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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 June 30, 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 July 31, 2003 there were 40,117,644 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 37 pages of which this is page 1.
The Exhibit Index appears on page 37.
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 June 30, 2003
and December 31, 2002............................................ 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2003 and 2002 .............. 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 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 ........................... 17
Item 3 Quantitative and Qualitative Disclosure about Market Risk ...... 31
Item 4 Controls and Procedures......................................... 31
PART II. OTHER INFORMATION
Item 1 Legal Proceedings ............................................. 33
Item 2 Changes in Securities ......................................... 33
Item 3 Defaults Upon Senior Securities ............................... 34
Item 6 Exhibits and Reports on Form 8-K .............................. 35
Signatures ............................................................... 36
2
PART I - FINANCIAL INFORMATION
ITEM 1.
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
JUNE 30, DECEMBER 31,
2003 2002
--------- ---------
ASSETS (Restated)
Current assets:
Cash and cash equivalents $ 180 $ 861
Restricted cash 580 415
Accounts receivable, net 3,203 4,797
Inventory 6,132 12,433
Prepaid expenses and other assets 3,678 3,402
Assets of discontinued operation 137 2,923
--------- ---------
Total current assets 13,910 24,831
Property and equipment, net 4,831 10,511
Other assets 278 381
--------- ---------
Total assets $ 19,019 $ 35,723
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 7,525 $ 8,144
Other accrued liabilities 6,895 6,774
Deferred contract obligations 8,000 8,000
Loan payable to bank 1,403 2,604
Convertible subordinated notes 20,090 --
Convertible promissory notes 1,338 --
Liabilities of discontinued operation 1,924 1,085
--------- ---------
Total current liabilities 47,175 26,607
Convertible subordinated notes -- 22,390
Other long-term liabilities 1,983 2,076
--------- ---------
Total liabilities 49,158 51,073
--------- ---------
Stockholders' equity (deficiency):
Common Stock 16 16
Additional paid-in capital 335,054 333,740
Accumulated deficit (365,165) (348,766)
Accumulated other comprehensive income (loss) 30 (340)
Common stock held in treasury at cost (74) --
--------- ---------
Total stockholders' equity (deficiency) (30,139) (15,350)
--------- ---------
Total liabilities and stockholders' equity $ 19,019 $ 35,723
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
-------- -------- -------- --------
(Restated) (Restated)
Sales $ 4,965 $ 8,110 $ 9,582 $ 15,942
Cost of sales 4,124 6,671 11,750 13,718
-------- -------- -------- --------
Gross profit (loss) 841 1,439 (2,168) 2,224
-------- -------- -------- --------
Operating expenses:
Research and development/engineering 1,706 3,696 3,625 7,827
Selling and marketing 827 1,676 1,762 3,499
General and administrative 1,551 3,151 3,186 6,187
Asset impairment and restructuring charges 2,763 -- 3,362 --
-------- -------- -------- --------
Total operating expenses 6,847 8,523 11,935 17,513
-------- -------- -------- --------
Operating loss (6,006) (7,084) (14,103) (15,289)
Interest expense (607) (660) (1,124) (1,020)
Gain on debt extinguishment 1,500 -- 1,500 1,393
Other income, net 855 1,093 953 148
-------- -------- -------- --------
Loss from continuing operations before loss from discontinued
operations, and cumulative effect of change
in accounting principle (4,258) (6,651) (12,774) (14,768)
Loss from discontinued operations (1,767) (1,391) (3,625) (2,951)
-------- -------- -------- --------
(6,025) (8,042) (16,399) (17,719)
Cumulative effect of change in accounting principle -- -- -- (5,500)
-------- -------- -------- --------
Net loss $ (6,025) $ (8,042) $(16,399) $(23,219)
======== ======== ======== ========
Basic and diluted loss per share:
Loss from continuing operations $ (0.11) $ (0.31) $ (0.33) $ (0.76)
Loss from discontinued operations (0.04) (0.06) (0.09) (0.15)
Cumulative effect of change in accounting principle -- -- -- (0.28)
-------- -------- -------- --------
Basic and diluted net loss per share applicable to
Common Stockholders $ (0.15) $ (0.37) $ (0.42) $ (1.19)
======== ======== ======== ========
Shares used in Basic and Diluted per share computation 40,731 21,865 38,634 19,437
======== ======== ======== ========
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)
Six months ended June 30,
2003 2002
-------- --------
Cash flows from operating activities: (Restated)
Net loss $(16,399) $(23,219)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss from discontinued operations 3,625 2,951
Depreciation 2,696 3,508
(Gain) Loss on disposal of property and equipment (886) 229
Cumulative effect of change in accounting principle -- 5,500
Inventory valuation and other related charges 3,608 1,805
Asset impairment charges 3,108 --
Amortization of discount on promissory notes 135 --
Amortization of warrants -- 280
Notes conversion expense -- 198
Stock compensation expense 482 --
Gain on redemption of convertible notes (1,500) (1,393)
Write-off of notes receivable 100 150
Changes in operating assets and liabilities:
Accounts receivable 1,519 (184)
Inventory 1,802 6,575
Prepaid expenses and other assets 557 (71)
Accounts payable (686) 1,327
Other accrued liabilities 288 (8,407)
-------- --------
Net cash used in operating activities (1,551) (10,751)
-------- --------
Cash flows from investing activities:
Loan to Speedcom (400) --
Acquisition of property and equipment -- (431)
(Increase) Decrease in restricted cash (580) 2,911
Net asset of discontinued operation 929 2,897
-------- --------
Net cash provided by investing activities (51) 5,377
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock, net 307 7,496
Proceeds (payments) on bank loan (1,202) 2,976
Proceeds from convertible promissory note 1,668 --
Payments under capital lease obligations (289) (202)
Redemption of convertible notes -- (384)
-------- --------
Net cash provided by financing activities 484 9,886
-------- --------
Effect of exchange rate changes on cash 22 63
-------- --------
Net increase (decrease) in cash and cash equivalents (1,096) 4,575
Cash and cash equivalents at beginning of the period 1,276 2,525
-------- --------
Cash and cash equivalents at end of the period $ 180 7,100
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
5
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONTINUED
(In thousands, unaudited)
2003 2002
------ ------
Supplemental cash flow disclosures: (Restated)
Cash paid for interest $ 281 $ 762
------ ------
Non-cash transactions :
Issuance of common stock for consulting services $ 450 $ --
------ ------
Issuance of warrants for consulting services $ -- $ 480
------ ------
Redemption of convertible notes in exchange for
property and equipment $2,300 $ --
------ ------
Treasury stock acquired in exchange for
property and equipment $ 74 $ --
------ ------
Issuance of common stock in settlement
with creditors $ -- $1,273
------ ------
The accompanying notes are an integral part of these consolidated financial
statements.
6
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
consolidated financial statements.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of P-Com,
Inc.'s (referred to herein, together with its wholly-owned subsidiaries, as
"P-Com" or the "Company") financial condition as of June 30, 2003, and the
results of their operations and their cash flows for the three-month and
six-month periods ended June 30, 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 for the year ended December 31, 2002. Operating
results for the three-month and six-month periods ended June 30, 2003 are not
necessarily indicative of the operating results that may be expected for the
year ending December 31, 2003.
