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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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
P-COM, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0289371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3175 S. WINCHESTER BOULEVARD, CAMPBELL, CALIFORNIA 95008
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 866-3666
---------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer as defined
in the Exchange Act Rule 12b-2. YES [ ] NO [X]
As of November 1, 2004 there were 11,796,669 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 36 pages of which this is page 1.
The Exhibit Index appears on page 36.
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 September 30, 2004
and December 31, 2003......................................... 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2004 and 2003....... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 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 ... 32
Item 4 Controls and Procedures...................................... 32
PART II. Other Information
Item 1 Legal Proceedings .......................................... 32
Item 2 Changes in Securities ...................................... 33
Item 6 Exhibits and Reports on Form 8-K ........................... 33
Signatures ............................................................. 35
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 3,731 $ 6,185
Accounts receivable, net 4,680 4,801
Inventory 4,135 5,258
Prepaid expenses and other assets 2,235 2,256
--------- ---------
Total current assets 14,781 18,500
Property and equipment, net 1,928 3,807
Goodwill 11,991 11,981
Others Assets 341 277
--------- ---------
Total Assets $ 29,041 $ 34,565
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,665 $ 4,035
Other accrued liabilities 6,326 8,226
Notes payable and current maturities of long-term
debt 2,793 1
Deferred contract obligations -- 8,000
Liabilities of discontinued operations 269 313
--------- ---------
Total current liabilities 13,053 20,575
--------- ---------
Long-Term Liabilities:
Long-term debt 150 6
--------- ---------
Total long term liabilities 150 6
--------- ---------
Total liabilities 13,203 20,581
--------- ---------
Series B Preferred Stock 1,517 1,361
Series C Preferred Stock 2,332 870
Series D Preferred Stock 2,000 2,000
--------- ---------
Total Preferred Stock 5,849 4,231
--------- ---------
Stockholders' equity:
Common Stock 35 20
Treasury Stock (74) (74)
Additional paid-in capital 375,162 373,186
Accumulated deficit (364,871) (363,173)
Accumulated other comprehensive loss (263) (206)
--------- ---------
Total Stockholders ' equity 9,989 9,753
--------- ---------
Total liabilities and stockholders' equity $ 29,041 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
--------------------- ---------------------
Sales $ 6,143 $ 5,569 $ 19,897 $ 15,151
Cost of sales 4,986 4,431 15,009 16,181
-------- -------- -------- --------
Gross profit (loss) 1,157 1,138 4,888 (1,030)
-------- -------- -------- --------
Gross margin 19% 20% 25% -7%
Operating expenses:
Research and development/engineering 1,310 1,180 3,825 4,805
Selling and marketing 2,003 883 5,188 2,645
General and administrative 1,130 1,154 3,383 4,303
Asset impairment and restructuring
charges -- 350 -- 3,712
-------- -------- -------- --------
Total operating expenses 4,443 3,567 12,396 15,465
-------- -------- -------- --------
Operating expense as a percentage
of sales 72% 64% 62% 102%
Operating loss (3,286) (2,429) (7,508) (16,495)
Interest expense (142) (501) (304) (1,625)
Gain on debt extinguishment -- 8,762 -- 10,262
Other income (expense), net (10) 2,201 8,286 3,117
-------- -------- -------- --------
Income (loss) from continuing operations (3,438) 8,033 474 (4,741)
Income (loss) from discontinued operations -- 1,367 (40) (2,258)
-------- -------- -------- --------
Net income (loss) (3,438) 9,400 434 (6,999)
Accretion to increase preferred stock to
redemption values (683) -- (2,132) --
-------- -------- -------- --------
Income (loss) applicable to common
stockholders $ (4,121) $ 9,400 $ (1,698) $ (6,999)
======== ======== ======== ========
Basic income (loss) per common share:
Income (loss) from continuing
operations $ (0.27) $ 5.68 $ (0.16) $ (3.57)
