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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2003.
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer as defined
in the Exchange Act Rule 12b-2.
YES [ ] NO [X]
As of April 30, 2003 there were 41,037,644 shares of the Registrant's
Common Stock outstanding, par value $0.0001 per share. Effective March 10, 2003,
the Registrant's Common Stock was delisted from the NASDAQ Small Cap Market and
commenced trading electronically on the OTC Bulletin Board of the National
Association of Securities Dealers, Inc.
This quarterly report on Form 10-Q consists of 35 pages of which this is
page 1. The Exhibit Index appears on page 33.
1
P-COM, INC.
TABLE OF CONTENTS
Page
PART I. Financial Information Number
--------------------- ------
Item 1 Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002.................................................... 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002 ................................... 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 .......................................... 5
Notes to Condensed Consolidated Financial Statements ................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................... 14
Item 3 Quantitative and Qualitative Disclosure about Market Risk ............... 27
Item 4 Controls and Procedures.................................................. 27
PART II. Other Information
Item 1 Legal Proceedings ...................................................... 28
Item 2 Changes in Securities .................................................. 28
Item 3 Defaults Upon Senior Securities ........................................ 28
Item 6 Exhibits and Reports on Form 8-K ....................................... 29
Signatures ......................................................................... 30
Certifications......................................................................... 31
2
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1.
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
March 31, December 31,
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 1,233 $ 1,616
Accounts receivable, net 5,177 5,561
Inventory 8,747 13,639
Prepaid expenses and other assets 4,075 3,413
--------- ---------
Total current assets 19,232 24,229
Property and equipment, net 8,657 11,040
Other assets 427 454
--------- ---------
Total assets $ 28,316 $ 35,723
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,560 $ 8,610
Other accrued liabilities 17,228 15,067
Loan payable to bank 3,023 2,908
Convertible promissory note 962 --
--------- ---------
Total current liabilities 30,773 26,585
--------- ---------
Convertible subordinated notes 22,390 22,390
Other long-term liabilities -- 2,098
--------- ---------
Total liabilities 53,163 51,073
--------- ---------
Stockholders' equity (deficit):
Common Stock 16 16
Additional paid-in capital 334,585 333,740
Accumulated deficit (359,140) (348,766)
Accumulated other comprehensive loss (308) (340)
--------- ---------
Total stockholders' equity (deficit) (24,847) (15,350)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 28,316 $ 35,723
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
3
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
Three months ended March 31,
2003 2002
Sales $ 4,617 $ 7,832
Cost of sales 8,225 7,047
-------- --------
Gross profit (loss) (3,608) 785
-------- --------
Operating expenses:
Research and development 1,919 4,131
Selling and marketing 935 1,823
General and administrative 1,635 3,037
-------- --------
Total operating expenses 4,489 8,991
-------- --------
Loss from continuing operations (8,097) (8,206)
Interest expense (517) (355)
Other income, net 98 444
-------- --------
Loss from continuing operations before income taxes,
loss from discontinued
operations, and cumulative
effect of change in accounting principle (8,516) (8,117)
Provision for income taxes -- --
-------- --------
Loss from continuing operations before loss from
discontinued operations, and cumulative
effect of change in accounting principle (8,516) (8,117)
Loss from discontinued operations (1,858) (1,558)
-------- --------
(10,374) (9,675)
Cumulative effect of change in accounting principle -- (5,500)
-------- --------
Net loss $(10,374) $(15,175)
======== ========
Basic and diluted loss per share:
Loss from continuing operations $ (0.23) $ (0.48)
Loss from discontinued operations $ (0.05) $ (0.09)
Cumulative effect of change in accounting principle $ (0.00) $ (0.32)
-------- --------
Basic and diluted loss per share applicable to Common
Stockholders $ (0.28) $ (0.89)
======== ========
Shares used in basic and diluted per share
computation 36,538 16,999
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Three months ended March 31,
2003 2002
Cash flows from operating activities:
Net loss $(10,374) $(15,175)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,470 1,913
Provision for impairment of assets 1,404 --
Cumulative effect of change in accounting principle -- 5,500
Inventory valuation and other charge 3,460 --
Property and equipment impairment charge 599 --
Changes in assets and liabilities:
Accounts receivable 101 2,859
Inventory 639 4,042
Prepaid expenses and other assets 24 1,342
Accounts payable 808 (149)
Other accrued liabilities 283 (4,792)
-------- --------
Net cash used in operating activities (1,586) (4,460)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment -- (360)
Loan to a corporation (400) --
Decrease in restricted cash -- 2,911
-------- --------
Net cash provided by investing activities (400) 2,551
-------- --------
Cash flows from financing activities:
Proceeds from Employee Stock Purchase Plan -- 35
Proceeds from issuance of common stock, net 307 --
Proceeds from bank loan 115 --
Proceeds from convertible promissory note, net 1,368 --
Payments under capital lease obligations (193) (64)
-------- --------
Net cash provided by (used in) financing activities 1,597 (29)
-------- --------
Effect of exchange rate changes on cash 8 (13)
-------- --------
Net decrease in cash and cash equivalents (381) (1,951)
Cash and cash equivalents at beginning of the period 1,614 7,103
-------- --------
Cash and cash equivalents at end of the period $ 1,233 5,152
-------- --------
The accompanying notes are an integral part of these consolidated fnancial
statements.
5
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONTINUED
(In thousands, unaudited)
Three months ended March 31,
2003 2002
Supplemental cash flow disclosures :
Cash paid for interest $ 85 $ 58
---- ----
Warrants issued in connection with convertible
promissory notes $538 $ --
---- ----
The accompanying notes are an integral part of these condensed 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
consolidated financial statements.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of P-Com,
Inc.'s (referred to herein, together with its wholly-owned subsidiaries, as
"P-Com" or the "Company") financial condition as of March 31, 2003, and the
results of their operations and their cash flows for the three months ended
March 31, 2003 and 2002. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's audited 2002
consolidated financial statements, including the notes thereto, and the other
information set forth therein, included in the Company's Annual Report on Form
10-K. Operating results for the three-month period ended March 31, 2003 are not
necessarily indicative of the operating results that may be expected for the
year ending December 31, 2003.
Liquidity
Through March 31, 2003, the Company has incurred substantial losses and negative
cash flows from operations and, as of March 31, 2003, had an accumulated deficit
of $359.1 million. For the three months ended March 31, 2003, the Company
recorded a net loss of $10.4 million and used $1.6 million cash in operating
activities. At March 31, 2003, the Company had approximately $1.2 million in
cash and cash equivalents, drawn principally from a credit facility ("Credit
Facility") with Silicon Valley Bank (the "Bank"), discussed below. The amount
outstanding under the Credit Facility was approximately $3.0 million on March
31, 2003. In January 2003, the Company sold 2.1 million shares of Common Stock
to an existing stockholder at a per share price of $0.18, for aggregate net
proceeds of $307,000. Additionally, the Company closed a $1.5 million
convertible note financing in March 2003, resulting in net proceeds of
approximately $1.4 million (the "Bridge Notes"), after deducting certain fees.
In connection with the Bridge Notes financing, the Company loaned $400,000 to
Speedcom Wireless Corporation ("Speedcom"), discussed below.
The Company has $0.8 million of interest payable on the 7% Convertible
Subordinated Notes ("Convertible Notes") and $0.2 million payable on a
promissory note, each due on May 1, 2003. The Company is currently in default
under the terms of the $0.2 million note, and is currently negotiating to
restructure the note as well as the Convertible Notes. In the event the Company
is unable to restructure the Convertible Notes on or before June 1, 2003, it
will be in default under the terms of the Convertible Notes, and the repayment
of the principal amount on the Convertible Notes will be accelerated to the
current period. The total amount due under the terms of the Convertible Notes is
approximately $22.4 million. In addition to restructuring its Convertible Notes
and the $0.2 promissory note, the Company is negotiating with its other
creditors to reduce the amounts owed and to extend the repayment terms. The
Company is also actively seeking additional debt and equity financing in order
to continue as a going concern.
If the Company fails to (i) generate sufficient revenues from new and existing
products sales; (ii) obtain agreements from its creditors to reduce the amount
owed and extend repayment terms; (iii) obtain additional debt or equity
financing; (iv) restructure the repayment of the interest on the Convertible
Notes and the repayment of the $0.2 million promissory note, and (v) continue to
be granted waivers by the Bank of certain compliance covenants under the Credit
Facility, as discussed below, the Company will have insufficient capital to
continue its operations. Without sufficient capital to fund the Company's
operations, the Company will no longer be able to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary if the Company is unable to
continue as a going concern.
On September 20, 2002, the Company entered into the Credit Facility with the
Bank for up to a maximum of $5.0
7
million in total borrowings. As of March 31, 2003, the loan amount payable to
the Bank under the Credit Facility aggregated approximately $3.0 million. As of
March 31, 2003, the Company was not in compliance with the minimum tangible net
worth covenant established in the Credit Facility. The Bank waived the Company's
obligation to comply with this covenant through March 31, 2003, but has not
provided a waiver of compliance through April 30, 2003. In the event the Bank
ceases to extend further credit under the Credit Facility, or declares a
default, the Company will no longer have access to external sources of bank
financing. The Bank has also amended the Credit Facility to limit borrowing for
eligible inventories to $1.0 million during the period from April 21, 2003 and
ending on May 10, 2003. On and after May 11, 2003, borrowings on eligible
inventories will be further restricted to a maximum of $750,000.
As a result of the Company's default under certain capital lease obligations,
the total amount of $2.3 million due has been accelerated to the current period.
