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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(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, 2004.
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
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P-COM, INC.
(Exact name of Registrant as specified in its charter)
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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 August 9, 2004 there were 10,389,984 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.
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, 2004
and December 31, 2003......................................... 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2004 and 2003 ........... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2004 and 2003 ......................... 5
Notes to Condensed Consolidated Financial Statements ........ 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 19
Item 3 Quantitative and Qualitative Disclosure about Market Risk ... 34
Item 4 Controls and Procedures...................................... 34
PART II.Other Information
Item 1 Legal Proceedings .......................................... 35
Item 2 Changes in Securities ...................................... 35
Item 6 Exhibits and Reports on Form 8-K ........................... 36
Signatures ............................................................. 36
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
June 30, Dec 31,
ASSETS 2004 2003
--------- ---------
Current assets:
Cash and cash equivalents $ 4,876 $ 6,185
Accounts receivable, net 6,508 4,801
Inventory 4,304 5,258
Prepaid expenses and other assets 2,429 2,256
--------- ---------
Total current assets 18,117 18,500
Property and equipment, net 2,203 3,807
Goodwill 11,991 11,981
Others assets 319 277
--------- ---------
Total assets $ 32,630 $ 34,565
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,108 $ 4,035
Other accrued liabilities 7,499 8,226
Deferred contract obligations -- 8,000
Note payable-current 1,336 1
Liabilities of discontinued operations 284 313
--------- ---------
Total current liabilities 13,227 20,575
--------- ---------
Long-Term Liabilities:
Note payable - non-current 150 6
--------- ---------
Total long term liabilities 150 6
--------- ---------
Total liabilities 13,377 20,581
--------- ---------
Series B Preferred Stock 1,465 1,361
Series C Preferred Stock 1,724 870
Series D Preferred Stock 2,000 2,000
--------- ---------
Total Preferred Stock 5,189 4,231
--------- ---------
Stockholders' equity:
Common stock 35 20
Treasury stock (74) (74)
Additional paid-in capital 375,167 373,186
Accumulated deficit (360,750) (363,173)
Accumulated other comprehensive loss (313) (206)
--------- ---------
Total stockholders ' equity 14,064 9,753
--------- ---------
Total liabilities and stockholders' equity $ 32,630 $ 34,565
========= =========
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,
2004 2003 2004 2003
-------- -------- -------- --------
Sales $ 6,917 $ 4,965 $ 13,754 $ 9,582
Cost of sales 4,925 4,124 10,024 11,750
-------- -------- -------- --------
Gross profit (loss) 1,992 841 3,730 (2,168)
-------- -------- -------- --------
Gross margin 29% 17% 27% -23%
Operating expenses:
Research and development/engineering 1,258 1,706 2,515 3,625
Selling and marketing 1,735 827 3,186 1,762
General and administrative 1,070 1,551 2,253 3,186
Asset impairment and restructuring charges -- 2,763 -- 3,362
-------- -------- -------- --------
Total operating expenses 4,063 6,847 7,954 11,935
-------- -------- -------- --------
Operating expense as a percentage of sales 59% 138% 58% 125%
Operating loss (2,071) (6,006) (4,224) (14,103)
Interest expense (87) (607) (162) (1,124)
Gain on debt extinguishment -- 1,500 -- 1,500
Other income (expense), net 8,411 855 8,298 953
-------- -------- -------- --------
Income (loss) from continuing operations 6,253 (4,258) 3,912 (12,774)
-------- -------- -------- --------
Discontinued operations -- (1,767) (40) (3,625)
-------- -------- -------- --------
Net income (loss) 6,253 (6,025) 3,872 (16,399)
Accretion to increase preferred stock to redemption values (673) -- (1,449) --
-------- -------- -------- --------
Income (loss) applicable to common stockholders $ 5,580 $ (6,025) $ 2,423 $(16,399)
======== ======== ======== ========
Basic and diluted income (loss) per share:
Income (loss) from continuing operations $ 0.62 $ (3.14) $ 0.28 $ (9.92)
Income (loss) from discontinued operations -- (1.30) 0.00 (2.81)
-------- -------- -------- --------
Basic and diluted net income (loss) per share applicable to
common stockholders $ 0.62 $ (4.44) $ 0.28 $ (12.73)
======== ======== ======== ========
Shares used in basic and diluted per share computation 9,015 1,358 8,584 1,288
======== ======== ======== ========
Diluted net income (loss) per share:
Income (loss) from continuing operations $ 0.40 $ (3.14) $ 0.26 $ (9.92)
Income (loss) from discontinued operations -- (1.30) -- (2.81)
-------- -------- -------- --------
Diluted net income (loss) per share applicable to
common stockholders $ 0.40 $ (4.44) $ 0.26 $ (12.73)
======== ======== ======== ========
Shares used in diluted per share computation 15,452 1,358 15,021 1,288
======== ======== ======== ========
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,
2004 2003
-------- --------
Cash flows from operating activities:
Net income (loss) $ 3,872 $(16,399)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Loss from discontinued operations 40 3,625
Depreciation 806 2,696
(Gain) loss on disposal of property and equipment 53 (886)
Inventory valuation and related charges 3,608
Asset impairment and other restructuring charges -- 3,108
Amortization of discount on promissory notes -- 135
Amortization of warrants 91 --
Stock compensation expense -- 482
(Gain) on redemption of convertible notes -- (1,500)
(Gain) on vendor settlements (894) --
(Gain) on deferred contract obligation (7,500) --
Write-off of notes receivable -- 100
Changes in operating assets and liabilities:
Accounts receivable (1,635) 1,519
Inventory 898 1,802
Prepaid expenses and other assets (540) 557
Accounts payable (25) (686)
Other accrued liabilities 485 288
-------- --------
Net cash used in operating activities (4,349) (1,551)
-------- --------
Cash flows from investing activities:
Loan to Speedcom -- (400)
Acquisition of property and equipment (132) --
(Increase) decrease in restricted cash -- (580)
Sale of property 829 --
Net asset of discontinued operation -- 929
-------- --------
Net cash used in investing activities 697 (51)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock, net 100 307
Proceeds (payments) on bank loan -- (1,202)
Proceeds from convertible promissory note, net -- 1,668
Proceeds from special warrant offer 2,619 --
Payments under capital lease obligations (382) (289)
-------- --------
Net cash provided by (used in) financing activities 2,337 484
-------- --------
Effect of exchange rate changes on cash 6 22
-------- --------
Net increase (decrease) in cash and cash equivalents (1,309) (1,096)
Cash and cash equivalents at beginning of the period 6,185 1,276
-------- --------
Cash and cash equivalents at end of the period $ 4,876 $ 180
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
5
Six months ended June 30,
2004 2003
------ ------
Supplemental cash flow disclosures :
Cash paid for interest $ 114 $ 281
------ ------
Non-cash investing and financing activities :
Issuance of Common Stock for consulting
services $ -- $ 450
------ ------
Redemption of convertible notes in exchange
for property and equipment $ -- $2,300
------ ------
Issuance of notes payable to settle deferred
contract obligations $ 500 $ --
------ ------
Treasury stock acquired in exchange for
property and equipment $ -- $ 74
------ ------
Conversion of Series C Preferred
Stock into Common Stock $ 491 $ --
------ ------
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, 2004, and the
results of their operations and their cash flows for the three-month and
six-month periods ended June 30, 2004 and 2003. These unaudited condensed
consolidated financial statements should be read in conjunction with the
Company's audited 2003 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, 2003. Operating
results for the three-month and six-month periods ended June 30, 2004 are not
necessarily indicative of the operating results that may be expected for the
year ending December 31, 2004.
Effective July 19, 2004, the Company affected a one for thirty reverse stock
split of its Common Stock. All Common Stock numbers in the footnotes to the
unaudited consolidated financial statements and this Form 10-Q reflect the
implementation of the reverse stock split.
Liquidity and Management's Plans
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, 2004, the Company used $4.3 million cash in its operating
activities. Also, while the Company had approximately $4.9 million in cash and
cash equivalents at June 30, 2004, and working capital of approximately $4.9
million, the Company's deteriorating cash position relative to projected future
cash requirements, raise substantial doubt about the Company's ability to
continue as a going concern. In order to continue as a going concern, management
must be successful in its plan to acquire additional working capital, as P-Com's
known and likely cash requirements in 2004 will exceed available cash resources,
including available borrowings under the Company's existing credit facility with
Silicon Valley Bank (the "Credit Facility"). The Credit Facility expires on
September 25, 2004, and management is currently negotiating to renew the Credit
Facility.
No assurances can be given that P-Com will be able to renew the Credit Facility,
or that additional financing will continue to be available to P-Com on
acceptable terms, or at all. If the Company is unsuccessful in its plans to (i)
renew the Credit Facility; (ii) obtain additional debt or equity financing;
(iii) generate sufficient revenues from new and existing products sales; (iv)
diversify its customer base; (v) decrease costs of goods sold, and achieve
higher operating margins; (vi) refinance the obligation due Agilent Financial
Services, Inc. of approximately $1.7 million due December 1, 2004; (vii)
negotiate agreements to settle outstanding claims; or (viii) otherwise
consummate a transaction that improves its liquidity position, the Company will
have insufficient capital to continue its operations. 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 INCOME (LOSS) PER SHARE
For purposes of computing diluted net income per share in the three and six
months ended June 30, 2004, the weighted average common share equivalents
include all stock options, warrants, and convertible notes with an exercise
price below the average fair market of the Company's Common Stock for the
period. In the three and six months ended June 30, 2003, all options, warrants,
and convertible notes are excluded from the computations of diluted net loss per
share because they non-dilutive.
7
The following table sets forth the computation of basic and diluted earnings per
share: (In thousands, except per share date, unaudited)
Three months Three months Six months Six months
ended ended ended ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
Numerator:
Income(loss) from continuing operations $ 6,253 $ (4,258) $ 3,912 $(12,774)
Income(loss) from discontinued operations -- (1,767) (40) (3,625)
-------- -------- -------- --------
Net income(loss) 6,253 (6,025) 3,872 (16,399)
Preferred Stock accretion (673) -- (1,449) --
-------- -------- -------- --------
Numerator for basic earnings per share
-income(loss) available to common stockholders 5,580 (6,025) 2,423 (16,399)
Effect of dilutive securities:
Preferred stock accretion 673 -- 1,449 --
6% convertible warrants-interest 3 -- 3 --
Numerator for diluted earnings per share
-income(loss) available to common stockholders
after assumed conversions $ 6,256 $ (6,025) $ 3,875 $(16,399)
Denominator
Denominator for basic earnings per share
-weighted average shares 9,015 1,358 8,584 1,288
Effect of dilutive securities:
Warrants 6 -- 6 --
Convertible Preferred Stock 4,084 -- 4,084 --
Convertible promissory notes 2,347 -- 2,347 --
-------- -------- -------- --------
Dilutive potentional common shares 6,437 -- 6,437 --
Denonminator for diluted earnings per share
-adjusted weighted -average shares and assumed
conversions 15,452 1,358 15,021 1,288
======== ======== ======== ========
Basic earnings per share 0.62 (4.44) 0.28 (12.73)
======== ======== ======== ========
Diluted earnings per share 0.40 (4.44) 0.26 (12.73)
======== ======== ======== ========
3. BORROWING ARRANGEMENTS
On September 25, 2003, the Company renewed its Credit Facility with Silicon
Valley Bank (the "Bank") through September 25, 2004. 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 $3.0 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 25% of eligible EXIM 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 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, 2004
and December 31, 2003, no amounts were due to the Bank under the Credit
Facility.
