-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QVM4Ob48eDIuiIHpKjNPvtE18fxur3crRMEfmd1O68EBAh8lMcm/6pHOgI/fnVDB +7CmEW88y2Rhl7cWm5SPEQ== 0001012870-99-003362.txt : 19990927 0001012870-99-003362.hdr.sgml : 19990927 ACCESSION NUMBER: 0001012870-99-003362 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19990924 FILER: COMPANY DATA: COMPANY CONFORMED NAME: P COM INC CENTRAL INDEX KEY: 0000935493 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 770289371 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-25356 FILM NUMBER: 99717084 BUSINESS ADDRESS: STREET 1: 3175 S WINCHESTER BLVD CITY: CAMPBELL STATE: CA ZIP: 95008 BUSINESS PHONE: 4088663666 MAIL ADDRESS: STREET 1: 3175 S WINCHESTER BLVD STREET 2: P-COM INC CITY: CAMPBELL STATE: CA ZIP: 95008 10-Q/A 1 FORM 10-Q/A - AMENDMENT #3 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________ FORM 10-Q/A Amendment No. 3 To Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998. OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number: 0-25356 _______________ P-Com, Inc. (Exact name of Registrant as specified in its charter) _______________ Delaware 77-0289371 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 3175 S. Winchester Boulevard, Campbell, California 95008 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (408) 866-3666 _______________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of May 11, 1998, there were 43,155,565 shares of the Registrant's Common Stock outstanding, par value $0.0001. This quarterly report on Form 10-Q/A consists of 34 pages of which this is page 1. The Exhibit Index appears on page 34. 1 AMENDED FILING OF FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 - RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION P-Com, Inc. (the "Company") is amending, pursuant to this amendment, its Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. The Company has adjusted the allocation of the purchase price related to the March 28, 1998 and April 1, 1998 acquisition of the Wireless Communications Group of Cylink Corporation (the "Cylink Wireless Group"). The Company initially recorded a charge for purchased in-process research and development ("IPR&D") in March 1998 based upon a purchase price allocation which was made in a manner consistent with widely recognized appraisal practices at the date of acquisition. Subsequently the Company has resolved to adjust the amount originally allocated to acquired IPR&D based on a more current and preferred methodology. As such, the Company has adjusted the allocation of the purchase price related to the acquisition of the Cylink Wireless Group. This adjustment reduced the charge to operations for IPR&D from $33.9 million to $15.4 million and created a higher recorded value of goodwill and other intangible assets. This amended filing contains related financial information and disclosures as of and for the three month period ended March 31, 1998. See Note 1 to the Condensed Consolidated Financial Statements. 2 P-COM, INC. TABLE OF CONTENTS
Page Part I. Financial Information Number --------------------- ------ Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997......................................... 4 Condensed Consolidated Statements of Operations for the three month periods ended March 31, 1998 and 1997................... 5 Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 1998 and 1997............. 6 Notes to Condensed Consolidated Financial Statements.......... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 13 Part II. Other Information ----------------- Item 1. Legal Proceedings............................................. 32 Item 2. Changes in Securities......................................... 32 Item 3. Defaults Upon Senior Securities............................... 32 Item 4. Submission of Matters to a Vote of Security Holders........... 32 Item 5. Other Information............................................. 32 Item 6. Exhibits and Reports on Form 8-K.............................. 32 Signatures.................................................... 33
3 PART I - FINANCIAL INFORMATION - ------------------------------ ITEM I P-COM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, December 31, 1998 1997 ----------- -------------- (restated) ASSETS Current assets: Cash and cash equivalents $ 25,922 $ 88,145 Accounts receivable, net 68,667 70,883 Notes receivable 207 205 Inventory 74,848 58,003 Prepaid expenses and other current assets 15,514 10,632 -------------- --------------- Total current assets 185,158 227,868 Property and equipment, net 39,656 $ 32,313 Deferred income taxes 6,855 1,697 Goodwill and other assets 77,754 43,643 -------------- --------------- $ 309,423 305,521 ============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 38,193 38,043 Accrued employee benefits 2,810 3,930 Other accrued liabilities 10,519 6,255 Income taxes payable 9,249 6,409 Notes payable 245 293 -------------- --------------- Total current liabilities 61,016 54,930 -------------- --------------- Long-term debt 102,255 101,690 -------------- --------------- Minority interest 705 604 -------------- --------------- Stockholders' equity: Preferred stock - - Common Stock 4 4 Additional paid-in capital 134,165 131,735 Retained earnings 13,283 18,380 Accumulated other comprehensive income (2,005) (1,822) -------------- --------------- Total stockholders' equity $ 145,447 $ 148,297 -------------- --------------- $ 309,423 $ 305,521 ============== ===============
The accompanying notes are an integral part of these consolidated financial statements. 4 P-COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data, unaudited)
Three Months Ended March 31, 1998 1997 ---------- ---------- (restated) Sales Product $ 51,421 $ 38,593 Service 7,216 5,634 ---------- ---------- Total sales 58,637 44,227 ---------- ---------- Cost of sales Product 28,847 23,141 Service 4,665 4,311 ---------- ---------- Total cost of sales 33,512 27,452 ---------- ---------- Gross profit 25,125 16,775 ---------- ---------- Operating expenses: Research and development 7,728 6,774 Selling and marketing 4,225 2,915 General and administrative 3,891 3,437 Goodwill amortization 698 346 Acquired in-process research and development 15,442 - ---------- ---------- Total operating expenses 31,984 13,472 ---------- ---------- Income (loss) from operations (6,859) 3,303 Interest expense (1,766) (296) Interest income 882 380 Other income (expense) 20 (156) ---------- ---------- Income (loss) before income taxes (7,723) 3,231 Provision (benefit) for income taxes (2,626) 1,553 ---------- ---------- Net income (loss) $ (5,097) $ 1,678 ========== ========== Net income (loss) per share: Basic $ (0.12) $ 0.04 ========== ========== Diluted $ (0.12) $ 0.04 ========== ========== Shares used in per share computation: Basic 42,951 41,371 ========== ========== Diluted 42,951 43,238 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 5 P-COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited)
Three Months Ended March 31, 1998 1997 ------------ ------------ (restated) Cash flows from operating activities: - ------------------------------------ Net income (loss) $ (5,097) $ 1,678 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 2,923 1,136 Amortization of goodwill 689 346 Change in minority interest 101 (21) Deferred income taxes (5,158) 14 Acquired in-process research and development expenses 15,442 - Change in assets and liabilities (net of acquisition balances): Accounts receivable (3,214) 2,287 Notes receivable (2) 435 Inventory (11,736) (6,881) Prepaid expenses (3,185) 115 Goodwill and other assets (1,854) (126) Accounts payable (1,205) 229 Accrued employee benefits (1,120) 135 Other accrued liabilities 4,264 (2,759) Income taxes payable 2,840 1,337 ----------- ----------- Net cash used in operating activities (6,303) (2,075) ----------- ----------- Cash flows from investing activities: - ------------------------------------- Acquisition of property and equipment (9,805) (2,618) Acquisitions, net of cash acquired (48,874) (10,855) ----------- ----------- Net cash used in investing activities (58,679) (13,473) ----------- ----------- Cash flows from financing activities: - ------------------------------------ Proceeds (payment) of notes payable 517 (4,754) Proceeds from stock issuances, net of expenses 2,430 1,418 ----------- ----------- Net cash provided by (used in) financing activities 2,947 (3,336) ----------- ----------- Effect of exchange rate changes on cash (183) (228) ----------- ----------- Net decrease in cash and cash equivalents (62,223) (19,112) Cash and cash equivalents at the beginning of the period 88,145 42,226 ----------- ----------- Cash and cash equivalents at the end of the period $ 25,922 23,114 =========== =========== Supplemental cash flow disclosures: Cash paid for income taxes $ 676 $ 200 =========== =========== Stock issued in connection with the acquisition of CSM and ACS $ - $ 14,500 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 6 P-COM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of P-Com, Inc.'s (referred to herein, together with its wholly owned and partially owned subsidiaries, as "P-Com" or the "Company") financial condition as of March 31, 1998, and the results of its operations and its cash flows for the three months ended March 31, 1998 and 1997. These financial statements should be read in conjunction with the Company's audited 1997 financial statements, including the notes thereto, and the other information set forth therein, included in the Company's Annual Report on Form 10-K/A (File No. 0-25356). Operating results for the three month period ended March 31, 1998 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 1998. This Quarterly Report on Form 10-Q/A contains forward-looking statements that involve numerous risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q/A that are not purely historical are forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, including without limitation statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the factors affecting operating results contained in this Quarterly Report on Form 10-Q/A. The Company recorded a charge for purchased in-process research and development ("IPR&D") in March 1998 relating to the acquisition of the Cylink Wireless Group in a manner consistent with widely recognized appraisal practices at the date of acquisition. Subsequent to this time, the Company became aware of some new information which brought into question the traditional appraisal methodology, and revised its purchase price allocation based upon a more current and preferred methodology. As a result of computing IPR&D using the current preferred methodology, the Company, decided to revise the amount originally allocated to IPR&D. As such, the Company has restated its first, second, and third quarter 1998 consolidated financial statements. As a result, the first quarter charge for acquired IPR&D was decreased from $33.9 million previously recorded to $15.4 million, a decrease of $18.5 million with a corresponding increase in goodwill and other intangible assets and related amortization in subsequent quarters. Technological feasibility was not established for the expensed IPR&D, and the expensed IPR&D had no alternative future use. The portion of the purchase price allocated to goodwill and other intangible assets includes $6.3 million of developed technology, $2.7 million of core technology, $1.8 million of assembled workforce, and $23.5 million of goodwill. The effect of this reallocation on previously reported condensed consolidated financial statements as of and for the three-month period ended March 31, 1998 is as follows (in thousands except per share amounts, unaudited): 7
Three months ended March 31, 1998 Statements of Operations: As reported Restated -------------- ------------- Acquired in-process research and development expenses $ 33,856 $ 15,442 Loss from operations $ (25,273) $ (6,859) Net loss $ (17,249) $ (5,097) Net loss per share Basic and diluted $ (0.40) $ (0.12) March 31, 1998 Balance Sheets: As reported Restated -------------- ------------- Deferred income taxes $ 13,117 $ 6,855 Goodwill and other assets $ 59,340 $ 77,754 Total assets $ 297,271 $ 309,423 Retained earnings $ 1,131 $ 13,283 Total stockholders' equity $ 133,295 $ 145,447
2. NET INCOME (LOSS) PER SHARE The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires presentation of both Basic EPS and Diluted EPS on the face of the income statement. Basic EPS, which replaces primary EPS, is computed by dividing net income available to Common Stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Unlike the computation of primary EPS, Basic EPS excludes the dilutive effect of stock options. Diluted EPS replaces fully diluted EPS and gives effect to all dilutive potential common shares outstanding during a period. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from exercise of stock options rather than the higher of the average or ending stock price as used in the computation of fully diluted EPS. Following is a reconciliation of the numerators and denominators of the Basic and Diluted EPS computations for the periods presented below (in thousands except per share data):
Three months ended March 31, 1998 1997 -------------- -------------- (restated) Numerator for basic income (loss) per share - net income (loss) $ (5,097) $ 1,678 ============== ============== Denominator for basic income (loss) per common share 42,951 41,371 Effect of dilutive securities: Stock options and warrants - 1,867 -------------- -------------- Denominator for diluted income (loss) per common share 42,951 43,238 ============== ============== Income (loss) from continuing operations before extraordinary items per common share: Basic $ (0.12) $ 0.04 ============== ============== Diluted $ (0.12) $ 0.04 ============== ==============
For the first quarter of 1998, the weighted-average unexercised stock options to purchase 1,570,817 shares of Common Stock were excluded from the computation of diluted net loss per share, as the effect would be antidilutive. For the first quarter of 1997, 142,300 weighted-average outstanding stock options were also excluded from the computation of net income per share. Options are antidilutive when the Company has a net loss or when the exercise price of the stock option is greater than the average market price of the Company's Common Stock. 8 3. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for reporting comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gain/loss on available- for-sale securities. The Company's total comprehensive income (loss) was as follows (in thousands):
Three Months Ended March 31, 1998 1997 ---------- ---------- (restated) Net income (loss) $(5,097) $1,679 Other comprehensive income (loss) (183) (277) ------- ------ Total comprehensive income (loss) $(5,280) $1,402 ======= ======
