginia. Three have been evaluated
and found to be compliant; however, we cannot be certain that Y2K failures will
not affect these suppliers. The remaining suppliers are scheduled to be
evaluated by the end of September 1999. CRC has identified its critical
suppliers. Evaluations are scheduled to be completed by the end of September
1999. There are three critical suppliers for the Technosystem business unit.
Evaluation of these suppliers is scheduled to be completed by the end of
September 1999.
Year 2000 Obligations: Potential Exposure
In April 1999, the Company established a year 2000 limited warranty which
covers products that have been tested and certified as Y2K compliant by the
Company. The warranty is posted on the Company's website and has been sent to
customers in response to requests for Y2K assurances. Under the warranty, the
Company will repair or replace the Y2K certified product which experiences a Y2K
limitation. The warranty specifically disclaims liability for all consequential
and incidental damages resulting from a Y2K complication experienced by a Y2K
certified product.
The Company's exposure in the event of Y2K complications may be impacted by
Y2K provisions contained in outstanding agreements. For example, the Company's
bank line of credit, as amended, obligates the Company to perform acts to ensure
the Y2K compliance of its systems and adopt a remediation plan if necessary by
September 30, 1999.
Budget
The Company's budget for the Y2K Program is approximately $2.0 million and has
been approved by the Company's Board of Directors. Through June 30, 1999, the
Company has spent $558,000 on Y2K related expenses. This figure incorporates
the following expenses: (1) $250,000 in November 1998 to upgrade the MRP
business system utilized by the California, Redditch, UK and Tortona, Italy
sites; (2) $24,000 in March 1999 to Y2K consultants; (3) $26,200 through June
1999 in legal expenses; (4) $4,000 through June 1999 in travel expenses to the
Company's non-California sites for the purpose of assessing Y2K compliance; (5)
$20,500 through June of 1999 on miscellaneous items including maintenance of the
Y2K website and vendor compliance mailings; (6) $80,000 in March 1999 to uprade
the Tortona, Italy maintenance system; and (7) $145,000 through June 1999 in
employee salaries.
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
nature and amount of programming required to upgrade or replace each of the
affected programs, the rate and magnitude of related labor and consulting costs
and the success of the Company's external customers and suppliers in addressing
the Y2K issue. The Company's evaluation is ongoing and it expects that new and
different information will become available to it as that evaluation continues.
Consequently, there is no guarantee that all material elements will be Y2K ready
in time.
Volatility of Stock Price
In recent years, the stock market in general, and the market for shares of
small capitalization and technology stocks in particular, have experienced
extreme price fluctuations. Such fluctuations have often been unrelated to the
operating performance of affected companies. The Company believes that factors
such as announcements of developments related to its business, announcements of
technological innovations or new products or enhancements by the Company or its
competitors, developments in the emerging countries' economies, sales by
competitors, including sales to its customers, sales of its common stock into
the public market, including by members of management, developments in its
relationships with customers, partners, lenders, distributors and suppliers,
shortfalls or changes in revenues, gross margins, earnings or losses or other
financial results that differ from analysts' expectations (as recently
experienced), regulatory developments, fluctuations in results of operations and
general conditions in its market or markets served by its customers or the
economy, could cause the price of its common stock to fluctuate, sometimes
reaching extreme and unexpected lows. The market price of its Common Stock may
continue to decline substantially, or otherwise continue to experience
significant fluctuations in the
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future, including fluctuations that are unrelated to its performance. Such
fluctuations could continue to materially adversely affect the market price of
its Common Stock.
Substantial Amount of Debt
In November 1997, through a private placement of the Company's Notes, the
Company incurred $100 million of indebtedness. In December 1998, January 1999
and February 1999, the Company retired approximately $40 million of such
indebtedness in exchange for approximately 5.3 million shares of its Common
Stock. As of June 30, 1999, its total indebtedness including current liabilities
was approximately $185.4 million and its stockholders' equity was approximately
$97.6 million.
As of June 30, 1999, the Company's bank line of credit provided for borrowings
of approximately $50.0 million, which as of June 30, 1999 had been fully
utilized. In July 1999, the Company repaid $20.0 million of this indebtedness,
reducing the principal balance to $30.0 million. The revolving commitment, as
amended, has been reduced to $30.0 million until maturity on January 15, 2000.