Employee Stock Option Expense
Because the Company has adopted the disclosure-only provision of SFAS No. 123,
no compensation expense has been recognized for its stock option plan or for its
stock purchase plan. Had compensation costs for our two stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans, consistent with the method of SFAS 123, our net loss and net
loss per share would have been reduced to the pro forma amounts indicated as
follows:
For three months ended March 31
2003 2002
---------- ----------
Net loss applicable to common stockholders
As reported $ (10,374) $ (15,175)
Employee stock option expense based on fair value (580) (1,232)
---------- ----------
Pro forma $ (10,945) $ (16,407)
---------- ----------
Net loss per share
As reported - Basic and Diluted $ (0.28) $ (0.89)
Employee stock option expense based on fair value (0.02) (0.08)
---------- ----------
Pro forma - Basic and Diluted $ (0.30) $ (0.97)
---------- ----------
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 2003 and 2002, respectively: expected volatility of 197%, and 125%;
weighted-average risk-free interest rates of 2.1% and 4.1%; weighted-average
expected lives of 4.0 and 3.5; respectively, and a zero dividend yield.
2. NET LOSS PER SHARE
For purpose of computing diluted net loss per share, weighted average common
share equivalents do not include stock options with an exercise price that
exceeds the average fair market value of the Company's Common Stock for the
period because the effect would be anti-dilutive. Because losses were incurred
in the first quarter of 2003 and 2002, all options, warrants, and convertible
notes are excluded from the computations of diluted net loss per share because
they are anti-dilutive.
3. RECENT ACCOUNTING PRONOUNCEMENT
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period commencing July 1,
8
2003. We believe that the adoption of this standard will have no material impact
on our financial statements.
4. BORROWING ARRANGEMENTS
On September 20, 2002, the Company and the Bank entered into the Credit
Facility. The Credit Facility consists of a Loan and Security Agreement for a
$1.0 million borrowing line based on domestic receivables, and a Loan and
Security Agreement under the Export-Import ("EXIM") program for a $4.0 million
borrowing line based on export related inventories and receivables. The Credit
Facility provides for cash advances equal to 70% of eligible accounts receivable
balances for both the EXIM program and domestic lines, and up to $1.2 million
for eligible inventories under the EXIM program. Advances under the Credit
Facility bear interest at the Bank's prime rate plus 2.5% per annum. The Credit
Facility expires on September 20, 2003, and is secured by all receivables,
deposit accounts, general intangibles, investment properties, inventories, cash,
property, plant and equipment of the Company. The Company has also issued a $4.0
million secured promissory note underlying the Credit Facility to the Bank. As
of March 31, 2003, the loan amount payable to the Bank under the Credit Facility
aggregated $3.0 million. The Company is not in compliance with the minimum
tangible net worth covenants established in the Credit Facility and has, on May
1, 2003, received a waiver from the Bank of the non-compliance through March 31,
2003. The Bank has also amended the Credit Facility to limit further borrowing
for eligible inventories to $1.0 million during the period, April 21, 2003 to
May 10, 2003. On and after May 11, 2003, borrowings on eligible inventories will
be further reduced to $750,000.
The Company has an unsecured overdraft line with a bank in Italy, for borrowings
up to $83,000, based on domestic trade receivables. Borrowings under this line
bear interest at 4.5% per annum. The amount outstanding on this overdraft line
at March 31, 2003 was approximately $52,000.
On March 29, 2001, the Company and Foothill Capital Corporation entered into a
Loan and Security Agreement with a borrowing capacity of up to $25.0 million.
The Loan and Security Agreement was to mature in March 2004. Borrowings under
the Loan and Security Agreement were limited to 85% of eligible accounts
receivable. The Loan and Security Agreement was terminated on February 6, 2002.
5. CONVERTIBLE PROMISSORY NOTE
The Convertible Promissory Note consists of the following (in thousands,
unaudited):
March 31, December 31,
2003 2002
Principal loan amount $ 1,500 $ --
Discount on note (538) --
------- ------------
962 --
======= ============
On March 26, 2003, the Company closed the Bridge Notes financing, resulting in
net proceeds to the Company of approximately $1.4 million, after deducting
certain expenses. In connection with the Bridge Notes financing, the Company
loaned $400,000 to Speedcom. The loan to Speedcom is in the form of a two year
10% note convertible into common stock of Speedcom.
The Bridge Notes are convertible into Common Stock of the Company upon the
completion of additional equity or equity-based financing in an amount equal to
at least $3.0 million. The Bridge Notes bear interest at 10% per annum, and the
rate will increase to 13% per annum if it remains outstanding six months after
the issuance date. The Bridge Notes mature on March 25, 2004, and are
subordinated to amounts due the Bank under the Credit Facility. The Bridge Notes
are senior to the Convertible Notes. In connection with the issuance of the
Bridge Notes, the Company issued to the investor group Series A Warrants, with a
three-year term, to purchase a total of 2,500,000 shares of the Company's Common
Stock, at $0.12 per share, and Series B Warrants, with a three-year term, to
purchase 3,500,000 shares of the Company's Common Stock, at $0.20 per share. The
exercise price of the Series A and Series B Warrants could be reduced to $0.001
per share of Common Stock should the Company fail to obtain stockholder approval
for a proposed amendment to the Company's Bylaws to permit the issuance of
convertible
9
securities with certain conversion, exercise or exchange price adjustment
provisions, by July 25, 2003. The fair value of the warrants was estimated using
the Black-Scholes model, with the following assumptions: expected volatility of
197%, weighted-average risk free interest rate of 2.12%, weighted average
expected lives of 3 years, and a zero dividend yield. The value of the warrants
has been disclosed as `Discount on note' and is being amortized over the
maturity period of the Bridge Notes to interest expense.
6. BALANCE SHEET COMPONENTS
Inventory consists of the following (in thousands, unaudited):
March 31, December 31,
2003 2002
-------- --------
Raw materials $ 27,919 36,599
Work-in-process 5,475 3,921
Finished goods 9,440 12,396
Inventory at customer sites 329 290
-------- --------
43,163 53,206
Less: Inventory reserves (34,416) (39,567)
-------- --------
$ 8,747 $ 13,639
======== ========
Other accrued liabilities consist of the following (in thousands, unaudited):
March 31, December 31,
2003 2002
------- -------
Deferred contract obligation (a) $ 8,000 $ 8,000
Purchase commitment 2,195 2,195
Accrued warranty (b) 1,002 936
Accrued employee benefits 877 943
Lease obligations 2,345 435
Senior subordinated secured promissory note (c) 202 202
Interest payable 671 276
Other 1,936 2,016
------- -------
$17,228 $15,067
======= =======
(a) In connection with a Joint Development and License Agreement
("JDL"), the Company entered into an Original Equipment Manufacturer Agreement
("OEM") with a vendor. Under the OEM, the Company agreed to pay the vendor $8.0
million for the vendor's marketing efforts for Company products manufactured
under the JDL. As of March 31, 2003 and 2002, this $8.0 million payment
obligation remains outstanding because the Company believes that the vendor has
not performed its marketing obligations. The Company has written to contest the
vendor's claim for $8.0 million and has asserted additional claims against the
vendor in the amount of $11.6 million, exclusive of interest.
(b) A summary of product warranty reserve activity is as follows:
Balance at January 1, 2003 $ 936
Additions relating to products sold 266
Payments (200)
-------
Balance at March 31, 2003 $1,002
-------
(c) In lieu of the payment of interest due on certain of the Company's
4.25% Convertible Subordinated Notes due on November 1, 2002, the Company issued
a promissory note in the amount of approximately $0.2 million. The promissory
note bears interest at 7% per annum, and matures on May 1, 2003.
10
After maturity, interest shall accrue at the rate of 9% per annum. The
promissory note is secured by certain property and equipment of the Company. The
Company is currently in default under the terms of the promissory note, and is
currently negotiating to restructure the note.
7. INDEMNIFICATIONS
Officer and Director Indemnifications
As permitted under Delaware law and to the maximum extent allowable under
that law, the Company has agreements whereby the Company indemnifies its current
and former officers and directors for certain events or occurrences while the
officer or director is, or was serving, at the Company's request in such
capacity. These indemnifications are valid as long as the director or officer
acted in good faith and in a manner that a reasonable person believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements is
unlimited; however, the Company has a director and officer insurance policy that
limits the Company's exposure and enables the Company to recover a portion of
any future amounts paid. As a result of the Company's insurance policy coverage,
the Company believes the estimated fair value of these indemnification
obligations is minimal.
Other Indemnifications
As is customary in the Company's industry, as provided for in local law in the
U.S. and other jurisdictions, many of the Company's standard contracts provide
remedies to its customers, such as defense, settlement, or payment of judgment
for intellectual property claims related to the use of our products. From time
to time, the Company indemnifies customers against combinations of loss,
expense, or liability arising from various trigger events related to the sale
and the use of our products and services. In addition, from time to time the
Company also provides protection to customers against claims related to
undiscovered liabilities or additional product liability. In the Company's
experience, claims made under such indemnifications are rare and the associated
estimated fair value of the liability is not material.
8. COMMON STOCK
In January 2003, the Company sold 2.1 million shares of Common Stock to an
existing stockholder at a per share price of $0.18, for aggregate net proceeds
of $307,000.
9. LOSS ON DISCONTINUED OPERATIONS
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No 144, "Accounting for the Impairment or Disposal
of Long Lived Assets" (SFAS 144). Under SFAS 144, a component of business that
is held for sale is reported in discontinued operations if (i) the operations
and cash flows will be, or have been, eliminated from the ongoing operations of
the company and (ii) the company will not have any significant continuing
involvement in such operations.