DISCONTINUED OPERATIONS
As more fully discussed in Note 10, the financial statements for December 31,
2002 and June 30, 2003 have been restated to reflect the Company's services
business unit as a discontinued operation.
CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2002, the Company adopted the Statement of Financial
Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets.
Pursuant to the impairment recognition provisions of SFAS 142, the Company
timely completed its evaluation of the effects of adopting SFAS 142.
Accordingly, under the transitional provisions of SFAS 142, a goodwill
impairment loss of $5.5 million was recorded related to the Company's services
segment during the first quarter of 2002. The pro forma effects of this change
in accounting principle are not material to the accompanying financial
statements.
LIQUIDITY AND MANAGEMENT'S PLAN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As reflected in the financial statements, for the six-month period
ended June 30, 2003, the Company incurred a net loss of $16.4 million and used
$1.6 million cash in its operating activities. As of June 30, 2003, the Company
has accumulated deficit of $365.2 million. At June 30, 2003, the Company had
approximately $0.2 million in cash and cash equivalents, drawn principally from
a credit facility ("Credit Facility") with Silicon Valley Bank (the "Bank"), and
a working capital deficiency of approximately $33.2 million. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern.
The negative conditions are partially mitigated by certain financing activities
and management's plans to restructure the operating expenses and financial
condition of the Company. In January 2003, the Company sold 2.1 million shares
of Common Stock to an existing stockholder for aggregate net proceeds of
$307,000. Additionally, the Company closed a $1.5 million convertible note
financing in March 2003, and an additional $300,000 convertible note financing
in May 2003, resulting in aggregate net proceeds of $1.7 million (the "Bridge
Notes"). In July 2003, the Company closed an additional $900,000 Bridge Notes
financing, of which $500,000 was loaned to SPEEDCOM Wireless Corporation
("SPEEDCOM"), as discussed in Note 17. Each of the Bridge Notes converts into
Common Stock of the Company upon the consummation of a qualified financing of at
least $3.0 million ("Qualified Financing"), and upon stockholder approval of an
increase in the number of authorized Common Stock.
7
At June 30, 2003, the Company owed $0.8 million of interest on the 7%
Convertible Subordinated Notes ("Convertible Notes") and $0.2 million on a
promissory note, each due on May 1, 2003. The Company obtained waivers with
respect to the payment of interest under the Convertible Notes and with respect
to payment of the $0.2 promissory note. On August 4, 2003, the principal and
accrued interest of $21,138,000 due under the terms of the Convertible Notes was
converted into 1,000,000 shares of Series B Convertible Preferred Stock. The
Company is currently negotiating the settlement of the $0.2 million promissory
note, and is in negotiations with its other creditors to reduce the amounts owed
to such creditors. In order to finance the payment of reduced amounts that have
been offered to such creditors, the Company is seeking additional debt or equity
financing. Such financing is necessary for the Company to fully execute
management's debt restructuring plan.
If the Company is unsuccessful in its plans to (i) close a Qualified Financing,
or otherwise obtain debt or equity financing; (ii) generate sufficient revenues
from new and existing products sales; (iii) obtain agreements from its creditors
to reduce the amount owed and extend repayment terms; (iii) negotiate agreements
to settle outstanding litigation; or (iv) renew the Credit Facility when it
expires in September 2003, 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.
2. NET LOSS PER SHARE
For purposes 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 three and six months ended June 30, 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 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.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. This
statement is designed to improve financial reporting such that contracts with
comparable characteristics are accounted for similarly. The statement, which is
generally effective for contracts entered into or modified after June 30, 2003,
is not anticipated to have a significant effect on the Company's financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. At June 30, 2003, the Company had no such
financial instruments outstanding and therefore adoption of this standard has no
financial reporting implications. On August 4, 2003, the Company issued shares
of Series B Preferred Stock, which have certain terms that, while improbable,
may require their mandatory redemption for cash. The Company believes that
accounting for these securities as a mezzanine security, outside of equity,
under Staff Accounting Bulletin No. 64 (SAB 64), is appropriate.
8
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 $750,000 for
eligible inventories (limited to 30% of eligible accounts receivable), 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 June 30, 2003, the loan amount
payable to the Bank under the Credit Facility aggregated $1.4 million.
The Bank has 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 were 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 June 30, 2003 was approximately $52,000.
5. CONVERTIBLE PROMISSORY NOTES AND WARRANTS
The Convertible Promissory Notes (Bridge Notes) and Warrants consisted of the
following components at the date of issuance (in thousands, unaudited):
June 30
2003
--------
Convertible Bridge Notes $ 1,338
Beneficial Conversion Feature -
Warrants for Common Stock 462
--------
$ 1,800
========
On March 26, 2003, the Company closed the $1.5 million (face value) Bridge Notes
and Warrants financing. On May 28, 2003 the Company received an additional
$300,000 (face value) Bridge Notes and Warrants financing.
The Bridge Notes are contingently convertible into Common Stock of the Company
upon the completion of a Qualified Financing and the amendment of the Company's
articles of incorporation to increase the number of authorized Common Stock. The
Bridge Notes bear interest at 10% per annum, and the rate will increase to 13%
per annum if they remain outstanding six months after the issuance date. The
$1.5 million Bridge Notes mature on March 25, 2004, and the $0.3 million Bridge
Notes mature on May 27, 2004, and both are subordinated to the amounts due to
the Bank under the Credit Facility. The Bridge Notes are senior to the
Convertible Notes.
In connection with the issuance of the $1.5 million Bridge Notes, the Company
issued detachable 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. In connection with the issuance of
the $0.3 million Bridge Notes, the Company issued detachable Series A Warrants,
with a three-year term, to purchase a total of 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 700,000 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 securities with certain
9
conversion, exercise or exchange price adjustment provisions. The Company and
the investor group have agreed to extend the period of time that the Company has
to obtain stockholder approval to the 210th day following the date of issuance
of the Bridge Notes. The Company allocated the proceeds of the compound
instrument to the Bridge Notes and the Warrants based upon their relative fair
values. 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 in this Note 5, and it is being amortized over the maturity period of
the Bridge Notes to interest expense. The face value of the Bridge Notes was
considered their fair value for purposes of this allocation.
In addition, the conversion terms afforded the $1.5 million Bridge Notes
resulted in a beneficial conversion feature, represented by the amount that the
market value of the Common Stock on the commitment date exceeded the conversion
rate. The beneficial conversion feature, which amounts to approximately $1.1
million, which exceeds the current carrying value of the Bridge Notes, will be
recorded at an amount equal to the face value of the Bridge Notes when the
contingencies referred to above, are resolved, if ever.
The carrying value of the Bridge Notes is being accreted to their respective
face values through periodic charges to interest expense. Total amortization of
the discounts amounted to $135,000 for the six months ended June 30, 2003.