8
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. As of June 30, 2004, no amounts were
outstanding under this line.
4. BALANCE SHEET COMPONENTS
Inventory
Inventory consists of the following (in thousands of dollars, unaudited):
June 30, December 31,
2004 2003
-------- ------------
Raw materials $1,250 $3,219
Work-in-process 45 1,682
Finished goods 2,924 277
Inventory at customer sites 85 80
------ ------
$4,304 $5,258
====== ======
Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands, unaudited):
June 30, December 31,
2004 2003
-------- ------------
Purchase commitment (a) $ 278 $1,238
Accrued warranty (b) 1,023 1,110
Accrued employee compensation 796 1,092
Value added tax payable 154 129
Customer advances 559 468
Lease obligations 1,964 2,335
Accrued rent 444 497
Deferred revenue 749 243
Other 1,532 1,114
$7,499 $8,226
====== ======
9
a) During the six-month period ended June 30, 2004, the Company settled an
outstanding disputed purchase commitment amounting to approximately $0.9 million
for no cash or other consideration. The associated reduction of this liability
is included as a reduction of cost of sales.
b) A summary of product warranty reserve activity for the six-month period
ended June 30, 2004 is as follows:
Balance at January 1, 2004 $ 1,110
Additions relating to products sold 243
Payments (330)
-------
Balance at June 30, 2004 $ 1,023
=======
A summary of product warranty reserve activity for the six-month period
ended June 30, 2003 is as follows:
Balance at January 1, 2003 $ 936
Additions relating to products sold 300
Payments (335)
-----
Balance at June 30, 2003 $ 901
=====
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. The
Company has disputed any claims by the vendor with respect to the $8.0 million
obligation, and asserted claims against the vendor totaling over $11.0 million.
The Company has entered into a settlement agreement with the vendor with respect
to all claims between the vendor and the Company. Under the terms of the
agreement, the Company is obligated to pay the vendor $500,000, payable $100,000
immediately, $100,000 upon the earlier of the receipt of financing by the
Company equal to at least $100,000 or December 31, 2004, and $300,000 in twelve
monthly installments of $25,000 per month beginning January 1, 2005.
Notes Payable
Notes payable, as of June 30, 2004 and December 31, 2003 consisted of the
following:
2004 2003
Discounted convertible note payable (a) $ 986 --
Note payable - current (b) 500 --
Note payable to bank -- $ 1
1,486 $ 1
Less current maturities 1,336 1
Non-current maturities of promissory notes payable $ 150 $ 0
====== ======
(a) The Company entered into a series of promissory notes with certain warrant
holders who were unable to participate in the Company's Special Warrant Offer,
as described below, due to certain exercise limitations in the Series A, Series
B, Series C-1, and Series C-2 Warrants. These holders have accepted promissory
notes issued by the Company that will be cancelled upon the receipt of
stockholder approval to remove the warrant exercise limitations. Upon the
receipt of stockholder approval, the warrant holders to whom the promissory
notes were issued will tender the promissory notes to the Company in full
consideration for the exercise price of their warrants. As a result, there will
be no remaining Series A or Series B Warrants outstanding, and Series C-1
Warrants to purchase approximately 0.7 million shares and Series C-2 Warrants to
purchase approximately 0.7 million shares will remain outstanding. The Company
shall pay interest on the unpaid principal balance of the promissory notes at
the rate of 6% per annum.
(b) See deferred contract obligations, above.
10
5. INDEMNIFICATIONS
Officer and Director Indemnifications
As permitted under Delaware law and to the maximum extent allowable under that
law, the Company has agreements whereby the Company indemnifies its current and
former officers and directors for certain events or occurrences while the
officer or director is, or was serving, at the Company's request in such
capacity. These indemnifications are valid as long as the director or officer
acted in good faith and in a manner that a reasonable person believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements is
unlimited; however, the Company has a director and officer insurance policy that
limits the Company's exposure and enables the Company to recover a portion of
any future amounts paid. As a result of the Company's insurance policy coverage,
the Company believes the estimated fair value of these indemnification
obligations is minimal.
Other Indemnifications
As is customary in the Company's industry, as provided for in local law in the
U.S. and other jurisdictions, many of the Company's standard contracts provide
remedies to its customers, such as defense, settlement, or payment of judgment
for intellectual property claims related to the use of our products. From time
to time, the Company indemnifies customers against combinations of loss,
expense, or liability arising from various trigger events related to the sale
and the use of our products and services. In addition, from time to time, the
Company also provides protection to customers against claims related to
undiscovered liabilities or additional product liability. In the Company's
experience, claims made under such indemnifications are rare and the associated
estimated fair value of the liability is not material.
6. STOCKHOLDERS' EQUITY
Effective July 19, 2004, the Company effected a one for thirty reverse stock
split of its authorized Common Stock, thereby reducing the number of shares of
Common Stock from 700 million to 23,333,333 shares, $0.0001 par value (the
"Common Stock"). All share and per share information included in this report
gives effect to the reverse stock split.
The authorized capital stock includes 2.0 million shares of Preferred Stock,
$0.0001 par value (the "Preferred Stock"), including 500,000 shares of which
have been designated Series A Junior Participating Preferred Stock (the "Series
A") pursuant to the Stockholder Rights Agreement, 1,000,000 shares as Series B
Convertible Preferred Stock (the "Series B Preferred Stock"), 10,000 shares as
Series C Convertible Preferred Stock (the "Series C Preferred Stock"), and 2,000
shares of its Preferred Stock as Series D Convertible Preferred Stock (the
"Series D Preferred Stock").
COMMON STOCK
In January 2003, the Company sold 0.7 million shares of Common Stock to an
existing stockholder at a per share price of $5.40, for aggregate net proceeds
of $307,000.
For the six-month period ended June 30, 2004, 2,160,181 shares of Common Stock
were issued upon conversion of the Company's Series C Preferred Stock and
approximately 1.4 million shares of Common Stock were issued upon completion of
the Special Warrant Offer.
11
SPECIAL WARRANT OFFER
Under the terms of the special warrant offer (the "Special Warrant Offer"), for
a period of 15 days ending June 25, 2004, the Company temporarily lowered the
exercise price of its issued and outstanding Series A, B, and C-2 Warrants to
$.05 per share. The exercise prices of the Series A, B and C-2 Warrants prior to
the Special Warrant Offer, and following its conclusion, are $0.12, $0.20, and
$0.18, respectively. In order to exercise the Series C-2 Warrants at the reduced
exercise price of $0.05 per share, the holders of these Warrants were required
to exercise the same number of Series C-1 Warrants via a cashless exercise
provision whereby the holder received one share of the Company's Common Stock
for every two Series C-1 Warrants exercised. The participating holders of the
Series A and B warrants were allowed to exercise up to one-half of their
Warrants at the reduced exercise price of $0.05 per share if they also exercised
the remaining half of their Warrants via a cashless exercise provision whereby
the holder received one share of the Company's Common Stock for every two
Warrants exercised.
In connection with the Special Warrant Offer, the Company issued approximately
1.4 million shares of Common Stock in the quarter ended June 30, 2004 and raised
working capital of approximately $2.6 million. The Company has an obligation to
issue approximately 1.2 million shares to the noteholders, which, as discussed
in Note 4, will occur upon stockholder approval to remove certain warrant
exercise limitations.
SERIES B CONVERTIBLE PREFERRED STOCK
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
approximately 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 a number of shares of the Company's Common Stock equal to
the stated value divided by $6.00. As of December 31, 2003 and June 30, 2004,
there are approximately 108,406 shares of Series B Convertible Preferred Stock
outstanding. The following table reflects changes in Series B Preferred Stock
during the quarterly period ended June 30, 2004:
Shares Amount
(In thousands)
------- -------
Balances as of December 31, 2003
Preferred Stock accretions to accrete the carrying 108,406 $ 1,361
value to the redemption value
Preferred Stock accretions to accrete the carrying value
to the redemption value -- $ 104
------- -------
Balances as of June 30, 2004 108,406 $ 1,465
======= =======
(a) The Company accretes its Series B Preferred Stock to redemption value
through periodic charges to retained earnings.
(b) The Series B Preferred Stock is classified as a mezzanine security,
outside of stockholders' equity in the accompanying balance sheet due to
the cash redemption provisions noted below. Under Statements of Financial
Accounting Standards No. 150, this security would have been classified as
equity.
(c) As of June 30, 2004, outstanding Series B Preferred Stock is convertible
into 381,916 shares of Common Stock.
If declared, the holders of the Series B Convertible Preferred Stock shall be
entitled to receive dividends payable out of funds legally available. Holders of
Series B Convertible Preferred Stock shall share pro rata in all dividends and
other declared distributions. The basis of distribution shall be the number of
shares of Common Stock that the holders would hold if all of the outstanding
shares of Series B Convertible Preferred Stock had converted into Common Stock.
Any time after January 31, 2004 and subject to certain limitations, the Company
may require the holders of Series B Convertible Preferred Stock to convert all
outstanding shares of Series B Convertible Preferred Stock into shares of Common
Stock, in accordance with the optional conversion formula, and all of the
following conditions are met:
o Closing bid price of the Common Stock for 10 consecutive trading
days prior to delivery of the mandatory conversion Notice equals or
exceeds $12.00;
o Company shall have filed a registration statement covering all
shares of Common Stock issuable upon conversion of the Series B
Convertible Preferred Stock, declared effective by the SEC, and
continuing effectiveness through and including the date of the
mandatory conversion;
12
o All shares of Common Stock issuable upon conversion of Series B
Convertible Preferred Stock are authorized and reserved for
issuance; registered for resale under the Securities Act; and listed
on the Bulletin Board or other national exchange; and
o All amounts, if any, accrued or payable under the Certificate of
Designation, Rights and Preferences of the Series B Convertible
Preferred Stock ("Certificate of Designation") shall have been paid.