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The disclosures prescribed by SFAS 131 are effective in 1998, and are not required for interim periods. The Company does not expect this pronouncement to have a material effect on its financial statements. 4. ACQUISITIONS On March 28, 1998, the Company acquired substantially all of the assets, and on April 1, 1998, the accounts receivable of the Cylink Wireless Group for $46.0 million in cash and $14.5 million in a short-term, non interest bearing unsecured subordinated promissory note due July 6, 1998. The Cylink Wireless Group designs, manufactures and markets spread spectrum radio products for voice and data applications in both domestic and international markets. The acquisition of the accounts receivable on April 1, 1998 was recorded in the second quarter of 1998. The Company accounted for this acquisition as a purchase business combination. The results of Cylink Wireless Group are included from the date of acquisition and were not material to the Company's results of operations for the three-month period ended March 31, 1998. The total purchase price of the acquisition is as follows (in thousands): Cash Payment $46,000 Short-term promissory note 14,500 Expenses 2,483 ------- Total $62,983 =======
9 The allocation of the purchase price, restated for the revision of the amount allocated to in-process research and development ("IPR&D"), as discussed below, was as follows (in thousands):
(As reported) (Restated) ------------- ---------- Accounts receivable, net $ 9,065 $ 9,065 Inventory 5,109 5,109 Property and equipment, net 461 461 Current liabilities assumed (1,355) (1,355) Intangible assets: 15,847 Goodwill - 23,482 In-process research and development 33,856 15,442 Developed technology - 6,291 Acquired workforce - 1,781 Core technology - 2,707 -------- -------- Total $ 62,983 $ 62,983 ======== ========
The following unaudited pro forma information combines the historical sales and net income (loss) and net income (loss) per share of P-Com and the Cylink Wireless Group for the three months ended March 31, 1998 and the year ended December 31, 1997 in each case as if the acquisition had occurred at the beginning of the earliest period presented. The results include amortization of goodwill and other intangible assets related to the acquisition of the Cylink Wireless Group, as restated for the revision of the amount of purchase price allocated to IPR&D as discussed below, and as previously reported. (In thousands, except per share data)
Three Months Ended Twelve Months Ended March 31, 1998 December 31, 1997 (restated) (restated) ----------------------------------- ------------------------------------- P-Com Cylink Pro Forma P-Com Cylink (1) Pro Forma -------- -------- --------- -------- ---------- --------- Sales $ 58,637 $ 4,508 $ 63,145 $220,702 $ 27,957 $248,659 Net income (loss) (5,097) (4,706) (9,803) 18,891 (3,443) 15,448 Net income (loss) per share: Basic (0.12) (0.11) (0.23) 0.45 (0.08) 0.37 Diluted (0.12) (0.11) (0.23) 0.43 (0.08) 0.35
- ---------- (1) On November 5, 1998, Cylink publicly announced that it and its independent accountants had initiated a review of revenue recognition practices which would result in a restatement of Cylink's previously issued first and second quarter 1998 results and that the first three quarters of 1998 were all expected to show substantial operating losses. During the review, certain facts became publicly available that indicated that errors had been made in the application of revenue recognition policies which also impacted Cylink's fourth quarter 1998 results. These restated results were announced in a press release issued by Cylink dated December 16, 1998 and have been reflected in the Cylink balances shown in the financial statements. These restated results only impact the year ended December 31, 1997 for the Cylink Wireless Group as follows (in thousands):
Statement of Operations: (As reported) (Restated) ------------- ---------- Revenue $31,267 $27,957 Operating expenses 14,118 14,118 Income from operations 3,688 1,769 Net income 2,668 1,343
10 After consideration of recent guidance, which included modifications of widely recognized appraisal practices, the Company has adjusted the allocation of the purchase price related to the acquisition of the Cylink Wireless Group, which included decreasing the IPR&D charge from $33.9 million as originally reported in the Company's Quarterly Report on Form 10-Q for its quarter ended March 31, 1998 to $15.4 million. The result of this restatement is a lesser charge to income for IPR&D and a higher recorded value of goodwill and other intangible assets, resulting in increased amortization of such goodwill and other intangible assets in future periods. IPR&D had no alternative future use at the date of acquisition and technological feasibility had not been established. Among the various factors considered in determining the amount of the allocation of the purchase price to IPR&D were estimating the stage of development of each IPR&D project at the date of acquisition, estimating cash flows resulting from the expected revenues generated from such projects, and discounting the net cash flows. In addition, other factors were considered in determining the value assigned to purchased in-process technology such as research projects in areas supporting products which address the growing third world markets by offering a new point-to-multipoint product, a faster, less expensive more flexible point-to-point product, and the development of enhanced Airlink products, consisting of a Voice Extender, Data Metro II, and RLL encoding products. IPR&D essentially comprised three significant projects: a new point-to-multipoint product; a faster, less expensive, more flexible point-to- point product; and the development of enhanced Airlink products acquired from Cylink Wireless Group, consisting of a Voice Extender, Data Metro II and RLL encoding products. At the time of the acquisition, these projects were estimated to be 60%, 85% and 50% complete, respectively, with estimated costs to complete of $2.4 million, $2.6 million and $0.6 million, respectively. The new point-to- multipoint product will include significant developments such as time division multiple access scalability and a software controlled (vs. dipswitch controlled) installation system and is not expected to be completed prior to 2000. This new product is expected to generate revenues over the next 10 years. The point-to- point product will significantly redesign the RF section and digital board by offering a more robust RF section, proprietary software, network management functions and easier configuration options. This project is expected to be completed during the third quarter of 1998 and generate revenues over the next 10 years. The enhancements to existing Airlink products will focus on voice frequency, pseudonoise code technology and the introduction of compression technology and are expected to be completed during the first quarter of 1999. These projects are expected to generate revenues over the next 10 years. Cost assumptions used to determine the future cash flows of IPR&D included a gross margin of approximately 55% and an operating income margin of approximately 35%. These margins assume the Company is successful in developing its products and generates some economics of scale and operating leverage if it continues to grow. In determining the value assigned to the IPR&D, the Company used a discount rate of 28% which represented Cylink Wireless Group's weighted- average cost of capital. Developed technology is the technology that has reached technological feasibility and is currently being sold as products in the market. Core technology can be defined as the "building block" for future technological developments and is derived from developed technology. As a result, for purposes of allocating the purchase price to the intangible assets acquired, the core technology underlying the in-process technology was separately identified and capitalized. For the new point-to-multipoint product, the core technology comprised the RF platform and baseband modern design. For the point-to-point product, the core technology comprised the wireless protocol engine (FPGA design). For the enhanced Airlink products, the core technology comprised the site manager software. Developed technology of $6.3 million will be amortized over the period of the expected revenue stream of the developed products of approximately four years. The value of the acquired workforce, $1.8 million, will be amortized on a straight-line basis over three years, and the remaining identified intangible assets, including core technology of $2.7 million and goodwill of $23.5 million will be amortized on a straight-line basis over ten years. Due to the timing of the acquisition, there was no amortization expense related to the acquisition of the Cylink Wireless Group during the quarter ended March 31, 1998. If none of these projects are successfully developed, the Company's sales and profitability may be adversely affected in future periods. Additionally, the failure of any particular individual project in process could impair the 11 value of other intangible assets acquired. The Company expects to begin to benefit from the purchased in-process technology in 1999. 5. BORROWING ARRANGEMENTS The Company entered into a new revolving line-of-credit agreement on April 23, 1998 that provides for borrowings of up to $25 million. The line-of-credit expires on June 22, 1998 or upon demand by the bank. Borrowings under the line are secured and bear interest at either a base interest rate or a variable interest rate. The Company entered into a new revolving line of credit agreement on May 15, 1998 that provides for borrowings of up to $50 million and replaces the revolving line of credit agreement dated April 23, 1998. The line of credit expires on April 30, 2001. Borrowings under the line are secured and bear interest at either a base interest rate or a variable interest rate. The agreement requires the Company to comply with certain financial covenants including the maintenance of specific minimum ratios. The Company was in compliance with such covenants as of March 31, 1998. 6. INVENTORY Inventory consists of the following (in thousands):
March 31, December 31, 1998 1997 (unaudited) ----------- ------------ Raw materials $10,940 $ 9,695 Work-in-process 38,355 32,472 Finished goods 25,553 15,836 ------- ------- $74,848 $58,003 ======= =======
7. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
March 31, December 31, 1998 1997 (unaudited) ----------- ------------ Tooling and test equipment $ 35,304 $ 31,603 Computer equipment 5,719 4,950 Furniture and fixtures 5,238 4,979 Land and buildings 1,357 1,389 Construction-in-process 8,863 3,294 -------- -------- 56,481 46,215 Less--accumulated depreciation and amortization (16,825) (13,902) -------- -------- $ 39,656 $ 32,313 ======== ========
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview On March 28, 1998, the Company acquired substantially all of the assets, and on April 1, 1998, the accounts receivable, of the Wireless Communications Group of Cylink Corporation (the "Cylink Wireless Group"). The acquisition was accounted for as a purchase business combination in accordance with Accounting Principles Board Opinion No. 16. Under the purchase method of accounting, the purchase price was allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition with any excess recorded as goodwill. Results of operations for the Cylink Wireless Group have been included with those of the Company for periods subsequent to the date of acquisition. The total purchase price of the acquisition was $63.0 million including acquisition expenses of $2.5 million. Of the purchase price, $15.4 million has been assigned to in-process research and development ("IPR&D") and expensed upon the consummation of the acquisition. The Company originally recorded a $33.9 million charge for purchased IPR&D in March 1998 based upon a purchase price allocation which was made in a manner consistent with widely recognized appraisal practices at the date of acquisition. Subsequently, the Company has resolved to adjust the amount originally allocated to acquired IPR&D based on a more current and preferred methodology. As such, the Company has adjusted the allocation of the purchase price related to the acquisition of the Cylink Wireless Group. The result is a lesser charge to income for IPR&D and a higher recorded value of goodwill and other intangible assets. Among the various factors considered in determining the amount of the allocation of the purchase price to IPR&D were estimating the stage of development of each IPR&D project at the date of acquisition, estimating cash flows resulting from the expected revenues generated from such projects, and discounting the net cash flows, in addition to other assumptions. Developed technology will be amortized over the period of the expected revenue stream of the developed products of approximately four years. The value of the acquired workforce will be amortized on a straight-line basis over three years, and the remaining identified intangibles, including goodwill and core technology will be amortized on a straight-line basis over ten years. Due to the timing of the acquisition, there was no amortization expense related to the acquisition of the Cylink Wireless Group during the quarter ended March 31, 1998. In addition, other factors were considered in determining the value assigned to purchased IPR&D such as research projects in areas supporting products which address the growing third world markets by offering a new point to multi-point product, a faster, less expensive more flexible point-to-point product, and the development of enhanced Airlink products, consisting of a Voice Extender, Data Metro II, and RLL encoding products. At the time of acquisition, these projects were estimated to be 60%, 85%, and 50% complete, respectively. The Company expects to begin to benefit from these projects in 1999. If none of these projects are successfully developed, the Company's sales and profitability may be adversely affected in future periods. Additionally, the failure of any particular individual project in process could impair the value of other intangible assets acquired. The Company expects to begin to benefit from the purchased in-process technology in 1999. The Company acquired the assets of the Cylink Wireless Group to extend the Company's existing product line and distribution channels and to provide the Company's with additional technology and products under development. The Wireless Group's existing product line and distribution channels provided immediate