The line of credit requires the Company to comply with several financial
covenants, including the maintenance of specific minimum ratios. At periods in
time since June 30, 1998, the Company has amended its existing bank line of
credit to prevent defaults with respect to several covenants. Had these
amendments not been made, the Company would have defaulted on those covenants in
its bank line, which would have triggered cross defaults in the Notes, preferred
stock instruments and other debt. While the amendments to the covenants have
been structured based on the Company's business plan that would allow the
Company to continue to be in compliance with such covenants, should the Company
not meet its business plan, or should the Company not be able to raise adequate
capital, it is possible that an event of default will occur under the line-of-
credit agreement. If a default is declared by the lenders, cross defaults will
be triggered on the Company's Notes and other debt instruments resulting in
accelerated repayments of such debts. Such events would materially adversely
affect the Company's business, financial condition and results of operations.
The Company's ability to make scheduled payments of the principal and interest
on indebtedness will depend on future performance, which is subject in part to
economic, financial, competitive and other factors beyond its control. There can
be no assurance that the Company will be able to make payments on or restructure
or refinance its debt in the future, if necessary.
The Company's debt burden is causing it to explore the possible disposition of
Control Resources Corporation, Technosystem S.p.A., and potentially other
business units.
Dividends
Since the Company's incorporation in 1991, the Company has not declared or
paid cash dividends on its common stock, and the Company anticipates that any
future earnings will be retained for investment in the business. Any payment of
cash dividends in the future will be at the discretion of the Company's board of
directors and will depend upon, among other things, its earnings, financial
condition, capital requirements, extent of indebtedness and contractual
restrictions with respect to the payment of dividends.
Change of Control Inhibition
Members of the Company's board of directors and executive officers, together
with members of their families and entities that may be deemed affiliates of or
related to such persons or entities, beneficially own approximately 5% of the
outstanding shares of common stock. As a practical matter, these stockholders
are able to influence the election of the members of its board of directors and
influence the outcome of corporate actions requiring stockholder approval, such
as mergers and acquisitions.
This level of ownership, together with the stockholder rights ("poison pill")
plan, 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 P-Com and may adversely affect the voting and other rights of
other holders of common stock.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of any other preferred stock that may be
issued in the future, including the Series A junior participating preferred
stock that may be issued pursuant to the stockholder rights ("poison pill")
plan, upon the occurrence of certain triggering events. In general, the
stockholder rights plan provides a mechanism by which the share position of
anyone that acquires 15% or more of the Common Stock will be substantially
diluted. Future issuance of the Series A preferred stock or any additional
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of its outstanding voting stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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The Company has international sales and facilities and is, therefore, subject
to foreign currency rate exposure. Historically, its international sales have
been denominated in British pounds sterling or United States dollars. With
recent acquisitions of foreign companies, certain of its international sales are
denominated in other foreign currencies, including Italian lira. The Company
enters into foreign forward exchange contracts to reduce the impact of currency
fluctuations of anticipated sales to British customers. The objective of these
contracts is to neutralize the impact of foreign currency exchange rate
movements on the Company's operating results. The gains and losses on forward
exchange contracts are included in earnings when the underlying foreign currency
denominated transaction is recognized.
The foreign exchange forward contracts described above generally require the
Company to sell foreign currencies for U.S. dollars at rates agreed to at the
inception of the contracts. The forward contracts generally have maturities of
six months or less. These contracts generally do not subject the Company to
significant market risk from exchange rate movements because the contracts are
designed to offset gains and losses on the balances and transactions being
hedged. At June 30, 1999, the Company had forward contracts to sell
approximately $13.5 million in British pounds. The fair value of forward
exchange contracts approximates cost. The Company does not anticipate any
material adverse effect on its financial position resulting from the use of
these instruments.
The functional currency of the Company's wholly owned and majority-owned
foreign subsidiaries are the local currencies. Assets and liabilities of these
subsidiaries are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Income and expense items are translated at average exchange
rates for the period. Accumulated net translation adjustments are recorded in
stockholders' equity. Foreign exchange transaction gains and losses are included
in the results of operations, and were not material for all periods presented.
Based on our overall currency rate exposure at June 30, 1999, a near-term 10%
appreciation or depreciation of the U.S. dollar would have an insignificant
effect on our financial position, results of operations and cash flows over the
next fiscal year. In 1998, a near-term 10% appreciation or depreciation of the
U.S. dollar was also determined to have an insignificant effect. The Company
does not use derivative financial instruments for speculative or trading
purposes.
Interest Rate Risk
The Company's Notes bear interest at a fixed rate, therefore, the Company's
financial condition and results of operations would not be affected by interest
rate changes in this regard. The Company's revolving line of credit is subject
to interest at either a base interest rate or a variable interest rate that is
within 500 basis points of the base interest rate. A 500 basis point increase
over the base interest rate would not be material to the Company's financial
condition or results of operations.
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PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS.