Upon the occurrence of the following events, the holders of Series B Convertible
Preferred Stock may request the Company to purchase their shares of Series B
Convertible Preferred Stock for cash:
o Company fails to remove any restrictive legend on any Common Stock
certificate issued to Series B Convertible Preferred Stock holders
upon conversion as required by the Certificate of Designation;
o Company makes an assignment for creditors or applies for appointment
of a receiver for a substantial part of its business/property or
such receiver is appointed;
o Bankruptcy, insolvency, reorganization or liquidation proceedings
shall be instituted by or against the Company;
o Company sells substantially all of its assets;
o Company merges, consolidates or engages in a business combination
with another entity that is required to be reported pursuant to Item
1 of Form 8-K (unless the Company is the surviving entity and its
capital stock is unchanged);
o Company engages in transaction(s) resulting in the sale of
securities whereby such person or entity would own greater than 50%
of the outstanding shares of Common Stock of the Company (on a
fully-diluted basis);
o Company fails to pay any indebtedness of more than $250,000 to a
third party, or cause any other default which would have a material
adverse effect on the business or its operations.
The Series B Convertible Preferred Stock ranks senior to the Common Stock, the
Series A Preferred Stock and any class or series of capital stock of the Company
created thereafter. The consent of the majority holders of the Series B
Convertible Preferred Stock is required to create any securities that rank
senior or pari passu to the Series B Convertible Preferred Stock. Upon a
liquidation event, any securities senior to the Series B Convertible Preferred
Stock shall receive a distribution prior to the Series B Convertible Preferred
Stock and pursuant to the rights, preferences and privileges thereof, and the
Series B Convertible Preferred Stock shall receive the liquidation preference
with respect to each share. If the assets and funds for distribution are
insufficient to permit the holders of Series B Convertible Preferred Stock and
any pari passu securities to receive their preferential amounts, then the assets
shall be distributed ratably among such holders in proportion to the ratio that
the liquidation preference payable on each share bears to the aggregate
liquidation preference payable on all such shares. If the outstanding shares of
Common Stock are increased/decreased by any stock splits, stock dividends,
combination, reclassification, reverse stock split, etc., the conversion price
shall be adjusted accordingly. Upon certain reclassifications, the holders of
Series B Convertible Preferred Stock shall be entitled to receive such shares
that they would have received with respect to the number of shares of Common
Stock into which the Series B Convertible Preferred Stock would have converted.
If the Company issues any securities convertible for Common Stock or options,
warrants or other rights to purchase Common Stock or convertible securities pro
rata to the holders of any class of Common Stock, the holders of Series B
Convertible Preferred Stock shall have the right to acquire those shares to
which they would have been entitled upon the conversion of their shares of
Series B Convertible Preferred Stock into Common Stock. The Series B Convertible
Preferred Stock does not have voting rights.
SERIES C CONVERTIBLE PREFERRED STOCK AND WARRANTS
In October and December 2003, P-Com issued approximately 10,000 shares of Series
C Convertible Preferred Stock with a stated value of $1,750 per share, together
with warrants to purchase approximately 4.6 million shares of Common Stock. Each
share of Series C Convertible Preferred Stock converts into a number of shares
of the Company's Common Stock equal to the stated value divided by $3.00. As of
December 31, 2003 and June 30, 2004, there are approximately 9,942 shares and
6,239 shares, respectively, of Series C Convertible Preferred Stock outstanding.
The following table reflects changes in Series C Preferred Stock during the
quarterly period ended June 30, 2004:
13
Shares Amount
(In thousands)
--------- ---------
Balances as of December 31, 2003
Preferred Stock accretions to accrete the carrying value 9,942 $ 870
to the redemption value
Conversion of Series C Preferred Stock into 2,160,181 (3,703) 490)
shares of Common Stock
Preferred Stock accretions to accrete the carrying value 1,344
to the redemption value
--------- ---------
Balances as of June 30, 2004 6,239 $ 1,724
========= =========
(a) The Company accretes its Series C Preferred Stock to redemption value
through periodic charges to retained earnings.
(b) The Series C Preferred Stock is classified as a mezzanine security,
outside of stockholders' equity in the accompanying balance sheet due to
the cash redemption provisions noted below. Under Statements of Financial
Accounting Standards No. 150, this security would have been classified as
equity.
(c) As of June 30, 2004, outstanding Series C Preferred Stock is convertible
into approximately 3,639,572 shares of Common Stock.
Holders of Series C Convertible Preferred Stock are entitled to receive, out of
legally available funds, dividends at the rate of 6% per annum beginning on the
first anniversary of their date of issuance and 8% per annum beginning on the
second anniversary of their date of issuance. Dividends are payable
semi-annually, either in cash or shares of P-Com Common Stock.
Each share of Series C Convertible Preferred Stock is convertible into a number
of shares of Common Stock equal to the stated value, plus any accrued and unpaid
dividends, divided by an initial conversion price of $3.00. This conversion
price is subject to adjustment for any stock splits, stock dividends or similar
transactions. The conversion price is also subject to adjustment in the event
that P-Com makes a dilutive issuance of Common Stock or other securities that
are convertible into or exercisable for Common Stock at an effective per share
purchase price that is less than the conversion price of the Series C Preferred
Stock in effect at the time of the dilutive issuance. The holders of Series C
Preferred Stock may convert their shares into shares of Common Stock at any
time. However, no holder of Series C Preferred Stock may convert its shares into
shares of Common Stock if the conversion would result in the holder or any of
its affiliates, individually or in the aggregate, beneficially owning more than
9.999% of P-Com's outstanding Common Stock. In the event a holder is prohibited
from converting into Common Stock under this provision due to the 9.999%
ownership limitation discussed above, the excess portion of the Series C shall
remain outstanding, but shall cease to accrue a dividend.
Subject to limitations above, the Series C Convertible Preferred Stock is also
mandatorily convertible at the option of P-Com 180 days after the effective date
of a registration statement covering the shares of Common Stock issuable upon
the conversion of the Series C Convertible Preferred Stock, and upon the
satisfaction of the following conditions: (i) for ten consecutive days, the
Common Stock closes at a bid price equal to or greater than $6.00; (ii) the
continued effectiveness of the registration statement; (iii) all shares of
Common Stock issuable upon conversion of the Series C Convertible Preferred
Stock and Series C-1 and Series C-2 Warrants are authorized and reserved for
issuance, are registered under the Securities Act for resale by the holders, and
are listed or traded on the OTC Bulletin Board or other national exchange; (iv)
there are no uncured redemption events; and (v) all amounts accrued or payable
under the Series C Convertible Preferred Stock Certificate of Designation or
registration rights agreement have been paid. As of June 30, 2004, approximately
3,703 shares of Series C Convertible Preferred Stock had been converted into
approximately 2,160,181 shares of Common Stock and approximately 6,239 shares of
Series C Convertible Preferred Stock remained outstanding and approximately
900,000 of the Series C-1 Warrants and 900,000 of the Series C-2 Warrants had
been exercised. The shares of Series C Convertible Preferred Stock that remain
outstanding are convertible into approximately 3,639,572 shares of Common Stock,
subject to the limitation on conversion described above. The number of shares of
Common Stock issuable upon conversion of the Series C Convertible Preferred
Stock and exercise of the Series C-1 and Series C-2 Warrants are subject to
adjustment for stock splits, stock dividends and similar transactions and for
certain dilutive issuances.
14
The investors of Series C were issued 233 Series C-1 Warrants and 233 Series C-2
Warrants for every share of Series C purchased. The C-1 Warrant shall have a
term of five years and an initial exercise price of $4.50 per warrant,
increasing to $5.40 per warrant beginning February 6, 2005. The Series C-2
Warrant shall have a term of five years and an initial exercise price of $5.40
per warrant, increasing to $6.60 per warrant beginning August 6, 2005. Subject
to an effective registration statement, beginning twenty-four (24) months after
the Effective Date, the Company may redeem the Series C-1 Warrants for $0.03 per
Warrant if the Closing Bid Price of the Company's Common Stock is equal to or
greater than $10.80 for ten (10) consecutive trading days. Beginning February 6,
2007, the Company may redeem the Series C-2 Warrants for $0.03 per Warrant if
the Closing Bid Price of the Company's Common Stock is equal to or greater than
$13.20 for ten (10) consecutive trading days. The Conversion Price of the Series
C and the Exercise Price of the C-1 and C-2 Warrants shall be subject to
adjustment for issuances of Common Stock at a purchase price less than the
then-effective Conversion Price or Exercise Price, based on weighted average
anti-dilution protection, subject to customary carve-outs.
If P-Com completes a private equity or equity-linked financing (the "New
Financing"), the Series C holders may exchange any outstanding Series C at 100%
of face value for the securities issued in the New Financing. Such right shall
be voided in the event the Company raises $5.0 million of additional equity
capital at a price of not less than $3.60 per share.
For any equity or equity-linked private financing consummated within 12 months
after the closing of the Series C Financing, the investors in the Series C shall
have a right to co-invest in any private financing up to fifty (50%) percent of
the dollar amount invested in the Series C Financing. The investors shall have
five (5) trading days to respond. This co-investment provision shall not apply
to the issuance of stock in situations involving bona-fide strategic
partnerships, acquisition candidates and public offerings.
Upon the occurrence of the following events, (each a "Redemptive Event"), the
holders of Series C Preferred Stock may require the Company to purchase their
shares of Series C Preferred Stock for cash:
o the Company fails to remove any restrictive legend on any Common
Stock certificate issued to Series C Preferred Stock holders upon
conversion as required by the Certificate of Designation and such
failure continues uncured for five business days after receipt of
written notice;
o the Company makes an assignment for the benefit of creditors or
applies for appointment of a receiver for a substantial part of its
business/property or such receiver is appointed;
o bankruptcy, insolvency, reorganization or liquidation proceedings
shall be instituted by or against the Company and shall not be
dismissed within 60 days of their initiation;
o the Company sells substantially all of its assets;
o the Company merges, consolidates or engages in a business
combination with another entity that is required to be reported
pursuant to Item 1 of Form 8-K (unless the Company is the surviving
entity and its capital stock is unchanged);
o the Company engages in transaction(s) resulting in the sale of
securities to a person or entity whereby such person or entity would
own greater than fifty percent (50%) of the outstanding shares of
Common Stock of the Company (calculated on a fully-diluted basis);
o the Company fails to pay any indebtedness of more than $250,000 to a
third party, or cause any other default which would have a material
adverse effect on the business or its operations.