benefit to the Company's business and the technology and products under development were expected to provide further revenue opportunities in the expanding markets of Asia and Latin America. The purchase price for the Cylink Wireless Group was based on the fair value as determined by two willing independent parties. The value for the intangible assets was determined in a manner consistent with widely recognized appraisal practices at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. As the dominant supplier of spread spectrum radios in Asia and Latin America, the established relationships provided by the acquisition significantly improved the Company's penetration of these markets. The Company believes that the IPR&D at the time of the acquisition constituted a significant part of the 13 Wireless Group's value. In particular, in certain markets the frequency spectrum used by the Airlink products is becoming increasingly saturated. The Viper product offered the Wireless Group's customer a migration path into new frequency bands. The Company does not believe that it could have developed such products internally or could have purchased them elsewhere for less. During the second quarter of 1998, due to limited staff and facilities, the Company delayed the research project for the new narrowband point-to-multipoint project acquired from the Cylink Wireless Group and focused available resources on the broadband point-to-multipoint project which is targeted for a larger addressable market. The narrowband point-to-multipoint project has a total remaining expected development cost of approximately $2.4 million and, due to the allocation of resources discussed above, is not expected to be completed prior to the year 2000. The point-to-point project, discussed above, which was acquired from the Cylink Wireless Group, is scheduled to be completed during the third quarter of 1998 at an estimated total cost of $2.0 million. The enhanced Airlink projects are scheduled to be completed during the first quarter of 1999 at an estimated total cost of $0.6 million. The following table sets forth items from the Consolidated Condensed Income Statements as a percentage of sales for the periods indicated. In addition, this Quarterly Report on Form 10-Q/A may contain forward-looking statements that involve numerous risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q/A that are not purely historical may be forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including without limitation, statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the factors affecting operating results contained in this Quarterly Report on Form 10-Q/A. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the Company's 1997 Annual Report on Form 10- K/A and other documents filed by the Company with the Securities and Exchange Commission.
Three Months Ended March 31, 1998 1997 ------------ ----------- (restated) Sales 100.0% 100.0% Cost of sales 57.2 62.1 -------- -------- Gross profit 42.8 37.9 -------- -------- Operating expenses: Research and development 13.2 15.3 Selling and marketing 7.2 6.6 General and administrative 6.8 7.7 Goodwill amortization 1.1 0.8 Acquired in-process research and development 26.3 - -------- -------- Total operating expenses 54.5 30.4 -------- -------- Income (loss) from operations (11.7) 7.5 -------- -------- Interest and other income (expense), net (1.5) (0.2) -------- -------- Income (loss) before income taxes (13.2) 7.3 Provision (benefit) for income taxes (4.5) 3.5 -------- -------- Net income (loss) (8.7%) 3.8% ======== ========
Results of Operations for the Three Months Ended March 31, 1998 and 1997 Sales. Sales for the three months ended March 31, 1998 and 1997 were approximately $58.6 million and $44.2 million, respectively, an increase of 33%. The increase was primarily due to increased unit sales of 23 GHz, 38 GHz and 15 GHz radio systems to new and existing customers and sales from companies recently 14 acquired. Sales to new customers in the first quarter of 1998 (excluding companies recently acquired) were less than 5% of total sales. For the three months ended March 31, 1998, five customers accounted for 63% of the sales of the Company. For the three months ended March 31, 1997, five customers accounted for 55% of the sales of the Company. The Company recently acquired three companies, including the acquisition of the assets of the Cylink Wireless Group which were acquired on March 28, 1998 and April 1, 1998. Sales for the Cylink Wireless Group from the acquisition date of March 28, 1998 to the end of the first quarter of 1998 were approximately $2.0 million RT Masts and Telematics were acquired on November 27, 1997 and are accounted for as poolings-of-interest. Under the pooling-of-interest method of accounting, prior period financial statements are restated to present the results of the combined companies as if they had been combined since inception. Sales for RT Masts in the first quarter of 1998 and 1997 were approximately $4.4 million and $4.6 million, respectively. Sales for Telematics in the first quarter of 1998 and 1997 were approximately $1.3 million and $2.0 million, respectively. Product sales for the three months ended March 31, 1998 were approximately $51.4 million or 88% of total sales, and service sales were approximately $7.2 million. Historically, the Company has generated a majority of its sales outside of the United States. For the three months ended March 31, 1998, the Company generated approximately $9.9 million or 17% of its sales in the U.S. and approximately $48.7 million or 83% internationally. Gross Profit. For the three months ended March 31, 1998 and 1997, gross profit was approximately $25.1 million, or 42.8% of sales, and approximately $16.8 million, or 37.9% of sales, respectively. The improvement in gross profit in the first quarter of 1998 compared to the corresponding period in 1997 was primarily due to the Company negotiating lower prices with vendors and product design improvements, such as reducing the number of components across the range of the Company's products, which increased manufacturing efficiencies and economies of scale. There can be no assurance that gross profit will remain at this level or continue to improve. Research and Development. For the three months ended March 31, 1998 and 1997, research and development expenses were approximately $7.7 million and $6.8 million, respectively. The increase in dollars in research and development expenses during the three months ended March 31, 1998 as compared to the corresponding period in 1997 was due primarily to expenses associated with increased staffing. As a percentage of sales, research and development expenses decreased from 15.3% in the three months ended March 31, 1997 to 13.2% in the corresponding period in 1998. The decrease in research and development expenses as a percentage of sales were primarily due to higher level of sales in the three months ended March 31, 1998, as compared to the corresponding period in 1997. The Company expects that research and development expenses will continue to increase significantly in dollars during the remainder of 1998. Selling and Marketing. For the three months ended March 31, 1998 and 1997, selling and marketing expenses were approximately $4.2 million and $2.9 million, respectively. The increase in selling and marketing expenses in the three months ended March 31, 1998, as compared to the corresponding period in 1997, was primarily due to increased staffing and increased expenses relating to the Company's expansion of its international sales and marketing organization. As a percentage of sales, selling and marketing expenses increased from 6.6% in the three months ended March 31, 1997 to 7.2% in the corresponding period in 1998. The increase in selling and marketing expenses as a percentage of sales was primarily due to the Company's expansion of its international market. The Company expects that such expenses will continue to increase significantly in dollars during the remainder of 1998, as the Company continues to expand its operations. General and Administrative. For the three months ended March 31, 1998 and 1997, general and administrative expenses were $3.9 million and $3.4 million, respectively. The increase was principally due to increased staffing and other costs resulting from the Company's expansion of its operations. As a percentage of sales, general and administrative expenses decreased from 7.7% in the three months ended March 31, 1997 to 6.8% in the corresponding period in 1998. This decrease in general and administrative expenses as a percentage of sales was due primarily to a higher level of sales in the three months ended March 31, 1998, as compared to the corresponding period in 1997. The Company expects that general and administrative expenses will continue to increase significantly in dollars during the remainder of 1998 as compared to 1997 as the Company continues to expand its operations. 15 Goodwill Amortization. Goodwill amortization consists of the charge to income that results from the allocation over the estimated useful life of the component of the cost of the Company's acquisitions accounted for by the purchase method which is greater than the fair value of the net assets acquired. For the three months ended March 31, 1998 and 1997, goodwill amortization was $0.7 million and $0.3 million, respectively. The increase in goodwill amortization in the three months ended March 31, 1998 as compared to the corresponding period in 1997 was because Technosystem S.p.A. ("Technosystem") a Rome, Italy-based company, and Columbia Spectrum Management LP ("CSM") a Vienna, Virginia-based company were acquired in February 1997 and March 1997, respectively. As a result, goodwill was not amortized for the entire quarter for the three months ended March 31, 1997. In-Process Research and Development. The Company recorded a charge for in- process research and development ("IPR&D") in March 1998 relating to the acquisition of the Cylink Wireless Group in a manner consistent with widely recognized appraisal practices at the date of acquisition. Subsequent to this time, the Company became aware of new information which brought into question the traditional appraisal methodology, and revised its purchase price allocation based upon a more current and preferred methodology. As a result of computing in-process research and development using the more current and preferred methodology, the Company, decided to revise the amount originally allocated to in-process research and development. As such, the Company has restated its first, second, and third quarter 1998 consolidated financial statements. As a result, the first quarter charge for acquired IPR&D was decreased from $33.9 million previously recorded to $15.4 million, a decrease of $18.5 million with a corresponding increase in goodwill and other intangible assets and related amortization in subsequent quarters. Technological feasibility was not established for the expensed IPR&D, and the expensed IPR&D had no alternative future use. The portion of the purchase price allocated to goodwill and other intangible assets includes $6.3 million of developed technology, $2.7 million of core technology, $1.8 million of assembled workforce, and $23.5 million of goodwill. Among the various factors considered in determining the amount of the allocation of the purchase price to IPR&D were estimating the stage of development of each IPR&D project at the date of acquisition, estimating cash flows resulting from the expected revenues generated from such projects, and discounting the net cash flows. In addition, other factors were considered in determining the value assigned to purchased in-process technology such as research projects in areas supporting products which address the growing third world markets. IPR&D essentially comprised three significant projects: a new point-to- multipoint product; a faster, less expensive, more flexible point-to-point product; and the development of enhanced Airlink products acquired from Cylink Wireless Group, consisting of a Voice Extender, Data Metro II and RLL Encoding products. At the time of the acquisition, these projects were estimated to be 60%, 85% and 50% complete, respectively, with estimated costs to complete of $2.4 million, $2.6 million and $0.6 million, respectively. The new point-to- multipoint product will include significant developments such as time division multiple access scalability and a software controlled (vs. dipswitch controlled) installation system and is not expected to be completed prior to 2000. This new product is expected to generate revenues over the next 10 years. The point-to- point product will significantly redesign the RF section and digital board by offering a more robust RF section, proprietary software, network management functions and easier configuration options. This project is expected to be completed during the third quarter of 1998 and generate revenues over the next 10 years. The enhancements to existing Airlink products will focus on voice frequency, pseudonoise code technology and the introduction of compression technology and are expected to be completed during the first quarter of 1999. These projects are expected to generate revenues over the next 10 years. Cost assumptions used to determine the future cash flows of IPR&D included a gross margin of approximately 55% and an operating income margin of approximately 35%. These margins assume the Company is successful in developing its products and generates some economies of scale and operating leverage if it continues to grow. In determining the value assigned to the IPR&D, the Company used a discount rate of 28% which represented Cylink Wireless Group's weighted- average cost of capital. Additionally, the failure of any particular individual project in process could impair the value of other intangible assets acquired. 