In the first quarter of 2003, the Company committed to a plan to sell its
services business, P-Com Network Services, Inc. ("PCNS"). Accordingly, beginning
in the first quarter of 2003, this business is reported as a discontinued
operation and the financial statement information related to this business has
been presented on one line, titled "Discontinued Operations" in the Consolidated
Statements of Operations for the first quarter ended March 31, 2003 and 2002.
11
Summarized results of PCNS are as follows (in thousands):
For Three Months Ended March 31,
--------------------------------
2003 2002
------- -------
Sales $ 946 $ 508
------- -------
Loss from operations $ (454) $(1,558)
Loss on discontinued operations (1,404) --
------- -------
(1,858) (1,558)
Provision for income taxes -- --
------- -------
Net loss $(1,858) $(1,558)
======= =======
The assets and liabilities of the discontinued operations consisted of the
following (in thousands):
2003 2002
------ ------
Total assets related to discontinued operations
Cash $ 124 $2,796
Accounts receivable 757 1,548
Inventory 80 1,563
Prepaid expenses and other assets 5 92
Property plant and equipment 100 919
Other assets 46 70
------ ------
$1,112 $6,988
------ ------
Total liabilities related to discontinued operations
Accounts payable 672 8
Other accrued liabilities 214 468
Loan payable to bank 342 --
------ ------
$1,228 $ 476
------ ------
10. SALES BY GEOGRAPHIC REGION
The breakdown of product sales by geographic region is as follows (in
thousands):
For Three Months Ended
March 31
---------------
2003 2002
------ ------
North America $ 284 $ 765
United Kingdom 1,577 1,369
Europe 632 1,144
Asia 1,756 4,188
Other Geographic Regions 368 366
------ ------
$4,617 $7,832
====== ======
12
11. COMPREHENSIVE LOSS
Comprehensive loss is comprised of net loss and the currency translation
adjustment. Comprehensive loss was $10.4 million for the three months ended
March 31, 2003 and $15.2 million for the three months ended March 31, 2002.
12. CONTINGENCIES
The Company has been named as a defendant in proceedings by its landlord in the
UK and by a former landlord of a warehouse facility leased by the Company in San
Jose, California, each for defaults under the respective leases. The total
amount of remaining lease obligations with respect to the San Jose, California
and UK facility are approximately $234,000 and $220,000, respectively.
The Brevard County of Florida has filed a tax lien encumbering all property,
plant and equipment owned by the Company located in the County for payment of
delinquent personal property taxes. The balance on March 31, 2003 claimed by
Brevard County is approximately $120,000. The Company is currently preparing an
amended property tax return to address the unpaid taxes.
The Company is currently in default in the payment of rent with respect to its
lease for its principal place of business, in Campbell, California. The total
amount in arrears is approximately $125,000. The Company is currently
renegotiating the terms of the lease.
13. RELATED PARTY TRANSACTIONS
As mentioned in Note 13 to the Financial Statements, the Company issued
3,000,000 Common Stock to Cagan McAfee Capital Partners ("CMCP") in April 2003,
as consideration for investment banking advisory services rendered. The Company
further paid finder's fees totaling approximately $30,000 in the first quarter
of 2003 to CMCP for new equity raised in the quarter.
Myntahl Corporation, a shareholder of the Company, is also an appointed
distributor in China and acts as our agent in Latin America. The Company has
sales of approximately $0.4 million to Myntahl, and paid approximately $58,000
in commissions to Myntahl during the first quarter of 2003.
14. SUBSEQUENT EVENTS
The Company issued 4,500,000 shares of its Common Stock to two outside
consultants in April 2003 for investment banking advisory services and public
and investor relations services.
On April 30, 2003, the Company entered into an Asset Purchase Agreement with JKB
Global, LLC ("JKB") to sell certain assets of PCNS, its discontinued service
business. The total cash consideration is expected to be approximately $105,000,
plus the assumption of certain liabilities. The Company is a guarantor of PCNS'
obligations under its premises lease, through July 2007. As part of the sale to
JKB, JKB has agreed to sublet the premises from PCNS for one year beginning May
1, 2003. The terms of the sublease require JKB to pay less than the total amount
of rent due under the terms of the master lease. As a result, the Company
remains liable under the terms of the guaranty for the deficiency, or
approximately $10,000 per month through the term of the sublease. The total
obligation under the terms of the master lease is approximately $1.6 million.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements, which
involve numerous risks and uncertainties. The statements contained in this
Quarterly Report on Form 10-Q that are not purely historical may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including
without limitation, statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under, "Certain Factors
Affecting the Company," contained in this Item 2 and elsewhere in this Quarterly
Report on Form 10-Q. Additional factors that could cause or contribute to such
differences include, but are not limited to, those discussed in our Annual
Report on Form 10-K, and other documents filed by us with the Securities and
Exchange Commission.
Overview
We supply broadband wireless equipment and services for use in
telecommunications networks. Currently, we sell 2.4 GHz and 5.7 GHz spread
spectrum radio systems, as well as 7 GHz, 13 GHz, 14 GHz, 15 GHz, 18 GHz, 23
GHz, 26 GHz, 38 GHz and 50 GHz radio systems. We also provide software and
related services for these products. Additionally, we offered services,
including engineering, furnishing and installation, program management, test and
turn-up, and integration of telephone central offices' transmission and DC power
systems, microwave, spread spectrum and cellular systems. We have decided to
exit the services business as part of our strategy to reduce expenses and focus
on our product business.
The telecommunications equipment industry continues to experience a significant
worldwide slowdown. Our product sales decreased $2.8 million or 38% in the first
quarter of 2003 compared to the previous quarter. We continue to reduce our
operating expenses by, among other things, exiting the services business,
reducing our personnel, and consolidating our facilities. These improvements,
however, have failed to offset the impact of reduced revenue experienced by the
Company as a result of the significant worldwide slowdown in the
telecommunications equipment industry.
Critical accounting policies
Management's use of estimates and assumptions
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates,
and such differences could be material and affect the results of operations
reported in future periods.
Fair value of financial instruments
The Company measures its financial assets and liabilities in accordance with
accounting principles generally accepted in the United States of America. The
estimated fair value of our Convertible Notes was approximately 30% of par or
$6.7 million at March 31, 2003 and December 31, 2002. The estimated fair value
of cash, accounts receivable and payable, bank loans and accrued liabilities at
March 31, 2003 and December 31, 2002 approximated cost due to the short maturity
of these assets and liabilities.
Revenue recognition
Revenue from product sales is recognized upon transfer of title and risk of
loss, which is upon shipment of the product provided no significant obligations
remain and collection is probable. Provisions for estimated warranty repairs,
returns and other allowances are recorded at the time revenue is recognized.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts for estimated losses from the
inability of our customers to make required payments. We evaluate our allowance
for doubtful accounts based on the aging of our accounts receivable, the
financial condition of our customers and their payment history, our historical
write-off experience and other assumptions. In order to limit our credit
exposure, we require irrevocable letters of credit and even prepayment from
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certain of our customers before commencing production.
Inventory
Inventory is stated at the lower of cost or market, cost being determined on a
first-in, first-out basis. We assess our inventory carrying value and reduce it
if necessary, to its net realizable value based on customer orders on hand, and
internal demand forecasts using management's best estimate given the information
currently available. Our customers' demand is highly unpredictable, and can
fluctuate significantly caused by factors beyond the control of the Company. Our
inventories include parts and components that are specialized in nature or
subject to rapid technological obsolescence. We maintain an allowance for
inventories for potentially excess and obsolete inventories and gross inventory
levels that are carried at costs that are higher than their market values. If we
determine that market conditions are less favorable than those projected by
management, such as an unanticipated decline in demand not meeting our
expectations, additional inventory write-downs may be required.
Impairment of long- lived assets
In the event that certain facts and circumstances indicate that the long-lived
assets may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated probability weighted future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if an impairment is required. Our only
long-lived assets are property and equipment. The cash flow analysis for the
property and equipment is performed over the shorter of the expected useful
lives of the assets, or the expected life cycles of our product line. An
impairment charge is recorded if the net cash flows derived from the analysis is
less than the asset's carrying value. We deem that the property and equipment is
fairly stated if the future undiscounted cash flows exceed its carrying amount.
A $599,000 impairment valuation charge in connection with property and equipment
for our Point-to-Multipoint product line was charged to product cost of sales in
the first quarter of 2003.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents and trade
accounts receivable. The Company places its cash equivalents in a variety of
financial instruments such as market rate accounts and U.S. Government agency
debt securities. The Company, by policy, limits the amount of credit exposure to
any one financial institution or commercial issuer.
The Company performs on-going credit evaluations of its customers' financial
condition to determine the customer's credit worthiness. Sales are then
generally made either on 30 to 60 day payment terms, Cash on Delivery (COD) or
letters of credit. The Company extends credit terms to international customers
of up to 90 days, which is consistent with prevailing business practices.
At March 31, 2003 and December 31, 2002, approximately 35% and 37%,
respectively, of trade accounts receivable represent amounts due from three
customers, resectively.
Accounting for Income Taxes
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. While we consider historical levels
of income, expectations and risks associated with estimates of future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event that we determine that we would
be able to realize deferred tax assets in the future in excess of the net
recorded amount, an adjustment to the deferred tax asset would increase income
in the period such determination was made.