15
The Series C Preferred Stock ranks senior to the Common Stock, the Series A
Preferred Stock, the Series B Preferred Stock and ranks pari passu with the
Series D Preferred Stock. The consent of the majority holders of the Series C
Preferred Stock is required to create any securities that rank senior or pari
passu to the Series C Preferred Stock. If P-Com liquidates, dissolves or winds
up, the holders of Series C Preferred Stock and Series D Preferred Stock are
entitled to receive the stated value of their shares plus all accrued and unpaid
dividends prior to any amounts being paid to the holders of Series B Preferred
Stock and P-Com Common Stock. In addition, the holders of Series C Preferred
Stock are entitled to share ratably together with the holders of the Series D
Preferred Stock, the Series B Convertible Preferred Stock and P-Com Common Stock
in all remaining assets after the satisfaction of all other liquidation
preferences. If the assets and funds for distribution are insufficient to permit
the holders of Series C Preferred Stock and any pari passu securities to receive
their preferential amounts, then the assets shall be distributed ratably among
such holders in proportion to the ratio that the liquidation preference payable
on each share bears to the aggregate liquidation preference payable on all such
shares. If the outstanding shares of Common Stock are increased/decreased by any
stock splits, stock dividends, combination, reclassification, reverse stock
split, etc., the conversion price shall be adjusted accordingly.
Upon certain reclassifications, the holders of Series C Preferred Stock shall be
entitled to receive such shares that they would have received with respect to
the number of shares of Common Stock into which the Series C Preferred Stock
would have converted. If the Company issues any securities convertible for
Common Stock or options, warrants or other rights to purchase Common Stock or
convertible securities pro rata to the holders of any class of Common Stock, the
holders of Series C Preferred Stock shall have the right to acquire those shares
to which they would have been entitled upon the conversion of their shares of
Series C Preferred Stock into Common Stock.
The holders of Series C Preferred Stock are entitled to vote together with the
holders of the Series D Preferred Stock and Common Stock, as a single class, on
all matters submitted to a vote of P-Com's stockholders. The holders of Series C
Preferred Stock are entitled to a number of votes equal to the number of shares
of P-Com Common Stock that would be issued upon conversion of their shares of
Series C Preferred Stock.
SERIES D CONVERTIBLE PREFERRED STOCK
P-Com has designated 2,000 shares of its Preferred Stock as Series D Convertible
Preferred Stock. In December 2003, P-Com issued the 2,000 shares of Series D
Convertible Preferred Stock to redeem $2 million of notes payable assumed from
the SPEEDCOM asset acquisition. The Series D Preferred Stock has a stated value
of $1,000 per share. Each share of Series D Preferred Stock is convertible into
a number of shares of Common Stock equal to the stated value divided by an
initial conversion price of $4.50. This conversion price is subject to
adjustment for any stock splits, stock dividends or similar transactions. The
holders of Series D Preferred Stock may convert their shares into shares of
Common Stock at any time. However, no holder of Series D Preferred Stock may
convert its shares into shares of Common Stock if the conversion would result in
the holder or any of its affiliates, individually or in the aggregate,
beneficially owning more than 9.999% of P-Com's outstanding Common Stock. As of
December 31, 2003 and June 30, 2004, there are approximately 2,000 shares of
Series D Convertible Preferred Stock outstanding. The following table reflects
changes in Series D Preferred Stock during the quarterly period ended June 30,
2004:
Amount
Shares (In thousands)
------ --------------
Balances as of December 31, 2003 2,000 $2,000
------ ------
Balances as of June 30, 2004 2,000 $2,000
====== ======
(a) The Series D Preferred Stock is classified as a mezzanine security,
outside of stockholders' equity in the accompanying balance sheet due to
the cash redemption provisions noted below. Under Statements of Financial
Accounting Standards No. 150, this security would have been classified as
equity.
(b) As of June 30, 2004, outstanding Series D Preferred Stock is convertible
into 444,444 shares of Common Stock.
16
Holders of Series D Preferred Stock are entitled to share pro-rata, on an
as-converted basis, in any dividends or other distributions that may be declared
by the board of directors of P-Com with respect to the Common Stock. If P-Com
liquidates, dissolves or winds up, the holders of Series D Preferred Stock and
the holders of Series C Preferred Stock are entitled to receive the stated value
of their respective shares plus all accrued and unpaid dividends, pari passu,
and prior to any amounts being paid to the holders of Series B Preferred Stock
and P-Com Common Stock. In addition, the holders of Series D Preferred Stock are
entitled to share ratably together with the holders of Series C Preferred Stock,
Series B Preferred Stock and P-Com Common Stock in all remaining assets after
the satisfaction of all other liquidation preferences.
The holders of Series D Preferred Stock are entitled to certain rights and
preferences with respect to the holders of P-Com Common Stock. The holders of
Series D Preferred Stock are entitled to vote together with the holders of P-Com
Common Stock and holders of Series C Preferred Stock, as a single class, on all
matters submitted to a vote of P-Com's stockholders. The holders of Series D
Preferred Stock are entitled to a number of votes equal to the number of shares
of P-Com Common Stock that would be issued upon conversion of their shares of
Series D Preferred Stock.
Upon the occurrence of the following events, (each a "Redemptive Event"), the
holders of Series D Preferred Stock may require the Company to purchase their
shares of Series D Preferred Stock for cash:
o the Company fails to remove any restrictive legend from certificates
representing shares of P-Com Common Stock that are issued to holders
who convert their shares of Series D Preferred Stock;
o the Company makes an assignment for the benefit of creditors, or
applies for or consents to the appointment of a receiver or trustee;
o Any bankruptcy, insolvency, reorganization or other proceeding for
the relief of debtors is instituted by or against P-Com and is not
dismissed within 60 days;
o the Company sells substantially all of its assets, merges or
consolidates with any other entity or engages in a transaction that
results in any person or entity acquiring more than 50% of P-Com's
outstanding Common Stock on a fully diluted basis;
o the Company fails to pay when due any payment with respect to any of
its indebtedness in excess of $250,000;
o the Company breaches any agreement for monies owed or owing in an
amount in excess of $250,000 and the breach permits the other party
to declare a default or otherwise accelerate the amounts due under
that agreement; and
o the Company permits a default under any agreement to remain uncured
and the default would or is likely to have a material adverse effect
on the business, operations, properties or financial condition of
P-Com.
7. 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 lines. In the second quarter of 2003, the Company recorded a $2.1
million inventory related charge to cost of sales for its point-to-multipoint,
Tel-link point-to-point and Air-link spread spectrum inventories. In the 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. As a result of this adjustment, there
is no remaining net book value of property and equipment related to the
point-to-multipoint product line.
17
A summary of inventory reserve activities is as follows:
Inventory
Reserve
--------
Balance at January 1, 2004 $ 26,178
Additions charged to Statement of Operations 1,147
Deductions from reserves (1,797)
--------
Balance at June 30, 2004 $ 25,528
--------
8. LOSS ON DISCONTINUED OPERATIONS
In the first quarter of 2003, the Company committed to a plan to sell its
services business, P-Com Network Services, Inc. ("PCNS"). Accordingly, beginning
in the first quarter of 2003, this business is reported as a discontinued
operation and the financial statement information related to this business has
been presented on one line, titled "Discontinued Operations" in the Consolidated
Statements of Operations for the three-month and six-month period ended June 30,
2004 and 2003.
Summarized results of PCNS are as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
------- ------- ------- -------
Sales $ -- $ 119 $ -- $ 1,065
------- ------- ------- -------
Loss from operations $ -- $ (248) $ -- $ (702)
Loss on disposition
of discontinued operations -- (1,519) (40) (2,923)
------- ------- ------- -------
-- (1,767) (40) (3,625)
Provision for income taxes -- -- -- --
------- ------- ------- -------
Net profit (loss) $ -- $(1,767) $ (40) $(3,625)
======= ======= ======= =======
The assets and liabilities of the discontinued operations consisted of the
following (in thousands):
June 30, December 31,
2004 2003
--------- ------------
Total assets related to discontinued operations
Cash $ -- $ --
Accounts receivable -- --
Inventory -- --
Prepaid expenses and other assets -- --
Property plant and equipment -- --
Other assets --
---- ----
$ -- $ --
==== ====
Total liabilities related to discontinued operations
Accounts payable $ -- $183
Other accrued liabilities 284 130
Loan payable to bank -- --
---- ----
$284 $313
==== ====
18
9. SALES BY GEOGRAPHIC REGION AND CONCENTRATIONS
The breakdown of product sales by geographic region is as follows (in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
------- ------- ------- -------
North America $ 582 $ 475 $ 1,061 $ 759
United Kingdom 1,485 1,619 3,500 3,196
Europe 1,014 1,088 2,414 1,720
Asia 573 1,210 1,043 2,816
Latin America and other regions 3,263 573 5,736 1,091
------- ------- ------- -------
$ 6,917 $ 4,965 $13,754 $ 9,582
======= ======= ======= =======
During the six-month period ended June 30, 2004 and 2003, four customers
accounted for a total of 63% and 53% of our total sales, respectively.
10. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of the Company's reported net income
(loss) and the currency translation adjustment associated with our foreign
operations. Comprehensive income (loss) was $5.6 million and $(5.7) million for
the three months ended June 30, 2004 and 2003, respectively. Comprehensive
income (loss) was $2.3 million and $(16.1) million for the six months ended June
30, 2004 and 2003, respectively.
11. CONTINGENCIES
In June 2000, two former consultants to P-Com Italia S.p.A. filed a complaint
against P-Com Italia in the Civil Court of Rome, Italy seeking payment of
certain consulting fees allegedly due the consultants totaling approximately
$615,000. The Civil Court of Rome has appointed a technical consultant in order
to determine the merit of certain claims made by the consultants. P-Com believes
that the claims are wholly without merit and, while no assurances can be given,
that the claims will be rejected.
12. SALE OF ASSETS
On June 1, 2004, P-Com restructured its Italian operations and sold its Italian
facility in Tortona, Italy. As part of the restructuring, P-Com Italia S.p.A.
("P-Com Italia") entered into an Asset Transfer Agreement with Nuove Officine
Radio Tortona S.r.l. ("NORT") whereby P-Com Italia sold its facility and certain
inventory in Tortona, Italy to NORT for approximately $736,000 (the "Asset
Transfer"). In connection with the Asset Transfer, P-Com also entered into a
Repair Service Agreement with NORT, pursuant to which P-Com Italia outsourced
certain operations to NORT. In connection with the Asset Transfer, P-Com Italia
transferred certain of its employees to NORT including all employment
liabilities and accruals associated with such employees. P-Com received
approximately $829,000 cash from the sale and restructuring and realized a gain
of $24,000 in the quarter ended June 30, 2004.
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.
19
Overview. We supply broadband wireless equipment and services for use in
telecommunications and enterprise 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. Additionally, prior to May
2003, 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. During the quarter ended March 31, 2003, we decided to exit
the services business as part of our strategy to reduce expenses and focus on
our product business.