6. BALANCE SHEET COMPONENTS
Restricted cash consists of funds designated for the cash collateral account in
connection with the Credit Facility.
Inventory consists of the following (in thousands, unaudited):
JUNE 30, DECEMBER 31,
2003 2002
------- -------
(Restated)
Raw materials $ 3,151 $ 9,748
Work-in-process 962 1,580
Finished goods 1,943 815
Inventory at customer sites 76 290
------- -------
$ 6,132 $12,433
======= =======
Other accrued liabilities consist of the following (in thousands, unaudited):
JUNE 30, DECEMBER 31,
2003 2002
----- -----
(Restated)
Purchase commitment $1,238 $2,195
Accrued warranty (a) 901 936
Accrued employee benefits 838 943
Value added tax payable 414 248
Customer advances 320 267
Lease obligations 241 435
Senior subordinated secured promissory note (b) 202 202
Interest payable 1,145 276
Other 1,596 1,272
------ ------
$6,895 $6,774
====== ======
10
a) A summary of product warranty reserve activity is as follows:
Balance at January 1, 2003 $ 936
Additions relating to products sold 300
Payments (335)
-----
Balance at June 30, 2003 $ 901
-----
b) 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 matured on May 1, 2003. After maturity,
interest accrues at the rate of 9% per annum. The promissory note is secured by
certain property and equipment of the Company. The Company is in default under
the terms of the promissory note, and is currently negotiating to restructure
the note.
Deferred contract obligations
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 June 30, 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 $11,634,803, exclusive of interest.
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 triggering 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.
11
In April 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 to the Company by Liviakis. The Common Stock issued for these services
was valued at the market prices on the dates issued. Aggregate compensation
expense associated with these transactions during the six months ended June 30,
2003 amounted to $450,000. The Company incurred $1.28 million in charges during
the six months ended June 30, 2002 as a result of the issuance of Common Stock
in connection with certain legal settlements and the redemption of certain of
the Company's 4.25% Convertible Subordinated Notes.
In June 2003, the Company acquired 920,000 shares of Common Stock in exchange
for property and equipment valued at $74,000. These shares are held in treasury.
In June 2002, the Company sold approximately 11,464,000 shares of unregistered
Common Stock at a per share price of $0.70, for an aggregate net proceeds of
approximately $7.5 million. In May 2002, the Company issued approximately
1,281,000 shares of unregistered Common Stock at an average price of $0.99 per
share in settlement of amounts owing to vendors.
In the second quarter of 2002, the Company issued an aggregate of 284,121 new
shares of our Common Stock with a fair market value of $0.2 million upon the
conversion of the 4.25% Convertible Subordinated Notes with a principal value of
$0.7 million.
9. ASSET IMPAIRMENT AND OTHER RESTRUCTURING CHARGES
The Company continually monitors its inventory carrying value in the light of
the slowdown in the global telecommunications market, especially with regard to
an assessment of future demand for its Point-to-Multipoint, and its other legacy
product line, and this has resulted in a $2.1 million charge to cost of sales
for its Point-to-Multipoint, Tel-Link Point-to-Point and Air-link Spread
Spectrum inventories during the three months ended June 30, 2003. In the first
quarter of 2003, the Company recorded a $3.4 million inventory related charge to
cost of sales, of which $2.0 million was related to its Point-to-Multipoint
inventories. These charges were offset by credits of $1.8 million in the second
quarter associated with a write-back of accounts payable and purchase commitment
liabilities arising from vendor settlements.
In the first and second quarter of 2003, the Company continued to reevaluate the
carrying value of property and equipment relating to its Point-to-Multipoint
product line, that are held for sale. The evaluation resulted in a $2.5 million
provision for asset impairment in the second quarter of 2003, and $0.6 million
provision in the first quarter of 2003. As a result of these adjustments, there
is no remaining net book value of property and equipment related to the
Point-to-Multipoint product line.
A summary of inventory reserve and provision for impairment of plant and
property activities is as follows:
Inventory Provision for
Reserve impairment
-------- --------
Balance at January 1, 2003 $ 39,567 $ --
Additions charged to Statement of Operations 5,517 3,108
Deductions from reserves (17,234) --
-------- --------
Balance at June 30, 2003 $ 27,850 $ 3,108
-------- --------
In connection with a workforce reduction in May 2003, the Company accrued a $0.2
million charge relating to severance packages given to certain of its executive
officers. All pertinent criteria for recognition of this liability were met
during the period of recognition.
10. LOSS ON DISCONTINUED OPERATIONS
In the first quarter of 2003, the Company committed to a plan to sell its
services business, P-Com Network
12
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 three-month and six-months ended June 30, 2003 and 2002. 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 was
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, under the terms of the master lease of approximately $1.5 million,
and the amount is accrued as loss on disposition of discontinued operations in
the second quarter of 2003, which was the period that such loss was incurred.
Summarized results of PCNS are as follows (in thousands):
Three Months Ended June 30, Six months ended June 30,
2003 2002 2003 2002
------- ------- ------- -------
Sales $ 119 $ 625 $ 1,065 $ 1,133
------- ------- ------- -------
Loss from operations $ (248) $(1,391) $ (702) $(2,951)
Loss on disposition of discontinued operations (1,519) -- (2,923) --
------- ------- ------- -------
(1,767) (1,391) (3,625) (2,951)
Provision for income taxes -- -- -- --
------- ------- ------- -------
Net loss $(1,767) $(1,391) $(3,625) $(2,951)
======= ======= ======= =======
June 30, December 31,
2003 2002
------ ------
Total assets related to discontinued operations
Cash $ 90 $ 342
Accounts receivable 7 763
Inventory -- 1,206
Prepaid expenses and other assets -- 10
Property plant and equipment -- 529
Other assets 40 73
------ ------
$ 137 $2,923
Total liabilities related to discontinued operations
Accounts payable 309 466
Other accrued liabilities 1,615 293
Loan payable to bank -- 326
------ ------
$1,924 $1,085
------ ------
13
11. SALES BY GEOGRAPHIC REGION AND CONCENTRATIONS
The breakdown of product sales by geographic region is as follows (in
thousands):
For Three Months Ended For Six Months Ended
June 30 June 30
---------------------- ---------------------
2003 2002 2003 2002
------- ------- ------- -------
(Restated) (Restated)
North America $ 475 $ 994 $ 759 $ 1,760
United Kingdom 1,619 1,550 3,196 2,919
Europe 1,088 975 1,720 2,119
Asia 1,210 4,446 2,816 8,634
Other Geographic Regions 573 145 1,091 510
------- ------- ------- -------
$ 4,965 $ 8,110 $ 9,582 $15,942
======= ======= ======= =======
During the six-month period ended June 30, 2003 and 2002, four and three
customers accounted for a total of 53% and 41% of our total sales, respectively.
