<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 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 77-0028937
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3175 S. Winchester Boulevard
Campbell, California 95008
(Address of principal executive offices) (Zip Code)
(408) 866-3666
(Registrant's telephone number, including area code)
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 4, 2000, there were 77,228,710 outstanding shares of the
Registrant's Common Stock, par value $0.0001.
===============================================================================
This Quarterly Report on Form 10-Q consists of 28 pages of which this is Page 1.
The Exhibit index appears on Page 28.
<PAGE>
P-COM, INC.
FORM 10-Q
INDEX
FOR QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1 Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31,
1999......................................................................... 3
Condensed Consolidated Statements Of Operations for the Three Months and Six
Months Ended June 30, 2000 and 1999.......................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999....................................................... 5
Notes to Condensed Consolidated Financial Statements......................... 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 12
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk................... 25
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings............................................................ 26
ITEM 2 Changes in Securities........................................................ 26
ITEM 3 Defaults Upon Senior Securities.............................................. 26
ITEM 4 Submission of Matters to a Vote of Security Holders.......................... 26
ITEM 5 Other Information............................................................ 26
ITEM 6 Exhibits and Reports on Form 8-K............................................. 26
Signatures................................................................... 27
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 18,282 $ 11,629
Accounts receivable, net.......................................... 45,375 38,935
Inventory......................................................... 54,973 46,849
Prepaid expenses.................................................. 10,942 15,987
Notes receivable.................................................. 5,152 --
Net assets of discontinued operations............................. -- 3,151
--------- ---------
Total current assets............................................. 134,724 116,551
Property and equipment, net........................................ 28,227 36,626
Deferred income taxes.............................................. -- 9,858
Goodwill and other assets.......................................... 28,395 50,605
--------- ---------
$ 191,346 $ 213,640
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 40,825 $ 34,275
Accrued employee benefits......................................... 2,354 2,894
Other accrued liabilities......................................... 20,041 15,841
Deferred contract obligation...................................... 8,000 8,000
Notes payable..................................................... 10,066 23,557
--------- ---------
Total current liabilities........................................ 81,286 84,567
--------- ---------
Other long-term liabilities........................................ 1,911 3,542
--------- ---------
Convertible subordinated notes..................................... 29,700 36,316
--------- ---------
Contingencies (Note 13)
Stockholders' equity:
Common Stock...................................................... 8 7
Additional paid-in capital........................................ 296,752 238,721
Accumulated deficit............................................... (217,076) (148,973)
Accumulated other comprehensive (loss)............................ (1,235) (540)
--------- ---------
Total stockholders' equity....................................... 78,449 89,215
--------- ---------
$ 191,346 $ 213,640
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Sales:
Product................................... $ 36,839 $ 26,490 $ 76,479 $ 49,984
Service................................... 11,994 8,954 23,409 19,368
-------- -------- -------- --------
Total sales.............................. 48,833 35,444 99,888 69,352
-------- -------- -------- --------
Cost of sales:
Product................................... 49,332 42,804 79,387 59,585
Service................................... 8,844 5,825 17,130 13,398
-------- -------- -------- --------
Total cost of sales...................... 58,176 48,629 96,517 72,983
-------- -------- -------- --------
Gross profit (loss)........................ (9,343) (13,185) 3,371 (3,631)
-------- -------- -------- --------
Operating expenses:
Research and development................... 5,168 9,103 11,566 18,140
Selling and marketing...................... 3,580 5,256 6,680 9,778
General and administrative................. 6,997 7,388 15,699 12,714
Goodwill amortization...................... 16,564 1,775 18,176 3,551
Restructuring charges...................... -- 3,285 -- 3,285
-------- -------- -------- --------
Total operating expenses.................. 32,309 26,807 52,121 47,468
-------- -------- -------- --------
Loss from continuing operations............ (41,652) (39,992) (48,750) (51,099)
Interest expense........................... (1,208) (2,315) (2,780) (4,131)
Other income (expense), net................ 1,467 111 (3,371) (53)
-------- -------- -------- --------
Loss from continuing operations before
income taxes and extraordinary items...... (41,393) (42,196) (54,901) (55,283)
Provision for income taxes................. 10,809 252 11,092 252
-------- -------- -------- --------
Loss from continuing operations before
extraordinary item........................ (52,202) (42,448) (65,993) (55,535)
Loss on discontinued operations............ -- (12,167) (4,000) (13,014)
Extraordinary item: retirement of Notes.... -- -- 1,890 7,284
-------- -------- -------- --------
Net loss................................... (52,202) (54,615) (68,103) (61,265)
Charge related to conversion of Preferred
Stock to Common Stock..................... -------- --------- -------- --------
-- (12,190) -- (12,190)
-------- --------- -------- --------
Net loss applicable to holders of Common
Stock..................................... -------- -------- -------- --------
$(52,202) $(66,805) $(68,103) $(73,455)
======== ======== ======== ========
Basic and diluted net loss attributable to
holders of Common Stock per share:
Loss from continuing operations before
extraordinary item....................... $(0.68) $(0.82) $(0.86) $ (1.14)
Discontinued operations................... -- (0.23) (0.05) (0.27)
Extraordinary item........................ -- -- 0.02 0.15
Conversion of Preferred Stock............. -- (0.24) -- (0.25)
-------- -------- -------- --------
Net loss................................. $(0.68) $(1.29) $(0.89) $ (1.51)
======== ======== ======== ========
Basic and diluted shares used in per share
computations..............................
77,086 51,872 76,279 48,584
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net loss .................................................................. $(68,103) $(61,265)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ............................................................ 6,011 8,202
Amortization of goodwill ................................................ 3,128 4,108
Loss on disposal of property and equipment .............................. 2,924 2,507
Compensation expense related to stock options ........................... 102 --
Valuation adjustment to deferred income taxes .......................... 9,858 --
Restructuring & other charges .......................................... -- 3,300
Inventory charges ....................................................... 17,053 11,800
Accounts receivable charges ............................................. -- 21,400
Accrued liabilities charges ............................................. 4,318 --
Write off of goodwill ................................................... 15,000 --
Gain on exchange of convertible notes ................................... (1,890) (7,284)
Loss on sale of subsidiaries ............................................ 1,260 --
Loss on disposal of discontinued operations ............................. 4,000 --
Amortization of stock warrants .......................................... 952 --
Change in assets and liabilities:
Accounts receivable .................................................. (8,928) 3,381
Inventory ............................................................ (28,767) (2,960)
Prepaid expenses and notes receivable ................................ 3,528 4,192
Goodwill and other assets ............................................ 1,455 1,056
Accounts payable ..................................................... 11,141 (8,753)
Accrued employee benefits ............................................ 501 641
Other accrued liabilities ............................................ (225) 5,216
------------ ----------
Net cash used in operating activities ................................ (26,682) (14,459)
------------ ----------
Cash flows from investing activities:
Acquisition of property and equipment ................................... (5,127) (3,910)
Cash paid on disposal of discontinued operations ........................ (2,000) --
Cash proceeds from sale of subsidiaries ................................. 2,485 --
Cash proceeds from sale of property and equipment ....................... 700 --
----------- ----------
Net cash used in investing activities ................................ (3,942) (3,910)
----------- ----------
Cash flows from financing activities:
Borrowings (payments) under capital lease obligation .................... 338 (258)
Proceeds (payments) of notes payable .................................... (13,017) (35)
Proceeds from long-term debt ............................................ -- 1,778
Proceeds from the issuance of commons stock, net of expenses ............ 43,776 39,107
Proceeds from exercise of stock options ................................. 7,125 --
Issuance of note receivable to officer .................................. (250) --
----------- ----------
Net cash provided by financing activities ............................ 37,972 40,592
----------- ----------
Effect of exchange rate changes on cash ................................... (695) (3,863)
----------- ----------
Net increase in cash and cash equivalents ................................. 6,653 18,360
Cash and cash equivalents at the beginning of the period .................. 11,629 29,241
----------- ----------
Cash and cash equivalents at the end of the period ........................ $ 18,282 $ 47,601
----------- ----------
Supplemental cash flow disclosures:
Cash paid for income taxes .............................................. $ 385 $ 331
----------- ----------
Cash paid for interest .................................................. $ 1,327 $ 4,804
----------- ----------
Exchange of Convertible Subordinated Notes for Common Stock ............. $ 7,017 $ 25,539
----------- ----------
Repricing of warrants ................................................... $ -- $ 2,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not contain all of the information
and footnotes required by generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of P-Com, Inc.'s (referred to herein, together
with its wholly-owned subsidiaries, as "P-Com" or the "Company") financial
condition as of June 30, 2000, and the results of its operations and its cash
flows for the three and six months ended June 30, 2000 and 1999. These
consolidated financial statements should be read in conjunction with the
Company's audited 1999 consolidated financial statements, including the notes
thereto, and the other information set forth therein, included in the Company's
Annual Report on Form 10-K . Operating results for the three- and six-month
periods ended June 30, 2000 are not necessarily indicative of the operating
results that may be expected for the year ending December 31, 2000.