On December 10, 2003, P-Com acquired the Wave Wireless Networking division of
SPEEDCOM Wireless Corporation ("SPEEDCOM") and related assets, in consideration
for the issuance to SPEEDCOM of 2,116,666 shares of P-Com's Common Stock, and
the assumption of certain of its liabilities, including approximately $1.58
million in notes representing loans by P-Com to SPEEDCOM. Wave Wireless
Networking ("Wave Wireless") specializes in manufacturing, configuring and
delivering custom broadband wireless access networking equipment, including the
SPEEDLAN family of wireless Ethernet bridges and routers, for business and
residential customers internationally. The acquisition provides P-Com with
complementary license - exempt point - to - point and point - to - multipoint
wireless access systems for private networks and security and surveillance
applications.
While management believes that the worldwide slowdown in the telecommunications
equipment industry has subsided, it has yet to show significant signs of
recovery. As a result, our product sales have not recovered to levels necessary
to achieve profitability, despite an increase in product sales of $2.0 million
or 39% in the second quarter of 2004 compared to the same period in the previous
year. Although our sales have increased, we continue to be burdened by high
operating and other legacy costs. As a result, we continue to focus on reducing
our operating and other expenses by, among other things, consolidating our
facilities, negotiating lower costs for materials, and outsourcing our product
manufacturing. These cost reduction efforts, which include reductions resulting
from the Company's exit from its services business, and reductions in personnel,
have allowed us to reduce our operating loss by $3.9 million during the second
quarter of 2004, or 66% compared to the same period in the previous year. The
Company recorded net income of $6.3 million, which is $12.3 million higher than
the corresponding period in the previous year. The income reported in the
quarter ended June 30, 2004 was principally due to non-cash, non-recurring gains
resulting from vendor settlements.
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.
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 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.
20
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, Other Than Goodwill. 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.
Impairments of Goodwill. Goodwill resulting from the purchase of Wave Wireless
will not be amortized into operations. Rather, such amounts will be tested for
impairment at least annually. This impairment test is calculated at the
reporting unit level, which, for P-Com is at the enterprise level. The annual
goodwill impairment test has two steps. The first identifies potential
impairments by comparing the fair value of the Company, as determined using the
price of its Common Stock as reported on the OTC Bulletin Board of the NASDAQ,
with its carrying value, including goodwill. If the fair value exceeds the
carrying amount, goodwill is not impaired and the second step is not necessary.
If the carrying value exceeds the fair value, the second step calculates the
possible impairment loss by comparing the implied fair value of goodwill with
the carrying amount. If the implied goodwill is less than the carrying amount, a
write-down will be recorded. In the event that management of P-Com determines
that the value of goodwill has become impaired using this approach, an
accounting charge for the amount of the impairment will be recorded. No
impairment of goodwill resulted from this measurement approach immediately
following the Wave Wireless acquisition. The Company will perform this test
annually, on the first day of the fourth fiscal quarter of each year.
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, 2004 and 2003, approximately 69% and 63%, respectively, of trade
accounts receivable represent amounts due from four and five customers,
respectively.
RESULTS OF OPERATIONS
Sales. For the three months ended June 30, 2004, total sales were
approximately $6.9 million as compared to $5.0 million for the same period in
the prior year. For the six months ended June 30, 2004, total sales were
approximately $13.8 million as compared to $9.6 million for the same period in
the prior year. Despite the increase in revenue in the quarter ended June 30,
2004 compared to the comparable period in 2003, our sales continue to be
adversely affected by the continuing capital expenditure control measures
implemented by North American and European telecommunication companies, and
heightened competition. As a result, a substantial portion of our product sales
during the quarter ended June 30, 2004 came from Tel-Link out-of-warranty repair
activities, which generated approximately $2.6 million of our sales in the
second quarter of 2004, compared to $2.9 million in the comparable period in
2003. During the six months ended June 30, 2004, Tel-Link out-of-warranty repair
activities generated approximately $6.1 million of our sales, compared to $5.0
million in the comparable period in 2003.
21
During the six months ended June 30, 2004, approximately 29% of our sales were
to the Latin American market to a single wireless carrier in that market, and
13% of our sales were to the Asia-Pacific Rim areas and the Middle East markets
combined. During the same period in 2003, we generated 3% of our sales to the
Latin American market and 33% of our sales in the Asia-Pacific Rim and the
Middle East combined. The United Kingdom market contributed 25% of the Company's
revenue in the six months ended June 30, 2004, compared to 33% in the same
period in 2003. Our next largest market is the European continent, which
generated approximately 18% of the Company's revenue in the six months ended
June 30, 2004 and in the six months ended June 30, 2003. The decrease in sales
to the Asia-Pacific Rim areas and the Middle East in the six-month period ended
June 30, 2004, compared to the comparable period in 2003 is principally due to a
substantial decrease in sales to China. This decrease is primarily attributable
to decreased sales to the Company's product reseller in the China market. The
Company did not sell any product to this reseller in the second quarter of 2004,
and it is currently anticipated that sales to the China market through this
product reseller will not return to levels experienced in prior quarters in the
near term.
The substantial increase in sales to the Latin American market in the six months
ended June 30, 2004 is attributable to sales to a leading wireless carrier in
Latin America, which began ordering product from the Company beginning in the
third quarter of 2003.
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 continued
worldwide weakness in the telecommunications industry is significantly affecting
our customers' capital expenditures and consequently our revenue levels.
Gross Profit (Loss). Gross profit for the three months ended June 30, 2004
and 2003, was $2.0 million and $0.8 million, respectively, or 29% and 17% of
sales in each of the respective quarters. Excluding a $0.4 million inventory
charge and a $0.5 million one-time benefit from Tel-Link out-of-warranty repair
activities, the gross profit margins for the quarter ended June 30, 2004 would
have been 27%. The gross profit margins for the quarter ended June 30, 2004
improved compared to the gross profit margins for the quarter ended June 30,
2003 because of reductions in manufacturing overhead expenses which were
partially offset by decreases in the average selling price of point-to-point
systems.
Gross profit (loss) for the six months ended June 30, 2004 and 2003 was $3.7
million and ($2.2) million, respectively, or 27% and (23%) of sales in each of
the respective quarters. Excluding a $0.4 million inventory charge and a $0.5
million one-time benefit from Tel-Link out-of-warranty repair activities, the
gross profit margins for the six months ended June 30, 2004 would have been 26%.
Excluding $3.6 million inventory and related charges, gross profit margins for
the six months ended June 30, 2003 would have been 15%. The gross profit margins
for the six months ended June 30, 2004 improved compared to the gross profit
margins for the six months ended June 30, 2003 because of reductions in
manufacturing overhead expenses which were partially offset by decreases in the
average selling price of point-to-point systems.
The Company's gross margins during the first six months of 2004 also benefited
from sales of Wave Wireless products, which sell at a higher gross margin. The
Company acquired that product line in the fourth quarter of 2003.
Research and Development. For the three months ended June 30, 2004 and
2003, research and development ("R&D") expenses were approximately $1.3 million
and $1.7 million, respectively. For the six months ended June 30, 2004 and 2003,
R&D expenses were approximately $2.5 million and $3.6 million, respectively. As
a percentage of sales, research and development expenses were at 18% for the
three months ended June 30, 2004, compared to 34% for the three months ended
June 30, 2003. The percentage decrease is due to significant expense reduction
efforts as mentioned above.
22
Selling and Marketing. For the three months ended June 30, 2004 and 2003,
sales and marketing expenses were approximately $1.7 million and $0.8 million,
respectively. For the six months ended June 30, 2004 and 2003, sales and
marketing expenses were approximately $3.2 million and $1.8 million,
respectively. The increase in sales and marketing expenses during 2004 is due to
headcount additions and other related expenses, principally attributed to the
acquisition of Wave Wireless in the fourth quarter of 2004, and higher
commissions in light of increased sales. As a percentage of sales, selling and
marketing expenses were 25% for the three months ended June 30, 2004, compared
to 17% for the three months ended June 30, 2003.
General and Administrative. For the three months ended June 30, 2004 and
2003, general and administrative expenses were approximately $1.1 million and
$1.6 million, respectively. For the six months ended June 30, 2004 and 2003,
general and administrative expenses were approximately $2.3 million and $3.2
million, respectively. The decrease in general and administrative expense during
2004 is principally attributable to a realization of savings from cost reduction
efforts that continued from 2003 to 2004, including reduced consulting, legal
and other professional fees and expenses, and facilities consolidation. As a
percentage of sales, general and administrative expenses were 15% for the three
months ended June 30, 2004, compared to 31% for the three months ended June 30,
2003. The percentage decrease is due to our success in significantly reducing
our expenses throughout the year, as discussed above.
Asset Impairment and Other Restructuring Charges. In the event that
certain facts and circumstances indicate that the long-lived assets may be
impaired, an evaluation of recoverability would be performed. When an evaluation
occurs, management conducts a probability analysis based on the weighted future
undiscounted cash flows associated with the asset. The results are then compared
to the asset's carrying amount to determine if impairment is necessary. The cash
flow analysis for the property and equipment is performed over the shorter of
the expected useful lives of the assets, or the expected life cycles of our
product line. An impairment charge is recorded if the net cash flows derived
from the analysis are less than the asset's carrying value. We deem that the
property and equipment is fairly stated if the future undiscounted cash flows
exceed its carrying amount.
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 agreed to
sublet the premises from PCNS for one year beginning May 1, 2003. The terms of
the sublease required JKB to pay less than the total amount of rent due under
the terms of the master lease. As a result, the Company remained liable under
the terms of the guaranty for the deficiency, and the total obligation under the
terms of the master lease was approximately $1.5 million, and these were accrued
in the second quarter of 2003 as loss on disposal of discontinued operations. In
the third quarter of 2003, the Company reached a settlement agreement with the
landlord for $0.3 million, and wrote-back the excess accrual of $1.2 million as
a gain on discontinued operations.
Interest Expense. For the three months ended June 30, 2004 and 2003,
interest expense was $0.09 million and $0.6 million, respectively. For the six
months ended June 30, 2004 and 2003, interest expense was $0.2 million and $1.1
million, respectively. Interest expense during 2004 was primarily for interest
paid on capital leases. Interest expense during 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
certain promissory notes.
Gain on Debt Restructuring. For the three-month period ended June 30,
2004, gain on debt restructuring and other income, net, totaled $8.4 million
compared to $2.4 million for the comparable three-month period in 2003. For the
six-month period ended June 30, 2004, other income, net, totaled $8.3 million
compared to $2.5 million for the corresponding period in 2003. The higher amount
in 2004 was due to $7.5 million of gain on a settlement of a deferred contract
obligation and a $1.0 million gain on settlements with various vendors in the
second quarter of 2004.