12. EMPLOYEE STOCK OPTION EXPENSE
The Company continues to apply the intrinsic method in accounting for stock
based employee compensation and, accordingly, has reflected the appropriate
disclosure provisions of SFAS No. 123. Had stock-based compensation costs for
our two stock-based compensation plans been determined and reported on the fair
value method 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
reported as follows:
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
2003 2002 2003 2002
--------- --------- ---------- ----------
Net loss applicable to Common Stockholders
As reported $ (6,025) $ (8,042) $ (16,399) $ (23,219)
Pro forma $ (6,389) $ (9,256) $ (17,344) $ (25,665)
Net loss per share
As reported - Basic and Diluted $ (0.15) $ (0.37) $ (0.42) $ (1.19)
Pro forma - Basic and Diluted $ (0.16) $ (0.42) $ (0.45) $ (1.32)
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.
13. COMPREHENSIVE LOSS
Comprehensive loss is comprised of the Company's reported net loss and the
currency translation adjustment associated with our foreign operations.
Comprehensive loss was $5.7 million and $7.0 million for the three months ended
June 30, 2003 and 2002, respectively. Comprehensive loss was $16.1 million and
$22.1 million for the six months ended June 30, 2003 and 2002, respectively.
14. PROPOSED ACQUISITION OF ASSETS AND CERTAIN LIABILITIES OF SPEEDCOM
On June 16, 2003, the Company entered into a definitive agreement to acquire the
operating assets of SPEEDCOM in exchange for approximately 67.5 million shares
of P-Com Common Stock and the assumption of certain liabilities, including
approximately $3.0 million in subordinated debt of SPEEDCOM. SPEEDCOM
manufactures, configures and delivers a variety of broadband fixed-wireless
14
products, including its award-winning SPEEDLAN family of wireless Ethernet
bridges and routers. Internet service providers, telecommunications carriers and
other service providers, and private organizations in the U.S. and more than 80
foreign countries worldwide, use SPEEDCOM's products to provide broadband
"last-mile" wireless connectivity in various point-to-point and
point-to-multipoint configurations for distances up to 25 miles. SPEEDCOM's
products provide high-performance broadband fixed wireless solutions
specifically designed for building-to-building local area network connectivity
and wireless Internet distribution.
The subordinated debt to be assumed is expected to be amended to become
convertible into shares of Common Stock of the Company at approximately $0.20
per share. The shares proposed to be issued to SPEEDCOM will equal up to
approximately 30% of the Company's outstanding Common Stock immediately upon
closing, assuming the conversion of the Series B Convertible Preferred Stock, as
mentioned in Note 17 to the financial statements, the issuance of shares in
connection with the Qualified Financing, and conversion of certain other
convertible securities of the Company. The acquisition will enable the Company
to expand its Spread Spectrum product offerings and expand its distribution
network. The SPEEDCOM transaction is subject to stockholder approval of
SPEEDCOM, and requires approval by the Company's stockholders of an increase in
the number of authorized shares of Common Stock of the Company.
In anticipation of the acquisition, the Company has advanced $400,000 to
SPEEDCOM under a 10% convertible promissory note. As further discussed in Note
17, an additional $500,000 was advanced to SPEEDCOM under similar terms and
conditions in July 2003. The Company carries the amounts due in other current
assets and currently plans to apply the amounts to the ultimate purchase price
of SPEEDCOM.
15. CONTINGENCIES
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. GLP Intressenter AB
holds a judgment against the Company, filed on March 7, 2003, in the amount of
$34,757.10. The Company is currently negotiating a settlement of all amounts due
GLP Intressenter AB, and the total liability is accrued on the Company's
financial statements.
On June 17, 2003, NVA Development Corporation filed a Motion for Judgment
against the Company for payment in the amount of $80,427, arising out of the
Company's guaranty, of PCNS' performance, under a Lease Termination Agreement
between NVA Development Corporation and PCNS. PCNS breached the terms of payment
under the Lease Termination Agreement. The Company is currently negotiating a
settlement of amounts owed NVA Development Corporation. Until such settlement,
if any, the Company has recorded all amounts due under the lease agreement.
On April 4, 2003, Christine Schubert, Chapter 7 Trustee for Winstar
Communications, Inc. et al, filed a Motion to Avoid and Recover Transfers
Pursuant to 11 U.S.C. ss.ss.547 and 550, in the United States Bankruptcy Court
for the District of Delaware and served the Summons and Notice on July 22, 2003.
The amount of the alleged preferential transfers to the Company is approximately
$13.7 million. We have reviewed the Motion and believe that the payments made by
Winstar Communications, Inc. are not voidable preference payments under the
United States Bankruptcy Code. In the opinion of management, the circumstances
surrounding this matter do not rise to the level that the Company is required to
record a liability. Any liability for this matter, if any, will be recorded when
and if estimable.
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 June 30, 2003 claimed by
Brevard County is approximately $120,000. The Company is currently preparing an
amended property tax return to address the unpaid taxes. Although the Company is
negotiating this matter with the taxing authority, management has determined
that the criteria for liability recognition has been met and has recorded the
liability.
16. RELATED PARTY TRANSACTIONS
As mentioned in Note 8 to the financial statements, the Company issued 3,000,000
shares of Common Stock to 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. The Company accounted for the fees as a reduction
of proceeds from the offering reflected in equity.
15
Myntahl Corporation, a stockholder of the Company, is also an appointed
distributor in China and acts as our agent in Mexico. The Company has sales of
approximately $0.5 million to Myntahl, and accrued approximately $11,000 in
commissions to Myntahl during the three months ended June 30, 2003. The Company
has sales of approximately $0.9 million to Myntahl, and incurred approximately
$69,000 in commissions to Myntahl during the six-month period ended June 30,
2003.
17. SUBSEQUENT EVENTS
In July 2003, the Company closed an additional Bridge Notes financing, resulting
in gross proceeds to the Company of approximately $0.9 million. In connection
with the Bridge Notes financing, the Company loaned to SPEEDCOM $500,000 in the
form of a two-year 10% note, which is convertible into Common Stock of SPEEDCOM.
On August 4, 2003, the principal amount and accrued interest of $21,138,000 due
under the terms of the Convertible Notes was converted into 1,000,000 shares of
Series B Convertible Preferred Stock with a stated value of $21.138 per share.
Each share of Series B Convertible Preferred Stock converts into Common Stock of
the Company at $0.20 per share. The Series B Convertible Preferred Stock
contains certain provisions that may result in a mandatory cash redemption. As a
result, the Company will reflect the carrying value of these instruments as a
mezzanine security outside of stockholders' equity.
The holders of the Series B Convertible Preferred Stock have agreed to exercise
their conversion options upon receipt of stockholder approval increasing the
number of authorized shares of Common Stock to allow for conversion, and upon
completion of an equity financing resulting in gross proceed to the Company of
at least $3.0 million.
16
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 $3.1 million or 39% in the
second quarter of 2003 compared to the same period in the previous year. We
continue to reduce our operating expenses by, among other things, exiting the
services business, reducing our personnel, and consolidating our facilities.
These cost reduction efforts have allowed us to reduce our operating loss by
$1.1 million, or 15% compared to the same period in the previous year. Our net
loss has also been reduced by $2.0 million, or 25% compared to the same period
in the previous year.