Income (loss) from discontinued
operations -- 0.97 -- (1.69)
-------- -------- -------- --------
Basic income (loss) per share applicable to
common stockholders $ (0.27) $ 6.65 $ (0.16) $ (5.26)
======== ======== ======== ========
Diluted income (loss) per common share:
Income (loss) from continuing
operations $ (0.27) $ 1.61 $ (0.16) $ (3.57)
Income (loss) from discontinued
operations -- 0.27 -- (1.69)
-------- -------- -------- --------
Diluted income (loss) per share applicable
to common stockholders $ (0.27) $ 1.88 $ (0.16) $ (5.26)
======== ======== ======== ========
Shares used in basic income (loss) per share 15,358 1,413 10,842 1,329
======== ======== ======== ========
Shares used in diluted income (loss) per share 15,358 4,992 10,842 1,329
======== ======== ======== ========
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)
NINE MONTHS ENDED SEPT 30,
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
(loss) $ 434 $ (6,999)
Adjustments to reconcile net income (loss) to net
cash
used in operating activities:
Loss on discontinued operations 40 2,258
Depreciation 1,158 3,382
(Gain) Loss on disposal of property and equipment 73 (627)
Amortization of warrants 115 --
Inventory valuation and other -- 3,734
charge
Asset impairment charges -- 3,108
Amortization of discount on promissory notes -- 270
Gain on settlement of contract (7,500) --
Stock compensation expense -- 771
Gain on redemption of convertible notes -- (10,262)
Gain on vendor settlement (964) (2,060)
Write-off of notes receivable -- 100
Changes in assets and liabilities:
Accounts receivable 121 279
Inventory 1,114 4,113
Prepaid expenses and other assets (313) 2,185
Accounts payable (412) (2,104)
Other accrued liabilities (527) 1,613
-------- --------
Net cash provided by (used) in operating
activities (6,661) (239)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to Speedcom -- (1,100)
Acquisition of property and equipment (203) (142)
(Increase) Decrease in restricted cash -- 390
Net asset of discontinued operation -- (907)
Sale of property 829 --
-------- --------
Net cash provided by (used in) investing
activities 626 (1,759)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net -- 307
(Repayment of) Proceeds from bank loan 1,457 (688)
Proceeds from convertible promissory note -- 2,639
Payments under capital lease obligations (563) (43)
Proceeds from sale of SPEEDCOM common stock 100 --
Proceeds from special warrant offer 2,589 --
-------- --------
Net cash used in financing activities 3,583 2,215
-------- --------
Effect of exchange rate changes on cash (2) 27
-------- --------
Net increase (decrease) in cash and cash equivalents (2,454) 244
Cash and cash equivalents at beginning of the period 6,185 861
-------- --------
Cash and cash equivalents at end of the period $ 3,731 $ 1,105
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
(CONTINUED)
NINE MONTHS ENDED SEPT 30,
2004 2003
-------- --------
Supplemental cash flow disclosures:
Cash paid for interest $ 303 $ 174
-------- --------
Non-cash investing and financing activities:
Issuance of Common Stock for consulting
services $ -- $ 450
-------- --------
Issuance of Common Stock for vendor
payments $ -- $ 360
-------- --------
Redemption of 7% convertible by issuance
of common stock $ -- $ 20,090
-------- --------
Redemption of convertible notes in exchange for
property and equipment $ -- $ 2,300
-------- --------
Treasury stock acquired in exchange for
property and equipment $ -- $ 74
-------- --------
Conversion of Series C preferred stock into
common stock $ 521 $ --
-------- --------
Issuance of notes payable to settle deferred
contract obligations $ 500 $ --
-------- --------
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 September 30, 2004, and the
results of their operations and their cash flows for the three-month and
nine-month periods ended September 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 nine-month periods ended September 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 nine-month period
ended September 30, 2004, the Company used $6.7 million cash in its operating
activities. At September 30, 2004, the Company had approximately $3.7 million in
cash and cash equivalents, and working capital of approximately $1.7 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.