23
Other Income, Net. For the three-month period ended June 30, 2004, other
income, net, totaled $8.4 million compared to an income of $0.9 million for the
comparable three-month period in 2003. For the six-month period ended June 30,
2004, other income, net, totaled $8.3 million compared to an income of $1.0
million for the comparable six-month period in 2003. The other income during
2004 was due primarily to a $7.5 million gain from the settlement of a deferred
contract obligation, a $1.0 million gain due to settlement of purchase
commitments with various vendors, and as a result of a loss due to foreign
exchange rates. The other income during 2003 was due primarily to a $0.8 million
gain from the sale of property and equipment.
Provision (Benefit) for Income Taxes. We have not recorded the tax benefit
of our net operating 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
Cash Used in Operations. During the six-month period ended June 30, 2004,
we used approximately $4.3 million of cash in operating activities, primarily
due to a $7.5 million non-cash gain on a deferred contract obligation and a $0.9
million non-cash gain on vendor settlements, which were offset by our net income
of $3.9 million, depreciation expenses of $0.8 million, and a $0.1 million
non-cash loss related to amortization of warrants. Significant reductions to
cash flow resulted from a net increase of $1.6 million in accounts receivable
and a net increase of $0.5 million in prepaid and other assets. These were
partially offset by a net decrease in inventories of $0.9 million assets and a
net increase in other accruals of $0.5 million.
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 decrease in inventories of $1.8 million, a net decrease in
trade receivables of $1.5 million, and a net decrease 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.
Cash from Investing Activities. During the six-month period ended June 30,
2004, we generated approximately $0.7 million of cash in investing activities,
principally due to the sale of property in Italy for $0.8 million which was
offset by $0.1 million related to asset acquisition. 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.
Cash from Financing Activities. During the six-month period ended June 30,
2004, we generated $2.3 million of cash flows from financing activities,
principally due to the receipt of $2.6 million resulting from the exercise of
certain warrants in connection with a special warrant offering, and $0.1 million
from the sale of certain common stock of SPEEDCOM held by the Company, offset by
$0.4 million in payments related to capital lease obligations. During the
six-month period ended June 30, 2003, we generated $0.5 million in cash from
financing activities, primarily from the issuance of 10% convertible promissory
notes (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.
We do not have any material commitments for capital equipment other than those
capital lease obligations reflected as other accrued liabilities on the
Company's balance sheet. At June 30, 2004, those obligations totaled
approximately $2.1 million. 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.
24
Commitments and Off Balance Sheet Instruments
Rent expense under operating leases totaled approximately $849,000 for the six
months ended June 30, 2004, and the Company expects to incur approximately the
same amount during the third and fourth quarters of 2004 under these operating
leases. The Company does not have any future non-cancelable lease payments under
operating leases.
During 2003 and 2004, the Company entered into several payment plan agreements
with vendors and creditors requiring the Company to pay off balances past due,
or amounts agreed to between the Company and such vendors or creditors under
settlement agreements. At June 30, 2004, the total amount remaining to be paid
under those agreements totaled approximately $3.1 million. Of that amount,
approximately $2.7 million is scheduled to be paid by December 31, 2004, and the
remainder in 2005. Approximately $2.1 million represent capital lease
obligations reflected as other accrued liabilities on the Company's balance
sheet. The Company does not have available adequate cash resources to satisfy
these obligations, and provide cash to finance projected operations during the
remainder of 2004. See "Current Liquidity" below for a discussion of
management's plan to satisfy the Company's requirements with respect to these
obligations, and to provide cash to finance projected operations.
Current Liquidity. As of June 30, 2004, our principal sources of liquidity
consisted of borrowing availability under the Credit Facility, and approximately
$4.9 million of cash and cash equivalents, compared to approximately $6.2
million in cash and cash equivalents at December 31, 2003. Available borrowings
under the Credit Facility at June 30, 2004 were approximately $3.1 million,
compared to $3.7 million at December 31, 2003. The Credit Facility expires on
September 25, 2004. Management is currently negotiating to renew the Credit
Facility.
At June 30, 2004, our total liabilities were approximately $13.4 million,
compared to $20.6 million at December 31, 2003. At June 30, 2004 our working
capital was approximately $4.9 million, compared to a negative working capital
of $2.1 million at December 31, 2003. To address our working capital position
and ultimately return P-Com to profitability, management's plan is to seek
additional debt or equity capital, continue its focus on increasing sales,
settle outstanding obligations, control general and operating expenses, and
reduce the cost of goods sold. Considering the uncertainty regarding P-Com's
ability to materially increase sales, and given P-Com's deteriorating cash
position, P-Com's known and likely cash requirements in 2004 will exceed
available cash resources. As a result of this condition, management is currently
seeking additional debt or equity financing. P-Com will also be required to
borrow from its existing Credit Facility in order to satisfy its liquidity
requirements for the remainder of 2004, although available borrowings under the
Credit Facility are likely to be inadequate to satisfy P-Com's working capital
requirements. The Credit Facility expires on September 25, 2004.
If P-Com fails to (i) renew the Credit Facility; (ii) obtain additional debt or
equity financing; (iii) generate sufficient revenues from new and existing
products sales; (iv) diversify its customer base; (v) decrease costs of goods
sold, and achieve higher operating margins; (vi) refinance the obligation due
Agilent Financial Services of approximately $1.7 million due December 1, 2004;
(vii) negotiate agreements to settle outstanding claims; or (viii) otherwise
consummate a transaction that improves its liquidity position, the Company will
have insufficient capital to continue its operations. Without sufficient capital
to fund its operations, P-Com will no longer be able to continue as a going
concern. P-Com's independent accountants' opinion on P-Com's consolidated
financial statements for the year ended December 31, 2003 included an
explanatory paragraph which raises substantial doubt about P-Com's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and clarification of recorded asset
amounts or to the amounts and classification of liabilities that may be
necessary if P-Com is unable to continue as a going concern.
25
CERTAIN FACTORS AFFECTING THE COMPANY
OUR CURRENT BUSINESS AND FINANCIAL CONDITION CHALLENGE OUR ABILITY TO CONTINUE
AS A GOING CONCERN.
Our core business product sales are still significantly below levels necessary
to achieve positive cash flow. From inception to June 30, 2004, our aggregate
net loss is approximately $360.8 million. Our cash position has declined to $4.9
million at June 30, 2004, and is deteriorating. Although we have positive
working capital of $4.9 million as of June 30, 2004, P-Com's known and likely
cash requirements in 2004 will exceed available cash resources. Our short-term
liquidity could disrupt our supply chain, and result in our inability to
manufacture and deliver our products, which would adversely affect our results
of operations.
Our independent accountants' opinion on our 2003 consolidated financial
statements includes an explanatory paragraph indicating substantial doubt about
our ability to continue as a going concern. To continue as a going concern, we
will have to increase our sales, decrease costs and possibly induce creditors to
forebear or to convert to equity, raise additional equity financing, and/or
raise new debt financing. We may not accomplish these tasks.
P-COM CANNOT SUSTAIN ITSELF AT THE CURRENTLY DEPRESSED SALES LEVELS.
A continued 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. We do not believe that our
core products sales levels can sufficiently recover while an industry-wide
slowdown in demand persists. Until product sales levels can sufficiently
recover, our business, financial condition and results of operations will
continue to be adversely affected. P-Com cannot sustain itself at the currently
depressed sales levels, unless it is able to substantially reduce costs, improve
gross margins on its sales, or obtain additional debt or equity financing.
OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN AND FAILURE TO
OBTAIN NEEDED FINANCING WILL AFFECT OUR ABILITY TO PURSUE FUTURE GROWTH AND HARM
OUR BUSINESS OPERATIONS, AND WILL AFFECT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
In the event the Company is unable to raise additional debt or equity financing
during the next two quarters, or otherwise improve its liquidity position, we
will not be able to continue as a going concern. The Company's 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 Company's history of substantial
operating losses could also severely limit the Company's ability to raise
additional financing. In addition, given the recent price for our Common Stock,
if we raise additional funds by issuing equity securities, additional
significant dilution to our stockholders could result.
If the Company is unable to increase sales, decrease costs, or obtain additional
equity or debt financing, the Company 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.
P-COM RELIES ON A LIMITED NUMBER OF CUSTOMERS FOR A MATERIAL PORTION OF ITS
SALES AND THE LOSS OF OR REDUCTION IN SALES TO ANY OF THOSE CUSTOMERS COULD HARM
ITS BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATION.
For the six-months ended June 30, 2004, sales to four customers accounted for
63% of total sales. The loss of any one of these customers would have an
immediate and material effect on P-Com's sales. P-Com's ability to maintain or
increase its sales in the future will depend, in part upon its ability to obtain
orders from new customers as well as the financial condition and success of its
customers, the telecommunications industry and the global economy. P-Com's
customer concentration also results in concentration of credit risk. As of June
30, 2004, four customers accounted for 69% of P-Com's total accounts receivable
balances.
26
If P-Com's customers cannot finance their purchases of P-Com's products or
services, this may adversely affect P-Com's business, operations and financial
condition. The financial difficulties of existing or potential customers may
also limit the overall demand for P-Com's 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 P-Com's
products or services, would adversely affect P-Com's business. Difficulties of
this nature have occurred in the past and P-Com believes they will occur in the
future.
P-COM FACES SUBSTANTIAL COMPETITION AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
P-Com faces intense competition worldwide from a number of leading
telecommunications equipment and technology suppliers. These companies offer a
variety of competitive products and services. These companies include Alcatel
Network Systems, Alvarion, Stratex Networks, Ceragon, Ericsson Limited, Fresnel,
Harris Corporation-Farinon Division, NEC, Sagem, Nortel, 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 P-Com. P-Com faces actual
and potential competition not only from these established companies, but also
from start - up companies that are developing and marketing new commercial
products and services. Some of P-Com's current and prospective customers and
partners have developed, are currently developing or could manufacture products
competitive with P-Com's products.
The principal elements of competition in P-Com's market and the basis upon which
customers may select its 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. P-Com expects 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 P-Com's competitors could cause a decline in sales or loss of
market acceptance of its systems. New offerings could also make P-Com's systems,
services or technologies obsolete or non-competitive. In addition, P-Com is
experiencing significant price competition and expects that competition to
intensify.
P-COM'S OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BY DETERIORATING GROSS
MARGINS.
The intense competition for P-Com's licensed products has resulted in a
continued reduction in its average selling prices. These reductions have not
been offset by a corresponding decrease in cost of goods sold, resulting in
deteriorating gross margins in some of its 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 P-Com cannot significantly reduce costs, develop new products in a timely
manner or in the event it fails to achieve increased sales of new products at a
higher average selling price, then it may be unable to offset declining average
selling prices in many of its product lines. If P-Com is unable to offset
declining average selling prices, or achieve corresponding decreases in
manufacturing operating expenses, its gross margins will continue to decline.