2. RECLASSIFICATIONS
The Company has reclassified certain amounts reported in the prior year's
financial statements, including the reclassification of its Italian subsidiary,
Technosystem S.p.A., as a discontinued operation, to conform with current year
presentation.
3. NET LOSS PER SHARE
For purpose of computing basic and diluted loss per share, weighted average
common share equivalents do not include stock options, warrants, or shares to be
issued upon the assumed conversion of the 4 1/4% Convertible Subordinated Notes
(Notes) into Common Stock because the effect would be antidilutive. For the
three-month periods ended June 30, 2000 and 1999, options to purchase
approximately 4,315,000 and 2,740,000 shares of Common Stock were excluded from
the computation, respectively. For the six-month periods ended June 30, 2000 and
1999, options to purchase approximately 5,091,000 and 1,847,000 shares of Common
Stock were excluded from the computation, respectively. For the three and six-
month periods ended June 30, 2000, warrants to purchase 2,065,000 shares of
common stock were excluded from the computation. For the three and six months
ended June 30, 1999, warrants to purchase 1,242,000 shares of common stock were
excluded from the computation. For the three and six-month periods ended June
30, 2000 and 1999, the assumed conversion of the 4 1/4% Convertible Subordinated
Notes into 1,173,000 and 2,472,000 shares of Common Stock, was not included in
the computation.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," effective beginning in the first quarter of
2000. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000 and cannot be applied
retroactively. The Company is currently evaluating the impact of SFAS No. 133 on
its financial position and results of operations.
In December 1999, the Securities and Exchange Commission's ("SEC") staff
issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 provides the staff's views
6
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
in applying generally accepted accounting principles to selected revenue
recognition issues and is effective for the Company in the first quarter of
2000. However, in March and again in June 2000, in response to requests from a
number of groups asking for additional time to determine the effect, if any, on
registrants' revenue recognition practices, the SEC staff delayed the
implementation date of SAB No. 101. SAB No. 101 now must be implemented by the
Company no later than the fourth quarter of 2000 effective as of the first
quarter of 2000. In addition, the SEC staff is expected to issue a Frequently
Asked Questions ("FAQ") document which is expected to clarify and elaborate on
the SEC staff's views regarding revenue recognition. However, the SEC staff has
not yet issued the FAQ document. The Company has not yet determined the impact
that adoption will have on the consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of APB
Opinion No. 25 ("FIN 44"). FIN 44 establishes guidance for the accounting for
stock option grants or modifications to existing stock option awards and is
effective for option grants made after June 30, 2000. FIN 44 also establishes
guidance for the repricing of stock options and determining whether a grantee is
an employee, for which the guidance was effective after December 15, 1998 and
modifying a fixed option to add a reload feature, for which the guidance was
effective after January 12, 2000. The adoption of certain of the provisions of
FIN 44 prior to March 31, 2000 did not have a material effect on the financial
statements. The Company does not expect that the adoption of the remaining
provisions will have a material effect on the consolidated financial statements.
5. CAPITAL STOCK
In January 2000, the Company sold approximately 7,531,000 shares of Common
Stock at a per share price of $5.71, for an aggregate purchase price of $43.8
million. The unregistered shares were priced at a 15% discount to the average
closing sale prices of Common Stock for the 60 consecutive trading days prior to
the signing of the agreement.
In connection with a new loan agreement (see Note 6), the Company issued
warrants to purchase 200,000 shares of Common Stock at $5.71 per share. The
warrants, which are immediately exercisable and are subject to anti-dilution
clauses, expire on January 31, 2005.
6. BORROWING ARRANGEMENTS
The Company entered into a new loan agreement in January 2000 for $12.0
million. A portion of the proceeds of the new equity (see Note 5) and this debt
financing was used to repay the company's outstanding indebtedness of
approximately $27.0 million under its previous revolving line-of-credit
agreement. The loan matures on January 31, 2001, subject to one-year renewals at
the option of both parties. Borrowings under the line bear interest at the
greater of prime rate plus 2% or 8% per annum. Borrowings under the loan
agreement are secured by the Company's cash deposits, receivables, inventory,
equipment, investment property and intangibles of the Company. The maximum
borrowings under the agreement are limited to 85% of eligible accounts
receivable, not to exceed $12.0 million. In connection with the loan agreement
the Company issued warrants to purchase 200,000 shares of Common Stock and
recorded a discount to amounts recorded under the loan agreement of
approximately $2.0 million, which represents the estimated fair value of the
warrants. Such discount is being amortized to interest expense over the initial
term of the loan agreement. During the three and six-month periods ended June
30, 2000, the Company recorded approximately $0.5 million and $1.0 million,
respectively, of interest expense related to these warrants.
7
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(Unaudited)
7. BALANCE SHEET COMPONENTS
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Raw materials.......................................... $17,172 $22,484
Work-in-process........................................ 18,969 16,019
Finished goods......................................... 18,832 8,346
------- -------
$54,973 $46,849
======= =======
</TABLE>
8. RESTRUCTURING AND OTHER CHARGES
In the second quarter of 2000, the Company determined that there was a need
to reevaluate its inventory levels and related accrued liabilities in light of
recent changes in product and customer mix. The evaluation was prompted by a
change in customer mix away from UK and other European markets and toward the US
market, and the resultant anticipated decrease in demand for certain of its
lower speed and lower frequency Tel-Link Point to Point products, and resulted
in total charges of approximately $21.3 million during the second quarter of
2000. These charges consisted of increases to inventory reserves of
approximately $17.0 million and accrued liabilities of approximately $4.3
million. In addition, the Company performed a review of the carrying value and
remaining life of long-lived assets and recorded write-downs of approximately
$15.0 million of goodwill, and an approximately $9.9 million increase in the
valuation allowance against deferred tax assets. (See Notes 10 and 11)
The increase in inventory and related reserves totaled approximately $21.3
million and was charged to Product Cost of Sales. Of this total, approximately
$15.4 million was required for excess and obsolete inventory reserves primarily
in the Company's Tel-Link product and was based on its revised sales reserves
forecasts and product demand, which reflect recent changes in product and
customer mix. For example, sales for 1999 to the UK and other European
customers, who historically purchase its lower speed and frequency products,
represented 52.5% of sales, and sales to US customers represented 30.8% of its
sales. In the second quarter of 2000, sales to UK and European customer
represented 26.7% of its sales and sales to US customers represented 64.6% of
its sales. Based on the mix of its recent sales orders and forecasted sales, the
Company expects this trend to continue during the next twelve months. As of June
30, 2000, the Company had net inventories of approximately $32.0 million related
to the Tel-Link Point to Point product line, which is its core product line.
Also in the second quarter of 2000, the inventory reserve was increased by
approximately $1.0 million related to the write-down of certain Point to
MultiPoint inventories to estimated market value. As of June 30, 2000, the
Company had net inventories of approximately $8.0 million related to the Point
to Multipoint product line.
Accrued liabilities were increased by approximately $3.2 million for a
charge to Product Cost of Sales primarily for non-cancelable excess/obsolete
inventory purchase commitments. These charges related primarily to the Company's
Point to Point 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 is embarking on a program to find buyers for excess and
obsolete inventory at prices below cost and is in the process of attempting to
renegotiate the non-cancelable purchase commitments with its suppliers.
The Company also reviewed its warranty reserves in light of recent
information related to product returns rates and the related repair charges and
recorded a increase to warranty reserves of approximately $1.0 million.
8
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
During 1999 and 1998, the Company's management approved restructuring
plans, which included initiatives to integrate the operations of acquired
companies, consolidate duplicate facilities, and reduce overhead. Total accrued
restructuring and other charges of approximately $36.5 million and
approximately $26.6 million were recorded in 1999 and 1998, respectively,
relating to these initiatives.