On November 3, 2004, the Company entered into a Note and Warrant Purchase
Agreement with an investor to provide up to $5.0 million in debt financing to
the Company (the "Debenture Financing"). See Note 12. The first tranche, of $3.3
million, is expected to close on or before November 15, 2004, and the second
tranche, of $1.7 million, is anticipated to close on or before December 31,
2004, subject to the satisfaction of certain conditions, including the
restructuring of an obligation due Agilent Financial Services, Inc. of
approximately $1.7 million due December 1, 2004 (the "Agilent Note"). The
proceeds from the Debenture Financing are expected to satisfy the Company's
liquidity requirements through the first quarter of 2005. No assurances can be
given that the conditions to closing the Debenture Financing will be satisfied,
or that additional financing will be available to P-Com on acceptable terms, or
at all.
To address its working capital needs, management is also evaluating options to
consolidate, seek a strategic partner or engage in some other corporate
transaction. If the Company is unsuccessful in its plans to: (i) obtain
additional debt or equity financing; (ii) generate sufficient revenues from new
and existing products sales; (iii) diversify its customer base; (iv) decrease
costs of goods sold, and achieve higher operating margins; (v) restructure the
Agilent Note; (vi) negotiate agreements to settle outstanding claims; or (vii)
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 COMMON SHARE
For purposes of computing diluted net income per share in the three and nine
months ended September 30, 2004 and the nine months ended September 30, 20003,
all options, warrants, and convertible notes are excluded from the computations
of diluted net loss per share because they are non-dilutive. In the three months
ended September 30, 2003, all options, warrants, and convertible notes that are
dilutive are included in the computation of diluted net loss per share .
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 Nine months Nine months
ended ended ended ended
Sept 30, 2004 Sept 30, 2003 Sept 30, 2004 Sept 30, 2003
-------- -------- -------- --------
Numerator:
Income(loss) from continuing operations $ (3,438) $ 8,033 $ 474 $ (4,741)
Income(loss) from discontinued operations -- 1,367 (40) (2,258)
-------- -------- -------- --------
Net income(loss) (3,438) 9,400 434 (6,999)
Preferred Stock accretion (683) -- (2,132) --
-------- -------- -------- --------
Numerator for basic earnings per share
-income(loss) available to common stockholders (4,121) 9,400 (1,698) (6,999)
Effect of dilutive securities:
Preferred stock accretion 683 -- 2,132 --
6% convertible warrants-interest 18 -- 21 --
Numerator for diluted earnings per share
-income(loss) available to common stockholders
after assumed conversions $ (4,121) $ 9,400 $ 1,698 $ (6,999)
Denominator
Denominator for basic earnings per share
-weighted average shares 15,358 1,413 10,842 1,329
-------- -------- -------- --------
Effect of dilutive securities:
Warrants -- 230 -- --
Convertible Preferred Stock -- 3,349 -- --
Convertible promissory notes -- -- -- --
-------- -------- -------- --------
Dilutive potentional common shares -- 3,579 -- --
Denominator for diluted earnings per share
-adjusted weighted -average shares and assumed
conversions 15,538 4,992 10,842 1,329
======== ======== ======== ========
Basic earnings per share $ (0.27) $ 6.65 $ (0.16) $ (5.26)
======== ======== ======== ========
Diluted earnings per share $ (0.27) $ 1.88 $ (0.16) $ (5.26)
======== ======== ======== ========
3. BORROWING ARRANGEMENTS
On September 17, 2004, the Company renewed its credit facility (the "Credit
Facility") with Silicon Valley Bank (the "Bank") through September 17, 2005. 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 75% 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
3.5% 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 September 30, 2004, the Company had borrowed $1,458,000 under the Credit
Facility. No amounts were borrowed under the Credit Facility as of December 31,
2003.
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 September 30, 2004, no amounts were
outstanding under this line.