Results of Operations
Sales. For the three months ended March 31, 2003, total product sales were
approximately $4.6 million, compared to $7.8 million for the same period in the
prior year. The decrease in total product sales was principally attributable to
a $2.6 million decrease in Point-to-Point and Spread Spectrum product shipments
to the Asia-Pacific Rim countries. The continuing capital expenditure control
measures implemented by North American telecommunication companies have also
adversely impacted our product sales. Approximately $2.0 million of our product
sales in the first quarter of 2003 and 2002 were from out-of-warranty repair
activities.
Sales for our discontinued service business was approximately $0.9 million
for the first quarter ended March 31, 2003, compared to approximately $0.5
million for the same period in 2002. The lower sales levels in 2002 were
primarily due to the regional telecommunications operating companies
implementing severe capital expenditure
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restraint in early 2002 resulting from the September 11, 2001 incident, and the
worldwide slow down in the telecommunications market.
During the three-month period ended March 31, 2003 and 2002, two customers
accounted for a total of 32% and 21% of our product sales, respectively.
During the three months ended March 31, 2003, we generated approximately
38% of our sales in the Asia-Pacific Rim areas and the Middle East combined.
During the same period in 2002, we generated 53% of our sales in the
Asia-Pacific Rim areas and the Middle East combined. The next largest market for
our product sales is the United Kingdom, which contributed 34% of the Company's
revenue in the first quarter of 2003, compared to 17% in the same period in
2002.
Many of our largest customers use our product to build telecommunication
network infrastructures. These purchases represent significant investments in
capital equipment and are required for network rollout in a geographic area or
market. Consequently, the customer may have different requirements from year to
year and may vary its purchase levels from us accordingly. As noted, the
worldwide slowdown in the telecommunications industry is significantly affecting
our customers and our revenue levels.
Gross Profit (Loss). Product gross profit (loss) for the three months ended
March 31, 2003 and 2002, was $(3.6) million and $0.8 million, respectively, or
(78)% and 10% of sales, respectively. Excluding the $3.5 million inventory
charge and the $0.6 million property and equipment impairment charge taken in
the first quarter, product gross profit margins for the quarter ended March 31,
2003 would have been 10%, which is comparable to the first quarter ended March
31, 2002. The inventory charge in the first quarter of 2003 consists of $2.0
million for our Point-to-Multipoint product, and $1.0 million for end of life
Spread Spectrum product. The impairment charge of $0.6 million related to our
Point-to-Multipoint product, and was taken in view of the less favorable market
conditions for this product line
Research and Development. For the three months ended March 31, 2003 and
2002, research and development (R&D) expenses were approximately $1.9 million
and $4.1 million, respectively. The decrease in dollar spending was due to
reduced staffing levels and substantial completion of product development effort
for our Point-to-Point Encore and AirPro Gold Spread Spectrum radios. As a
percentage of sales, research and development expenses were at 42% for the three
months ended March 31, 2003, compared to 53% for the three months ended March
31, 2002. The percentage decrease is due to significant expense reduction
efforts as mentioned above.
Selling and Marketing. For the three months ended March 31, 2003 and 2002,
sales and marketing expenses were $0.9 million and $1.8 million, respectively.
The decrease in dollar spending is due to lower commission payments in light of
decreased sales in the Asia-Pacific Rim areas, headcount reductions and reduced
traveling expenses. As a percentage of sales, selling and marketing expenses
were at 20% for the three months ended March 31, 2003, compared to 23% for the
three months ended March 31, 2002. The percentage decrease is caused by
significant savings in selling and marketing expenses, as described above.
General and Administrative. For the three months ended March 31, 2003 and
2002, general and administrative expenses were $1.6 million and $3.0 million,
respectively. The decrease in dollar expense in the first quarter of 2003 is
attributable to a realization of savings from cost reduction programs that
continued throughout 2002, and into the first quarter of 2003, including
headcount reductions, lowering of salaries, reduced consulting and legal
expenses, and facilities consolidation. As a percentage of sales, general and
administrative expenses were 35% for the three months ended March 31, 2003,
compared to 39% for the three months ended March 31, 2002. The percentage
decrease is due to our success in significantly reducing our expenses.
Loss on discontinued business. In the first quarter of 2003 we decided to
exit our services business, P-Com Network Services, Inc. ("PCNS"). Accordingly,
beginning in the first quarter of 2003, and for all prior periods, this business
is reported as a discontinued operation. On April 30, 2003, the Company entered
into an Asset Purchase Agreement with JKB Global, LLC ("JKB") to sell certain
assets of PCNS. The total cash consideration is expected to be approximately
$105,000, plus the assumption of certain liabilities. The Company is a guarantor
of PCNS' obligations under its premises lease, through July 2007. As part of the
sale to JKB, JKB has agreed to sublet the premises from PCNS for one year
beginning May 1, 2003. The terms of the sublease require JKB to pay less than
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the total amount of rent due under the terms of the master lease. As a result,
the Company remains liable under the terms of the guaranty for the deficiency,
or approximately $10,000 per month through the term of the sublease. The total
obligation under the terms of the master lease is approximately $1.6 million.
Change in accounting principle. Goodwill represents the excess of the
purchase price over the fair value of the net assets of acquired companies
accounted for as purchase business combinations. We adopted FAS 142 on January
1, 2002, and, as a result, recorded a transitional impairment charge of $5.5
million in the first quarter of 2002, representing the difference between the
fair value of expected cash flows from the services business unit, and its book
value.
Interest Expense. For the three months ended March 31, 2003 and 2002,
interest expense was $0.5 million and $0.4 million, respectively. The higher
expense levels were due to the higher interest rate paid on the $22.4 million of
Convertible Notes when they were restructured on November 1, 2002 to 7% per
annum, compared to 4.25% per annum previously. We further paid interest to the
Bank under the Credit Facility, which was obtained in September 2002, and on
capital leases.
Other income, net. For the three-month period ended March 31, 2003, other
income, net, totaled $0.1 million compared to $0.4 million for the comparable
three-month period in 2002. The higher amount in 2002 was due to higher earned
royalty and other miscellaneous credits, which did not recur in 2003.
Provision (Benefit) for Income Taxes. There is no provision for taxation
as we recorded net losses in both periods.
Liquidity and Capital Resources
During the three-month period ended March 31, 2003, we used approximately $1.6
million of cash in operating activities, primarily due to our net loss of $10.4
million, offset by a $1.4 million non-cash loss related to discontinued
operations during the quarter, $3.5 million of inventory charges, $0.6 million
of property and equipment impairment charge, and depreciation expense of $1.5
million. Significant contributions to cash flow resulted from increases in
accounts payable of $0.8 million and accrued liabilities of $0.3 million, a net
reduction in inventories of $0.6 million, and a net reduction in trade
receivables of $0.1 million.
During the three-month period ended March 31, 2002, we used approximately $4.5
million of cash in operating activities, primarily due to the fact that our net
loss of $15.2 million included $5.5 million of non-cash goodwill impairment
charges, and depreciation expense of $1.9 million. Other significant
contributions to cash flow resulted from operations for the quarter were cash
generated through net reduction of trade receivables of $2.9 million through
strong collection results, inventory reduction of approximately $4.0 million,
and reduction in prepaid expenses and other assets of $1.3 million, partially
offset by a net reduction in payables and other accrued liabilities of
approximately $4.9 million, which resulted from our ability to maintain key
vendor payments within terms and a slowdown of new payable balances occurring in
the period as a result of reduced orders from domestic Competitive Local
Exchange Carriers customers.
During the three-month period ended March 31, 2003, we used $0.4 million of cash
in investing activities, resulting from a loan made to Speedcom in connection
with the $1.5 million convertible promissory note financing obtained in March
2003. During the three-month period ended March 31, 2002, we generated
approximately $2.6 million of cash from investing activities due to the decrease
in restricted cash of $2.9 million. A vendor with whom we were in dispute had
attached the cash. We settled with the vendor in the first quarter of 2002.
During the three-month period ended March 31, 2003, we generated $1.6 million in
cash from financing activities, primarily from the issuance of the Bridge Notes,
which generated net proceeds of approximately $1.4 million, $0.3 million from
the issuance of Common Stock, and $0.1 million from borrowings under the Credit
Facility. The Bridge Notes bear interest at 10% per annum, and mature one year
from the date of issuance. The Bridge Notes are subordinated to outstanding
borrowings under the Credit Facility, but senior to the $22.4 million 7%
Convertible Notes due November 1, 2005. The proceeds from financing activities
were offset by $0.2 million payment for capital lease obligations. During the
three-month period ended March 31, 2002, cash flows from financing activities
were essentially neutral.
As of March 31, 2003, our principal sources of liquidity consisted of
approximately $1.2 million of cash and cash equivalents, and remaining amounts
available under the Credit Facility.
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At March 31, 2003, we had negative working capital of approximately $11.5
million. The negative working capital resulted from our continuing operating
losses, higher accounts payable balance, and a $3.4 million inventory write-down
to net realizable value. On May 1, 2003, we were obligated to make a $784,000
interest payment on our Convertible Notes, and a $202,000 payment with respect
to a promissory note restructured during November 2002. We did not make either
of the required payments, and we are currently in negotiations to restructure
the Convertible Notes and the $0.2 million promissory note. We are not in
default with respect to the interest payment on our Convertible Notes due on May
1, 2003 until June 1, 2003. Should we continue to be in default of the interest
payment on June 1, 2003, the principal amount plus any interest accrued on the
Convertible Notes will be accelerated. The total amount due under the terms of
the Convertible Notes is approximately $22.4 million. If the Company fails to
(i) generate sufficient revenues from new and existing products sales; (ii)
obtain agreements from its creditors to reduce the amount owed and extend
repayment terms; (iii) obtain additional debt or equity financing; (iv) continue
to be granted waivers by the Bank of certain compliance covenants under the
Credit Facility, and (v) successfully restructure the repayment on the interest
due on the Convertible Notes and principal sum due on the $202,000 promissory
note, we will have insufficient capital to continue our operations. Without
sufficient capital to fund our operations, we will no longer be able to continue
as a going concern.