The accrued restructuring and other charges and amounts charged against the
accrual as of June 30, 2000, are as follows (in thousands):
<TABLE>
<CAPTION>
Beginning Additions to Expenditures Remaining
Accrual Reserves and Write-offs Accrual
------- -------- -------------- -------
<S> <C> <C> <C> <C>
Inventory reserves..................... $16,180 $17,000 $ 3,200 $29,980
Non-cancelable purchase 2,947 3,200 157 5,990
commitments reserve.................. ------- -------- -------------- -------
Total inventory and other
related charges...................... 19,127 20,200 3,357 35,970
Accounts receivable reserve............ 9,669 -- 9,669 --
------- -------- -------------- -------
Total accrued restructuring $28,796 $20,200 $13,026 $35,970
and other charges.................... ======= ======== ============== =======
</TABLE>
9. GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets of acquired companies accounted for as purchase business
combinations. Goodwill is amortized on a straight-line basis over the period of
expected benefit, ranging from 7 to 20 years. Management continues to evaluate
and revise its business plan for the Cylink product line, and based on changes
to the related expected revenue stream, determined in the second quarter of 2000
that an evaluation analysis of the recoverability of the goodwill related to
this acquisition was required. Management's evaluation indicated that the
goodwill balance was impaired, and the Company therefore recorded a charge of
$15.0 million for the impairment of goodwill in the second quarter of 2000. The
remaining balance of goodwill related to the Cylink acquisition will be
amortized over the remaining estimated useful life of 4.5 years.
10. INCOME TAXES
Management regularly assesses the realizability of deferred tax assets
based upon the weight of available evidence, including such factors as the
recent earnings history and expected future taxable income. The methodology used
by Management to determine the amount of deferred tax assets that are more
likely than not to be realized is based upon the Company's recent earnings and
estimated future taxable income for the next year. Management believes that,
based on these factors, it is more likely than not that the Company will not
realize its deferred tax assets and, accordingly, an additional valuation
allowance of $9.9 million was recorded in the quarter ended June 30, 2000.
11. COMPREHENSIVE LOSS
Comprehensive loss is comprised of net loss and the currency translation
adjustment. Comprehensive loss was $52.4 million and $56.6 million for the three
months ended June 30, 2000 and 1999, respectively. Comprehensive loss was $68.8
million and $65.1 million for the six months ended June 30, 2000 and 1999,
respectively.
9
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
12. SEGMENT REPORTING
For purposes of segment reporting, the Company aggregates operating
segments that have similar economic characteristics and meet the aggregation
criteria of SFAS No. 131. The Company has determined that there are two
reportable segments: Product Sales and Service Sales. The Product Sales segment
consists of organizations located primarily in the United States, the United
Kingdom and Italy, which develop, manufacture, and/or market network access
systems for use in the worldwide wireless telecommunications market. The Service
Sales segment consists of an organization primarily located in the United States
and the United Kingdom, which provides comprehensive network services including
system and program planning and management, path design, and installation for
the wireless telecommunications 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. Transactions between segments are accounted for at cost and are not
included in sales. Accordingly, the following information is provided for
purposes of achieving an understanding of operations, but may not be indicative
of the financial results of the reported segments were they independent
organizations. In addition, comparisons of the Company's operations to similar
operations of other companies may not be meaningful. The following tables show
the operations of the Company's operating segments (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------------------- -----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Product......................................... $ 36,839 $ 26,490 $ 76,479 $ 49,984
Service......................................... 11,994 8954 23,409 19,368
-------- -------- -------- --------
Total.......................................... $ 48,833 $ 35,444 $ 99,888 $ 69,352
======== ======== ======== ========
Income(loss) from continuing operations:
Product......................................... $(52,972) $(43,405) $(67,373) $(56,999)
Service......................................... 770 957 1,380 1,464
-------- -------- -------- --------
Total.......................................... $(52,202) $(42,448) $(65,993) $(55,535)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Total assets:
Product............................................... $173,814 $191,606
Service............................................... 17,532 22,034
-------- --------
Total................................................ $191,346 $213,640
======== ========
</TABLE>
10
<PAGE>
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Unaudited)
The breakdown of sales by geographic customer destination are as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States.......................................... $31,530 $ 8,759 $49,552 $20,335
United Kingdom......................................... 11,474 13,407 33,335 27,972
Europe................................................. 1,564 11,458 4,938 14,139
Asia................................................... 2,800 1,370 6,055 2,688
Other geographic region................................ 1,465 450 6,008 4,218
------- ------- ------- -------
$48,833 $35,444 $99,888 $69,352
======= ======= ======= =======
</TABLE>
13. CONTINGENCIES
The Company is a defendant in a consolidated class action lawsuit in which
the plaintiffs are alleging various state securities laws violations by the
Company and certain of its officers and directors. The plaintiffs seek
unspecified damages based upon the decrease in market value of shares of the
Company's Common Stock. While management believes the actions are without merit
and intends to defend these actions vigorously, proceedings are at an early
stage and the Company is unable to speculate on their ultimate outcome. However,
the ultimate results could have a material adverse effect on the Company's
results of operations or financial position either through the defense or
results of such litigation.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q 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 1999 Annual Report on Form 10-K, and other documents
filed by the Company with the Securities and Exchange Commission.
Overview
We supply equipment and services for access to worldwide telecommunications
networks. Currently, we ship 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 broadband radio systems. We also provide software and related services for
these products. Additionally, we provide program management, engineering,
procurement, installation and maintenance elements of the telecommunications
networks between central office and customer premise locations over physical and
wireless facilities. Our Point-to-MultiPoint (PMP) radio system for use in the
telecommunications industry reached the production stage and shipments resulted
in production revenues beginning in the fourth quarter of 1999.
The net loss in the second quarter of 2000 included certain charges of
$46.9 million, which were related to our Product Business Segment. The net loss
in the second quarter of 1999 included unusual charges of $36.5 million, which
were related to our Product Business Segment. See further discussion in the
analysis of results of operations.
In the second quarter of 2000, we determined that there was a need to
reevaluate our inventory levels and related accrued liabilities in light of
recent changes in product and customer mix. The evaluation was prompted by a
change in customer mix away from UK and European markets and toward the US
market, and the resultant anticipated decrease in demand for certain of our
lower speed and lower frequency Tel-Link Point to Point products, and resulted
in total charges of $21.3 million during the second quarter of 2000. These
charges consisted of increases to inventory reserves of $17.0 million and
related accrued liabilities of approximately $4.3 million.
We have continued to evaluate and revise our business plan for the Cylink
product line, and based on changes to the related expected revenue stream,
determined in the second quarter of 2000 that an evaluation analysis of the
recoverability of the goodwill related to this acquisition was required. Our
evaluation indicated that the goodwill balance was impaired, and we therefore
recorded a charge for the impairment of goodwill of $15.0 million in the second
quarter of 2000.
In the second quarter of 1999, we determined that there was a need to
reevaluate our 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.
In January 2000, we received approximately $43.8 million in net proceeds
from a private placement of Common Stock. In addition, we entered into a new
loan agreement for $12.0 million in January 2000. The loan matures on January
31, 2001, subject to annual renewals. Borrowings under the line are secured by
our cash deposits, receivables, inventory, equipment, investment property and
intangibles. The maximum borrowings under the agreement will be limited to 85%
of eligible accounts receivable, not to exceed $12.0 million. We issued the
lender warrants to purchase 200,000 shares of Common Stock at $5.71 per share.
The warrants, which are immediately exercisable and are subject to anti-dilution
clauses, expire on January 31, 2005. We then used approximately $27.0 million
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-(Continued)
of proceeds from the Common Stock offering and new bank loan to repay all
outstanding borrowings under our previous bank line of credit.
In February 2000, we completed the divestiture of Technosystem S.p.A. and
Cemetel S.r.l, two of our Italian subsidiaries, resulting in additional losses
for the first quarter 2000 of approximately $4.0 million and $3.5 million,
respectively. In April 2000, we completed the divestiture of our Control
Resources Corporation subsidiary resulting in a gain of approximately $2.3
million. The divestures were the result of a strategic decision to concentrate
more on our core businesses and markets and to divest units with diminished
prospects.