CRITICAL ACCOUNTING POLICIES
MANAGEMENT'S USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with accounting principles
generally accepted in the U.S. 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 U.S. The estimated fair value of
our Convertible Notes was approximately 30% of par or $6.6 million at June 30,
2003 and December 31, 2002. The estimated fair value of cash, accounts
receivable and payable, bank loans and accrued liabilities at June 30, 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
17
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 that those projected by
management, such as an unanticipated decline in demand not meeting our
expectations, additional inventory write-downs may be required.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and include tooling and test
equipment, computer equipment, furniture, land and buildings, and
construction-in-progress. Depreciation is computed using the straight-line
method based upon the useful lives of the assets ranging from three to seven
years, and in the case of buildings, 33 years. Leasehold improvements are
amortized using the straight-line method based upon the shorter of the estimated
useful lives or the lease term of the respective assets.
IMPAIRMENT OF LONG- LIVED ASSETS
In the event that facts and circumstances indicate that the long-lived assets
may be impaired, an evaluation of recoverability would be performed. If an
evaluation were required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount to
determine if a write-down is required. A $599,000 impairment valuation charge in
connection with property and equipment for our Point-to-Multipoint product line
was charged to restructuring charges in the first quarter of 2003, and a further
$2.5 million impairment charge for the Point-to-Multipoint property and
equipment was recorded in the second 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, COD or letters of credit.
The Company extends credit terms to international customers for up to 90 days,
which is consistent with prevailing business practices.
At June 30, 2003 and 2002, approximately 63% and 18%, respectively, of trade
accounts receivable represent amounts due from four and two customers,
respectively.
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 June 30, 2003, total sales were
approximately $5.0 million as compared to $8.1 million for the same period in
the prior year. For the six months ended June 30, 2003, total sales were
approximately $9.6 million, compared to $15.9 million for the same period in the
prior year. The decrease in total sales for the six-month ended June 30, 2003 as
compared to 2002 was principally attributable to a $4.6 million decrease in
Point-to-Point and Spread Spectrum product shipments to the Asia-Pacific Rim
countries. The
18
continuing capital expenditure control measures implemented by North American
and European telecommunication companies have continued to adversely impact our
sales. Approximately $2.9 million of our sales in the second quarter of 2003 are
from out-of-warranty repair activities, an increase of $0.9 million over the
previous quarter.
During the six-month period ended June 30, 2003 and 2002, four and three
customers accounted for a total of 53% and 41% of our total sales, respectively.
During the six months ended June 30, 2003, we generated approximately 29%
of our sales in the Asia-Pacific Rim areas and the Middle East combined. During
the same period in 2002, we generated 54% of our sales in the Asia-Pacific Rim
and the Middle East combined. The United Kingdom market contributed 33% of the
Company's revenue in the six months ended June 30, 2003, compared to 18% in the
same period in 2002. Our next largest market is the European continent, which
generated approximately 18% of the Company's revenue in the six months ended
June 30, 2003, compared to 13% 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. Gross profit for the three months ended June 30, 2003 and
2002, was $841,000 and $1.4 million, respectively, or 17% and 18% of sales in
each of the respective quarters. Excluding the $0.3 million inventory and
related charges recorded in the second quarter, product gross profit margins for
the quarter ended June 30, 2003 would have been 23%. The higher gross margin was
attributable principally to a higher percentage of total revenue in the second
quarter from the sale of unlicensed equipment and out-of-warranty repairs, which
provide higher gross margins compared to newly developed product sales that have
not yet reached the volume required for higher margins. The inventory and
related charge in the second quarter of 2003 consists of $1.2 million for our
Point-to-Multipoint, and $0.9 million for our legacy Tel-link Point-to-Point and
Air-link Spread Spectrum products, offset by a write-back of $1.8 million of
accounts payable and purchase commitment liabilities arising from vendor
settlements. The charges related to our Point-to-Multipoint, Tel-link and
Air-link products were taken in view of the less favorable market conditions for
these products. For the six months ended June 30, 2003 and 2002, gross profit
was $1.4 million (excluding inventory and related charges of $3.6 million) and
$2.2 million, or 15% and 14% of sales, respectively. The higher gross margin was
attributable principally to a higher percentage of total revenue during the six
month period coming from the sale of unlicensed equipment and out-of-warranty
repairs, which provide higher gross margins compared to newly developed product
sales that have not yet reached the volume required for higher margins.
Including the inventory and related charges of $3.6 million, gross loss for the
six months ended June 30, 2003 is (23%).
RESEARCH AND DEVELOPMENT. For the three months ended June 30, 2003 and
2002, research and development (R&D) expenses were approximately $1.7 million
and $3.7 million, respectively. For the six months ended June 30, 2003 and 2002,
R&D expenses were approximately $3.6 million and $7.8 million, respectively. The
decrease in R&D expense was due to the restructuring of the Point-to-Multipoint
operations, reduced depreciation charges, reduced staffing levels and
substantial completion of product development efforts related to our
Point-to-Point Encore and AirPro Gold Spread Spectrum radios. As a percentage of
sales, research and development expenses were at 34% for the three months ended
June 30, 2003, compared to 46% for the three months ended June 30, 2002. The
percentage decrease is due to significant expense reduction efforts as mentioned
above.
SELLING AND MARKETING. For the three months ended June 30, 2003 and 2002,
sales and marketing expenses were approximately $0.8 million and $1.7 million,
respectively. For the six months ended June 30, 2003 and 2002, sales and
marketing expenses were approximately $1.8 million and $3.5 million,
respectively. The decrease in sales and marketing 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 was 17% for the three months ended June 30, 2003,
compared to 21% for the three months ended June 30, 2002. The percentage
decrease was caused by significant savings in sales and marketing expenses, as
described above.
GENERAL AND ADMINISTRATIVE. For the three months ended June 30, 2003 and
2002, general and administrative expenses were approximately $1.6 million and
$3.2 million, respectively. For the six months ended June 30, 2003
19
and 2002, general and administrative expenses were approximately $3.2 million
and $6.2 million, respectively. The decrease in general and administrative
expense in the second quarter of 2003 is attributable to a realization of
savings from cost reduction programs that continued from 2002 to 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 31% for the three months ended June 30, 2003,
compared to 39% for the three months ended June 30, 2002. The percentage
decrease is due to our success in significantly reducing our expenses throughout
the year.
ASSET IMPAIRMENT AND OTHER RESTRUCTURING CHARGES. In the first and second
quarter of 2003, the Company determined that there was a need to reevaluate the
carrying value of its property and equipment, which are held for sale, relating
to its Point-to-Multipoint product line. The evaluation was performed in light
of the continuing slowdown in the global telecommunications market for this
product line. The evaluation resulted in a $2.5 million provision for asset
impairment in the second quarter of 2003, and $0.6 million provision in the
first quarter of 2003.
In connection with the workforce reduction in May 2003, the Company
recorded a $0.2 million charge in the second quarter of 2003 relating to a
severance package given to certain of its executive officers.