4. BALANCE SHEET COMPONENTS
INVENTORY
Inventory consists of the following (in thousands of dollars, unaudited):
September 30, December 31,
2004 2003
------------- ------------
Raw materials $ 365 $3,219
Work-in-process 554 1,682
Finished goods 3,216 277
Inventory at customer sites -- 80
------------- ------------
$4,135 $5,258
============= ============
OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following (in thousands, unaudited):
September 30, December 31,
2004 2003
------------- ------------
Purchase commitment (a) $ 278 $1,238
Accrued warranty (b) 931 1,110
Accrued employee compensation 1,088 1,092
Value added tax payable 214 129
Customer advances 361 468
Lease obligations 1,778 2,335
Accrued rent 427 497
Deferred revenue 214 243
Other 1,035 1,114
------------- ------------
$6,326 $8,226
============= ============
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.
9
b) A summary of product warranty reserve activity for the nine-month period
ended September 30, 2004 is as follows:
Balance at January 1, 2004 $ 1,110
Additions relating to products sold 353
Payments (532)
-------
Balance at September 30, 2004 $ 931
=======
c) A summary of product warranty reserve activity for the nine-month period
ended September 30, 2003 is as follows:
Balance at January 1, 2003 $ 936
Additions relating to products sold 300
Payments (344)
-------
Balance at September 30, 2003 $ 892
=======
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 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 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, of which it paid $100,000
on October 1, 2004. The Company is obligated to pay an additional $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 September 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 1,457 1
------ ------
2,943 1
Less current maturities 2,793 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
accepted promissory notes issued by the Company that, while outstanding on
September 30, 2004, were cancelled following receipt of stockholder
approval to remove the warrant exercise limitations at the Company's
annual meeting of stockholders held on October 8, 2004. The warrant
holders to whom the promissory notes were issued tendered the promissory
notes to the Company in full consideration for the exercise price of their
warrants. As a result, there are 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 remain outstanding.
(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. On October 8, 2004, shareholders
approved an amendment to the Company's Articles of Incorporation to increase the
Company's authorized capital stock to 37.0 million shares, of which 35.0 million
are designated Common Stock.
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 nine-month period ended September 30, 2004, 2,247,289
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.
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
$1.50 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 $3.60, $6.00,
and $5.40, respectively. In order to exercise the Series C-2 Warrants at the
reduced exercise price of $1.50 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.
11
In connection with the Special Warrant Offer, the Company issued approximately
1.4 million shares of Common Stock in the nine month period ended September 30,
2004 and raised working capital of approximately $2.6 million. On October 8,
2004, the Company issued an additional approximately 1.2 million shares in
connection with the Special Warrant Offer, as discussed in Note 4.
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 September 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 September 30, 2004:
Shares Amount
(In thousands)
------- -------
Balances as of December 31, 2003
Preferred Stock accretions to accrete the carrying
value to the redemption value 108,406 $ 1,361
Preferred Stock accretions to accrete the carrying
value to the redemption value -- $ 156
------- -------
Balances as of September 30, 2004 108,406 $ 1,517
======= =======
(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 September 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;
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.
12
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 September 30, 2004, there are approximately 9,942 shares
and 6,089 shares, respectively, of Series C Convertible Preferred Stock
outstanding. The following table reflects changes in Series C Preferred Stock
during the quarterly period ended September 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 2,247,288 (3,853) (521)
shares of Common Stock
Preferred Stock accretions to accrete the carrying value
to the redemption value 1,983
--------- ---------
Balances as of September 30, 2004 6,089 $ 2,332
========= =========
(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 September 30, 2004, outstanding Series C Preferred Stock is
convertible into approximately 3,552,456 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 September 30, 2004,
approximately 3,853 shares of Series C Convertible Preferred Stock had been
converted into approximately 2,247,289 shares of Common Stock and approximately
6,089 shares of Series C Convertible Preferred Stock remained outstanding and
approximately 910,419 of the Series C-1 Warrants and 910,419 of the Series C-2
Warrants had been exercised. The shares of Series C Convertible Preferred Stock
that remain outstanding are convertible into approximately 3,552,456 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.