16 Developed technology is the technology that has reached technological feasibility and is currently being sold as products in the market. Core technology can be defined as the "building block" for future technological developments and is derived from developed technology. As a result, for purposes of allocating the purchase price to the intangible assets acquired, the core technology underlying the in-process technology was separately identified and capitalized. For the new point-to-multipoint product, the core technology comprised the RF platform and baseband modern design. For the point-to-point product, the core technology comprised the wireless protocol engine (FPGA design). For the enhanced Airlink products, the core technology comprised the site manager software. Developed technology of $6.3 million will be amortized over the period of the expected revenue stream of the developed products of approximately four years. The value of the acquired workforce, $1.8 million, will be amortized on a straight-line basis over three years, and the remaining identified intangible assets, including core technology of $2.7 million and goodwill of $23.5 million will be amortized on a straight-line basis over ten years. Due to the timing of the acquisition, there was no amortization expense related to the acquisition of the Cylink Wireless Group during the quarter ended March 31, 1998. The Company acquired the assets of the Cylink Wireless Group to extend the Company's existing product line and distribution channels and to provide the Company's with additional technology and products under development. The Wireless Group's existing product line and distribution channels provided immediate benefit to P-COM's business and the technology and products under development were expected to provide further revenue opportunities in the expanding markets of Asia and Latin America. The purchase price for the Cylink Wireless Group was based on the fair value as determined by two willing independent parties. The value for the intangible assets was determined in a manner consistent with widely recognized appraisal practices at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. As the dominant supplier of spread spectrum radios in Asia and Latin America, the established relationships provided by the acquisition significantly improved the Company's penetration of these markets. The Company believes that the IPR&D at the time of the acquisition constituted a significant part of the Wireless Group's value. In particular, in certain markets the frequency spectrum used by the Airlink products is becoming increasingly saturated. The Viper product offered the Wireless Group's customer a migration path into new frequency bands. The Company does not believe that it could have developed such products internally or purchase them elsewhere for less. Interest and Other Income (Expense). The Company incurred interest expense of $1.8 million during the three-month period ended March 31, 1998 as compared to $0.3 million during the corresponding period in 1997. For the first quarter of 1998, interest expense consisted primarily of interest and fees incurred on borrowings under the Company's bank line of credit, interest on the principal amount of the Company's Convertible Subordinated Notes ("Notes") due 2002, and finance charges and fees related to the Company's receivables purchase agreements. For the first quarter of 1997, interest expense consisted primarily of interest and fees incurred on borrowings under the Company's bank line of credit. The Company generated interest income of $0.9 million during the three-month period ended March 31, 1998 as compared to $0.4 million during the corresponding period in 1997. For the first quarter of 1998, interest income consisted primarily of interest generated from the Company's cash in its interest bearing bank accounts. For the first quarter of 1997, interest income consisted primarily of interest income generated from the Company's cash investments. Other income and expense consist primarily of translation gains and losses relating to the financial statements of the Company's international subsidiaries and trade discounts taken. In the first quarter of 1997, the Company recorded a net expense of $0.2 million. Liquidity and Capital Resources The Company used approximately $6.3 million in operating activities during the three months ended March 31, 1998, primarily due to increases in accounts receivable, inventory, prepaid expenses, deferred income taxes, and other assets of $3.2 million, $11.7 million, $3.2 million, $5.2 million, and $1.9 million, respectively, and a decrease in accounts payable of $1.2 million. These uses of cash were partially offset by the net income (excluding non-cash charges for acquired IPR&D expense) of $10.3 million, and depreciation and amortization expense of $2.9 million 17 and $0.7 million, respectively, and increases in other accrued liabilities and income taxes payable of $3.1 million and $2.8 million, respectively. The Company used approximately $58.7 million in investing activities during the three months ended March 31, 1998 consisting of approximately $48.9 million used for acquisitions including the acquisition of the assets of the Cylink Wireless Group, and $9.8 million to acquire capital equipment. On March 28 and April 1, 1998, the Company acquired substantially all of the assets of the Cylink Wireless Group, for $46.0 million in cash and $14.5 million in a three month, non-interest bearing unsecured subordinated promissory note due July 6, 1998. The Cylink Wireless Group designs, manufactures and markets spread spectrum radio products for voice and data applications in both domestic and international markets. The Company incurred a one-time research and development charge of approximately $15.4 million. In connection with the acquisition of the assets of the Cylink Wireless Group, the Company purchased the accounts receivable balance of $9.1 million on April 1, 1998. The consideration for these accounts receivable was included in the total purchase price of $60.5 million in cash and debt mentioned above. The Company generated approximately $2.9 million in its financing activities during the three months ended March 31, 1998. The Company received approximately $2.4 million from the issuance of the Company's Common Stock pursuant to the Company's stock option and employee stock purchase plans. At March 31, 1998 and December 31, 1997, net accounts receivable were approximately $68.7 million and $70.9 million, respectively. The Company has established a receivables purchase agreement by and between the Company and Wells Fargo HSBC Trade Bank N.A. that allows the Company to sell up to $20 million of accounts receivable. These sales have no recourse to the Company. The Company plans to heavily utilize this facility as part of managing its overall liquidity and/or third party financing programs. No accounts receivable from Cylink Wireless Group were purchased in the acquisition during the first quarter of 1998. At March 31, 1998 and December 31, 1997, inventory was approximately $74.8 million and $58.0 million, respectively. Of the $16.8 million increase that occurred in the three months ended March 31, 1998, $5.1 million was due to the acquisition of inventory from Cylink Wireless Group. At March 31, 1998, the Company had working capital of approximately $124.1 million, compared to $172.9 million at December 31, 1997. In recent quarters, most of the Company's sales have been realized near the end of each quarter, resulting in a significant investment in accounts receivable at the end of the quarter. In addition, the Company expects that its investments in accounts receivable and inventories will continue to be significant and will continue to represent a significant portion of working capital. Significant investments in accounts receivable and inventories will subject the Company to increased risks that could materially adversely affect the Company's business, prospects, financial condition and results of operations. The Company's principal sources of liquidity as of March 31, 1998 consisted of approximately $25.9 million of cash and cash equivalents. The Company entered into a new revolving line of credit agreement on April 23, 1998 that provides for borrowings of up to $25.0 million. The line of credit expires on June 22, 1998 or upon demand by the bank. Borrowings under the line are secured and bear interest at either a base interest rate or a variable interest rate. The Company entered into a new revolving line-of-credit agreement on May 15, 1998 that provides for borrowings of up to $50.0 million and replaces the revolving line of credit agreement dated April 23, 1998. The line of credit expires on April 30, 2001. Borrowings under the line are secured and bear interest at either a base interest rate or a variable interest rate. The agreement requires the Company to comply with certain financial covenants, including the maintenance of specific minimum ratios. At present, the Company does not have any material commitments for capital equipment purchases. However, the Company's future capital requirements will depend upon many factors, including the development of new radio systems and related software tools, potential acquisitions, the extent and timing of acceptance of the Company's radio systems in the market, requirements to maintain adequate manufacturing facilities, working capital requirements for Geritel S.p.A. ("Geritel"), Atlantic Communication Sciences, Inc. ("ACS"), Technosystem, Control Resources Corporations ("CRC"), CSM and Cylink Wireless Group, the progress of the Company's research and development efforts, expansion of the Company's marketing and sales efforts, the Company's results of operations and the status of competitive products. The Company believes that cash and cash equivalents on hand, 18 and anticipated cash flow from operations, if any, and funds available from the Company's bank line of credit, are adequate to fund its ordinary operations for at least the next twelve months. There can be no assurance, however, that the Company will not require additional financing prior to such date to fund its operations. For a discussion of risk factors associated with the Company's future capital requirements, please see "Certain Factors Affecting Operating Results--Future Capital Requirements" and "Acquisitions". There can be no assurance that any operations of ACS, Geritel, Technosystem, CRC, CSM or Cylink Wireless Group will be profitable after the acquisitions. Moreover, there can be no assurance that the anticipated benefits of the ACS, Geritel, Technosystem, CRC, CSM and Cylink Wireless Group acquisitions will be realized. The process of integrating the operations of ACS, Geritel, Technosystem, CRC, CSM and Cylink Wireless Group into the Company's operations may result in unforeseen operating difficulties and could absorb significant management attention, expenditures and reserves that would otherwise be available for the ongoing development of the Company's business. Certain Factors Affecting Operating Results Limited Operating History P-Com was founded in August 1991 and was in the development stage until October 1993 when it began commercial shipments of its first product. From inception to the end of the first quarter of fiscal 1998, the Company generated a cumulative net profit of approximately $13.3 million. The decrease in cumulative net profit from 1997 to the first quarter of 1998 was due to the one time IPR&D charge of approximately $15.4 million related to the acquisition of the assets of the Cylink Wireless Group. From October 1993 through March 31, 1998, the Company generated sales of approximately $513.5 million, of which $279.3 million, or 54% of such amount, was generated in the year ended December 31, 1997 and the first quarter of 1998. The Company does not believe recent growth rates are indicative of future operating results. Due to the Company's limited operating history and limited resources, among other factors, there can be no assurance that profitability or significant revenues on a quarterly or annual basis will occur in the future. During 1997 and the first quarter of 1998, both the Company's sales and operating expenses increased more rapidly than the Company had anticipated. There can be no assurance that the Company's revenues will continue to remain at or increase from the levels experienced in 1997 or in the first quarter of 1998 or that sales will not decline. The Company's net sales for the first quarter of 1998 were lower than its net sales of the Company for the fourth quarter of 1997. This represents the Company's first quarter of sequentially lower sales than the prior period. The Company intends to continue to invest significant amounts in its operations, particularly to support product development and the marketing and sales of recently introduced products, and operating expenses will continue to increase significantly in absolute dollars. If the Company's sales do not correspondingly increase, the Company's results of operations would be materially adversely affected. Accordingly, there can be no assurance that the Company will achieve profitability in future periods. The Company is subject to all of the risks inherent in the operation of a new business enterprise, and there can be no assurance that the Company will be able to successfully address these risks. Significant Customer Concentration To date, approximately one hundred customers accounted for substantially all of the Company's sales, and two customers, each of which individually accounted for over 10% of the Company's 1997 sales, accounted for over 27% of the Company's 1997 sales. During the first quarter of 1998, five customers accounted for 63% of the Company's sales and as of March 31, 1998, four customers accounted for 56% of the Company's backlog scheduled for shipment in the twelve months subsequent to March 31, 1998. The Company anticipates that it will continue to sell its products and services to a changing but still relatively small group of customers. Several of the Company's subsidiaries are dependent on one or a few customers. Some companies implementing new networks are at early stages of development and may require additional capital to fully implement their planned networks. The Company's ability to achieve sales in the future will depend in significant part upon its ability to obtain and fulfill orders from, maintain relationships with and provide support to existing and new customers, to manufacture systems in volume on a timely and cost-effective basis and to meet stringent customer performance and other requirements and shipment delivery dates, as well as the condition, working capital availability and success of its customers. As a result, any cancellation, reduction or delay in orders by or shipments to any customer, as a result of manufacturing or supply difficulties or otherwise, or the inability of any customer to finance its purchases of the Company's 19 products or services, as has been the case with certain customers historically, may materially adversely affect the Company's business, financial condition and results of operations. In addition, financial difficulties of any existing or potential customers may limit the overall demand for the Company's products and services (for example, certain potential customers in the telecommunications industry have been reported to have undergone financial difficulties and may therefore limit their future orders). In addition, acquisitions in the communications industry are common, which further concentrates the customer base and may cause orders to be delayed or