Our Credit Facility provides for maximum borrowings of $5.0 million, consisting
of $1.0 million based on domestic receivables, and $4.0 million based on export
related inventories and receivables under the Export-Import ("EXIM") program.
The Bank makes cash advances equal to 70% of eligible accounts receivable
balances for both the EXIM program and domestic lines, and up to $1.2 million
for eligible inventories under the EXIM program. Advances under the Credit
Facility bear interest at the Bank's prime rate plus 2.5% per annum. The Credit
Facility expires on September 20, 2003. All amounts due under the Credit
Facility are secured by all receivables, deposit accounts, general intangibles,
investment properties, inventories, cash, property, plant and equipment of the
Company. We had issued a $4.0 million secured promissory note underlying the
Credit Facility to the Bank. As of March 31, 2003, the loan amount payable to
the Bank under the Credit Facility aggregated approximately $3.0 million. As of
March 31, 2003, the Company was not in compliance with the minimum tangible net
worth covenants set forth in the Credit Facility. The Bank waived the Company's
obligation to comply with this covenant through March 31, 2003, but has not
provided a waiver of compliance through April 30, 2003. The Bank has also
amended the Credit Facility to limit borrowing for eligible inventories to $1.0
million during the period from April 21, 2003 and ending on May 10, 2003. On and
after May 11, 2003, borrowings on eligible inventories will be further
restricted to a maximum of $750,000. In the event the Bank ceases to extend
further credit under the Credit Facility, or declares a default, we will no
longer have access to external sources of bank financing.
We have an unsecured overdraft line with a bank in Italy, for borrowings up to
$83,000, based on domestic trade receivables. Borrowings under this line bear
interest at 4.5% per annum. As of March 31, 2003, the overdraft amount drawn on
this line was approximately $52,000.
Given (i) our deteriorating cash position; (ii) the reduction in the borrowing
base under our Credit Facility; (iii) the aging of our accounts payable; (iv)
the size and working capital needs of our business; (v) our history of losses;
and (vi) the acceleration of amounts due under capital leases and other
agreements as a result of defaults, there is substantial doubt about the
Company's ability to continue as a going concern in the absence of additional
funding in the short term. We are currently working to raise additional new
equity and/or debt financing in the range of $5.0 million to $8.0 million over
the next 12 months to fund our operations. Additional financing may not be
available to us on acceptable terms, or at all, when required by us. Without
sufficient capital to fund our operations, we will be unable to continue as a
going concern despite making significant reductions in our operating expense
levels over the past 12 months. In addition to receiving new funds, we need to
significantly increase sales, reduce our short-term liabilities by inducing
large creditors to convert their receivables into our Common Stock or agreeing
to forbear on the amount owing, or to offer extended payment terms. If we are
not able to increase sales to a sufficient level, or to reach such agreements
with any or enough of our creditors, we will not be able to continue as a going
concern. As a result of these circumstances, our independent accountants'
opinion on our consolidated financial statements for the year ended December 31,
2002 includes an explanatory paragraph indicating that these matters raise
substantial doubt about our ability to continue as a going concern. If
additional funds are raised through issuance of equity securities, further
dilution to the existing stockholders will result.
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The following summarizes our contractual obligations at March 31, 2003, and the
effect such obligations are expected to have on our liquidity and cash flow in
future periods:
Less than one One to three Three to five After five
year years years years Total
------- ------- ------- ------- -------
Obligations (in $000):
Convertible Subordinated Notes $ -- $22,390 $ -- $ -- $22,390
Convertible promissory note 1,702 -- -- -- 1,702
Non-cancelable operating lease 2,283 6,789 465 -- 9,537
obligations
Capital lease obligations 2,345 -- -- -- 2,345
Loan payable to banks 3,023 3,023
Purchase order commitments 1,046 1,046
------- ------- ------- ------- -------
Total $10,399 $29,179 $ 465 $ -- $40,043
------- ------- ------- ------- -------
As a result of the Company's default under certain capital lease obligations,
the total amount due has been accelerated to the current period.
We do not have any material commitments for capital equipment. Additional future
capital requirements will depend on many factors, including our plans to
increase manufacturing capacity, working capital requirements for our
operations, and our internal free cash flow from operations.
Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period commencing July 1, 2003. We believe that the adoption
of this standard will have no material impact on our financial statements.
CERTAIN FACTORS AFFECTING THE COMPANY
CONTINUING WEAKNESS IN THE TELECOMMUNICATIONS EQUIPMENT AND SERVICES SECTOR HAS
ADVERSELY AFFECTED THE OPERATING RESULTS, FUTURE GROWTH AND STABILITY OF OUR
BUSINESS.
A severe worldwide slowdown in the telecommunications equipment and services
sector is affecting us. Our customers, particularly systems operators and
integrated system providers, are deferring capital spending and orders to
suppliers such as our Company, and in general are not building out any
significant additional infrastructure at this time. In the U.S., most
Competitive Local Exchange Carriers (CLECs) have declared bankruptcy. In
addition, our accounts receivable, inventory turnover, and operating stability
can be jeopardized if our customers experience financial distress. We do not
believe that our products and services sales levels can recover while an
industry-wide slowdown in demand persists.
Global economic conditions have had a depressing effect on sales levels in past
years, including a significant slowdown for us in 1998 and 2001 to first quarter
of 2003. The soft economy and slowdown in capital spending encountered in the
United States, the United Kingdom, continental Europe, parts of the Asia
continent, and other
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geographical markets have had a significant depressing effect on the sales
levels of telecommunication products and services such as ours. These factors
may continue to adversely affect our business, financial condition and results
of operations. We cannot sustain ourselves at the currently depressed sales
levels, unless we are able to obtain additional debt or equity financing, and we
are able to enter into agreements with our creditors to reduce the amount owed
and extend repayment terms.
OUR BUSINESS AND FINANCIAL POSITIONS HAVE DETERIORATED SIGNIFICANTLY.
Our business and financial positions have deteriorated significantly. Our core
business product sales, as well as services sales levels, were reduced sharply
beginning with the second half of 2001. From inception to March 31, 2003, our
aggregate net loss is approximately $359.1 million. Our cash, working capital,
accounts receivable, inventory, total assets, employee headcount, backlog and
total stockholders' equity were all substantially below levels of one year ago.
We have negative working capital of $11.5 million as of March 31, 2003. Our
short-term liquidity deficiency could disrupt our supply chain, and result in
our inability to manufacture and deliver our products, which would adversely
affect our results of operations.
Our independent accountants' opinion on our 2002 consolidated financial
statements includes an explanatory paragraph indicating substantial doubt about
our ability to continue as a going concern. To continue long term as a going
concern, we will have to increase our sales, and possibly induce other creditors
to forebear or to convert to equity, raise additional equity financing, and/or
raise new debt financing. We may not accomplish these tasks.
WE MAY ENTER INTO SUBSEQUENT AGREEMENTS TO MERGE OR CONSOLIDATE WITH OTHER
COMPANIES, AND WE MAY INCUR SIGNIFICANT COSTS IN THE PROCESS, WHETHER OR NOT THE
TRANSACTIONS ARE COMPLETED.
We signed an Agreement and Plan of Merger with Telaxis Communications
Corporation, dated September 9, 2002. The Agreement was terminated by mutual
agreement on January 7, 2003. On January 27, 2003, we signed a letter of intent
to acquire privately held Procera Networks Inc., of Sunnyvale, California, in a
stock-for-stock transaction. The acquisition effort was terminated in April
2003. We may enter into other acquisition agreements in furtherance of our
strategy to consolidate with other companies in the fixed wireless market. We
may not be able to close any acquisitions on the timetable we anticipate, if at
all. We have and may further incur significant non-recoverable expenses in these
efforts.
THE NASDAQ SMALLCAP MARKET HAS DELISTED OUR STOCK AND THIS MIGHT SEVERELY LIMIT
THE ABILITY TO SELL ANY OF OUR COMMON STOCK.
NASDAQ moved our stock listing from the NASDAQ National Market to the NASDAQ
Small Cap Market effective August 27, 2002 due to our failure to meet certain
listing requirements, including a minimum bid price of $1.00 per share. We
subsequently failed to meet certain NASDAQ Small Cap Market quantitative listing
standards, including a minimum $1.00 per share bid price requirement, and the
NASDAQ Listing Qualifications Panel determined that our stock would no longer be
listed on the NASDAQ Small Cap Market. Effective March 10, 2003, our Common
Stock commenced trading electronically on the OTC Bulletin Board of the National
Association of Securities Dealers, Inc. This move could result in a less liquid
market available for existing and potential stockholders to trade shares of our
Common Stock and could ultimately further depress the trading price of our
Common Stock.
Our Common Stock is subjected to the Securities Exchange Commission's ("SEC")
"penny stock" regulation. For transactions covered by this regulation,
broker-dealers must make a special suitability determination for the purchase of
the securities and must have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny stock, the rules generally require the delivery, prior to the transaction,
of a risk disclosure document mandated by the SEC relating to the penny stock
market. The broker-dealer is also subject to additional sales practice
requirements. Consequently, the penny stock rules may restrict the ability of
broker-dealers to sell the company's Common Stock and may affect the ability of
holders to sell the Common Stock in the secondary market, and the price at which
a holder can sell the Common Stock.