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.
15
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 September 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
September 30, 2004:
Amount
Shares (In thousands)
------ --------------
Balances as of December 31, 2003 2,000 $2,000
------ ------
Balances as of September 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 September 30, 2004, outstanding Series D Preferred Stock is
convertible into 444,444 shares of Common Stock.
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.
16
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 their point-to-multipoint product lines 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.
A summary of inventory reserve activities is as follows:
Inventory
Reserve
--------
Balance at January 1, 2004 $ 26,178
Additions charged to Statement of Operations 1,152
Deductions from reserves (2,474)
--------
Balance at September 30, 2004 $ 24,856
--------
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 nine-month period ended
September 30, 2004 and 2003.
17
Summarized results of PCNS are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------- ------- ------- -------
Sales $ -- $ -- $ -- $ 1,065
------- ------- ------- -------
Loss from operations $ -- $ -- $ -- $ (702)
Gain (Loss) on disposition
of discontinued operations -- 1,367 (40) (1,556)
------- ------- ------- -------
-- 1,367 (40) (2,258)
Provision for income taxes -- -- -- --
------- ------- ------- -------
Net profit (loss) $ -- $ 1,367 $ (40) $(2,258)
======= ======= ======= =======
The assets and liabilities of the discontinued operations consisted of the
following (in thousands):
September 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 $183
Other accrued liabilities 86 130
Loan payable to bank -- --
---- ----
$269 $313
==== ====
9. SALES BY GEOGRAPHIC REGION AND CONCENTRATIONS
The breakdown of product sales by geographic region is as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------- ------- ------- -------
North America $ 834 $ 474 $ 1,897 $ 1,233
United Kingdom 1,190 1,902 4,691 5,098
Europe 1,181 984 3,596 2,704
Asia 388 1,455 1,431 4,271
Latin America and other regions 2,550 754 8,282 1,845
------- ------- ------- -------
$ 6,143 $ 5,569 $19,897 $15,151
======= ======= ======= =======
During the nine-month period ended September 30, 2004 and 2003, four customers
accounted for a total of 67% and 56% of our total sales, respectively.
18
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 $(4.0) million and $9.6 million for
the three months ended September 30, 2004 and 2003, respectively. Comprehensive
income (loss) was $(1.7) million and $(6.5) million for the nine months ended
September 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 the claims made by the consultants. P-Com believes
that the claims are without merit and will ultimately be rejected. However,
while not probable in management's opinion, there is a possibility
that all or some portion of the claim will be allowed to proceed.
Under the terms of an agreement entered into in April of 2002, as amended from
time to time between the Company and George P. Roberts, the Company's Chairman
and former Chief Executive Officer, Mr. Roberts agreed to take a portion of his
salary in the form of Common Stock of the Company. To date, no shares have been
issued to Mr. Roberts and the Company and Mr. Roberts are currently in
discussions regarding to the number of shares issuable to him under the terms of
the agreement. Any amounts that may be due Mr. Roberts, whether owing in Common
Stock or otherwise, have not been accrued on the Company's financial statements
pending agreement of the number of shares to be issued Mr. Roberts. Had shares
been issued pursuant to the agreement, Mr. Roberts would have received
approximately 150,000 shares of Common Stock of the Company.
12. SUBSEQUENT EVENTS
DEBENTURE FINANCING
On November 3, 2004, the Company entered into a Note and Warrant Purchase
Agreement (the "Purchase Agreement") with a purchaser ("Purchaser") whereby the
Purchaser has agreed to purchase debentures from the Company in the aggregate
principal amount of up to $5,000,000 (the "Notes"). In addition, the Company has
agreed to issue warrants to purchase in the aggregate up to 800,000 shares of
the Company's Common Stock (the "Warrants"). The Warrants will have an initial
exercise price of $1.50 and a term of five years. The Notes and Warrants shall
be issued in two closings. The first closing shall take place on or before
November 15, 2004, and shall consist of $3,300,000 principal amount of Notes.