LOSS ON DISCONTINUED BUSINESS. In the first quarter of 2003, we decided to
exit our services business, PCNS. Accordingly, beginning in the first quarter of
2003, this business is reported as a discontinued operation and we recorded
losses from its operations and from the disposal of the services business unit
relating to writing down of assets to net realizable value. On April 30, 2003,
the Company entered into an Asset Purchase Agreement with JKB to sell certain
assets of PCNS. 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, and the total obligation under the
terms of the master lease is approximately $1.5 million, and these were accrued
in the second quarter of 2003 as loss on disposal of discontinued operations.
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 June 30, 2003 and 2002,
interest expense was $0.6 million and $0.7 million, respectively. Interest
expense for the second quarter of 2003 comprised primarily of interest on the
principal amount of our Convertible Notes, interest on our bank line of credit,
interest on capital leases and amortization of discount on the promissory notes.
The higher expense levels in the second quarter of 2002 were due to the
recording of $198,000 of notes conversion expense in connection with SFAS 84,
"Induced Conversion of Convertible Debt". For the six months ended June 30, 2003
and 2002, interest expense was $1.1 million and $1.0 million, respectively. The
higher expense in 2003 was due to the higher interest rate on the Convertible
Notes, which was raised to 7% per annum on November 1, 2002, compared to 4.25%
per annum previously, and amortization of discount on the Convertible Notes.
GAIN ON DEBT RESTRUCTURING AND OTHER INCOME, NET. For the three-month
period ended June 30, 2003, gain on debt restructuring and other income, net,
totaled $2.4 million compared to $1.0 million for the comparable three-month
period in 2002. For the six-month period ended June 30, 2003, other income, net,
totaled $2.5 million compared to $1.5 million for the corresponding period in
2002. The higher amount in 2003 was due to $1.5 million of gain on redemption of
Convertible Notes, and $0.8 million of gain from the sale of property and
equipment.
PROVISION (BENEFIT) FOR INCOME TAXES. We have not recorded the tax benefit
of our net operation losses since the criteria for recognition has not been
achieved. The net operating losses will be available to offset future taxable
income, subject to certain limitations and expirations.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended June 30, 2003, we used approximately $1.6
million of cash in operating activities, primarily due to our net loss of $16.4
million, offset by a $3.6 million non-cash loss related to inventory and related
charges, $3.1 million of property and equipment impairment charges, and
depreciation expense of $2.7 million. Significant contributions to cash flow
resulted from a net reduction in inventories of $1.8 million, a net
20
reduction in trade receivables of $1.5 million, and a net reduction in prepaid
and other current assets of $0.6 million. These were partially offset by a pay
down of accounts payable of $0.7 million.
During the six-month period ended June 30, 2002, we used approximately $10.8
million of cash in operating activities, primarily related to the net loss of
$23.2 million, including a $5.5 million non-cash goodwill impairment charge,
$1.8 million of inventory and related charges, and depreciation expense of $3.5
million, offset by a $1.4 million gain on the redemption of certain Convertible
Notes. Other significant contributions to cash flow from operations for the
six-month period ended June 30, 2002 were cash generated through inventory usage
of $6.6 million, and a net increase of trade payables of $1.3 million. These
were offset by a net decrease of other accrued liabilities of $8.4 million.
During the six-month period ended June 30, 2003, net cash flows used by
investing activities were minimal. The Company generated $0.9 million from
changes in the net assets of discontinued operations, offset by a $400,000 loan
to SPEEDCOM and a $0.6 million increase in restricted cash. During the six-month
period ended June 30, 2002, we generated approximately $8.3 million of cash from
investing activities due to the decrease in restricted cash of $2.9 million and
a contribution of $2.9 millon from changes in the net assets of discontinued
operations, offset by $0.4 million related to an asset acquisition.
During the six-month period ended June 30, 2003, we generated $0.5 million in
cash from financing activities, primarily from the issuance of the Bridge Notes,
which generated net proceeds of approximately $1.7 million, after deducting
expenses, and $0.3 million from the issuance of Common Stock, offset by a $1.2
million repayment of borrowings under the Credit Facility and a $0.3 million
payment of our capital leases obligations. 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 are senior
to the Convertible Notes. The Company repurchased $2.3 million of the
Convertible Notes with excess property and equipment, thereby reducing the
Company's obligation under the Convertible Notes to $20.1 million. During the
six-month period ended June 30, 2002, we generated $9.9 million cash flows from
financing activities, primarily through $7.5 million net proceeds from the
issuance of Common Stock, and $3.0 million cash advances from a bank based on
our qualifying trade receivables, offset by payments for capital leases and the
repurchase of the Convertible Notes.
As of June 30, 2003, our principal sources of liquidity consisted of
approximately $0.2 million of cash and cash equivalents, and remaining amounts
available under the Credit Facility.
At June 30, 2003, we had negative working capital of approximately $33.5
million. The negative working capital resulted from our continuing operating
losses, reclassification of the $20.1 million Convertible Notes to current due
to default on interest payments, and a $5.5 million inventory write-down to net
realizable value and accrual of other charges. 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 in November 2002. We did
not make either of the required payments, and received waivers with respect to
such payments through the date of the restructuring of the Convertible Notes, as
discussed below. If the Company fails to (i) obtain additional debt or equity
financing; (ii) generate sufficient revenues from new and existing products
sales; (iii) obtain agreements from its creditors to reduce the amount owed and
extend repayment terms; (iv) negotiate agreements to settle outstanding
litigation; or (v) renew the Credit Facility when it expires in September 2003,
the Company will have insufficient capital to continue its 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 $750,000 for
eligible inventories under the EXIM program, subject to a limit of not more than
30% of eligible trade receivables. 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 June 30, 2003, the loan amount payable to the Bank under the
Credit Facility aggregated approximately $1.4 million.
21
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 June 30, 2003, the overdraft amount drawn on
this line was approximately $53,000.
In July 2003, the Company closed an additional Bridge Notes financing, resulting
in gross proceeds to the Company of approximately $0.9 million. In connection
with the Bridge Notes financing, the Company loaned to SPEEDCOM $500,000 in the
form of a two-year 10% note, which is convertible into Common Stock of SPEEDCOM.
On August 4, 2003, as a result of the restructuring of its Convertible Notes,
the principal amount and accrued interest of $21,138,000 was converted into
1,000,000 shares of Series B Convertible Preferred Stock with a stated value of
$21.138 per share. Each share of the Series B Convertible Preferred Stock
converts into Common Stock of the Company at $0.20 per share. The holders of
Series B Convertible Preferred Stock have agreed to convert the Series B
Preferred Stock into Common Stock upon receipt of stockholder approval
increasing the number of authorized shares of Common Stock to allow for
conversion, and upon completion of a Qualified Financing.
Given (i) our deteriorating cash position; (ii) the impending expiration of our
Credit Facility; (iii) the aging of our accounts payable; (iv) the size and
working capital needs of our business; and (v) our recent history of losses, the
Company's ability to continue as a going concern is doubtful in the absence of
additional funding in the short term. 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 creditors to agree
to accept reduced payments, 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.