cancelled. There can be no assurance that the Company's sales will increase in the future or that the Company will be able to support or attract customers. See "Results of Operations." Significant Fluctuations in Results of Operations The Company has experienced and will in the future continue to experience significant fluctuations in sales, gross margins and operating results. The procurement process for most of the Company's current and potential customers is complex and lengthy, and the timing and amount of sales is difficult to predict reliably. The sale and implementation of the Company's products and services generally involves a significant commitment of the Company's senior management, sales force and other resources. The sales cycle for the Company's products and services typically involves a significant technical evaluation and commitment of cash and other resources, with the attendant delays frequently associated with, among other things: (i) existing and potential customers' seasonal purchasing and budgetary cycles; (ii) educating customers as to the potential applications of, and product-life cost savings associated with, using the Company's products and services; (iii) complying with customers' internal procedures for approving large expenditures and evaluating and accepting new technologies that affect key operations; (iv) complying with governmental or other regulatory standards; (v) difficulties associated with each customer's ability to secure financing; and (vi) negotiating purchase and service terms for each sale. Orders for the Company's products have typically been strongest towards the end of the calendar year, with a reduction in shipments occurring during the summer months, as evidenced in the third quarter of fiscal year 1997, due primarily to the inactivity of the European market, the Company's major current customer base, at such time. To the extent that this trend continues, the Company's results of operations will fluctuate from quarter to quarter. In addition, a single customer's order scheduled for shipment in a quarter can represent a significant portion of the Company's potential sales for such quarter. There can be no assurance that the Company will be able to obtain such large orders from single customers in the future. The Company has at times failed to receive expected orders, and delivery schedules have been deferred as a result of changes in customer requirements and commitments, among other factors. As a result, the Company's operating results for a particular period have in the past been and will in the future be materially adversely affected by a delay, rescheduling or cancellation of even one purchase order. Much of the anticipated growth in telecommunications infrastructure, if any, is expected to result from the entrance of new service providers, many of which do not have the financial resources of the existing service providers. To the extent these new service providers are unable to adequately finance their operations, they may cancel orders. Moreover, purchase orders are often received and accepted substantially in advance of shipment, and the failure to reduce actual costs to the extent anticipated or an increase in anticipated costs before shipment could materially adversely affect the gross margins for such orders, and as a result, the Company's results of operations. Moreover, most of the Company's backlog scheduled for shipment in the twelve months subsequent to March 31, 1998 can be canceled since orders are often made substantially in advance of shipment, and the Company's contracts typically provide that orders may be canceled with limited or no penalties. As a result, backlog is not necessarily indicative of future sales for any particular period. In addition, the Company's customers have increasingly been requiring shipment of products at the time of ordering rather than submitting purchase orders far in advance of expected dates of product shipment. Furthermore, most of the Company's sales in recent quarters have been realized near the end of each quarter. Accordingly, a delay in a shipment near the end of a particular quarter, as the Company has been experiencing recently, due to, for example, an unanticipated shipment rescheduling, a cancellation or deferral by a customer, competitive or economic factors, unexpected manufacturing or other difficulties, delays in deliveries of components, subassemblies or services by suppliers, or the failure to receive an anticipated order, may cause sales in a particular quarter to fall significantly below the Company's expectations and may materially adversely affect the Company's operating results for such quarter. In connection with its efforts to ramp-up production of products and services, the Company expects to continue to make substantial capital investments in equipment and inventory, recruit and train additional personnel 20 and possibly invest in additional manufacturing facilities. The Company anticipates that these expenditures will be made in advance of, and in anticipation of, increased sales and, therefore, that its gross margins will be adversely affected from time-to-time due to short-term inefficiencies associated with the addition of equipment and inventory, personnel or facilities, and that each cost category may increase as a percentage of revenues from time-to-time on a periodic basis. In addition, as the Company's customers increasingly require shipment of products at the time of ordering, the Company must forecast demand for each quarter and build up inventory accordingly. Such increases in inventory could materially adversely affect the Company's operations, if such inventory were not utilized or becomes obsolete. A large portion of the Company's expenses are fixed and difficult to reduce should revenues not meet the Company's expectations, thus magnifying the material adverse effect of any revenue shortfall. Furthermore, announcements by the Company or its competitors of new products, services and technologies could cause customers to defer or cancel purchases of the Company's systems and services, which would materially adversely affect the Company's business, financial condition and results of operations. Additional factors that have caused and will continue to cause the Company's sales, gross margins and results of operations to vary significantly from period to period include: new product introductions and enhancements, including related costs; the Company's ability to manufacture and produce sufficient volumes of systems and meet customer requirements; manufacturing capacity, efficiencies and costs; mix of sales through direct efforts or through distributors or other third parties; mix of systems and related software tools sold and services provided; operating and new product development expenses; product discounts; accounts receivable collection, in particular those acquired in recent acquisitions, especially outside of the United States; changes in pricing by the Company, its customers or suppliers; inventory write-offs, as the Company recently experienced in the second and third quarters of 1997 for a relatively immaterial amount in each such quarter, which the Company may experience again in the future; inventory obsolescence; natural disasters; market acceptance by the Company's customers and the timing of availability of new products and services by the Company or its competitors; acquisitions, including costs and expenses; usage of different distribution and sales channels; fluctuations in foreign currency exchange rates; delays or changes in regulatory approval of its systems and services; warranty and customer support expenses; customization of systems; and general economic and political conditions. In addition, the Company's results of operations have been and will continue to be influenced significantly by competitive factors, including the pricing and availability of, and demand for, competitive products and services. All of the above factors are difficult for the Company to forecast, and these or other factors could materially adversely affect the Company's business, financial condition and results of operations. As a result, the Company believes that period-to-period comparisons are not necessarily meaningful and should not be relied upon as indications of future performance. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock may be materially adversely affected. Acquisitions Since April 1996, the Company has acquired nine complementary companies and businesses. Integration of these companies into the Company's business is currently ongoing, and no assurance may be made that the Company will be able to successfully complete this process. Risks commonly encountered in such transactions include the difficulty of assimilating the operations and personnel of the combined companies, the potential disruption of the Company's ongoing business, the inability to retain key technical and managerial personnel, the inability of management to maximize the financial and strategic position of the Company through the integration of acquired businesses, additional expenses associated with amortization of acquired intangible assets, dilution of existing stockholders, the maintenance of uniform standards, controls, procedures, and policies, the impairment of relationships with employees and customers as a result of any integration of new personnel, risks of entering markets in which the Company has no or limited direct prior experience, and operating companies in different geographical locations with different cultures. All of the Company's acquisitions to date (the "Acquisitions"), except the acquisitions of CRC, RT Masts Limited ("RT Masts") and Telematics, Inc. ("Telematics") have been accounted for under the purchase method of accounting, and as a result, a significant amount of goodwill is being amortized as set forth in the Company's consolidated financial statements. This amortization expense may have a significant effect on the Company's financial results. There can be no assurance that the Company will be successful in overcoming these risks or any other problems encountered in connection with such acquisitions, or that such 21 transactions will not materially adversely affect the Company's business, financial condition, or results of operations. As part of its overall strategy, the Company plans to continue to acquire or invest in complementary companies, products or technologies and to enter into joint ventures and strategic alliances with other companies. The Company is currently pursuing numerous acquisitions; however, except with respect to the Cylink Wireless Group, no material acquisition has become the subject of any definitive agreement, letter of intent or agreement in principle. The Company is unable to predict whether and when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed. The Company competes for acquisition and expansion opportunities with many entities that have substantially greater resources than the Company. There can be no assurance that the Company will be able to successfully identify suitable acquisition candidates, complete acquisitions, or expand into new markets. Once integrated, acquired businesses may not achieve comparable levels of revenues, profitability, or productivity as the existing business of the Company or otherwise perform as expected. In addition, as commonly occurs with mergers of technology companies, during the pre-merger and integration phases, aggressive competitors may undertake formal initiatives to attract customers and to recruit key employees through various incentives. If the Company proceeds with one or more significant acquisitions in which the consideration consists of cash, as was the case with Cylink Wireless Group, a substantial portion of the Company's available cash could be used to consummate the acquisitions. Many business acquisitions must be accounted for as a purchase for financial reporting purposes. Most of the businesses that might become attractive acquisition candidates for the Company are likely to have significant goodwill and intangible assets, and acquisition of these businesses, if accounted for as a purchase, as was the case with Cylink Wireless Group, would typically result in substantial amortization of goodwill charges to the Company. The occurrence of any of these events could have a material adverse effect on the Company's workforce, business, financial condition and results of operations. Dependence on Contract Manufacturers; Reliance on Sole or Limited Sources of Supply The Company's internal manufacturing capacity is very limited. The Company utilizes contract manufacturers such as Remec, Inc., Sanmina Corporation, SPC Electronics Corp., GSS Array Technology, Celeritek, Inc. and Senior Systems Technology, Inc. to produce its systems, components and subassemblies and expects to rely increasingly on these and other manufacturers in the future. The Company also relies on outside vendors to manufacture certain other components and subassemblies. There can be no assurance that the Company's internal manufacturing capacity and that of its contract manufacturers will be sufficient to fulfill the Company's orders. Failure to manufacture, assemble and ship systems and meet customer demands on a timely and cost-effective basis could damage relationships with customers and have a material adverse effect on the Company's business, financial condition and operating results. Certain necessary components, subassemblies and services necessary for the manufacture of the Company's systems are obtained from a sole supplier or a limited group of suppliers. In particular, Eltel Engineering S.r.L. and Associates, Milliwave, Scientific Atlanta and Xilinx, Inc. each are sole source or limited source suppliers for critical components used in the Company's radio systems. The Company's reliance on contract manufacturers and on sole suppliers or a limited group of suppliers and the Company's increasing reliance on contract manufacturers and suppliers involves several risks, many of which the Company has been experiencing, including an inability to obtain an adequate supply of finished products and required components and subassemblies, and reduced control over the price, timely delivery, reliability and quality of finished products, components and subassemblies. The Company does not have long-term supply agreements with most of its manufacturers or suppliers. Manufacture of the Company's products and certain of these components and subassemblies is an extremely complex process, and the Company has from time to time experienced and may in the future continue to experience problems in the timely delivery and quality of products and certain components and subassemblies from vendors. Certain of the Company's suppliers have relatively limited financial and other resources. Any inability to obtain timely deliveries of components and subassemblies of acceptable quality or any other circumstance that would require the Company to seek alternative sources of supply, or to manufacture its finished products or such components and subassemblies internally, could delay the Company's ability to ship its systems, which could damage relationships with current or prospective customers and have a material adverse effect on the Company's business, financial condition and results of operations. 