The following table sets forth items from the Condensed Consolidated
Statement of Operations as a percentage of total sales for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six months ended June 30,
------------------------------------- -------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Product................................. 75.4% 74.7% 76.6% 72.1%
Service................................. 24.6 25.3 23.4 27.9
------- ------- ------ -------
Total Sales............................ 100.0 100.0 100.0 100.0
------- ------- ------ -------
Cost of sales:
Product................................. 101.0 120.8 79.5 85.9
Service................................. 18.1 16.4 17.1 19.3
------- ------- ------ -------
Total cost of sales.................... 119.1 137.2 96.6 105.2
------- ------- ------ -------
Gross profit............................. (19.1) (37.2) 3.4 (5.2)
------- ------- ------ -------
Operating expenses:
Research and development................ 10.6 25.7 11.6 26.2
Selling and marketing................... 7.4 14.8 6.7 14.1
General and administrative.............. 14.3 20.8 15.7 18.3
Goodwill and amortization............... 33.9 5.0 18.2 5.1
Restructuring charges................... -- 9.3 -- 4.7
------- ------- ------ -------
Total operating expenses................ 66.2 75.6 52.2 68.4
------- ------- ------ -------
Loss from continuing operations.......... (85.3) (112.8) (48.8) (73.6)
Interest expense......................... (2.5) (6.5) (2.8) (6.0)
Other income (expense), net.............. 3.0 0.2 (3.4) (0.1)
------- ------- ------ -------
Loss from continuing operations before
income taxes and extraordinary items.... (84.8) (119.1) (55.0) (79.7)
Provision for income taxes............... 22.1 0.7 11.1 0.4
------- ------- ------ -------
Loss from continuing operations before
extraordinary item...................... (106.9) (119.8) (66.1) (80.1)
Loss on discontinued operations.......... -- (34.3) (4.0) (18.8)
Extraordinary item: retirement of Notes.. -- -- 1.9 10.6
------- ------- ------ -------
Net loss................................. (106.9) (154.1) (68.2) (88.3)
------- ------- ------ -------
Charge related to conversion of
Preferred Stock to Common Stock......... -- (34.4) -- (17.6)
------- ------- ------ -------
Net loss applicable to holders of
Common Stock................................... (106.9)% (188.5)% (68.2)% (105.9)%
======= ======= ======= =======
</TABLE>
13
<PAGE>
Results of Operations for the Three and Six Months Ended June 30, 2000 and 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-(Continued)
Sales. For the three months ended June 30, 2000, total sales were
approximately $48.8 million, as compared to $35.4 million for the same period in
the prior year. The 37.9% increase in total sales was primarily due to ongoing
recovery in P-Com core Point to Point product sales in the United States
wireless markets, and shipments of the new Point-To-Multipoint systems. For the
six months ended June 30, 2000, total sales were approximately $99.9 million, as
compared to $69.4 million for the same period in the prior year. The 43.9%
increase was primarily due to the same reasons.
Product sales for the second quarter 2000 increased approximately $10.3
million or 39.1% as compared to the second quarter 1999. Product sales
represented approximately 75.4% and 74.7% of sales in the three months ended
June 30, 2000 and 1999, respectively. Point to Point (PTP) product sales
increased by approximately $4.3 million or 19.8% from approximately $21.7
million in the second quarter 1999 to approximately $26.0 million in the second
quarter 2000 primarily due to an increase in U.S unit volume. In addition, sales
of the recently released Tel-Link Point to MultiPoint (PMP) product for the
second quarter of 2000 were approximately $5.5 million, as compared to none in
the second quarter of 1999. Sales for other product lines for the three months
ended June 30, 2000 and 1999 were approximately $5.3 million and $5.3 million,
respectively.
Product sales for the six months ended June 30, 2000 increased
approximately $26.5 million or 53.0% as compared to the same period in 1999.
Product sales represented approximately 77% and 72% of total sales in the six
months ended June 30, 2000 and 1999, respectively. PTP product sales increased
by approximately $10.1 million or 25.3% from approximately $40.0 million in the
first half of 1999 to approximately $50.0 million in the first half of 2000
primarily due to an increase in U.S. unit sales. In addition, sales of the
recently released Tel-Link PMP product for the first half of 2000 were
approximately $9.5 million, compared to none in the first half of 1999. Sales
for other product lines for the six months ended June 30, 2000 and 1999 were
approximately $15.8 million and $10.6 million, respectively. We are
experiencing strong indications of interest in the PMP product line and expect
to realize increased sales of this product line in the future.
Service sales for the three months ended June 30, 2000 increased
approximately $3.0 million or 34% from the same period in the prior year.
Services sales represented 24.6% and 25.3% of total sales in the second quarter
2000 and 1999, respectively. Service sales for the six months ended June 30,
2000 increased approximately $4.0 million or 20.9% from the same period in the
prior year. These increases were primarily due to increased sales to existing
customers. Services sales represented 23.4% and 27.9% of total sales in the
first half of 2000 and 1999, respectively. The decrease in services sales as a
percentage of total sales for the six months ended June 30, 2000 was primarily
due to the sale of Cemetel in February 2000.
During the three month periods ended June 30, 2000 and 1999, four and two
customers accounted for a total of 61.9% and 44.4% of our sales, respectively.
During the six months ended June 30, 2000 and 1999, three and two customers
accounted for a total of 44.8% and 43.6% of our sales, respectively. We expect
to experience an increased concentration of sales to a relatively few customers
in the second half of 2000.
The breakdown of sales by geographic customer destination as a percentage
of total sales are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
United States............................................ 64.6% 24.7% 49.6% 29.3%
United Kingdom........................................... 23.5 37.8 33.4 40.3
Europe................................................... 3.2 32.3 4.9 20.4
Asia..................................................... 5.7 3.9 6.1 3.9
Other geographic region.................................. 3.0 1.3 6.0 6.1
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-(Continued)
Historically, we have generated a majority of our sales outside of the
United States. However, in the first half of 2000, and especially in the second
quarter of 2000, we experienced a shift in our geographic concentration of sales
from international markets to the United States. During the three months ended
June 30, 2000, we generated approximately 64.6% of our sales in the US and
approximately 35.4% internationally. During the same period in 1999, we
generated 24.7% of our sales in the US and 75.3% internationally. We expect to
continue the trend towards a higher concentration of US sales during the second
half of 2000.
Many of our largest customers use our products and services to build
telecommunication network infrastructures. These purchases are significant
investments in capital equipment and are required for a phase of the rollout in
a geographic area or a market. Consequently, the customer may have different
requirements from year to year and may vary its purchases from us accordingly.
Gross Profit (Loss). For the three months ended June 30, 2000 and 1999,
gross loss was $(9.3) million and $(13.2) million, respectively, or (19.1)% and
(37.2)% of sales, respectively. For the six months ended June 30, 2000 and 1999,
gross profit (loss) was approximately $3.4 million or 3.4%, and $(3.6) million
or (5.2)% of net sales, respectively. The negative gross margin in the second
quarter of 2000 was primarily due to additional provisions for inventory-related
issues of approximately $21.3 million. The negative gross margin in the second
quarter of 1999 was primarily due to additional provisions for inventory-related
issues and other non-recurring costs of approximately $21.4 million.
Included in the second quarter 2000 charges was approximately $15.4 million
for excess and obsolete inventory primarily related to our Tel-Link PTP
products. The reserves were based on our revised sales forecasts and product
demand, which reflect recent pronounced changes in product and customer mix. For
example, sales for 1999 to the UK and other European customers, who historically
purchase our lower speed and frequency products, represented 52.5% of sales, and
sales to US customers represented 30.8% of our sales. In the second quarter of
2000, sales to UK and European customer represented 26.7% of our sales and sales
to US customers represented 64.6% of our sales. Based on the mix of our recent
sales orders and forecasted sales, we expect this trend of increased demand for
higher speed units, usually referred to as broadband access equipment, to
continue during the next twelve months. Our inventory levels were driven based
upon forecasted sales expectations and historical product mixes. We have
embarked on a program to drive our material procurement plans based more largely
on customer orders to try to avoid the risk of building inventory without orders
in a fast-changing marketplace.
Also included in the inventory reserve was $1.0 million related to the
write-down of certain Point to MultiPoint inventories to estimated market value.
As of June 30, 2000, we had net inventories of approximately $32.0 million
related to the Tel-Link PTP product line, which is our core product line. As of
June 30, 2000, we had net inventories of approximately $8.0 million related to
the PMP product line.
In the second quarter 2000, we recorded $3.2 million of additional accrued
liabilities, which were charged to Product Cost of Sales, primarily for non-
cancelable excess/obsolete inventory purchase commitments. These charges
related primarily to our PTP product lines. Customer demand is not anticipated
to consume certain the inventory on hand within the next twelve months, but we
will continue to attempt to sell the inventory. We are embarking on a program to
find buyers for excess and obsolete inventory at prices below cost and are in
the process of attempting to renegotiate certain non-cancelable purchase
commitments with our key suppliers.