The second closing shall take place no later than December 30, 2004, and shall
consist of $1,700,000 principal amount of Notes. For the period beginning on the
first closing and ending on the second closing, the Company has agreed has
agreed not to pay more than $250,000 in proceeds from the first closing to
satisfy the indebtedness owed to Agilent Financial Services, Inc. ("Agilent")
among other conditions. The second closing is conditioned on the Company
entering into an agreement with Agilent limiting the remaining payments to
Agilent to no more than $100,000 per month over a period of sixteen months
following the second closing.
The Notes are payable in eight equal quarterly installments. The Notes shall
bear interest at an interest rate equal to seven percent (7%) per annum,
increasing to eight percent (8%) on July 1, 2005, and ten percent (10%) on April
1, 2006 through the maturity date. The principal and interest payments due may
be paid in either shares of the Company's Common Stock, cash or a combination of
both. The number of shares of Common Stock that may be used to pay the quarterly
installments is capped at 6,000,000 shares of Common Stock. The Notes will
contain certain provisions that provide for acceleration of payment upon the
occurrence of certain events, including, but not limited to, change in control,
merger and dissolution.
The Company also entered into a Registration Rights Agreement with the
Purchaser, which obligates the Company to register the 6,000,000 shares of
Common Stock that may be used to make the quarterly payments and the 800,000
shares of Common Stock issuable upon exercise of the Warrants. The Company is
obligated to register such shares with the Securities and Exchange Commission
within forty-five (45) days after the first closing.
Upon closure of this financing transaction, the Company will allocate the
proceeds received between the Note and the Warrants based upon their relative
fair values, which will likely result in discounting the carrying value of the
Note for accounting purposes. Following this allocation, the Note discount will
be amortized into interest expense over its term using the effective method.
Such amortization, while not currently estimable, will cause the effective
interest rate on the Note to be higher than the stated rate.
19
CHINA JOINT VENTURE
On September 23, 2004, P-Com entered into a joint venture agreement (the "JV
Agreement") with Nanjing Putian Telecommunications Co., Ltd. ("Nanjing Putian")
to form a joint venture in China (the "Joint Venture"). The purpose of the Joint
Venture is to establish a sales channel partner for the distribution of P-Com's
products in China. Under the terms of the JV Agreement, P-Com's capital
contribution to the Joint Venture shall consist of $100,000 cash, and inventory
consisting of licensed-exempt product, point-to-point licensed product, and
point-to-multipoint licensed product. The Joint Venture is effective upon
approval of the Joint Venture by the People's Republic of China. Management
anticipates receiving the necessary approvals to form the Joint Venture prior to
December 31, 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.
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 $0.6 million
or 10% in the third quarter of 2004 compared to the same period in the previous
year. Although our sales have increased, average selling prices in many of our
product lines continue to decrease, and we continue to be burdened by high
operating and other legacy costs. As a result, management is focused on (i)
bringing new products to market with substantially lower costs; (ii) continuing
to control operating and other legacy costs and expenses; and (iii) seeking
opportunities to consolidate, seek a strategic partner or engage in some other
corporate transaction that would result in the Company achieving positive cash
flow on an accelerated basis.
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.
20
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.
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 performs this test
annually, on the first day of the fourth fiscal quarter of each year. Currently,
no impairments of goodwill are warranted under this methodology.
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 September 30, 2004 and 2003, approximately 79% and 67%, respectively, of
trade accounts receivable represent amounts due from five and four customers,
respectively.