27
P-COM'S OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY 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. 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, therefore, P-Com typically permits
orders to be modified or canceled with limited or no penalties. In periods of
weak capital spending on the part of traditional customers, P-Com is 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 what occurred in 2000, 2001 and 2003.
P-COM DOES NOT HAVE THE CUSTOMER BASE OR OTHER RESOURCES OF MORE ESTABLISHED
COMPANIES, WHICH MAKES IT DIFFICULT FOR IT TO ADDRESS THE LIQUIDITY AND OTHER
CHALLENGES IT FACES.
Although P-Com has installed and has in operation over 150,000 radio units
globally, it has not developed a large installed base of its 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, P-Com has not built up the level of capital often
enjoyed by more established companies, so from time to time, it faces serious
challenges in financing its continued operations. P-Com may not be able to
successfully address these risks.
FAILURE TO MAINTAIN ADEQUATE LEVELS OF INVENTORY COULD RESULT IN A REDUCTION OR
DELAY IN SALES AND HARM P-COM'S RESULTS OF OPERATIONS.
P-Com's 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 P-Com keep inventory on hand to meet market
demands. Given the variability of customer needs and purchasing power, it is
difficult to predict the amount of inventory needed to satisfy customer demand.
If P-Com over-estimates or under-estimates inventory requirements to fulfill
customer needs, or if purchase orders are terminated by customers, P-Com's
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 2004.
P-COM'S LIMITED MANUFACTURING CAPACITY AND SOURCES OF SUPPLY MAY AFFECT ITS
ABILITY TO MEET CUSTOMER DEMAND, WHICH WOULD HARM ITS SALES AND DAMAGE ITS
REPUTATION.
P-Com's internal manufacturing capacity has been significantly reduced as a
result of the substantial decline in sales since 2001, and management's decision
to outsource much of the production of its products. Under certain market
conditions, such as when there is high capital spending and rapid system
deployment, P-Com's internal manufacturing capacity will not be sufficient to
fulfill customers' orders, and its contract manufacturers may not be able to
react to P-Com's demands on a timely basis. P-Com, or its contract manufacturers
failure to manufacture, assemble and ship systems and meet customer demands on a
timely and cost-effective basis could damage relationships with customers and
have a material adverse effect on its business, financial condition and results
of operations.
In addition, certain components, subassemblies and services necessary for the
manufacture of P-Com's 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 P-Com, too, has experienced.
P-Com's reliance on contract manufacturers and on sole suppliers or a limited
group of suppliers involves risks. From time to time, P-Com has experienced an
inability to obtain, or to receive in a timely manner, an adequate supply of
finished products and required components and subassemblies. This inability is
due to the above factors and, in some cases, P-Com's financial condition. As a
result, P-Com has less control over the price, timely delivery, reliability and
quality of finished products, components and subassemblies.
28
A significant ramp-up of production of products and services could require P-Com
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, P-Com anticipates 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.
P-COM'S BUSINESS DEPENDS ON THE ACCEPTANCE OF ITS PRODUCTS AND SERVICES, AND IT
IS UNCERTAIN WHETHER THE MARKET WILL ACCEPT AND DEMAND ITS PRODUCTS AND SERVICES
AT LEVELS NECESSARY FOR SUCCESS.
P-Com's 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 U.S. 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 P-Com's 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 personal communications networks/personal
communications services 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 2003. Moreover, one
potential application of P-Com's technology, the use of its systems in
conjunction with the provision of alternative wireless access in competition
with the existing wireline local exchange providers, depends on the pricing of
wireless telecommunications services at rates competitive with those charged by
wireline 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 P-Com
allocates resources to any market segment that does not grow, it may be unable
to reallocate capital and other resources to other market segments in a timely
manner, ultimately curtailing or eliminating its 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, P-Com must offer systems with superior price
and performance characteristics and extensive customer service and support.
Additionally, P-Com must supply these systems on a timely and cost-effective
basis, in sufficient volume to satisfy these prospective customers'
requirements, in order to induce them to transition to P-Com's technologies. Any
delay in the adoption of P-Com's systems and technologies may result in
prospective customers using alternative technologies in their next generation of
systems and networks. P-Com's financial condition may prevent P-Com from meeting
this customer demand or may dissuade potential customers from purchasing from
P-Com. Prospective customers may design their systems or networks in a manner
that excludes or omits P-Com's products and technology. Existing customers may
not continue to include P-Com's systems in their products, systems or networks
in the future. P-Com's technology may not replace existing technologies and
achieve widespread acceptance in the wireless telecommunications market. Failure
to achieve or sustain commercial acceptance of P-Com's currently available radio
systems or to develop other commercially acceptable radio systems would
materially adversely affect P-Com.
29
DUE TO P-COM'S INTERNATIONAL SALES AND OPERATIONS, P-COM IS 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 P-Com's current heavy dependence on international markets,
especially in the United Kingdom, the European continent, the Middle East,
China, and Latin America, P-Com faces economic, political and foreign currency
fluctuations that are often more volatile than those commonly experienced in the
United States. Approximately 85% of P-Com's sales in the six-month period ending
June 30, 2004 were made to customers located outside of the United States.
Historically, P-Com's international sales have been denominated in British
pounds sterling, Euros or United States dollars. A decrease in the value of
British pounds or Euros relative to United States dollars, if not hedged, will
result in an exchange loss for P-Com if it has Euro or British pounds sterling
denominated sales. Conversely, an increase in the value of Euro and British
pounds sterling will result in increased margins for P-Com on Euro or British
pounds sterling denominated sales as its functional currency is in United States
dollars. For international sales that P-Com would require to be United States
dollar-denominated, such a decrease in the value of foreign currencies could
make its systems less price-competitive if competitors choose to price in other
currencies and could adversely affect its financial condition. P-Com funds its
Italian subsidiary's operating expenses, which are denominated in Euros. An
increase in the value of Euro currency, if not hedged relative to the United
States dollar, could result in more costly funding for P-Com's Italian
operations, and as a result, higher cost of production to it as a whole.
Conversely, a decrease in the value of Euro currency will result in cost savings
for P-Com.
Additional risks are inherent in P-Com's 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 P-Com must ship in short periods; P-Com's
bank line of credit allows this financing up to $4.0 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 and the consequences of future geopolitical
events, which may adversely affect the markets in which we operate
and our ability to insure against these risks;
o recurrence of worldwide health epidemic similar to SARS, which
significantly affected P-Com's ability to travel and do business in
Asia and the Pacific Rim areas;
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 P-Com's products.
P-COM'S INTERNATIONAL OPERATIONS SUBJECT P-COM TO THE LAWS, REGULATIONS AND
LOCAL CUSTOMS OF THE COUNTRIES IN WHICH IT CONDUCTS 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 P-Com's international operations in
some markets will depend on its 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 P-Com's products in
specific international markets could limit our ability to compete in today's
highly competitive local markets for broadband wireless equipment.
30
In addition, many of P-Com's customer purchases and other agreements are
governed by a wide variety of complex foreign laws, which may differ
significantly from United States laws. Therefore, P-Com may be limited in its
ability to enforce its rights under those agreements and to collect damages, if
awarded in any litigation.
GOVERNMENTAL REGULATIONS AFFECTING MARKETS IN WHICH P-COM COMPETES COULD
ADVERSELY AFFECT ITS BUSINESS AND RESULTS OF OPERATIONS.
Radio communications are extensively regulated by the United States and foreign
governments as well as by international treaties. P-Com's systems must conform
to a variety of domestic and international requirements established to, among
other things, avoid interference among users of radio frequencies and to permit
interconnection of equipment. Historically, in many developed countries, the
limited availability of radio frequency spectrum has inhibited the growth of
wireless telecommunications networks. Each country's regulatory process differs.
To operate in a jurisdiction, P-Com must obtain regulatory approval for its
systems and comply with differing regulations.
Regulatory bodies worldwide continue to adopt new standards for wireless
telecommunications products. The delays inherent in this governmental approval
process may cause the cancellation, postponement or rescheduling of the
installment of communications systems by P-Com's customers and P-Com. 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 P-Com to modify its products and services and incur substantial costs in
order to comply with the regulations and changes.
In addition, P-Com is also affected by domestic and international authorities'
regulation of the allocation and auction of the radio frequency spectra.
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, P-Com could experience
delays in orders. Similarly, failure by regulatory authorities to allocate
suitable frequency spectrum could have a material adverse effect on P-Com's
results. In addition, delays in the radio frequency spectra auction process in
the United States could delay P-Com's ability to develop and market equipment to
support new services.
P-Com operates in a regulatory environment subject to significant change.
Regulatory changes, which are affected by political, economic and technical
factors, could significantly impact P-Com's operations by restricting its
development efforts and those of its customers, making current systems obsolete
or increasing competition. Any such regulatory changes, including changes in the
allocation of available spectra, could have a material adverse effect on P-Com's
business, financial condition and results of operations. P-Com may also find it
necessary or advisable to modify its systems and services to operate in
compliance with these regulations. These modifications could be expensive and
time-consuming.
P-COM MAY ENTER INTO AGREEMENTS TO MERGE OR CONSOLIDATE WITH OTHER COMPANIES,
AND IT MAY INCUR SIGNIFICANT COSTS IN THE PROCESS, WHETHER OR NOT THESE
TRANSACTIONS ARE COMPLETED.
P-Com signed an Agreement and Plan of Merger with Telaxis Communications
Corporation, dated September 9, 2002. This merger agreement was terminated by
mutual agreement on January 7, 2003. On January 27, 2003, P-Com signed a letter
of intent to acquire privately held Procera Networks Inc., of Sunnyvale,
California, in a stock-for-stock transaction. This acquisition effort was
terminated in April 2003. On June 16, 2003, P-Com entered into an Asset Purchase
Agreement with SPEEDCOM Wireless Corporation to acquire substantially all of the
assets of SPEEDCOM (the "SPEEDCOM Acquisition"). The SPEEDCOM Acquisition closed
on December 10, 2003. P-Com may not be able to close any strategic acquisition
on the timetable it anticipates, if at all. P-Com has and may further incur
significant non-recoverable expenses in these efforts.
31
THE SPEEDCOM ACQUISITION WILL CONTINUE TO RESULT IN SIGNIFICANT COSTS TO P-COM.
P-Com assumed approximately $630,000 in accounts payable and assumed certain
other liabilities in connection with the SPEEDCOM Acquisition. These liabilities
are expected to continue to affect P-Com's financial condition in the
short-term.
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.
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 P-Com, 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 related 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.