In the second quarter of 2000, we also reviewed our warranty reserves in
light of recent information related to product return rates and the related
repair charges and recorded a increase to warranty reserves of approximately
$1.0 million.
The second quarter 1999 inventory reserve charges included a charge for
excess and obsolete inventory of approximately $15.4 million to inventories in
the Tel-Link PTP product line. Our inventory levels were driven based upon
forecasted sales expectations worldwide. The continued downturn in the
telecommunications industry resulted in decreased forecasted international sales
to Europe, Africa and Asia.
Included in the second quarter 1999 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.
Additionally, we recorded charges for purchase commitment losses for non-
cancelable excess
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-(Continued)
inventory purchase commitments of approximately $6.0 million. This purchase
commitment loss also was related to our PTP Tel-Link product line. Gross margins
for the second quarter 1999 were also negatively impacted by 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 three months ended June 30, 2000 and 1999, product gross margins were
(33.9) % and (61.6)%, respectively. For the six months ended June 30, 2000 and
1999, product gross margins were (3.8)% and (19.2)%, respectively. The negative
product gross margin in the second quarter 2000 was due to several factors,
including higher material costs for certain product components, start-up costs
associated with the new PMP product line, other manufacturing variances, as well
as certain charges aggregating $21.3 million against to Product Cost of Sales in
the second quarter of 2000 previously discussed. Product gross margin for the
second quarter of 1999 was negatively impacted by manufacturing variances and
declining average selling prices for the industry sector which generated lower
margins, as well as certain charges aggregating $21.4 million discussed above.
The negative impact on Product gross margins for the second quarter of 2000 and
1999 of the charges discussed above was 57.8 percentage points and 80.8
percentage points, respectively.
Service gross profits as a percentage of service sales were approximately
26.3% and 34.9% for the three months ended June 30, 2000 and 1999, respectively,
and were approximately 26.8% and 30.8% for the six months ended June 30, 2000
and 1999, respectively. The decrease in service gross margin was due to changes
in the services provided related to changes in the customer mix, as well as
increased hiring in our services business units.
We have an ongoing program to reduce the costs of manufacturing our Tel-
Link PTP and PMP products. As part of this program, we have been attempting to
achieve cost reductions principally through lower costs and increased
availability for key components by reducing our dependence on sole source
suppliers, improving our production efficiency and increased utilization of
third party subcontractors for the manufacture of our products, and engineering
and manufacturing design improvements. We believe that as of June 30, 2000 we
have reserved for all known material costs and expenses related to our
manufacturing cost reduction programs. There can be no assurance that our
ongoing or future programs can be accomplished, that they will increase gross
profits or that there will not be any future charges related to these or similar
programs.
Research and Development. For the three months ended June 30, 2000 and
1999, research and development expenses were approximately $5.2 million and $9.1
million, respectively. As a percentage of sales, research and development
expenses decreased from 25.7% for the three months ended June 30, 1999 to 10.6%
for the three months ended June 30, 2000. For the six months ended June 30,
2000 and 1999, research and development expenses were approximately $11.6
million and $18.1 million, respectively. As a percentage of sales, research and
development expenses decreased from 26.2% for the six months ended June 30, 1999
to 11.6% for the six months ended June 30, 2000. These decreases were primarily
due to the completion of our PMP development project in the fourth quarter of
1999.
Selling and Marketing. For the three months ended June 30, 2000 and 1999,
selling and marketing expenses were $3.6 million and $5.3 million, respectively.
As a percentage of sales, selling and marketing expense decreased from 14.8% for
the three months ended June 30, 1999 to 7.3% for the three months ended June 30,
2000. For the six months ended June 30, 2000 and 1999, selling and marketing
expenses were $6.7 million and $9.8 million, respectively. As a percentage of
total sales, selling and marketing expense decreased from 14.1% for the six
months ended June 30, 1999 to 6.7% for the six months ended June 30, 2000. The
decreases were primarily due to continuation of our cost reduction program
implemented in 1999.
General and Administrative. For the three months ended June 30, 2000 and
1999, general and administrative expenses were $7.0 million and $7.4 million,
respectively. As a percentage of total sales, general and administrative
expenses decreased from 20.8% to 14.3% for the three months ended June 30, 1999
and 2000, respectively. The decrease as a percentage of sales reflects our
continued efforts to control costs. For the six months ended June 30, 2000 and
1999, general and administrative expenses were $15.7 million and $12.7 million,
respectively. As a percentage of total sales, general and administrative
expenses decreased from 18.3% to 15.7% for the six months ended June 30, 1999
and 2000, respectively. The increase in the amount of general and administrative
expenses for the six months ended June 30, 2000 was primarily due to a $1.5
million write-off of
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-(Continued)
uncollectible non-trade receivables, as well as increased headcount and legal
and accounting services, in the first quarter of 2000.
Goodwill Amortization. Goodwill represents the excess of the purchase price
over the fair value of the net assets of acquired companies accounted for as
purchase business combinations. Goodwill is amortized on a straight-line basis
over the period of expected benefit, ranging from 7 to 20 years. For the three
months ended June 30, 2000 and 1999, goodwill amortization was approximately
$16.6 million and $1.8 million, respectively. The increase in goodwill
amortization in the three months ended June 30, 2000 as compared to the
corresponding period in 1999 was due to the second quarter 2000 write off of
$15.0 million of goodwill associated with the Cylink acquisition.
For the six months ended June 30, 2000 and 1999, goodwill amortization was
approximately $18.2 million and $3.6 million, respectively. The increase in
goodwill amortization for the six months ended June 30, 2000 was due to the
write off of $15.0 million of goodwill in the second quarter of 2000, partially
offset by a decrease in amortization resulting from the first quarter 2000 sale
of Technosystem S.p.A. and Cemetel.
Interest Expense. For the three months ended June 30, 2000 and 1999,
interest expense was $1.2 million and $2.3 million, respectively. For the six
months ended June 30, 2000 and 1999, interest expense was $2.8 million and $4.1
million, respectively. The reduction in interest expense was primarily due to
reduced amounts of bank debt and other long term debt.
Other Income (Expense), net. For the three month period ended June 30, 2000
other income (expense), net, totaling $1.5 million consisted primarily of a gain
of $2.3 on the April 2000 sale of our Control Resource Corporation (CRC)
subsidiary, a gain of $0.5 million from the sale of certain assets of our P-Com
Italia subsidiary, partially offset by write downs of $2.0 million resulting
from evaluation of the remaining lives and carrying value of certain equipment.
In April 2000, we completed the sale of CRC, for which we received $1.5 million
in cash proceeds and a $4.3 million note receivable due in September 2000. For
the six month period ended June 30, 2000 other income (expense), net, totaling
$(3.4) million consisted of net losses on the sale of our Cemetel and CRC
subsidiaries and net of losses related to the disposition and write downs of
property and equipment. We do not expect the sale of these subsidiaries to have
a material impact on future revenues or operational expenses.
Sales contracts negotiated in foreign currencies have been primarily
limited to British pound sterling contracts and any balance sheet impact to date
due to currency fluctuations in British pound sterling has been insignificant.
We may in the future be exposed to the risk of foreign currency gains and losses
depending upon the magnitude of a change in the value of a local currency in an
international market.
Discontinued Operations. In August of 1999, our Board of Directors decided
to divest its broadcast equipment business, Technosystem. Accordingly, beginning
in the third quarter of 1999, this business was reported as a discontinued
operation and the financial statement information related to this business has
been presented on one line in the December 31, 1999 Consolidated Balance Sheet,
"net assets of discontinued operation", and in the "discontinued operations"
line of the Condensed Consolidated Statements of Operations. The "net assets of
discontinued operations" represented the assets to be sold offset by the
liabilities to be assumed by the buyers of the business. In February 2000, we
completed the disposal of Technosystem and recorded an additional loss of $4.0
million.
Extraordinary Item. In January of 2000, we exchanged an aggregate of $7.0
million of our 4 1/4% Convertible Subordinated Notes (Notes) for an aggregate of
677,000 shares of newly issued Common Stock with a fair market value of $5.1
million. This transaction resulted in an extraordinary gain of $1.9 million. In
the first quarter of 1999 we had a similar gain of $7.3 million from the
exchange of shares for Notes. We do not anticipate any future exchanges.