The following summarizes our contractual obligations at June 30, 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 $20,090 $ -- $ -- $ -- $20,090
Convertible promissory note 2,002 -- -- -- 2,002
Non-cancelable operating lease 783 3,816 736 -- 5,335
obligations
Capital lease obligations 241 1,983 -- -- 2,224
Loan payable to banks 1,403 -- -- -- 1,403
Purchase order commitments 1,238 -- -- -- 1,238
------- ------- ------- ------- -------
Total $25,757 $ 5,799 $ 736 $ -- $32,292
------- ------- ------- ------- -------
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 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
22
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.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. This
statement is designed to improve financial reporting such that contracts with
comparable characteristics are accounted for similarly. The statement, which is
generally effective for contracts entered into or modified after June 30, 2003,
is not anticipated to have a significant effect on the Company's financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. At June 30, 2003, the Company had no such
financial instruments outstanding and therefore adoption of this standard had no
financial reporting implications. On August 5, 2003, the Company issued shares
of Series B Preferred Stock, which have certain terms that, while improbable,
may require their mandatory redemption for cash. The Company believes that
accounting for these securities as a mezzanine security, outside of equity,
under Staff Accounting Bulletin No. 64 (SAB 64) is appropriate.
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 and,
internationally, 3G network rollout and commercialization continue to experience
delays. 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 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, and continuing
through 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 geographical markets have had a significant depressing
effect on the sales levels of telecommunication products 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.
OUR BUSINESS AND FINANCIAL POSITIONS HAVE DETERIORATED SIGNIFICANTLY.
Our business and financial positions have deteriorated significantly. Our core
business product sales were reduced sharply beginning with the second half of
2001. From inception to June 30, 2003, our aggregate net loss is approximately
$365.2 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
$33.3 million as of June 30, 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 accountant's 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
23
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 also entered into a definitive agreement to acquire the operating
assets and certain liabilities of SPEEDCOM on June 16, 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, including the SPEEDCOM
Wireless Corporation transaction. 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 subject 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.
THE CONVERSION OR EXERCISE OF OUR OUTSTANDING CONVERTIBLE SECURITIES WILL HAVE A
SIGNIFICANT DILUTIVE EFFECT ON OUR EXISTING STOCKHOLDERS.
In August 2003, our remaining Convertible Notes converted into 1,000,000 shares
of Series B Preferred Stock. The Series B Preferred Stock and outstanding Common
Stock warrants are convertible into approximately 110 million shares of our
Common Stock. The conversion or exercise of our outstanding convertible
securities, including the Series B Preferred Stock and warrants, into shares of
our Common Stock (which requires stockholder approval of an increase in the
number of authorized Common Stock) will result in substantial dilution to our
existing stockholders. In connection with the purchase of substantially all the
assets of SPEEDCOM, the Company intends to issue approximately 67.5 million
additional shares of Common Stock. Additional equity securities are expected to
be issued in connection with a Qualified Financing. These issuances will result
in additional 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.
24
In the event the Company is unable to raise additional debt or equity financing
in the short-term, 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 six-month period ended June 30, 2003, sales to four customers accounted
for 53% of total 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 June 30, 2003, four
customers accounted for 63% of our total accounts receivable balances. Many of
our significant recurring customers are located outside the U.S., primarily in
the Asia-Pacific Rim areas, 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.
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.
25
Finally, acquisitions in the telecommunications industry are common, which tends
to further concentrate the potential customer base in larger companies.
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, Ceragon, Ericsson Limited, Harris
Corporation-Farinon Division, NEC, NERA, Nokia Telecommunications, SIAE,
Siemens, and Proxim. 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 HAVE BEEN ADVERSELY AFFECTED BY DETERIORIATING GROSS
MARGINS.
The intense competition for many of our products has resulted in a reduction in
our average selling prices. These reductions have not been offset by a
corresponding decrease in the cost of goods sold, resulting in deteriorating
gross margins in some of our product lines. These deteriorating gross margins
may continue in the short term. Reasons for the decline 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 may
be unable to offset declining average selling prices in many of our product
lines. If we are unable to offset declining average selling prices, or achieve
corresponding decreases in manufacturing operating expenses, our gross margins
in many of our product lines will continue to decline.
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 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 incur 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
26
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 in 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, or if purchase orders are terminated by customers, our results of
operations could continue to be adversely affected. In particular, increases in
inventory or cancellation of purchase orders 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 $5.5
million write-down in the first two quarters 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.
FAILURE TO MAINTAIN A VALID CERTIFICATE FOR ISO 9001:1994 AND UPGRADE THE
CERTIFICATE TO ISO 9001:2000 MAY ADVERSELY AFFECT OUR SALES.
Many of our customers require their vendors to maintain a valid ISO Quality
certificate before placing purchase orders. The Company has had a certificate
since December 7, 1993. On December 15, 2003, ISO requires all holders of ISO
9001:1994 to upgrade to ISO 9001:2000. If we are unsuccessful in our efforts to
upgrade to ISO 9001:2000, our ability to secure purchase orders for our products
may be adversely affected.
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.
27
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 through the second
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 U.S. Approximately 90% of our
sales in the six-month period ended June 30, 2003 were made to customers located
outside of the U.S. Historically, our international sales have been denominated
in British pounds sterling, Euros or U.S. dollars. A decrease in the value of
British pounds or Euros relative to U.S. 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 U.S. 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
U.S. 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.
28
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 terrorist activities;
o recurrence of worldwide health epidemic similar to SARs, which
significantly affected our ability to travel and do business in the
Far East;
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 U.S. 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.
29
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 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 in order 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 U.S.
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
30
stock could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock.
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 June 30, 2003, we had approximately 40,118,000 shares of Common Stock
outstanding. The closing market price of our shares was $0.09 per share on that
date. As of June 30, 2003, there were 2,661,317 options outstanding that are
vested. Based upon option exercise prices related to vested options on June 30,
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 U.S. 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 June 30, 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 $6.6 million at June 30, 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 a 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% Convertible Notes were exchanged for three-year Convertible
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. In addition, we have $1.8 million of Bridge Notes that bear
interest at 10% per annum, and the rate will increase to 13% per annum if they
remain outstanding six months after the issuance date. Interest earned on our
cash balances is not material.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the quarter ended June 30, 2003, the Company's management,
including its chief executive officer and chief financial officer, has evaluated
the effectiveness of the Company's disclosure controls and procedures, as such
term is defined in Rule 13a-15(e) promulgated under the Securities and Exchange
Act of 1934, as amended. Based on that evaluation, the Company's chief executive
officer and chief financial officer concluded that the Company's disclosure
controls and procedures were effective as of June 30, 2003 to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities and Exchange Act of
31
1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
32
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 the Company 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 obtained judgments against the
Company for approximately $238,000, arising out of the Company's failure to pay
rent and default under the lease. On July 23, 2003, the Company entered into an
agreement to dismiss the complaints, and to settle all amounts due and owing
Gahrahmat in consideration for the payment to Gahrahmat of the amount of
$91,771, which amount has been paid to Gahrahmat.