RESULTS OF OPERATIONS
SALES. For the three months ended September 30, 2004, total sales were
approximately $6.1 million as compared to $5.6 million for the same period in
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the prior year. For the nine months ended September 30, 2004, total sales were
approximately $19.9 million as compared to $15.2 million for the same period in
the prior year. Despite the increase in revenue in the quarter ended September
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 September 30, 2004 came from Tel-Link out-of-warranty
repair activities, which generated approximately $2.5 million of our sales in
the third quarter of 2004, compared to $3.0 million in the comparable period in
2003. On December 10, 2003, P-Com acquired the Wave Wireless Networking division
of SPEEDCOM Wireless Corporation ("SPEEDCOM") and related assets. During the
quarter ended September 30, 2004, sales of SPEEDCOM products were approximately
$0.6 million. During the nine months ended September 30, 2004, Tel-Link
out-of-warranty repair activities generated approximately $8.6 million of our
sales compared to $7.8 million in the comparable period in 2003 and sales of our
Encore products increased to approximately $6.2 million compared to $1.4 million
in the comparable period in 2003. Sales of SPEEDCOM products were approximately
$2.2 million during the nine months ended September 30, 2004.
During the nine months ended September 30, 2004, approximately 30% 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 32% of our sales in the Asia-Pacific Rim and
the Middle East combined. The United Kingdom market contributed 24% of the
Company's revenue in the nine months ended September 30, 2004, compared to 33%
in the same period in 2003. The European continent generated approximately 18%
of the Company's revenue in the nine months ended September 30, 2004 and 2003.
The decrease in sales to the Asia-Pacific Rim areas and the Middle East in the
nine-month period ended September 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 third 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. As a result of the formation of a joint
venture that the Company formed with Nanjing Putien in September 2004, the
Company anticipates that it will incur sales to the China market beginning in
the first quarter of 2005.
The substantial increase in sales to the Latin American market in the nine
months ended September 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 September 30,
2004 and 2003, was $1.2 million and $1.1 million, respectively, or 19% and 20%
of sales in each of the respective quarters.
Gross profit (loss) for the nine months ended September 30, 2004 and 2003 was
$4.9 million and ($1.0) million, respectively, or 25% and (7%) 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 nine months ended September 30, 2004 would have
been 24%. Excluding a $3.6 million inventory and related charges, gross profit
margins for the nine months ended September 30, 2003 would have been 17%. The
gross profit margins for the nine months ended September 30, 2004 improved
compared to the gross profit margins for the nine months ended September 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 September 30, 2004
and 2003, research and development ("R&D") expenses were approximately $1.3
million and $1.2 million, respectively. For the nine months ended September 30,
2004 and 2003, R&D expenses were approximately $3.8 million and $4.8 million,
respectively. As a percentage of sales, R&D expenses were 21% for the three
months ended September 30, 2004 and 2003. As a percentage of sales, R&D expenses
were 19% for the nine months ended September 30, 2004 and 32% for the nine
months ended September 30, 2003. The percentage decrease for the nine months
ended September 30, 2004 and 2003 is due to significant expense reduction
efforts as mentioned above.
22
SELLING AND MARKETING. For the three months ended September 30, 2004 and
2003, sales and marketing expenses were approximately $2.0 million and $0.9
million, respectively. For the nine months ended September 30, 2004 and 2003,
sales and marketing expenses were approximately $5.2 million and $2.6 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 2003, higher commissions
in light of increased sales, and a non-recurring settlement of a dispute with a
reseller paid during the third quarter of 2004. As a percentage of sales,
selling and marketing expenses were 33% for the three months ended September 30,
2004, compared to 16% for the three months ended September 30, 2003. As a
percentage of sales, selling and marketing expenses were 26% for the nine months
ended September 30, 2004, compared to 17% for the nine months ended September
30, 2003.
GENERAL AND ADMINISTRATIVE. For the three months ended September 30, 2004
and 2003, general and administrative expenses were approximately $1.1 million
and $1.2 million, respectively. For the nine months ended September 30, 2004 and
2003, general and administrative expenses were approximately $3.4 million and
$4.3 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 18% for the three months ended September 30, 2004, compared to 21% for the
three months ended September 30, 2003. As a percentage of sales, general and
administrative expenses were 17% for the nine months ended September 30, 2004,
compared to 28% for the nine months ended September 30, 2003. The percentage
decreases are 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.
The Company recorded a $0.4 million charge in the third quarter of 2003 for
liability relating to a terminated lease facility in the United Kingdom.