Provision (Benefit) for Income Taxes. We regularly assess the realizability
of deferred tax assets based upon the weight of available evidence, including
such factors as the recent earnings history and expected future taxable income.
The methodology used by us to determine the amount of deferred tax assets that
are more likely than not to be realized is based upon our recent earnings and
estimated future taxable income for the next year. We believe that, based on
these factors, it is more likely than not that we will not realize its deferred
tax assets and, accordingly, additional valuation allowance of $9.9 million was
recorded in the quarter ended June 30, 2000. The
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-(Continued)
provision for income taxes for the six months of 2000 consists of the $10.6
million increase in valuation allowance, as well as estimated state and foreign
taxes.
Liquidity and Capital Resources
During the six-month period ended June 30, 2000, we used approximately
$26.7 million of cash in operating activities, primarily due to the net loss of
$68.1 million and the non-cash gain on exchange of Notes of $1.9 million offset
by non-cash charges including $9.9 million of valuation allowances against
deferred taxes, $15.0 million write-off of goodwill, $17.0 million of inventory
charges, and $4.3 million of accrued liability charges, as well as the net loss
on disposal of subsidiaries and discontinued operations of $4.0 million and net
losses of $2.9 million resulting from dispositions and write-off of property and
equipment. In addition, we experienced increases in operating cash flow from
non-cash depreciation and amortization of $9.1 million, an increase in accounts
payable of $11.1 million, and a decrease in prepaid expenses of $3.5 million,
offset by an increase in inventories of $28.8 million and an increase in
accounts receivable of $8.9 million. During the six-month period ended June 30,
2000, we used approximately $3.9 million in investing activities primarily for
the acquisition of property and equipment and the disposal of subsidiaries.
During the six-month period ended June 30, 2000, we retired approximately
$7.0 million of our Notes through the issuance of approximately 677,000 shares
of Common Stock. This non-cash exchange resulted in an extraordinary gain of
approximately $1.9 million. During the six-month period ended June 30, 2000, we
generated approximately $38.0 million from financing activities. We repaid
approximately $27 million of borrowings under our bank line of credit and
borrowed $10 million under a new loan agreement. The loan matures on January 31,
2001, subject to annual renewals. The maximum borrowings under the agreement are
limited to 85% of eligible accounts receivable, not to exceed $12 million.
Borrowings under the line are secured by substantially all of our assets. In
addition we received approximately $43.8 million in net proceeds from a private
placement of approximately 7.5 million shares of Common Stock in January 2000,
and $7.1 million from the exercise of stock options during the six months ended
June 30, 2000.
At June 30, 2000, we had working capital of approximately $53.4 million,
compared to $32.0 million at December 31, 1999. In recent years, we have
realized most of our sales near the end of each quarter, resulting in a
significant investment in accounts receivable at the end of the quarter. We
expect that our investments in accounts receivable and inventories will continue
to represent a significant portion of working capital. Significant investments
in accounts receivable and inventories will continue to subject us to risks that
have and continue to materially adversely affect our business prospects,
financial condition and results of operations.
At June 30, 2000 our principal source of liquidity consisted of
approximately $18.3 million of cash and cash equivalents. At December 31, 1999,
we had approximately $11.6 million in cash and cash equivalents.
The Company does not have any material commitments for Capital equipment.
Additional future capital requirements will depend upon many factors, including
our plans to increase manufacturing capacity, working capital requirements for
our operations, and our results of operations.
In view of our forecasted cash requirements for operations for the next
twelve months, and particularly for the fourth quarter of 2000, we are presently
working to complete a sale of additional common stock and expect to generate
proceeds from this sale in August 2000. These proceeds, together with existing
working capital, are expected to be sufficient to meet our working capital needs
through at least December 31, 2000. We are evaluating various additional
alternatives to improve liquidity and working capital through June 30, 2001, if
required. These alternatives include the sale of additional stock, seeking
advance payments from customers with open orders and the divestiture of certain
business units. There can be no assurance, however, that any additional
financing will be available to us on acceptable terms, or at all, when required
by us.
Risk Factors
You should carefully consider the risks described below before making an
investment decision.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-(Continued)
We may be unable to obtain additional capital needed to operate and grow our
business, which could damage our financial condition and further erode our stock
price
Based on our forecasted cash requirements for operations for the next
twelve months, and particularly for the fourth quarter of 2000, additional
working capital will be needed in order to fund the current level of
operations. Our capital requirements depend upon many factors, including
development of new products and related software tools, potential
acquisitions, maintenance of adequate manufacturing facilities and contract
manufacturing agreements, progress of research and developments efforts,
expansion of marketing and sales efforts, and status of competitive products.
Additional financing which we need in order to fund the current level of
operations through June 30, 2001 may not be available on acceptable terms or
at all. The continued existence of a substantial amount of debt could also
severely limit our ability to raise additional financing. In addition, given
the recent price for our Common Stock, if we raise additional funds by issuing
equity securities, significant dilution to our stockholders could result.
If adequate funds are not available, we may be required to restructure or
refinance our debt or delay, scale back or eliminate our research and
development, manufacturing programs. We may also need to obtain funds through
arrangements with partners or others that may require us to relinquish rights
to certain of our technologies or potential products or other assets. Our
inability to obtain capital, or our ability to obtain additional capital only
upon onerous terms, could materially adversely affect our business, operating
results and financial condition and further erode our stock price.
We do not have the customer base or other resources of more established
companies, which makes it more difficult for us to address challenges we may
face
We have not developed a large installed base of our equipment or the kind
of close relationships with a broad base of customers of a type enjoyed by
older, more developed companies, which would provide a base of financial
performance from which to launch strategic initiatives and withstand business
reversals. In addition, we have not built up the level of capital often enjoyed
by more established companies, so from time to time we may face challenges in
financing our continued operation. We may not be able to successfully address
these risks, which would adversely affect our results of operations and,
ultimately, our stock price.
We rely on our existing customers, and it will materially adversely affect our
operating results and financial condition if they do not support us
A substantial amount of our products and services are purchased by a limited
number of customers, so the loss of a large customer would significantly affect
our results of operations
If any of our important customers significantly reduce their purchases from
us, which has been the case during the last twelve months, then this may
materially adversely affect the profitability of our business and our ability to
remain in business. During 1999, we had three different customers that in total
accounted for over 44% of our sales. During the three and six month periods
ended June 30, 2000 we had four and three individual customers that in total
accounted for over 61% and 44% of our sales, respectively. During 1999, one
customer, Orange Personal Communications Ltd., accounted for 20% of our sales.
During the six month period ended June 30, 2000, this customer accounted for
7.5% of our sales. During the six month period ended June 30, 2000, one
customer, Lucent, accounted for 21.0% of our sales. We expect to experience an
increased concentration of sales to a relatively few customers in the second
half of 2000.
The Company places orders with suppliers based in part on customer non-binding
forecast. Historically, the Company has built products based on non-binding
forecasts from customers. This practice has resulted in write-offs of excessive
and obsolete inventory for each of the past three years.
Our customers may cancel orders leaving us with unsaleable equipment or idle
capacity
Our customers often enter into purchase orders with us far in advance of
manufacture of the equipment ordered. We have recently experienced several
purchase order cancellations and deferrals. Historically, we have chosen not to
harm our relationships with our customers by enforcing their obligations under
purchase orders when the customer wishes to cancel an order. Cancellations of
orders by customers may, depending upon the timing of the cancellation, leave us
with unsaleable equipment or idle capacity, which would adversely affect our
operating results and financial condition.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-(Continued)
We may try to issue stock at a discount to the current market price, which would
dilute our existing stockholders
In order to raise the funds we need to execute our business plan and fund
operations generally, we may have to try to continue to issue stock at a
discount to the current market price. Transactions of that kind would result in
dilution to our existing stockholders.
We may be forced to incur costs to restructure our business to reduce our
expenses, which could materially adversely affect our results of operations and
stock price
During 1998 and 1999, we generated net losses of approximately $62.5
million and $103.0 million, respectively. We also lost $68.1 million in the
first two quarters of 2000 and we may also incur net losses in subsequent
periods. In response to market declines and poor performance in our sector
generally and our lower than expected performance over the last several
quarters, we introduced measures to reduce operating expenses. These measures
included reductions in our workforce in 1998, write-downs in 1999 and sales of
non-core businesses in 2000. Additionally, management continues to evaluate
market conditions to assess the need to take further action to more closely
align our cost structure with anticipated revenues. Any subsequent actions
could result in additional restructuring charges, reductions of inventory
valuations and provisions for the impairment of long-lived assets, which could
materially adversely affect our results of operations and stock price.