As disclosed in the Company's Form 10-Q for the first quarter of 1999, a
consolidated amended class action complaint is pending against the Company and
certain of its officers and directors in the Superior Court of California,
County of Santa Clara. On March 1, 1999, defendants filed a demurrer. On May
13, 1999, the Court heard the defendants' demurrer and sustained the demurrer
with leave to amend the claims under the California securities laws and the
common law claim of fraud. A claim under the business and professions code
remains.
ITEM 2. CHANGES IN SECURITIES.
On June 4, 1999, the Company issued 5,134,795 shares of its Common Stock in
exchange for all 15,000 shares of its Series B Convertible Preferred Stock that
was outstanding on that date. In addition, the Company issued warrants to
purchase 1,242,257 shares of its Common Stock (the "New Warrants") in exchange
for outstanding warrants to purchase 1,242,257 shares of its Common Stock (the
"Old Warrants"). The Series B Preferred Stock and the Old Warrants were
thereafter cancelled by the Company. These securities were issued to Castle
Creek Technology Partners LLC, Marshall Capital Management, Inc. and Capital
Ventures International in an unregistered issuance, namely an exempt exchange of
securities pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended
(the "Securities Act"). The New Warrants are exercisable at all times prior to
December 22, 2003 for 1,242,257 shares of the Company's Common Stock upon
payment of an exercise price that is initially $3.00 per share. The exercise
price will be reset on June 4, 2000 to the lower of $3.00 or the average of the
closing bid prices of the Company's Common Stock on the ten trading days
immediately preceding June 4, 2000. In addition, the exercise price can be
adjusted downward and the number of shares of the Company's Common Stock issued
upon exercise of the warrants adjusted upward at any time if the Company issues
securities at a price per share less than the greater of the then-prevailing
exercise price and the market price of its Common Stock on the day prior to the
issuance.
On June 22, 1999, the Company issued 10,067,958 shares of its Common Stock for
an aggregate consideration of $40 million to the following seven investors: The
Kaufmann Fund, BayStar Capital, L.P., Lagunitas Partners LP, Gruber McBaine
International, Lockheed Martin Corp. Master Retirement Trust, Trustees of
Hamilton College, and State of Wisconsin Investment Board. The transaction was
an unregistered issuance of securities pursuant to the private offering
exemption provided by Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company's failure to timely register for resale under the Securities Act
its outstanding Series B Convertible Preferred Stock was "cured" by the exchange
of all the outstanding Series B Convertible Preferred Stock for newly issued
Common Stock. The Company remains obliged, however, to register such Common
Stock for resale.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION.
The Company has appointed Robert E. Collins as Chief Financial Officer and
Vice President, Finance and Administration during the second quarter of 1999.
In addition, Pier Antoniucci, President, has given notice of his intent to
resign his position with the Company at the end of September 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.46 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and the Kaufmann Fund.
10.47 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and Baystar Capital, L.P.
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10.48 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and Lagunitas Partners, L.P.
10.49 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and Gruber McBaine International.
10.50 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and Lockheed Martin Corp. Master
Retirement Trust.
10.51 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and Trustees of Hamilton College.
10.52 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and State of Wisconsin Investment
Board.
10.53 (8) Seventh Amendment to Credit Agreement by and among the
Registrant, as the Borrower, Union Bank of California, N.A.,
as Administrative Agent, Bank of America National Trust and
Savings Association, as Syndication Agent, and the lenders
party thereto dated as of June 29, 1999.
10.54 (2) Agreement between P-Com and Marshall Capital Management,
Inc., dated as of June 4, 1999.
10.55 (3) Agreement between P-Com and Castle Creek Technology Partners
LLC, dated as of June 4, 1999.
10.56 (4) Agreement between P-Com and Capital Ventures International,
dated as of June 4, 1999.
10.57 (5) Warrant to purchase shares of Common Stock, dated as of June
4, 1999, issued by P-Com, Inc. to Marshall Capital
Management, Inc.
10.58 (6) Warrant to purchase shares of Common Stock, dated as of June
4, 1999, issued by P-Com, Inc. to Castle Creek Technology
Partners LLC.
10.59 (7) Warrant to purchase shares of Common Stock, dated as of June
4, 1999, issued by P-Com, Inc. to Capital Ventures
International.
27.1 (8) Financial Data Schedule.
________________________
(1) Incorporated by reference to identically numbered exhibit to the
Company's Current Report on Form 8-K dated June 21, 1999, as filed
with the Securities and Exchange Commission on June 22, 1999.
(2) Incorporated by reference to Exhibit 48A to the Company's Report
on Form 8-K dated June 4, 1999, as filed with the Securities and
Exchange Commission on June 8, 1999.
(3) Incorporated by reference to Exhibit 48B to the Company's Report
on Form 8-K dated June 4, 1999, as filed with the Securities and
Exchange Commission on June 8, 1999.