22 No Assurance of Successful Expansion of Operations; Management of Growth Recently, the Company has significantly expanded the scale of its operations to support increased sales and to address critical infrastructure and other requirements. This expansion has included the leasing of additional space, the opening of branch offices and subsidiaries in the United Kingdom, Italy, Germany and Singapore, the opening of design centers and manufacturing operations throughout the world, the acquisition of a significant amount of inventory (the Company's inventory increased from approximately $58.0 million at December 31, 1997 to approximately $74.8 million at March 31, 1998) and accounts receivable, nine acquisitions, significant investments in research and development to support product development and services, including the recently introduced products and the development of point-to-multipoint systems, and the hiring of additional personnel in all functional areas, including in sales and marketing, manufacturing and operations and finance, and has resulted in significantly higher operating expenses. Currently, the Company is devoting significant resources to the development of new products and technologies and is conducting evaluations of these products and will continue to invest significant additional resources in plant and equipment, inventory, personnel and other items, to begin production of these products and to provide the marketing and administration, if any, required to service and support these new products. Accordingly, there can be no assurance that gross profit margin and inventory levels will not be adversely impacted in the future by start-up costs associated with the initial production and installation of these new products. These start-up costs include, but are not limited to, additional manufacturing overhead, additional allowance for doubtful accounts, inventory and warranty reserve requirements and the creation of service and support organizations. In addition, the increases in inventory on hand for new product development and customer service requirements increase the risk of inventory write-offs. As a result, the Company anticipates that its operating expenses will continue to increase significantly. If the Company's sales do not correspondingly increase, the Company's results of operations would be materially adversely affected. Expansion of the Company's operations and its acquisitions have caused and are continuing to impose a significant strain on the Company's management, financial, manufacturing and other resources and have disrupted the Company's normal business operations. The Company's ability to manage the recent and any possible future growth, should it occur, will depend upon a significant expansion of its manufacturing, accounting and other internal management systems and the implementation and subsequent improvement of a variety of systems, procedures and controls, including improvements relating to inventory control. For a number of reasons, the Company has not been able to fully consolidate and integrate the operations of certain acquired businesses. This inability may cause inefficiencies, additional operational complexities and expenses and greater risks of billing delays, inventory write-offs and financial reporting difficulties. The Company must establish and improve a variety of systems, procedures and controls to more efficiently coordinate its activities in its acquired (and to be acquired) companies and their facilities in Rome and Milan, Italy, France, Poland, the United Kingdom, New Jersey, Florida, Virginia, Washington and elsewhere. There can be no assurance that significant problems in these areas will not re-occur. Any failure to expand these areas and implement and improve such systems, procedures and controls, including improvements relating to inventory control, in an efficient manner at a pace consistent with the Company's business could have a material adverse effect on the Company's business, financial condition and results of operations. In particular, the Company must successfully manage the transition to higher internal and external volume manufacturing, including the establishment of adequate facilities, the control of overhead expenses and inventories, the development, introduction, marketing and sales of new products, the management and training of its employee base, the integration and coordination of a geographically and ethnically diverse group of employees and the monitoring of its third party manufacturers and suppliers. Although the Company has substantially increased the number of its manufacturing personnel and significantly expanded its internal and external manufacturing capacity, there can be no assurance that the Company will not experience manufacturing or other delays or problems that could materially adversely affect the Company's business, financial condition or results of operations. In this regard, any significant sales growth will be dependent in significant part upon the Company's expansion of its marketing, sales, manufacturing and customer support capabilities. This expansion will continue to require significant expenditures to build the necessary infrastructure. There can be no assurance that the Company's attempts to expand its marketing, sales, manufacturing and customer support efforts will be successful or will result in additional sales or profitability in any future period. As a result of the expansion of its operations and the significant increase in its operating expenses, as well as the difficulty in forecasting revenue levels, the Company 23 will continue to experience significant fluctuations in its revenues, costs, and gross margins, and therefore its results of operations. See "Results of Operations." Declining Average Selling Prices The Company believes that average selling prices and gross margins for its systems and services will decline in the long term as such systems mature, as volume price discounts in existing and future contracts take effect and as competition intensifies, among other factors. To offset declining average selling prices, the Company believes that it must successfully introduce and sell new systems on a timely basis, develop new products that incorporate advanced software and other features that can be sold at higher average selling prices and reduce the costs of its systems through contract manufacturing, design improvements and component cost reduction, among other actions. To the extent that new products are not developed in a timely manner, do not achieve customer acceptance or do not generate higher average selling prices, and the Company is unable to offset declining average selling prices, the Company's gross margins will decline, and such decline will have a material adverse effect on the Company's business, financial condition and results of operations. See "Results of Operations." Trade Account Receivables The Company is subject to credit risk in the form of trade account receivables. The Company may in certain circumstances be unable to enforce a policy of receiving payment within a limited number of days of issuing bills, especially in the case of customers that are in the early phases of business development. In addition, many of the Company's foreign customers are granted longer payment terms than those typically existing in the United States. The Company has experienced difficulties in the past in receiving payment in accordance with the Company's policies, particularly from customers awaiting financing to fund their expansion and from customers outside of the United States and the days outstanding of receivables have increased recently. There can be no assurance that such difficulties will not continue in the future, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company typically does not require collateral or other security to support customer receivables. The Company has in the past and may from time to time in the future sell its receivables, as part of an overall customer financing program, with immaterial recourse to the Company. There can be no assurance that the Company will be able to locate parties to purchase such receivables on acceptable terms, or at all. See "Results of Operations." No Assurance of Product Quality, Performance and Reliability The Company has limited experience in producing and manufacturing its systems and contracting for such manufacture. The Company's customers require very demanding specifications for quality, performance and reliability. There can be no assurance that problems will not occur in the future with respect to the quality, performance and reliability of the Company's systems or related software tools. If such problems occur, the Company could experience increased costs, delays in or cancellations or rescheduling of orders or shipments, delays in collecting accounts receivable and product returns and discounts, any of which would have a material adverse effect on the Company's business, financial condition or results of operations. In addition, in order to maintain its ISO 9001 registration, the Company periodically must undergo a recertification assessment. Failure to maintain such registration could materially adversely affect the Company's business, financial condition and results of operations. The Company completed ISO 9001 registration for its United Kingdom sales and customer support facility, its Geritel facility in Italy in 1996, and its Technosystem facility in Italy in 1997 and other facilities will also be attempting ISO 9001 registration. There can be no assurance that such registration will be achieved. Uncertainty of Market Acceptance The future operating results of the Company depend to a significant extent upon the continued growth and increased availability and acceptance of microcellular, PCN/PCS and wireless local loop access telecommunications services in the United States and internationally. There can be no assurance that the volume and variety of wireless telecommunications services or the markets for and acceptance of such services will continue to grow, or that such services will create a demand for the Company's systems. Because these markets are relatively new, it is difficult to predict which segments of these markets will develop and at what rate these markets will grow, if at all. If the short- haul millimeter wave or spread spectrum microwave wireless radio market and related services for the Company's 24 systems fails to grow, or grows more slowly than anticipated, the Company's business, financial condition and results of operations would be materially adversely affected. In addition, the Company has invested a significant amount of time and resources in the development of point-to-multipoint radio systems. Should the point-to-multipoint radio market fail to develop, or should the Company's products fail to gain market acceptance, the Company's business, financial condition and results of operations could be materially adversely affected. Certain sectors of the communications market will require the development and deployment of an extensive and expensive communications infrastructure. In particular, the establishment of PCN/PCS networks will require very large capital expenditures. There can be no assurance that communications providers have the ability to or will make the necessary investment in such infrastructure or that the creation of this infrastructure will occur in a timely manner. Moreover, one potential application of the Company's technology, use of the Company's systems in conjunction with the provision by wireless telecommunications service providers of alternative wireless access in competition with the existing wireline local exchange providers, is dependent on the pricing of wireless telecommunications services at rates competitive with those charged by wireline telephone companies. Rates for wireless access are currently substantially higher than those charged by wireline companies, and there can be no assurance that rates for wireless access will generally be competitive with rates charged by wireline companies. If wireless access rates are not competitive, consumer demand for wireless access will be materially adversely affected. If the Company allocates its resources to any market segment that does not grow, it may be unable to reallocate its resources to other market segments in a timely manner, which may curtail or eliminate its ability to enter such market segments. Certain of the Company's current and prospective customers are currently delivering products and technologies which utilize competing transmission media such as fiber optic and copper cable, particularly in the local loop access market. To successfully compete with existing products and technologies, the Company must, among many actions, offer systems with superior price/performance characteristics and extensive customer service and support, supply such systems on a timely and cost-effective basis in sufficient volume to satisfy such prospective customers' requirements and otherwise overcome any reluctance on the part of such customers to transition to new technologies. Any delay in the adoption of the Company's systems may result in prospective customers utilizing alternative technologies in their next generation of systems and networks, which would have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that prospective customers will design their systems or networks to include the Company's systems, that existing customers will continue to include the Company's systems in their products, systems or networks in the future, or that the Company's technology will to any significant extent replace existing technologies and achieve widespread acceptance in the wireless telecommunications market. Failure to achieve or sustain commercial acceptance of the Company's currently available radio systems or to develop other commercially acceptable radio systems would materially adversely affect the Company's business, financial condition and results of operations. In addition, there can be no assurance that industry technical standards will remain the same or, if emerging standards become established, that the Company will be able to conform to these new standards in a timely