When our large fixed costs combine with significant fluctuations in our sales,
large fluctuations in our results of operations may occur which could adversely
affect our stock price
A material portion of our expenses are fixed and difficult to reduce, which
magnifies the effects of any revenue shortfall. In addition, to prepare for the
future, we may continue to heavily invest resources in:
. the development of new products and technologies,
. the evaluation of these products,
. expansion into new geographic markets, and
. our plant and equipment, inventory, personnel and other items, in order to
efficiently produce these products and to provide necessary marketing and
administrative service and support.
As such, in addition to our fixed costs, our expenses will be increased by
start-up costs associated with the initial production and installation of new
products and technologies.
We experience significant fluctuations in sales, gross margins and
operating results. Our results of operations have also been and will continue
to be influenced by competitive factors, including pricing, availability and
demand for competitive products and services. These factors are difficult for
us to forecast, and have materially adversely affected our results of operations
and financial condition and may continue to do so. Because of our inability to
predict customer orders, delays, deferrals and cancellations, we may overbuild
inventory, and we may not be able to achieve or maintain our current sales
levels. We believe that period-to-period comparisons are thus not necessarily
meaningful and should not be relied upon as indications of future performance.
Because of all of the foregoing factors, in some future quarter or quarters,
revenues will be lower than expected and our operating results and financial
condition will be materially adversely affected. In addition, to the extent our
results of operations are below those projected by public market analysts, the
price of our Common Stock may continue to be materially adversely affected by
this discrepancy.
We may be unable to become profitable if the selling prices of our products and
services decline over time
We believe that average selling prices and possibly gross margins for our
systems and services will decline over time. This phenomenon is occurring in
our point-to-point products business. If we are unable to offset declining
average selling prices by comparable cost savings, our gross margins will
decline, and our results or operations and financial condition would be
adversely affected. Reasons for that decline in average selling prices include
the maturation of our systems, the effect of volume price discounts in existing
and future contracts and the
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-(Continued)
intensification of competition. To offset declining average selling prices, we
believe we must take a number of steps, including:
. successfully introducing and selling new systems on a timely basis;
. developing new products that incorporate advanced software and other
features that can be sold at higher average selling prices; and
. reducing the costs of our systems through contract manufacturing, design
improvements and component cost reduction, among other actions.
If we cannot develop new products in a timely manner, or if our new
products fail to achieve customer acceptance or do not generate higher average
selling prices, then we would be unable to offset declining average selling
prices. We therefore have a critical need for our new point-to-multipoint
product line to be successful.
We depend on contract manufacturers and limited sources of supply and, if they
fail us, production delays could damage our customer relationships
Our internal manufacturing capacity is very limited, and certain
components, subassemblies and services necessary for the manufacture and
production of our systems are obtained from a sole supplier or a small group of
suppliers. As a result, we have reduced control over the price, timely
delivery, reliability and quality of finished products, components and
subassemblies. We have experienced problems in the timely delivery and quantity
of products and certain components and subassemblies from vendors. We expect to
rely increasingly on these contract manufacturers and outside vendors in the
future, and they may prove undependable, stop doing business with us, or go out
of business. Due to the complexity of our products, finding and educating
additional or replacement vendors may be expensive and take considerable time.
Our internal manufacturing capacity and that of our contract manufacturers may
be insufficient to fulfill our orders, and we may be unable to obtain timely
deliveries of components and subassemblies of acceptable quality. Our failure
to manufacture, assemble and ship systems and meet customer demands on a timely
and cost-effective basis could damage relationships with customers and our
business.
If we are successful in growing our business, we may be unable to manage and
integrate the expanded operations associated with revenue growth, which may
increase costs and hurt profitability
Our prior expansion strained our management, financial resources,
manufacturing capacity and other resources and disrupted our normal business
operations. Our ability to manage any possible future growth may depend upon
significant expansion of our manufacturing, accounting and other internal
management systems and the implementation of a variety of systems, procedures
and controls, all of which would involve expenditures in advance of increased
sales. In particular, if our business grows, we must successfully manage
overhead expenses and inventories, develop, introduce and market new products,
manage and train our employee base, coordinate our geographically and ethnically
diverse workforce and monitor third party manufacturers and suppliers. We have
in the past experienced and may continue to experience significant problems in
these areas.
If our business grows, any failure to efficiently coordinate and improve
systems, procedures and controls, including improved inventory control and
coordination with our subsidiaries, could cause continued inefficiencies,
additional operational complexities and expenses, greater risk of billing
delays, inventory write-downs and financial reporting difficulties. Those
problems could impact our profitability and our ability to effectively manage
our business.
Accounting charges related to acquisitions may decrease future earnings
Many business acquisitions must be accounted for as purchase business
combinations for financial reporting purposes. All of our past acquisitions,
except the acquisitions of Control Resources Corporation, RT Masts Limited and
Telematics, Inc., have been accounted for as purchase business combinations,
resulting in a significant amount of goodwill being amortized. Amortization
expenses adversely affect our financial results.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-(Continued)
If our results of operations are inadequate, we may have difficulty servicing
our debt, which could cause a default and acceleration of repayment of our debts
As of June 30, 2000, our total indebtedness including current liabilities
was approximately $112.9 million and our stockholders' equity was approximately
$78.4 million. Our ability to make scheduled payments of the principal and
interest on our indebtedness will depend on our future performance, which is
subject in part to economic, financial, competitive and other factors beyond our
control. We may be unable to make payments on or restructure or refinance our
debt in the future, if necessary, which could lead to a default under our credit
agreement and note indenture and acceleration of repayments of the debts
thereunder.
Our customers may not pay us on time, leaving us short of funds needed to
operate our business
We may be unable to enforce a policy of receiving payment within a limited
number of days of issuing bills. We have had difficulties in the past in
receiving payment in accordance with our policies, particularly from customers
in the early phases of business development which are awaiting financing to fund
their expansion and from customers outside of the United States. Any inability
to timely collect our receivables could cause us to be short of cash to fund
operations and could have a material adverse effect on our business, financial
condition and results of operations.
We may experience problems with product quality, performance and reliability,
which may damage our customer relationships
We have limited experience in producing and manufacturing systems and
contracting for this manufacture. Our customers also require very demanding
specifications for quality, performance and reliability. As a consequence,
problems may occur with respect to the specifications for our systems or related
software tools. If those problems occur, we could experience increased costs,
delays, cancellations or reschedulings of orders or shipments, delays in
collections of accounts receivable and product returns and discounts. In
addition, the failure of any of our facilities to maintain or attain quality
certification by the International Standards Organization could adversely affect
our sales and sales growth. If any of these events occur, they might erode
customer confidence and cause them to reduce their purchases from us, which
would adversely impact our business and results of operations.
The market for our products may not grow fast enough to support our level of
investment, adversely affecting our results of operations
Our future operating results depend upon the continued growth and increased
availability and acceptance of advanced radio-based wireless telecommunications
systems and services in the United States and internationally. The volume and
variety of and the markets for and acceptance of wireless telecommunications
systems and services may not continue to grow as anticipated. Because these
markets are relatively new, predicting which market segments will develop and at
what rate they will grow is difficult. We have recently invested additional
significant time and resources in the development of new products, such as our
point-to-multipoint product line. If the market for these new products and the
market for related services for our systems fail to grow, or grow more slowly
than anticipated, revenue will also fail to grow, adversely affecting our
results of operations.
We may be unable to compete successfully for customers with either competitors
offering technologies similar to ours or with alternative technologies, which
could adversely affect our business and results of operations
Our wireless-based radio systems compete with other wireless
telecommunications products and alternative telecommunications transmission
media, including copper and fiber optic cable. We are experiencing intense
competition worldwide from a number of leading telecommunications companies.
Those companies offer a variety of competitive products and services and broader
telecommunications product lines, which makes us more vulnerable to shifts in
technology and customer preferences. Many of these companies have greater
installed bases, financial resources and production, marketing, manufacturing,
engineering and other capabilities than we do. We face actual and potential
competition not only from these established companies, but also from start-up
companies that are developing and marketing new commercial products and
services.
Two of our primary competitors are Ericsson and Digital Microwave.