32
ISSUING SECURITIES AS A MEANS OF RAISING CAPITAL AND THE FUTURE SALES OF THESE
SECURITIES IN THE PUBLIC MARKET COULD LOWER P-COM'S STOCK PRICE AND ADVERSELY
AFFECT ITS ABILITY TO RAISE ADDITIONAL CAPITAL IN SUBSEQUENT FINANCINGS.
P-Com has traditionally relied on debt and equity financings to meet its working
capital needs including the issuances of Series B Convertible Preferred Stock in
August 2003 and Series C Convertible Preferred Stock in October and December
2003. When the shares of Common Stock that are issuable upon conversion of these
securities are subsequently sold in the public market, the trading price of
P-Com Common Stock may be negatively affected. As of June 30, 2004, the last
reported sale price of P-Com common stock was $1.23 (after giving effect to the
1-for-30 reverse stock split implemented on July 19, 2004). Future sales of
P-Com's Common Stock, particularly shares issued upon the exercise or conversion
of outstanding or newly issued securities upon exercise of its outstanding
options, could have a significant negative effect on the market price of P-Com's
Common Stock. If the market price of P-Com Common Stock continues to decrease,
P-Com may not be able to conduct additional financings in the future on
acceptable terms or at all, and its ability to raise additional capital will be
significantly limited.
THE CONVERSION OR EXERCISE OF P-COM'S OUTSTANDING CONVERTIBLE SECURITIES WILL
HAVE A SIGNIFICANT DILUTIVE EFFECT ON P-COM'S EXISTING STOCKHOLDERS.
In March, May and July 2003, P-Com issued warrants to purchase approximately
293,333 shares of its Common Stock. In August 2003, P-Com's remaining 7%
Convertible Subordinated Notes due 2005 were converted into approximately one
million shares of Series B Convertible Preferred Stock, of which approximately
891,594 shares were converted into approximately 3.1 million shares of Common
Stock in December 2003. The remaining outstanding shares of Series B Convertible
Preferred Stock are convertible into approximately 381,916 million shares of
P-Com Common Stock.
In October and December 2003, P-Com issued approximately 10,000 shares of Series
C Convertible Preferred Stock together with warrants to purchase approximately
4.64 million shares of Common Stock. These shares of Series C Convertible
Preferred Stock are convertible into approximately 5.8 million shares of Common
Stock. In December 2003, P-Com issued 2,000 shares of Series D Convertible
Preferred Stock, which, in turn, are convertible into approximately 444,444
million shares of Common Stock. Although the conversion or exercise of these
securities is subject to limitations that prevent any single holder from holding
more than 4.999% or 9.999%, as the case may be, of P-Com's outstanding Common
Stock, the conversion or exercise of these securities will nevertheless result
in substantial dilution to P-Com's existing stockholders.
In December 2003, P-Com also issued 2,116,667 shares of its Common Stock in
connection with the SPEEDCOM Acquisition. This issuance resulted in substantial
dilution to P-Com's existing stockholders.
A RECENT AMENDMENT TO P-COM'S BYLAWS INCREASES P-COM'S ABILITY TO CONDUCT
FINANCING TRANSACTIONS USING ITS EQUITY SECURITIES AND, AS A RESULT, MAY CAUSE
FURTHER DILUTION TO P-COM'S STOCKHOLDERS.
At P-Com's 2003 annual meeting of stockholders, P-Com's stockholders approved a
proposal to amend P-Com's bylaws. As a result of this amendment, P-Com may issue
securities that are convertible into or exercisable for shares of P-Com Common
Stock at a conversion or exercise price that is subject to downward adjustment
without obtaining additional stockholder approval. This downward adjustment
mechanism is designed to protect the holders of these securities from having
their investments diluted by future issuances of P-Com Common Stock at a lower
price per share. This is accomplished by issuing an increased number of shares
of P-Com Common Stock to these security holders upon the conversion or exercise
of those securities. If the market price of P-Com Common Stock continues to
decline and P-Com is forced to continue raising capital through dilutive equity
financings, the holders of these convertible securities will be protected from
any dilution that may occur but, as a result, P-Com's other stockholders will be
diluted to a greater extent than if these convertible securities did not exist.
33
DUE TO THE RESERVATION OF A SUBSTANTIAL NUMBER OF P-COM'S AUTHORIZED AND
UNISSUED SHARES OF COMMON STOCK, P-COM HAS LITTLE OR NO FLEXIBILITY TO ISSUE
ADDITIONAL SHARES OF STOCK IN CONNECTION WITH FINANCING PROGRAMS, ACQUISITIONS
AND OTHER CORPORATE PURPOSES.
P-Com is authorized to issue a total of 23,333,333 million shares of Common
Stock. In addition, P-Com is required to reserve shares of Common Stock for
issuance upon conversion or exercise of P-Com's outstanding convertible
securities. P-Com has also reserved shares of Common Stock for issuance under
its 1995 Stock Option/Stock Issuance Plan. As a result, P-Com will have little
or no flexibility to act in the future with respect to financing programs,
acquisitions, forward stock splits and other corporate purposes without the
delay and expense involved in obtaining stockholder approval each time an
opportunity requiring the issuance of shares of Common Stock arises. Such a
delay could cause P-Com to lose the opportunity to pursue one or more of these
transactions. Moreover, P-Com's stockholders may refuse to grant the necessary
approval.
P-COM HAS ADOPTED ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN
ACQUISITION OF P-COM.
P-Com's 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 P-Com Common Stock.
The rights of the holders of P-Com 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 P-Com's Common Stock will be substantially
diluted. Future issuance of stock or additional preferred stock could have the
effect of making it more difficult for a third party to acquire a majority of
P-Com's outstanding voting stock.
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, 2004, 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. As of the end of the
quarter ended June 30, 2004, 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 (the "Exchange Act"). 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, 2004 to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
(b) Changes in internal control over financial reporting. There were no changes
in the Company's internal control over financial reporting identified in
connection with the evaluation required by Exchange Act Rule 13a-15(d) that
occurred during the most recent fiscal quarter that has materially affected or
is reasonably likely to materially affect the Company's internal control over
financial reporting.
34
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 $100,000 on
September 1, 2003, and is obligated to pay $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 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. Sections 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 P-Com is approximately
$13.7 million. P-Com filed a response to the Motion that the payments made by
Winstar Communications, Inc. are not voidable preference payments under the
United States Bankruptcy Code. The Bankruptcy Court, P-Com and Winstar have
agreed to settle all preference claims for $100,000. P-Com satisfied its
obligations under the settlement agreement on July 13, 2004.
In June 2000, two former consultants to P-Com Italia S.p.A. filed a
complaint against P-Com Italia in the Civil Court of Rome, Italy seeking payment
of certain consulting fees allegedly due the consultants totaling approximately
$615,000. The Civil Court of Rome has appointed a technical consultant in order
to determine the merit of certain claims made by the consultants. P-Com believes
that the claims are wholly without merit and, while no assurances can be given,
that the claims will be rejected.
The amount of ultimate liability with respect to each of the currently
pending actions is less than 10% of P-Com's current assets. In the event P-Com
is unable to satisfactorily resolve these and other proceedings that arise from
time to time, its financial position and results of operations may be materially
affected.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On July 19, 2004, we effected a 1-for-30 reverse stock split of our outstanding
Common Stock, for which we had received stockholder approval at our annual
meeting of stockholders held on December 2, 2003. As a result of the reverse
stock split, each outstanding share of Common Stock automatically converted into
one-thirtieth of a share of Common Stock, with the par value of each share of
Common Stock remaining at one hundreth of one cent ($.0001) per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
None.
35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Certificate of Amendment of Restated Certificate of
Incorporation of P-Com, Inc. filed with the Secretary of State
of the State of Delaware on July 15, 2004.
3.2 Restated Certificate of Incorporation of P-Com, Inc.
10.1 Performance-based Compensation Plan dated June 25, 2004
between P-Com, Inc. and Sam Smookler.
10.2 Form of Promissory Note, each dated as of June 16, 2003,
issued by P-Com to each of North Sound Legacy Fund LLC, North
Sound Legacy Institutional Fund LLC, North Sound Legacy
International Ltd. and SDS Merchant Fund LP.
10.3 Form of Promissory Note, each dated as of June 16, 2003,
issued by P-Com to each of North Sound Legacy Fund LLC, North
Sound Legacy Institutional Fund LLC, North Sound Legacy
International Ltd. and SDS Merchant Fund LP.
31.1 Certification of Principal Executive Officer Pursuant to
Exchange Act Rule 13a-14(a).
31.2 Certification of Principal Financial Officer Pursuant to
Exchange Act Rule 13a-14(a).
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 29, 2004, we filed a Form 8-K current report announcing the
consummation of a special warrant offer to holders of the Company's
existing Series A, Series B, Series C-1 and Series C-2 warrants,
resulting in proceeds to the Company of approximately $2.3 million.
On June 15, 2004, we filed a Form 8-K current report announcing the
restructuring of the Company's Italian operations conducted by P-Com
Italia S.p.A.
On April 30, 2004, we filed a Form 8-K current report reporting the
Company's financial results for the first quarter ended March 31,
2004.
On April 22, 2004, we filed a Form 8-K current report to announce
the time and call-in information of the earnings conference call for
the first quarter ended March 31, 2004 and announcing revenue
achieved for the first quarter ended March 31, 2004.
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/ Sam Smookler
-------------------
Sam Smookler
President
and Chief Executive Officer
(Duly Authorized Officer)
Date: August 16, 2004
By: /s/ Daniel W. Rumsey
--------------------
Daniel W. Rumsey
Interim Chief Financial Officer
(Principal Financial Officer)
Date: August 16, 2004
36
EXHIBIT INDEX
3.1 Certificate of Amendment of Restated Certificate of
Incorporation of P-Com, Inc. filed with the Secretary of State
of the State of Delaware on July 15, 2004.
3.2 Restated Certificate of Incorporation of P-Com, Inc.
10.1 Performance-based Compensation Plan dated June 25, 2004
between P-Com, Inc. and Sam Smookler.
10.2 Form of Promissory Note, each dated as of June 16, 2003,
issued by P-Com to each of North Sound Legacy Fund LLC, North
Sound Legacy Institutional Fund LLC, North Sound Legacy
International Ltd. and SDS Merchant Fund LP.
10.3 Form of Promissory Note, each dated as of June 16, 2003,
issued by P-Com to each of North Sound Legacy Fund LLC, North
Sound Legacy Institutional Fund LLC, North Sound Legacy
International Ltd. and SDS Merchant Fund LP.
31.1 Certification of Principal Executive Officer Pursuant to
Exchange Act Rule 13a-14(a).
31.2 Certification of Principal Financial Officer Pursuant to
Exchange Act Rule 13a-14(a).
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 Interim Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.