and cost-effective manner. Intensely Competitive Industry The wireless communications market is intensely competitive. The Company's wireless-based radio systems compete with other wireless telecommunications products and alternative telecommunications transmission media, including copper and fiber optic cable. The Company has experienced increasingly intense competition worldwide from a number of leading telecommunications companies that offer a variety of competitive products and services and broader telecommunications product lines, including Adtran, Inc., Alcatel Network Systems, California Microwave, Inc., Digital Microwave Corporation, Ericsson Limited, Harris Corporation-Farinon Division, Innova International Corp., Larus Corporation, Nokia Telecommunications, Philips T.R.T., Utilicom and Western Multiplex Corporation, many of which have substantially greater installed bases, financial resources and production, marketing, manufacturing, engineering and other capabilities than the Company. The Cylink Wireless Group which the Company recently acquired competes with a large number of companies in the wireless communications markets, including U.S. local exchange carriers and foreign telephone companies. The most significant competition for such group's products in the wireless market is from telephone companies that offer leased line data services. The Company faces actual and potential competition not only from these established companies, but also from start-up companies that are developing and marketing new commercial products and services. The Company may also 25 face competition in the future from new market entrants offering competing technologies. In addition, the Company's current and prospective customers and partners, certain of which have access to the Company's technology or under some circumstances are granted the right to use the technology for purposes of manufacturing, have developed, are currently developing or could develop the capability to manufacture products competitive with those that have been or may be developed or manufactured by the Company. The Company's results of operations may depend in part upon the extent to which these customers elect to purchase from outside sources rather than develop and manufacture their own radio systems. There can be no assurance that such customers will rely on or expand their reliance on the Company as an external source of supply for their radio systems. The principal elements of competition in the Company's market and the basis upon which customers may select the Company's systems include price, performance, software functionality, ability to meet delivery requirements and customer service and support. Recently, certain of the Company's competitors have announced the introduction of competitive products, including related software tools and services, and the acquisition of other competitors and competitive technologies. The Company expects its competitors to continue to improve the performance and lower the price of their current products and services and to introduce new products and services or new technologies that provide added functionality and other features. New product and service offerings and enhancements by the Company's competitors could cause a significant decline in sales or loss of market acceptance of the Company's systems, or make the Company's systems, services or technologies obsolete or noncompetitive. The Company has experienced significant price competition, and expects such competition to intensify, which may materially adversely affect its gross margins and its business, financial condition and results of operations. The Company believes that to be competitive, it will continue to be required to expend significant resources on, among other items, new product development and enhancements. In marketing its systems and services, the Company will face competition from vendors employing other technologies and services that may extend the capabilities of their competitive products beyond their current limits, increase their productivity or add other features. There can be no assurance that the Company will be able to compete successfully in the future. Requirement for Response to Rapid Technological Change and Requirement for Frequent New Product Introductions The communications market is subject to rapid technological change, frequent new product introductions and enhancements, product obsolescence, changes in end-user requirements and evolving industry standards. The Company's ability to be competitive in this market will depend in significant part upon its ability to successfully develop, introduce and sell new systems and enhancements and related software tools, including its point-to-multipoint systems currently under development, on a timely and cost-effective basis that respond to changing customer requirements. Recently, the Company has been developing point-to- multipoint radio systems. Any success of the Company in developing new and enhanced systems, including its point-to-multipoint systems currently under development, and related software tools will depend upon a variety of factors, including new product selection, integration of the various elements of its complex technology, timely and efficient completion of system design, timely and efficient implementation of manufacturing and assembly processes and its cost reduction program, development and completion of related software tools, system performance, quality and reliability of its systems and development and introduction of competitive systems by competitors. The Company has experienced and is continuing to experience delays from time to time in completing development and introduction of new systems and related software tools, including products acquired in the acquisitions. Moreover, there can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new systems or enhancements or related software tools. There can be no assurance that errors will not be found in the Company's systems after commencement of commercial shipments, which could result in the loss of or delay in market acceptance, as well as significant expenses associated with re-work of previously delivered equipment. The inability of the Company to introduce in a timely manner new systems or enhancements or related software tools that contribute to sales could have a material adverse effect on the Company's business, financial condition and results of operations. International Operations; Risks of Doing Business in Developing Countries Most of the Company's sales to date have been made to customers located outside of the United States. In addition, to date, the Company has acquired two Italy-based companies and two United Kingdom-based companies and two U.S. companies with substantial international operations. These companies currently sell their products and services primarily to customers in Europe, the Middle East and Africa. The Company anticipates that international 26 sales will continue to account for a majority of its sales for the foreseeable future. Historically the Company's international sales have been denominated in British pounds sterling or United States currencies. With recent acquisitions of foreign companies, certain of the Company's international sales may be denominated in other foreign currencies. A decrease in the value of foreign currencies relative to the United States dollar could result in losses from transactions denominated in foreign currencies. With respect to the Company's international sales that are United States dollar-denominated, such a decrease could make the Company's systems less price-competitive and could have a material adverse effect upon the Company's business, financial condition and results of operations. The Company has in the past mitigated its currency exposure to the British pound sterling through hedging measures. However, any future hedging measures may be limited in their effectiveness with respect to the British pound sterling and other foreign currencies. Additional risks inherent in the Company's international business activities include changes in regulatory requirements, costs and risks of localizing systems in foreign countries, delays in receiving components and materials, availability of suitable export financing, timing and availability of export licenses, tariffs and other trade barriers, political and economic instability, difficulties in staffing and managing foreign operations, branches and subsidiaries, difficulties in managing distributors, potentially adverse tax consequences, foreign currency exchange fluctuations, the burden of complying with a wide variety of complex foreign laws and treaties and the difficulty in accounts receivable collections. Many of the Company's customer purchase and other agreements are governed by foreign laws, which may differ significantly from U.S. laws. Therefore, the Company may be limited in its ability to enforce its rights under such agreements and to collect damages, if awarded. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. International telephone companies are in many cases owned or strictly regulated by local regulatory authorities. Access to such markets is often difficult due to the established relationships between a government owned or controlled telephone company and its traditional indigenous suppliers of telecommunications equipment. The successful expansion of the Company's international operations in certain markets will depend on its ability to locate, form and maintain strong relationships with established companies providing communication services and equipment in targeted regions. The failure to establish regional or local relationships or to successfully market or sell its products in international markets could significantly limit the Company's ability to expand its operations and would materially adversely affect the Company's business, financial condition and results of operations. The Company's inability to identify suitable parties for such relationships, or even if such parties are identified, to form and maintain strong relationships with such parties could prevent the Company from generating sales of its products and services in targeted markets or industries. Moreover, even if such relationships are established, there can be no assurance that the Company will be able to increase sales of its products and services through such relationships. Some of the Company's potential markets consist of developing countries that may deploy wireless communications networks as an alternative to the construction of a limited wired infrastructure. These countries may decline to construct wireless telecommunications systems or construction of such systems may be delayed for a variety of reasons, in which event any demand for the Company's systems in those countries will be similarly limited or delayed. In doing business in developing markets, the Company may also face economic, political and foreign currency fluctuations that are more volatile than those commonly experienced in the United States and other areas. Extensive Government Regulation Radio communications are subject to extensive regulation by the United States and foreign laws and international treaties. The Company's systems must conform to a variety of domestic and international requirements established to, among other things, avoid interference among users of radio frequencies and to permit interconnection of equipment. Each country has a different regulatory process. Historically, in many developed countries, the unavailability of frequency spectrum has inhibited the growth of wireless telecommunications networks. In order for the Company to operate in a jurisdiction, it must obtain regulatory approval for its systems and comply with different regulations in each jurisdiction. Regulatory bodies worldwide are continuing the process of adopting new standards for wireless communications products. The delays inherent in this governmental approval process may cause the cancellation, postponement or rescheduling of the installation of communications systems by the Company and its customers, which in turn may have a material adverse effect on the sale of systems by the Company to such customers. The failure to comply with current or future regulations or changes in the 27 interpretation of existing regulations could result in the suspension or cessation of operations. Such regulations or such changes in interpretation could require the Company to modify its products and services and incur substantial costs to comply with such time-consuming regulations and changes. In addition, the Company is also affected to the extent that domestic and international authorities regulate the allocation and auction of the radio frequency spectrum. Equipment to support new services can be marketed only if permitted by suitable frequency allocations, auctions and regulations, and the process of establishing new regulations is complex and lengthy. To the extent PCS operators and others are delayed in deploying these systems, the Company could experience delays in orders. Failure by the regulatory authorities to allocate suitable frequency spectrum could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, delays in the radio frequency spectrum auction process in the United States could delay the Company's ability to develop and market equipment to support new services. These delays could have a material adverse effect on the Company's business, financial condition and results of operations. The regulatory environment in which the Company operates is subject to significant change. Regulatory changes, which are affected by political, economic and technical factors, could significantly impact the Company's operations by restricting development efforts by the Company and its customers, making current systems obsolete or increasing the opportunity for additional competition. Any such regulatory changes, including changes in the allocation of available spectrum, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company might deem it necessary or advisable to modify its systems and services to operate in compliance with such regulations. Such modifications could be extremely expensive and time-consuming. Future Capital Requirements The Company's future capital requirements will depend upon many factors, including the development of new products and related software tools, potential acquisitions, requirements to maintain adequate manufacturing facilities and contract manufacturing agreements, the progress of the Company's research and development efforts, expansion of the Company's marketing and sales efforts, and the status of competitive products. There can be no assurance that additional financing will be available to the Company on acceptable terms, or at