On February 26, 2003, GLP Intressenter AB filed a complaint against the 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. GLP
Intressenter AB holds a judgment against the Company, filed on March 7, 2003, in
the amount of $34,757.10. The Company is currently negotiating a settlement of
all amounts due GLP Intressenter AB.
On June 20, 2003, Agilent Financial Services, Inc. filed a complaint against the
Company for Breach of Lease, Claim and Delivery and Account Stated, in Superior
Court of the State of California, County of Santa Clara. The amount claimed in
the complaint is approximately $2.5 million, and represents accelerated amounts
due under the terms of capitalized equipment leases of the Company. On June 27,
2003, the parties filed a Stipulation for Entry of Judgment and Proposed Order
of Dismissal of Action With Prejudice. Under the terms of the Stipulation, the
Company paid Agilent $50,000 on July 15, 2003, and is obligated to pay it
$100,000 on September 1, 2003, and $50,000 per month for fourteen months, from
October 1, 2003, up to and including November 1, 2004, and $1,725,000 on
December 1, 2004. As a result of the Stipulation, judgment under the Complaint
will not be entered unless and until the Company defaults under the terms of the
Stipulation. In the event the Company satisfies each of its payment obligations
under the terms of the Stipulation, the Complaint will be dismissed, with
prejudice.
On June 17, 2003, NVA Development Corporation filed a Motion for Judgment
against the Company for payment in the amount of $80,427.17, arising out of the
Company's guaranty, of P-Com Network Service, Inc.'s performance, under a Lease
Termination Agreement between NVA Development Corporation and PCNS. PCNS
breached the terms of payment under the Lease Termination Agreement. The Company
is currently negotiating a settlement of amounts owed NVA Development
Corporation.
On April 4, 2003, Christine Schubert, Chapter 7 Trustee for Winstar
Communications, Inc. et al, filed a Motion to Avoid and Recover Transfers
Pursuant to 11 U.S.C. ss.ss.547 and 550, in the United States Bankruptcy Court
for the District of Delaware and served the Summons and Notice on July 22, 2003.
The amount of the alleged preferential transfers to the Company is approximately
$13.7 million.
We have reviewed the Motion and believe that the payments made by Winstar
Communications, Inc. are not voidable preference payments under the United
States Bankruptcy Code.
Other than the amounts claimed by Christine Schubert, Chapter 7 Trustee for
Winstar Communications, Inc., the amount of ultimate liability with respect to
each of the currently pending actions are 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 May 2003, the Company issued a $300,000 convertible promissory note to an
investor group (the "Bridge Notes"). In connection with the Bridge Note
offering, the Company issued to the investor group, Series A Warrants, with a
three-year term, to purchase 500,000 shares of Common Stock, at $0.12 per share,
and Series B Warrants, with a three-year term, to purchase 700,000 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 securities with
certain conversion, exercise or exchange price adjustment provisions within
33
210 days following the date of issuance of the Bridge Notes, or October 22,
2003.
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 and 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.
At June 30, 2003, the Company had $0.8 million of interest payable on the
Convertible Notes and $0.2 million on a promissory note, each due on May 1,
2003. The Company failed to pay interest under the terms of the Convertible
Notes and the $0.2 million note, but obtained waivers with respect to such
non-payments by the holders of the Convertible Notes and the $0.2 promissory
note. On August 4, 2003, as a result of the restructuring of its Convertible
Notes, the principal amount and accrued interest of $21,138,000 due under the
terms of the Convertible Notes was converted into 1,000,000 shares of Series B
Convertible Preferred Stock with a stated value of $21.138 per share.
34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
2.1 Asset Purchase Agreement dated as of June 16, 2003, by and
between P-Com, Inc. and SPEEDCOM Wireless Corporation
3.1 Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock of P-Com, Inc., as filed with the
Delaware Secretary of State on July 29, 2003
10.1 Securities Purchase Agreement, dated May 28, 2003, by and among
P-Com, Inc., North Sound Legacy Fund LLC, North Sound Legacy
Institutional Fund LLC and North Sound Legacy International Ltd.
10.2 Registration Rights Agreement, dated May 28, 2003, by and among
P-Com, Inc., North Sound Legacy Fund LLC, North Sound Legacy
Institutional Fund LLC and North Sound Legacy International Ltd.
10.3 Security Agreement, dated May 28, 2003, by P-Com, Inc. and North
Sound Legacy Institutional Fund LLC, as collateral agent for
North Sound Legacy Fund LLC, North Sound Legacy Institutional
Fund LLC and North Sound Legacy International Ltd.
31.1 Certification of Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 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.
32.2 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 June 17, 2003, we filed a Form 8-K current report announcing the
Company's signing of a definitive agreement to acquire the business of
SPEEDCOM Wireless Corporation on June 16, 2003. Additionally, the
Company announced undertaking a recapitalization to reduce the
Company's debt levels.
On May 15, 2003, we filed a Form 8-K current report with regard to an
event of the same date, announcing the Company's revised financial
results for the first quarter 2003.
On April 7, 2003, we filed a Form 8-K current report with regard to an
event of April 4, 2003, announcing the appointment of a new General
Counsel, interim Chief Financial Officer, and the resignation of its
prior Chief Financial Officer. Additionally, the Company announced the
abandonment of its intent to acquire Procera Networks.
On April 1, 2003, we filed a Form 8-K announcing the issuance and sale
by the Company of convertible secured promissory notes in the
aggregate principal amount of $1,500,000 and four series of warrants
to purchase an aggregate of up to 6,000,000 shares of the Company's
Common Stock. The Company also announced that it had entered into a
Note Purchase Agreement with Speedcom Wireless Corporation, dated
March 26, 2003, for the purchase by the Company of a convertible
promissory note issued by Speedcom Wireless Corporation in the
principal amount of $400,000.
35
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: August 14, 2003
By: /s/ Daniel W. Rumsey
------------------------------
Daniel W. Rumsey
Interim Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2003
36
EXHIBIT INDEX
2.1(1) Asset Purchase Agreement dated as of June 16, 2003, by and
between P-Com, Inc. and SPEEDCOM Wireless Corporation
3.1 Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock of P-Com, Inc., as filed with the
Delaware Secretary of State on July 29, 2003
10.1 Securities Purchase Agreement, dated May 28, 2003, by and among
P-Com, Inc., North Sound Legacy Fund LLC, North Sound Legacy
Institutional Fund LLC and North Sound Legacy International Ltd.
10.2 Registration Rights Agreement, dated May 28, 2003, by and among
P-Com, Inc., North Sound Legacy Fund LLC, North Sound Legacy
Institutional Fund LLC and North Sound Legacy International Ltd.
10.3 Security Agreement, dated May 28, 2003, by P-Com, Inc. and North
Sound Legacy Institutional Fund LLC, as collateral agent for
North Sound Legacy Fund LLC, North Sound Legacy Institutional
Fund LLC and North Sound Legacy International Ltd.
31.1 Certification of Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 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.
32.2 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.
(1) Incorporated by reference to the identically numbered
exhibit to the Company's Report on Form 8-K as filed with
the Securities and Exchange Commission on June 17, 2003.
37