(4) Incorporated by reference to Exhibit 48C to the Company's Report
on Form 8-K dated June 4, 1999, as filed with the Securities and
Exchange Commission on June 8, 1999.
(5) Incorporated by reference to Exhibit 49.A to the Company's Report
on Form 8-K dated June 4, 1999, as filed with the Securities and
Exchange Commission on June 8, 1999.
(6) Incorporated by reference to Exhibit 49.B to the Company's Report
on Form 8-K dated June 4, 1999, as filed with the Securities and
Exchange Commission on June 8, 1999.
(7) Incorporated by reference to Exhibit 49.C to the Company's Report
on Form 8-K dated June 4, 1999, as filed with the Securities and
Exchange Commission on June 8, 1999.
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(8) Previously filed with the Company's Quarterly Report on Form 10-Q
for the quarter ending June 30, 1999 as filed with the securities
and Exchange Commission on August 16, 1999.
(b) Reports on Form 8-K.
Report on Form 8-K filed on April 19, 1999 for an event of
April 16, 1999, regarding the Company's planned reduction of
approximately 10% of its workforce as filed with the
Securities and Exchange Commission on April 19, 1999.
Report on Form 8-K filed April 22, 1999 for an event of April
21, 1999, regarding the Company's press release announcing
the filing of its amended Annual Report on Form 10-K for the
fiscal year 1998 with the Securities and Exchange Commission.
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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: June 19, 2000
By: /s/ George P. Roberts
---------------------
George P. Roberts
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: June 19, 2000
By: /s/ Robert E. Collins
---------------------
Robert E. Collins
Chief Financial Officer and Vice
President, Finance and Administration
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit No.
-----------
10.46 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and the Kaufmann Fund.
10.47 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and Baystar Capital, L.P.
10.48 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and Lagunitas Partners, L.P.
10.49 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and Gruber McBaine International.
10.50 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and Lockheed Martin Corp. Master
Retirement Trust.
10.51 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and Trustees of Hamilton College.
10.52 (1) Common Stock PIPES Purchase Agreement, dated June 21, 1999,
by and between P-Com and State of Wisconsin Investment
Board.
10.53 (8) Seventh Amendment to Credit Agreement by and among the
Registrant, as the Borrower, Union Bank of California, N.A.,
as Administrative Agent, Bank of America National Trust and
Savings Association, as Syndication Agent, and the lenders
party thereto dated as of June 29, 1999.
10.54 (2) Agreement between P-Com and Marshall Capital Management,
Inc., dated as of June 4, 1999.
10.55 (3) Agreement between P-Com and Castle Creek Technology Partners
LLC, dated as of June 4, 1999.
10.56 (4) Agreement between P-Com and Capital Ventures International,
dated as of June 4, 1999.
10.57 (5) Warrant to purchase shares of Common Stock, dated as of June
4, 1999, issued by P-Com, Inc. to Marshall Capital
Management, Inc.
10.58 (6) Warrant to purchase shares of Common Stock, dated as of June
4, 1999, issued by P-Com, Inc. to Castle Creek Technology
Partners LLC.
10.59 (7) Warrant to purchase shares of Common Stock, dated as of June
4, 1999, issued by P-Com, Inc. to Capital Ventures
International.
27.1 (8) Financial Data Schedule.
________________________
(1) Incorporated by reference to identically numbered exhibit to the
Company's Current Report on Form 8-K dated June 21, 1999, as filed
with the Securities and Exchange Commission on June 22, 1999.
(2) Incorporated by reference to Exhibit 48A to the Company's Report
on Form 8-K dated June 4, 1999, as filed with the Securities and
Exchange Commission on June 8, 1999.
(3) Incorporated by reference to Exhibit 48B to the Company's Report
on Form 8-K dated June 4, 1999, as filed with the Securities and
Exchange Commission on June 8, 1999.
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(4) Incorporated by reference to Exhibit 48C to the Company's Report on
Form 8-K dated June 4, 1999, as filed with the Securities and
Exchange Commission on June 8, 1999.
(5) Incorporated by reference to Exhibit 49.A to the Company's Report
on Form 8-K dated June 4, 1999, as filed with the Securities and
Exchange Commission on June 8, 1999.
(6) Incorporated by reference to Exhibit 49.B to the Company's Report
on Form 8-K dated June 4, 1999, as filed with the Securities and
Exchange Commission on June 8, 1999.
(7) Incorporated by reference to Exhibit 49.C to the Company's Report
on Form 8-K dated June 4, 1999, as filed with the Securities and
Exchange Commission on June 8, 1999.
(8) Previously filed with the Company's Quarterly Report on Form 10-Q
for the quarter ending June 30, 1999 as filed with the securities
and Exchange Commission on August 16, 1999.
52