all. As a result of the issuance of the Notes (as defined below), the Company may be limited in its ability to raise additional debt financing. If additional funds are raised by issuing equity securities, further dilution to the existing stockholders will result. If adequate funds are not available, the Company may be required to delay, scale back or eliminate its research and development, acquisition or manufacturing programs or obtain funds through arrangements with partners or others that may require the Company to relinquish rights to certain of its technologies or potential products or other assets. Accordingly, the inability to obtain such financing could have a material adverse effect on the Company's business, financial condition and results of operations. Uncertainty Regarding Protection of Proprietary Rights The Company relies on a combination of patents, trademarks, trade secrets, copyrights and a variety of other measures to protect its intellectual property rights. The Company generally enters into confidentiality and nondisclosure agreements with its service providers, customers and others, and attempts to limit access to and distribution of its proprietary rights. The Company also enters into software license agreements with its customers and others. However, there can be no assurance that such measures will provide adequate protection for the Company's trade secrets or other proprietary information, that disputes with respect to the ownership of its intellectual property rights will not arise, that the Company's trade secrets or proprietary technology will not otherwise become known or be independently developed by competitors or that the Company can otherwise meaningfully protect its intellectual property rights. There can be no assurance that any patent owned by the Company will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications will be issued with the scope of the claims sought by the Company, if at all. Furthermore, there can be no assurance that others will not develop similar products or software, duplicate the Company's products or software or design around the patents owned by the Company or that third parties will not assert intellectual property infringement claims against the Company. In addition, there can be no assurance that foreign intellectual property laws will adequately 28 protect the Company's intellectual property rights abroad. The failure of the Company to protect its proprietary rights could have a material adverse effect on its business, financial condition and results of operations. Litigation may be necessary to enforce the Company's patents, copyrights and other intellectual property rights, to protect the Company's trade secrets, to determine the validity of and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. The Company has, through its acquisition of the Cylink Wireless Group, has been put on notice from a variety of third parties that such Group's products may be infringing the intellectual property rights of other parties. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that infringement, invalidity, right to use or ownership claims by third parties or claims for indemnification resulting from infringement claims will not be asserted in the future or that such assertions will not materially adversely affect the Company's business, financial condition and results of operations. If any claims or actions are asserted against the Company, the Company may seek to obtain a license under a third party's intellectual property rights. There can be no assurance, however, that a license will be available under reasonable terms or at all. In addition, should the Company decide to litigate such claims, such litigation could be extremely expensive and time consuming and could materially adversely affect the Company's business, financial condition and results of operations, regardless of the outcome of the litigation. Dependence on Key Personnel The Company's future operating results depend in significant part upon the continued contributions of its key technical and senior management personnel, many of whom would be difficult to replace. The Company's future operating results also depend in significant part upon its ability to attract and retain qualified management, manufacturing, quality assurance, engineering, marketing, sales and support personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting or retaining such personnel. There may be only a limited number of persons with the requisite skills to serve in these positions and it may be increasingly difficult for the Company to hire such personnel over time. The loss of any key employee, the failure of any key employee to perform in his or her current position, the Company's inability to attract and retain skilled employees as needed or the inability of the officers and key employees of the Company to expand, train and manage the Company's employee base could materially adversely affect the Company's business, financial condition and results of operations. The Company has experienced and may continue to experience employee turnover due to several factors, including an expanding economy within the geographic area in which the Company maintains its principal business offices, making it more difficult for the Company to retain its employees. Due to this and other factors, the Company has experienced and may continue to experience high levels of employee turnover, which could adversely impact the Company's business, financial condition and results of operations. The Company is presently addressing these issues and will pursue solutions designed to retain its employees and to provide performance incentives. Year 2000 Compliance Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such Year 2000 ("Y2K") requirements. The Company has commenced, for all its information systems and software contained in the products it sells, a Y2K date conversion project to address necessary code changes, testing and implementation. Significant uncertainty exists concerning the potential effects associated with such compliance. The Company expects such modifications will be made on a timely basis and does not believe that the cost of such modifications will have a material effect on the Company's operating results. There can be no assurance, however, that the Company and/or its vendors will be able to modify timely and successfully such products, services and systems to comply with Y2K requirements, which could have a material adverse effect on the Company's business, financial condition and results of operations. Volatility of Stock Price The Company believes that factors such as announcements of developments related to the Company's business, announcements of technological innovations or new products or enhancements by the Company or its 29 competitors, developments in the Asia/Pacific region, sales by competitors, including sales to the Company's customers, sales of the Company's Common Stock into the public market, including by members of management, developments in the Company's relationships with its customers, partners, lenders, distributors and suppliers, shortfalls or changes in revenues, gross margins, earnings or losses or other financial results that differ from analysts' expectations (as recently experienced upon announcement of third quarter results), regulatory developments, fluctuations in results of operations and general conditions in the Company's market or the markets served by the Company's customers or the economy, could cause the price of the Company's Common Stock to fluctuate, perhaps substantially. In recent years the stock market in general, and the market for shares of small capitalization and technology stocks in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. Many companies in the telecommunications industry, including the Company, have recently experienced historic highs in the market price of their Common Stock. There can be no assurance that the market price of the Company's Common Stock will not decline substantially from its historic highs, or otherwise continue to experience significant fluctuations in the future, including fluctuations that are unrelated to the Company's performance. Such fluctuations could materially adversely affect the market price of the Company's Common Stock. Substantial Leverage In connection with the initial private placement of Notes due 2002 in November 1997, the Company incurred $100 million of indebtedness. As a result, the Company's total indebtedness including current liabilities, and stockholders' equity, as of March 31, 1998, was approximately $163.3 million and approximately $145.4 million, respectively. The Company's ability to make scheduled payments of the principal of, or interest on, its indebtedness will depend on its future performance, which is subject to economic, financial, competitive and other factors beyond its control. Limitations on Dividends Since its incorporation in 1991, the Company has not declared or paid cash dividends on its Common Stock, and the Company anticipates that any future earnings will be retained for investment in its business. Any payment of cash dividends in the future will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, extent of indebtedness and contractual restrictions with respect to the payment of dividends. Global Market Risks Countries in the Asia/Pacific region have recently experienced weaknesses in their currency, banking and equity markets. These weaknesses could adversely affect demand for the Company's products, the availability and supply of product components to the Company and, ultimately, the Company's consolidated results of operations. Control by Existing Stockholders; Effects of Certain Anti-Takeover Provisions Members of the Board of Directors and the executive officers of the Company, together with members of their families and entities that may be deemed affiliates of or related to such persons or entities, beneficially own approximately 6% of the outstanding shares of Common Stock of the Company. Accordingly, these stockholders are able to influence the election of the members of the Company's Board of Directors and influence the outcome of corporate actions requiring stockholder approval, such as mergers and acquisitions. This level of ownership, together with the Company's stockholder rights agreement, certificate of incorporation, equity incentive plans, bylaws and Delaware law, may have a significant effect in delaying, deferring or preventing a change in control of the Company and may adversely affect the voting and other rights of other holders of Common Stock. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. Although the Company has no present plans to issue shares of Preferred Stock, the Board of Directors has pre-approved the terms of a Series A Junior Participating Preferred Stock that may be issued pursuant to the stockholder rights agreement upon the occurrence of certain triggering events. In general, the stockholder rights agreement provides a mechanism by which the Board of Directors and stockholders may act to substantially dilute the share position of any takeover bidder that acquires 15% or more of the Common Stock. 30 Possible Adverse Effect on Market Price for Common Stock of Shares Eligible for Future Sale after the Offering Sales of the Company's Common Stock into the market could materially adversely affect the market price of the Company's Common Stock. Substantially all of the shares of Common Stock of the Company eligible for immediate and unrestricted sale in the public market at any time. 31 PART II - OTHER INFORMATION - --------------------------- ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 2.8(1) Asset Purchase Agreement dated March 13, 1998 by and between P-Com, Inc. and Cylink Corporation 2.8A(1) Amendment to the Asset Purchase Agreement dated March 13, 1998 by and between P-Com, Inc. and Cylink Corporation 2.8B(1) Amendment No. 2 to the Asset Purchase Agreement dated March 27, 1998 by and between P-Com, Inc. and Cylink Corporation 2.8C(1) Unsecured Subordinated Promissory Note 27.1(2) Financial Data Schedule
- ---------- (1) Previously filed as an exhibit to the Company's current Report on Form 8-K dated April 9, 1998 as filed with the Securities and Exchange Commission on March 28, 1998. (2) Previously filed as an exhibit to Amendment No. 1 to Form 10-Q for the quarterly period ended March 31, 1998, as filed with the Securities and Exchange Commission on April 30, 1999. (b) Reports on Form 8-K. Report on Form 8-K dated January 23, 1998, regarding the Company's earnings for the quarter and fiscal year ended December 31, 1997 as filed with the Securities and Exchange Commission on January 22, 1998. Report on Form 8-K dated March 16, 1998, regarding the Company's press release announcing the execution of a definite purchase agreement to acquire the assets of the Wireless Group of Cylink Corporation, as filed with the Securities and Exchange Commission on March 13, 1998. 32 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: September 24, 1999 By: /s/ George P. Roberts ---------------------------------------------- George P. Roberts Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) Date: September 24, 1999 By: /s/ Robert E. Collins ---------------------------------------------- Robert E. Collins Chief Financial Officer and Vice President Finance and Administration (Principal Financial Officer) 33 EXHIBIT INDEX
Exhibit No. - ------- 2.8(1) Asset Purchase Agreement dated March 13, 1998 by and between P-Com, Inc. and Cylink Corporation 2.8A(1) Amendment to the Asset Purchase Agreement dated March 13, 1998 by and between P-Com, Inc. and Cylink Corporation 2.8B(1) Amendment No. 2 to the Asset Purchase Agreement dated March 27, 1998 by and between P-Com, Inc. and Cylink Corporation 2.8C(1) Unsecured Subordinated Promissory Note 27.1(2) Financial Data Schedule
(1) Previously filed as an exhibit to the Company's current Report on Form 8-K dated April 9, 1998 as filed with the Securities and Exchange Commission on March 28, 1998. (2) Previously filed as an exhibit to Amendment No. 1 to Form 10-Q for the quarterly period ended March 31, 1998, as filed with the Securities and Exchange Commission on April 30, 1999. (c) Reports on Form 8-K. Report on Form 8-K dated January 23, 1998, regarding the Company's earnings for the quarter and fiscal year ended December 31, 1997 as filed with the Securities and Exchange Commission on January 22, 1998. Report on Form 8-K dated March 16, 1998, regarding the Company's press release announcing the execution of a definite purchase agreement to acquire the assets of the Wireless Group of Cylink Corporation, as filed with the Securities and Exchange Commission on March 13, 1998. 34 -----END PRIVACY-ENHANCED MESSAGE-----