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THE CONVERSION OR EXERCISE OF OUR OUTSTANDING CONVERTIBLE SECURITIES WILL HAVE A
SIGNIFICANT DILUTIVE EFFECT ON OUR EXISTING STOCKHOLDERS.
Currently, our outstanding 7% Convertible Notes and Common Stock warrants are
convertible into approximately 13.7 million shares of our Common Stock and
approximately 33% of the total number of shares of Common Stock outstanding as
of April 30, 2003. Consequently, the conversion or exercise of our outstanding
convertible securities, including the 7% Convertible Notes and warrants, into
shares of our Common Stock will result in substantial dilution to our existing
stockholders.
OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN AND FAILURE TO
OBTAIN NEEDED FINANCING WILL AFFECT OUR ABILITY TO PURSUE FUTURE GROWTH AND HARM
OUR BUSINESS OPERATIONS, AND WILL AFFECT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
In the event the Company is unable to raise additional debt or equity financing,
we will not be able to continue as a going concern. Even if we resolve our
short-term going concern difficulties, our future capital requirements will
depend upon many factors, including a re-energized telecommunications market,
development costs of new products and related software tools, potential
acquisition opportunities, maintenance of adequate manufacturing facilities and
contract manufacturing agreements, progress of research and development efforts,
expansion of marketing and sales efforts, and status of competitive products.
Additional financing may not be available in the future on acceptable terms or
at all. The continued existence of a substantial amount of debt could also
severely limit our ability to raise additional financing. In addition, given the
recent price for our Common Stock, if we raise additional funds by issuing
equity securities, significant dilution to our stockholders could result.
If adequate funds are not available, we may be required to close business or
product lines, further restructure or refinance our debt or delay, further scale
back or eliminate our research and development program, or manufacturing
operations. We may also need to obtain funds through arrangements with partners
or others that may require us to relinquish our rights to certain technologies
or potential products or other assets. Our inability to obtain capital, or our
ability to obtain additional capital only upon onerous terms, could very
seriously damage our business, operating results and financial condition.
WE DO NOT HAVE THE CUSTOMER BASE OR OTHER RESOURCES OF MORE ESTABLISHED
COMPANIES, WHICH MAKES IT MORE DIFFICULT FOR US TO ADDRESS THE LIQUIDITY AND
OTHER CHALLENGES WE FACE.
Although we have installed and have in operation over 150,000 radio units
globally, we have not developed a large installed base of our equipment or the
kind of close relationships with a broad base of customers of a type enjoyed by
larger, more developed companies, which would provide a base of financial
performance from which to launch strategic initiatives and withstand business
reversals. In addition, we have not built up the level of capital often enjoyed
by more established companies, so from time to time we face serious challenges
in financing our continued operations. We may not be able to successfully
address these risks.
WE RELY ON A LIMITED NUMBER OF CUSTOMERS FOR A MATERIAL PORTION OF OUR SALES AND
THE LOSS OF OR REDUCTION IN SALES TO ANY OF THOSE CUSTOMERS COULD HARM OUR
BUSINESS, FINANCIAL CONDITIONS, AND RESULTS OF OPERATION.
For the period ended March 31, 2003, sales to two customers accounted for 32% of
sales. Our ability to maintain or increase our sales in the future will depend,
in part upon our ability to obtain orders from new customers as well as the
financial condition and success of our customers, the telecommunications
industry and the global economy. Our customer concentration also results in
concentration of credit risk. As of March 31, 2003, three customers accounted
for 35% of our total accounts receivable balances. Many of our significant
recurring customers are located outside the United States, primarily in the
Asia-Pacific Rim, Middle East, United Kingdom and continental Europe. Some of
these customers are implementing new networks and are themselves in the various
stages of development. They may require additional capital to fully implement
their planned networks, which may be unavailable to them on an as-needed basis,
and which we cannot supply in terms of long-term financing.
21
If our customers cannot finance their purchases of our products or services,
this may materially adversely affect our business, operations and financial
condition. Financial difficulties of existing or potential customers may also
limit the overall demand for our products and services. Current customers in the
telecommunications industry have, from time to time, undergone financial
difficulties and may therefore limit their future orders or find it difficult to
pay for products sold to them. Any cancellation, reduction or delay in orders or
shipments, for example, as a result of manufacturing or supply difficulties or a
customer's inability to finance its purchases of our products or services, would
adversely affect our business. Difficulties of this nature have occurred in the
past and we believe they can occur in the future. For instance, in July 2002, we
announced a multiple year $100 million supply agreement with an original
equipment manufacturer in China. Even with an agreement in place, the customer
has changed the timing and the product mix requested, and has cancelled or
delayed many of its orders. Enforcement of the specific terms of the agreement
could be difficult and expensive within China, and we may not ultimately realize
the total benefits currently expected in the contract period.
Finally, acquisitions in the telecommunications industry are common, which tends
to further concentrate the potential customer base in larger companies.
We believe that average selling prices and gross margins for our Tel-Link
systems will tend to decline in both the near and the long term. Reasons for the
decline may include the maturation of the systems, the effect of volume price
discounts in existing and future contracts and the intensification of
competition.
If we cannot develop new products in a timely manner or fail to achieve
increased sales of new products at a higher average selling price, then we would
be unable to offset declining average selling prices. If we are unable to offset
declining average selling prices, or achieve corresponding decreases in
manufacturing operating expenses, our gross margins will decline.
WE FACE SUBSTANTIAL COMPETITION AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
We are experiencing intense competition worldwide from a number of leading
telecommunications equipment and technology suppliers. These companies offer a
variety of competitive products and services and some offer broader
telecommunications product lines. These companies include Alcatel Network
Systems, Alvarion, Stratex Networks, Cerragon, Ericsson Limited, Harris
Corporation-Farinon Division, NEC, NERA, Nokia Telecommunications, SIAE,
Siemens, and Proxim/Western Multiplex Corporation. Many of these companies have
greater installed bases, financial resources and production, marketing,
manufacturing, engineering and other capabilities than we do. We face actual and
potential competition not only from these established companies, but also from
start-up companies that are developing and marketing new commercial products and
services. Some of our current and prospective customers and partners have
developed, are currently developing or could manufacture products competitive
with our products. Nokia and Ericsson have developed competitive radio systems,
and there is new technology featuring free space optical systems now in the
marketplace.
The principal elements of competition in our market and the basis upon which
customers may select our systems include price, performance, software
functionality, perceived ability to continue to be able to meet delivery
requirements, and customer service and support. Recently, certain competitors
have announced the introduction of new competitive products, including related
software tools and services, and the acquisition of other competitors and
competitive technologies. We expect 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 our competitors could cause a decline in sales or loss of market
acceptance of our systems. New offerings could also make our systems, services
or technologies obsolete or non-competitive. In addition, we are experiencing
significant price competition and expect that competition to intensify.
OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY A CONTINUED DECLINE IN
CAPITAL SPENDING IN THE TELECOMMUNICATIONS MARKET.
Although much of the anticipated growth in the telecommunications infrastructure
is expected to result from the entrance of new service providers, many new
providers do not have the financial resources of existing service
22
providers. For example in the U.S., most CLECs are experiencing financial
distress. If these new service providers are unable to adequately finance their
operations, they may cancel or delay orders. Moreover, purchase orders are often
received and accepted far in advance of shipment and, as a result, we typically
permit orders to be modified or canceled with limited or no penalties. In
periods of weak capital spending on the part of traditional customers, we are at
risk for curtailment or cancellation of purchase orders, which can lead to
adverse operating results. Ordering materials and building inventory based on
customer forecasts or non-binding orders can also result in large inventory
write-offs, such as occurred in 2000 and 2001, and continued to occur in the
first quarter of 2003.
Global economic conditions have had a depressing effect on sales levels in the
past two and one-half years. The soft economy and reported slowdown in capital
spending in 2001 and 2002 in the U.S. and European telecommunications markets
have had a significant depressing effect on the sales levels in both years. In
fiscal 2002, our sales in the U.S. and Europe markets totaled $12.2 million,
compared to $79.4 million in 2001. This trend has continued to the first quarter
of 2003.
FAILURE TO MAINTAIN ADEQUATE LEVELS OF INVENTORY COULD RESULT IN A REDUCTION OR
DELAY IN SALES AND HARM OUR RESULTS OF OPERATIONS.
Our customers have increasingly been demanding short turnaround on orders rather
than submitting purchase orders far in advance of expected shipment dates. This
practice requires that we keep inventory on hand to meet market demands. Given
the variability of customer need and purchasing power, it is difficult to
predict the amount of inventory needed to satisfy customer demand. If we
over-estimate or under-estimate inventory requirements to fulfill customer
needs, our results of operations could continue to be adversely affected. In
particular, increases in inventory could adversely affect operations if the
inventory is ultimately not used or becomes obsolete. This risk was realized in
the large inventory write-downs from 1999 to 2002, and a $3.4 million write-down
in the first quarter of 2003.
OUR LIMITED MANUFACTURING CAPACITY AND SOURCES OF SUPPLY MAY AFFECT OUR ABILITY
TO MEET CUSTOMER DEMAND, WHICH WOULD HARM OUR SALES AND DAMAGE OUR REPUTATION.
Our internal manufacturing capacity, by design, is very limited. Under certain
market conditions, as for example when there is high capital spending and rapid
system deployment, our internal manufacturing capacity will not be sufficient to
fulfill customers' orders. We would therefore rely on contract manufacturers to
produce our systems, components and subassemblies. Our failure to manufacture,
assemble and ship systems and meet customer demands on a timely and
cost-effective basis could damage relationships with customers and have a
material adverse effect on our business, financial condition and results of
operations.