Ericsson is a formidable competitor for us because they provide both consulting
services and equipment they manufacture to customers as complete
telecommunications solutions. Ericsson's combined consulting and product
approach insulates them from
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-(Continued)
competition for sales of products because, in order for customers to obtain the
complete solution, Ericsson requires them to purchase the product from Ericsson,
which completely forecloses our opportunity to sell products to the customer. In
contrast, Digital Microwave is a product manufacturer like us, and competes
directly against us for product sales to customers, which leads to downward
pressure on prices we can charge for our products. If we are unable to
successfully compete for customers, future growth, revenues and profitability
would be adversely affected.
Failure to respond to rapid technological change or introduce new products in a
timely manner may limit our revenue growth and adversely impact our results of
operations
Rapid technological change, frequent new product introductions and
enhancements, product obsolescence, changes in end-user requirements and
evolving industry standards characterize the communications market. Our ability
to compete in this market will depend upon our successful development,
introduction and sale of new systems and enhancements and related software
tools, on a timely and cost-effective basis, in response to changing customer
requirements. We have experienced and continue to experience delays in customer
procurement and in completing development and introduction of new systems and
related software tools, including products acquired in acquisitions. Moreover,
we may not be successful in selecting, developing, manufacturing and marketing
new systems or enhancements or related software tools. Any inability to rapidly
introduce, in a timely manner, new systems, enhancements or related software
tools could have a material adverse effect on our results of operations and
limit future growth.
We have extensive international operations, in more volatile markets than the
United States, and changes in these markets may undermine our business there
In doing business in international markets, we face economic, political,
regulatory, logistical, legal, financial and business environments and foreign
currency fluctuations that are more volatile than those commonly experienced in
the United States. Until 2000, most of our sales were made to customers located
outside of the United States. Because of the more volatile nature of these
markets, the basis for our business in these markets may be frequently
jeopardized, materially and adversely affecting our operations in these
countries and our overall results of operations and growth.
We are subject to extensive government regulation, which may change and harm our
business
We operate in a constantly changing regulatory environment. Radio
communications are extensively regulated by the United States government, and we
also are subject to foreign laws and international treaties. Our systems must
conform to a variety of domestic and international requirements established to,
among other things, avoid interference among users of radio frequencies and to
permit interconnection of equipment. Regulatory changes, which are affected by
political, economic and technical factors, could significantly impact our
operations by restricting our development efforts and those of our customers.
Many of our competitors have broader telecommunications product lines, which
makes us more vulnerable than they are to regulatory changes that shift business
from one product to another. As a result, those regulatory changes could make
current systems obsolete, favor our competitors or increase competition. Any of
those regulatory changes, including changes in the allocation of available
spectrum or changes that require us to modify our systems and services, could
prove costly and thus materially adversely affect our business and results of
operations.
We are the subject of, and may be the subject of additional, class action suits,
which would divert significant resources away from our business
We are a defendant in a consolidated class action lawsuit in state court.
An unfavorable outcome could have a material adverse effect on our prospects and
financial condition. Even if the litigation is resolved in our favor, the
defense of that litigation will entail considerable cost and diversion of
efforts of management, either of which are likely to adversely affect our
results of operations.
We may be unable to protect our proprietary rights, permitting competitors to
duplicate our products and services or preventing us from selling our products
We rely on a combination of patents, trademarks, trade secrets, copyrights
and other measures to protect our intellectual property rights. However, these
measures may not provide adequate protection for our trade secrets or other
proprietary information. Any of our patents could be invalidated, circumvented
or challenged, or may not
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-(Continued)
provide competitive advantages to us. In addition, foreign intellectual property
laws may not adequately protect our intellectual property rights abroad. Any
failure or inability to protect proprietary rights could have a material adverse
effect on our competitive market position and business.
Litigation may also be necessary to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of
proprietary rights of others or to defend against claims of infringement. A
variety of third parties have sent correspondence to the former owner of the
Cylink Wireless Group in which they allege that the Cylink Wireless Group's
products may be infringing their intellectual property rights. We acquired that
Group in 1998. Therefore, any intellectual property litigation based upon those
allegations could result in substantial costs and diversion of management
attention and resources, and could prevent us from selling certain products or
require us to license technology to continue selling those products. Licenses
to any of that technology may not be available on acceptable terms or at all.
If we are unable to sell those products or can do so only by incurring high
licensing costs, our business, financial condition and results of operations
would be materially adversely affected.
Our results may suffer if we are unable to attract and retain qualified
management and technical personnel
Our highly technical business depends upon the continued contributions of
key technical and senior management personnel, many of whom would be difficult
to replace. Competition for qualified management, manufacturing, quality
assurance, engineering, marketing, sales and support personnel is intense in our
industry and geographic areas, and we may not be successful in attracting or
retaining those personnel. We experience high employee turnover which is
disruptive and could adversely impact our business. The loss, or failure to
perform, of any key employee could materially adversely affect our customer
relations and results of operations. Our chief financial officer is leaving us
in mid-August 2000 and we have not yet identified a replacement.
Our board has the power to reject offers to acquire shares of our Common Stock
in a change of control transaction, which may prevent our stockholders from
having the opportunity to accept those offers and discourage certain offers for
shares of our Common Stock
The following factors give our board of directors the power to reject
acquisition proposals without any input or consideration of these proposals by
our stockholders:
. our stockholder rights plan,
. our certificate of incorporation and bylaws,
. our equity incentive plans, and
. Delaware law.
As a result of these factors, our board of directors could significantly
delay, defer or prevent a change in control transaction involving P-Com, even if
holders of our Common Stock might want the transaction to occur. These factors
may adversely affect the voting and other rights of other holders of Common
Stock, and prevent stockholders from receiving and accepting offers to acquire
their shares that the board deems not to be in the best interest of our
stockholders. In addition, the power of the board to reject those offers may
discourage certain third parties from making these offers.
Relying on forward-looking statements could cause you to incorrectly assess the
risks and uncertainties in investing in our stock because our actual results
could differ materially from those anticipated in forward-looking statements
contained in this prospectus
This report and our other SEC filings contain "forward-looking" statements
that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including the risks faced by us described above and
elsewhere in this report.
We may face other risks not described in the foregoing risk factors which may
impair our business operations
The risks and uncertainties described in the foregoing risk factors may not
be the only ones facing us. Additional risks and uncertainties not presently
known to us may also impair our business operations. If any of the following
risks actually occur, our business, financial condition and results of
operations could be materially
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-(Continued)
adversely affected. In this case, the trading price of our Common Stock could
decline, and you may lose all or part of your investment.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For financial risks related to changes in interest rates and foreign
currency exchange rates, reference is made to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for
the year ended December 31, 1999, as well as the risks detailed above in the
present document.
25
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS.
There have been no material changes in the proceedings disclosed in our
1999 Form 10-K.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -------------------------------------------------------------------------------
<S> <C>
10.76(1) Asset Purchase Agreement between Paradyne Networks, Inc., P-Com, Inc., and
Control Resources Corporation, dated April 5, 2000.
10.77(1) Promissory note to James Sobcezak dated May 3, 2000.
27.1 Financial Data Schedule.
</TABLE>
_____________________
( (1) Incorporated by reference to identically numbered exhibit to the
Company's Amendment No. 7 to Form S-3 Registration Statement dated May 4,
2000.
(b) Reports on Form 8-K. The Company did not file any Reports on Form
-------------------
8-K during the quarter ended June 30, 2000.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
P-COM, INC.
-----------
(Registrant)
Date: August 10, 2000 By: /s/ George P. Roberts
--------------------------------
George P. Roberts
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 2000 By: /s/ Robert E. Collins
--------------------------------
Robert E. Collins
Chief Financial Officer and Vice
President, Finance and
Administration
(Principal Financial Officer)
27
<PAGE>
Index of Exhibits
-----------------
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -------------------------------------------------------------------------------
<S> <C>
10.76(1) Asset Purchase Agreement between Paradyne Networks, Inc., P-Com, Inc., and
Control Resources Corporation, dated April 5, 2000.
10.77(1) Promissory note to James Sobcezak dated May 3, 2000.
27.1 Financial Data Schedule.
</TABLE>
_____________________
( (1) Incorporated by reference to identically numbered exhibit to the
Company's Amendment No. 7 to Form S-3 Registration Statement dated May 4,
2000.
(b) Reports on Form 8-K. The Company did not file any Reports on Form
-------------------
8-K during the quarter ended June 30, 2000.
28