In addition, certain components, subassemblies and services necessary for the
manufacture of our systems are obtained from a sole supplier or a limited group
of suppliers. Many of these suppliers are in difficult financial positions as a
result of the significant slowdown that we, too, have experienced. Our reliance
on contract manufacturers and on sole suppliers or a limited group of suppliers
involves risks. We have from time to time experienced an inability to obtain, or
to receive in a timely manner, an adequate supply of finished products and
required components and subassemblies. As a result, we have less control over
the price, timely delivery, reliability and quality of finished products,
components and subassemblies.
A significant ramp-up of production of products and services could require us to
make substantial capital investments in equipment and inventory, in recruitment
and training of additional personnel and possibly in investment in additional
manufacturing facilities. If undertaken, we anticipate these expenditures would
be made in advance of increased sales. In this event, operating results would be
adversely affected from time-to-time due to short-term inefficiencies associated
with the addition of equipment and inventory, personnel or facilities, and these
cost categories may periodically increase as a percentage of revenues.
OUR BUSINESS DEPENDS ON THE ACCEPTANCE OF OUR PRODUCTS AND SERVICES, AND IT IS
UNCERTAIN WHETHER THE MARKET WILL ACCEPT AND DEMAND OUR PRODUCTS AND SERVICES AT
LEVELS NECESSARY FOR SUCCESS.
23
Our future operating results depend upon the continued growth and increased
availability and acceptance of micro cellular, personal communications
networks/personal communications services, and wireless local loop access
telecommunications services in the United States and internationally. The volume
and variety of wireless telecommunications services or the markets for and
acceptance of the services may not continue to grow as expected. The growth of
these services may also fail to create anticipated demand for our systems.
Predicting which segments of these markets will develop and at what rate these
markets will grow is difficult.
Some sectors of the telecommunications market will require the development and
deployment of an extensive and expensive telecommunications infrastructure. In
particular, the establishment of PCN/PCS networks requires significant capital
expenditures. Communications providers may determine not to make the necessary
investment in this infrastructure, or the creation of this infrastructure may
not occur in a timely manner, as has been the case in 2001 to first quarter of
2003. Moreover, one potential application of our technology, the use of our
systems in conjunction with the provision of alternative wireless access in
competition with the existing wireline local exchange providers, depends on the
pricing of wireless telecommunications services at rates competitive with those
charged by wireline operators. Rates for wireless access must become competitive
with rates charged by wireline companies for this approach to be successful.
Absent that, consumer demand for wireless access will be negatively affected. If
we allocate resources to any market segment that does not grow, we may be unable
to reallocate capital and other resources to other market segments in a timely
manner, ultimately curtailing or eliminating our ability to enter the other
segments.
Certain current and prospective customers are delivering services and features
that use competing transmission media, such as fiber optic and copper cable,
particularly in the local loop access market. To successfully compete with
existing products and technologies, we must offer systems with superior
price/performance characteristics and extensive customer service and support.
Additionally, we must supply these systems on a timely and cost-effective basis,
in sufficient volume to satisfy such prospective customers' requirements, in
order to induce the customers to transition to our technologies. Any delay in
the adoption of our systems and technologies may result in prospective customers
using alternative technologies in their next generation of systems and networks.
Our financial condition may prevent us from meeting this customer demand or may
dissuade potential customers from purchasing from us.
Prospective customers may design their systems or networks in a manner that
excludes or omits our products and technology. Existing customers may not
continue to include our systems in their products, systems or networks in the
future. Our technology may not replace existing technologies and achieve
widespread acceptance in the wireless telecommunications market. Failure to
achieve or sustain commercial acceptance of our currently available radio
systems or to develop other commercially acceptable radio systems would
materially adversely affect us.
DUE TO OUR INTERNATIONAL SALES AND OPERATIONS, WE ARE EXPOSED TO ECONOMIC AND
POLITICAL RISKS, AND SIGNIFICANT FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES
RELATIVE TO THE UNITED STATES DOLLAR.
As a result of our current heavy dependence on international markets, especially
in the United Kingdom, the European continent, the Middle East, and China, we
face economic, political and foreign currency fluctuations that are often more
volatile than those commonly experienced in the United States. Approximately 94%
of our sales in the first quarter of 2003 were made to customers located outside
of the United States. Historically, our international sales have been
denominated in British pounds sterling, Euros or United States dollars. A
decrease in the value of British pounds or Euros relative to United States
dollars, if not hedged, will result in exchange loss for us if we have Euro or
British pound sterling denominated sales. Conversely, an increase in the value
of Euro and British pounds will result in increased margins for us on Euro or
British pound sterling denominated sales as our functional currency is in U.S.
Dollars. For international sales that we would require to be United States
dollar-denominated, such a decrease in the value of foreign currencies could
make our systems less price-competitive if competitors choose to price in other
currencies and could have a material adverse effect upon our financial
condition.
We fund our Italian subsidiary's operating expenses, which are denominated in
Euros. An increase in the value of Euro currency, if not hedged relative to the
United States dollar, could result in more costly funding for our Italian
operations, and as a result, higher cost of production to us as a whole.
Conversely, a decrease in the value of Euro currency will result in cost savings
for us.
24
Additional risks are inherent in our international business activities. These
risks include:
o changes in regulatory requirements;
o costs and risks of localizing systems (homologation) in foreign
countries;
o availability of suitable export financing, particularly in the case
of large projects which we must ship in short periods; our bank line
of credit allows this financing up to $4 million, subject to
numerous conditions;
o timing and availability of export licenses, tariffs and other trade
barriers;
o difficulties in staffing and managing foreign operations, branches
and subsidiaries;
o difficulties in managing distributors;
o potentially adverse tax consequences; and
o difficulty in accounts receivable collections, if applicable.
Due to political and economic instability in new markets, economic, political
and foreign currency fluctuations may be even more volatile than conditions in
developed countries. Countries in the Asia/Pacific, African, and Latin American
regions have in recent years experienced weaknesses in their currency, banking
and equity markets. These weaknesses have adversely affected and could continue
to adversely affect demand for our products.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO THE LAWS, REGULATIONS AND LOCAL
CUSTOMS OF THE COUNTRIES IN WHICH WE CONDUCT OUR BUSINESS, WHICH MAY BE
SIGNIFICANTLY DIFFERENT FROM THOSE OF THE UNITED STATES.
In many cases, local regulatory authorities own or strictly regulate
international telephone companies. Established relationships between
government-owned or government-controlled telephone companies and their
traditional indigenous suppliers of telecommunications often limit access to
these markets. The successful expansion of our international operations in some
markets will depend on our ability to locate, form and maintain strong
relationships with established companies providing communication services and
equipment in designated regions. The failure to establish these regional or
local relationships or to successfully market or sell our products in specific
international markets could limit our ability to compete in today's highly
competitive local markets for broadband wireless equipment.
In addition, many of our customer purchases and other agreements are governed by
a wide variety of complex foreign laws, which may differ significantly from U.S.
laws. Therefore, we may be limited in our ability to enforce our rights under
those agreements and to collect damages, if awarded in any litigation.
GOVERNMENTAL REGULATIONS AFFECTING MARKETS IN WHICH WE COMPETE COULD ADVERSELY
AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
Radio communications are extensively regulated by the United States and foreign
governments as well as by international treaties. Our systems must conform to a
variety of domestic and international requirements established to, among other
things, avoid interference among users of radio frequencies and to permit
interconnection of equipment.
Historically, in many developed countries, the limited availability of radio
frequency spectrum has inhibited the growth of wireless telecommunications
networks. Each country's regulatory process differs. To operate in a
jurisdiction, we must obtain regulatory approval for our systems and comply with
differing regulations.
Regulatory bodies worldwide continue to adopt new standards for wireless
communications products. The delays inherent in this governmental approval
process may cause the cancellation, postponement or rescheduling of the
installation of communications systems by our customers and us. The failure to
comply with current or future
25
regulations or changes in the interpretation of existing regulations could
result in the suspension or cessation of operations. Those regulations or
changes in interpretation could require us to modify our products and services
and incur substantial costs to comply with the regulations and changes.
In addition, we are also affected by domestic and international authorities'
regulation of the allocation and auction of the radio frequency spectrum.
Equipment to support new systems and services can be marketed only if permitted
by governmental regulations and if suitable frequency allocations are auctioned
to service providers. Establishing new regulations and obtaining frequency
allocation at auction is a complex and lengthy process. If PCS operators and
others are delayed in deploying new systems and services, we could experience
delays in orders. Similarly, failure by regulatory authorities to allocate
suitable frequency spectrum could have a material adverse effect on our results.
In addition, delays in the radio frequency spectrum auction process in the
United States could delay our ability to develop and market equipment to support
new services.
We operate in a regulatory environment subject to significant change. Regulatory
changes, which are affected by political, economic and technical factors, could
significantly impact our operations by restricting our development efforts and
those of our customers, making current systems obsolete or increasing
competition. Any such regulatory changes, including changes in the allocation of
available spectrum, could have a material adverse effect on our business,
financial condition and results of operations. We may also find it necessary or
advisable to modify our systems and services to operate in compliance with these
regulations. These modifications could be expensive and time-consuming.
OUR STOCK PRICE HAS BEEN VOLATILE AND HAS EXPERIENCED SIGNIFICANT DECLINE, AND
MAY CONTINUE TO BE VOLATILE AND DECLINE.
In recent years, the stock market in general, and the market for shares of small
capitalization technology stocks in particular, have experienced extreme price
fluctuations. These fluctuations have often negatively affected small cap
companies such as us, and may impact our ability to raise equity capital in
periods of liquidity crunch. Companies with liquidity problems also often
experience downward stock price volatility. We believe that factors such as
announcements of developments relating to our business (including any financings
or any resolution of liabilities), announcements of technological innovations or
new products or enhancements by us or our competitors, developments in the
emerging countries' economies, sales by competitors, sales of significant
volumes of our Common Stock into the public market, developments in our
relationships with customers, partners, lenders, distributors and suppliers,
shortfalls or changes in revenues, gross margins, earnings or losses or other
financial results that differ from analysts' expectations, regulatory
developments, fluctuations in results of operations could and have caused the
price of our Common Stock to fluctuate widely and decline over the past two
years during the telecommunication recession. The market price of our Common
Stock may continue to decline, or otherwise continue to experience significant
fluctuations in the future, including fluctuations that are unrelated to our
performance.
WE HAVE ADOPTED ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN
ACQUISITION OF P-COM.
Our stockholder rights plan, certificate of incorporation, equity incentive
plans, bylaws and Delaware law may have a significant effect in delaying,
deferring or preventing a change in control and may adversely affect the voting
and other rights of other holders of Common Stock.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of any other Preferred Stock that may be
issued in the future, including the Series A junior participating Preferred
Stock that may be issued pursuant to the stockholder rights plan, upon the
occurrence of certain triggering events. In general, the stockholder rights plan
provides a mechanism by which the share position of anyone that acquires 15% or
more, (or 20% or more in the case of the State of Wisconsin Investment Board and
Firsthand Capital Management) of our Common Stock will be substantially diluted.
Future issuance of stock or additional preferred stock could have the effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock.
26
ISSUING ADDITIONAL SHARES BY SALES OF OUR SECURITIES IN THE PUBLIC MARKET AS A
PRIMARY MEANS OF RAISING WORKING CAPITAL COULD LOWER OUR STOCK PRICE AND IMPAIR
OUR ABILITY IN NEW STOCK OFFERINGS TO RAISE FUNDS TO CONTINUE OPERATIONS.
Future sales of our Common Stock, particularly including shares issued upon the
exercise or conversion of outstanding or newly issued securities upon exercise
of our outstanding options, could have a significant negative effect on the
market price of our Common Stock. These sales might also make it more difficult
for us to sell equity securities or equity-related securities in the future at a
time and price that we would deem appropriate.
As of March 31, 2003, we had approximately 36,538,000 shares of Common Stock
outstanding. The closing market price of our shares was $0.15 per share on that
date. As of March 31, 2003, there were 1,962,360 options outstanding that are
vested. Based upon option exercise prices related to vested options on December
31, 2003, there would be insignificant dilution or capital raised for
unexercised in-the-money options.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have international sales and facilities and are, therefore, subject to
foreign currency rate exposure. Historically, our international sales have been
denominated in British pounds sterling, Euro and United States dollars. The
functional currencies of our wholly-owned foreign subsidiaries are the local
currencies. Assets and liabilities of these subsidiaries are translated into
U.S. dollars at exchange rates in effect at the balance sheet date. Income and
expense items are translated at average exchange rates for the period.
Accumulated net translation adjustments are recorded in stockholders' equity.
Foreign exchange transaction gains and losses are included in the results of
operations, and were not material for all periods presented. Based on our
overall currency rate exposure at March 31, 2003, a near-term 10% appreciation
or depreciation of the U.S. dollar would have an insignificant effect on our
financial position, results of operations and cash flows over the next fiscal
year. We do not use derivative financial instruments for speculative or trading
purposes.
The estimated fair value of our fixed rate convertible subordinated notes is
approximately 30% of par, or $6.7 million at March 31, 2003. The estimates of
fair value will vary over time depending on our financial condition and expected
future cash flows.
INTEREST RATE RISK
Our outstanding notes bear interest at fixed rates. Although fluctuating
interest rate changes over short period would not affect our results of
operations relating to the debt, we may need to reschedule issued debt in the
future at high interest rates, or at rate structures that expose us to interest
rate risk, as had happened on November 1, 2002, when $22.4 million of our
outstanding 4.25% notes were exchanged for three-year notes bearing interest at
an annual rate of 7%. We further have an outstanding $202,000 promissory note,
which now bears interest at 9% per annum, instead of its original 7% per annum,
as the note has remained unpaid on its maturity date of May 1, 2003. Interest
earned on our cash balances is not material.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, under the supervision and
with the participation of management, including our Chief Executive Officer and
our Chief Financial Officer, we have evaluated the effectiveness of the design
and operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to us (including our consolidated subsidiaries) required to be included
in our periodic SEC filings. Other than as set forth below, there have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation. Except, in March 2003, the Company discovered that one of its
foreign subsidiaries withdrew $52,000 from a credit line without authorization
from management at the Company. The credit line has been suspended pending the
establishment of appropriate controls governing proper access to the credit
line.
27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 19, 2003, Mahmoud M. Gahrahmat, d/b/a/ Gahrahmat Properties, filed a
Complaint for Breach of Commercial Lease Contract against P-Com, Inc., in the
Superior Court of the State of California, County of Santa Clara. Gahrahmat
Properties is the former landlord of a warehouse facility leased by the Company
in San Jose, California. Gahrahmat Properties is seeking damages for
approximately $234,000, arising out of P-Com's failure to pay rent and eventual
default under the lease.
On February 26, 2003, GLP Intressenter AB filed a complaint against P-Com United
Kingdom, Inc., in the Birmingham County Court, United Kingdom, for the Company's
default under the commercial lease between the two parties. With respect to the
UK facility, GLP Intressenter AB is claiming approximately $220,000.
While the amount of ultimate liability with respect to these actions is less
than 10% of our current assets, in the event we are unable to satisfactorily
resolve these and other proceedings that arise from time to time, our financial
position and results of operations may be materially affected.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In January 2003, the Company issued 2,100,000 shares of Common Stock to an
existing stockholder for $0.18 a share, for a net proceed of $0.3 million. There
were no underwriters or commissions involved, and the stock issuance was exempt
from registration under the Securities Act by virtue of Section 4(2) of the
Securities Act and Rule 506 of Regulation D, because it was a non-public
offering to an accredited investor.
In connection with the issuance of the $1.5 million convertible promissory notes
in March 2003 (the "Bridge Notes"), the Company issued to the investor group
2,500,000 Series A Warrants, with a three-year term, to subscribe to the
Company's Common Stock, at $0.12 per share, and 3,500,000 Series B Warrants,
with a three-year term, to subscribe to the Company's Common Stock, at $0.20 per
share. The exercise price of the Series A and Series B Warrants could be reduced
to $0.001 per share of Common Stock should the Company fail to obtain
stockholder approval for a proposed amendment to the Company's Bylaws to permit
the issuance of convertible securities with certain conversion, exercise or
exchange price adjustment provisions, by the 120th day following March 26, 2003.
Total fees paid in connection with the Bridge Notes was $132,500. The Bridge
Notes were issued in reliance on the exemption from registration provided by
Securities Act Section 4(2), and Rule 506 of Regulation D, because the
transaction was a non-public offering to accredited investors.
On April 21, 2003, the Company issued 1,500,000 and 3,000,000 shares of Common
Stock to Liviakis Financial Communications Inc. ("Liviakis"), and Cagan McAfee
Capital Partners, LLC ("CMCP"). The Common Stock issued to CMCP was issued in
consideration for certain investment banking and other services provided to the
Company by CMCP, and the Common Stock issued to Liviakis was issued in
consideration for certain financial, public and investor relations services
provided the Company by Liviakis. The shares were issued to both Liviakis and
CMCP in private transactions, in reliance on an exemption from registration
under Securities Act Section 4(2), and Rule 506 of Regulation D, because it was
a non-public offering to accredited investors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company has $0.8 million of interest payable on the 7% Convertible
Subordinated Notes ("Convertible Notes") and $0.2 million on a promissory note,
each due on May 1, 2003. The Company is currently in default under the terms of
the $0.2 million note, and is currently negotiating to restructure the note as
well as the Convertible Notes. In the event the Company is unable to restructure
the Convertible Notes on or before June 1, 2003, it will be in default under the
terms of the Convertible Notes. The total amount due under the Convertible Notes
is
28
approximately $22.4 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On March 31, 2003, we filed a Form 8-K current report with
regard to an event of March 26, 2003, announcing the
consummation of a $1.5 million convertible note financing,
resulting in net proceeds of $967,500, after deducting certain
fees and a $400,000 loan to Speedcom Wireless Corporation.
On March 7, 2003, we filed a Form 8-K current report with
regard to an event of the same date, announcing the delisting
of our Common Stock from the NASDAQ Small Cap Market, and the
immediate eligibility for quotation on the OTC Bulletin Board
effective with the opening of business on March 10, 2003.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
P-COM, INC.
By: /s/ George P. Roberts
------------------------------
George P. Roberts
Chairman of the Board of Directors
and Chief Executive Officer
(Duly Authorized Officer)
Date: May 15, 2003
By: /s/ Daniel W. Rumsey
------------------------------
Daniel W. Rumsey
Interim Chief Financial Officer
(Principal Financial Officer)
Date: May 15, 2003
30
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, George P. Roberts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of P-Com, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ George P. Roberts
Chairman of the Board of Directors and
Chief Executive Officer
Date: May 15, 2003
31
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel W. Rumsey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of P-Com, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Daniel W. Rumsey
Interim Chief Financial Officer
Date: May 15, 2003
32
EXHIBIT INDEX
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Interim Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
33