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 September 30, 2004 and 2003,
interest expense was $0.1 million and $0.5 million, respectively. For the nine
months ended September 30, 2004 and 2003, interest expense was $0.3 million and
$1.6 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.
23
GAIN ON DEBT RESTRUCTURING AND OTHER INCOME, NET. For the three-month
period ended September 30, 2004, the Company did not record a gain on debt
restructuring and other income, compared to $11.0 million for the comparable
three-month period in 2003. For the nine-month period ended September 30, 2004,
other income, net, totaled $8.3 million compared to $13.4 million for the
corresponding period in 2003. The amount for the nine-month period ended
September 30, 2004 was due primarily 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 that were partially offset by $0.3
million of losses due to unfavorable exchange rates. The amount for the
corresponding period in 2003 was due primarily to a $10.3 million of gain on
redemption of the Convertible Notes, and a $2.1 million of gain from vendor
settlements.
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 nine-month period ended September 30,
2004, the Company used approximately $6.7 million of cash in operating
activities, primarily to fund operating losses.
During the nine-month period ended September 30, 2003, the Company used
approximately $0.2 million of cash in operating activities, primarily due to our
net loss of $7.0 million, a $10.3 million non-cash gain arising from the
redemption of the Convertible Notes, and $2.1 million non-cash gain from vendor
settlements. These amounts were offset by a $3.7 million non-cash loss related
to inventory and related charges, $3.1 million of property and equipment
impairment charges, and depreciation expenses of $3.4 million. Significant
contributions to cash flow resulted from a net reduction in inventories of $4.1
million, a net reduction in prepaid and other current assets of $2.2 million,
and a net increase of other accruals of $1.6 million. These were partially
offset by a reduction of accounts payable of $2.1 million.
CASH FROM INVESTING ACTIVITIES. During the nine-month period ended
September 30, 2004, the Company generated approximately $0.6 million in cash
from investing activities, principally due to the sale of property in Italy for
$0.8 million which was offset by $0.2 million related to asset acquisition.
During the nine-month period ended September 30, 2003, the Company used
approximately $1.8 million of cash for investing activities, due principally to
the loans to SPEEDCOM of $1.1 million, and $0.9 million arising from changes in
the net assets of discontinued operations, offset by a $0.4 million decrease in
restricted cash.
CASH FROM FINANCING ACTIVITIES. During the nine-month period ended
September 30, 2004, the Company generated cash of $3.6 million 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,
borrowing of $1.5 million from the Bank under the Credit Facility, and $0.1
million from the sale of certain common stock of SPEEDCOM held by the Company,
offset by $0.6 million in payments related to capital lease obligations. During
the nine-month period ended September 30, 2003, the Company generated $2.2
million of cash from financing activities, primarily through the receipt of $2.6
million from bridge financings, and $0.3 million from the receipt of proceeds
from the sale of Common Stock. These were offset by payments of $0.7 million to
the Bank under the Credit Facility and to lessors under capital leases of the
Company.
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 September 30, 2004, those obligations totaled
approximately $1.8 million, which amount is due and payable in the fourth
quarter of 2004. 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.
COMMITMENTS AND OFF BALANCE SHEET INSTRUMENTS
Rent expense under operating leases totaled approximately $1.3 million for the
nine months ended September 30, 2004, and the Company expects to incur rent
expense at approximately the same rate during the fourth quarter 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 September 30, 2004, the total amount remaining to be
paid under those agreements totaled approximately $2.5 million. Of that amount,
approximately $2.0 million is scheduled to be paid by December 31, 2004, and the
remainder in 2005. Approximately $1.8 million represents capital lease
obligations due Agilent Financial Services, Inc. (the "Agilent Note"), which is
reflected as other accrued liabilities on the Company's balance sheet. The
Company does not have available adequate cash resources to satisfy the Agilent
Note, and provide cash to finance projected operations during the remainder of
2004. While no assurances can be given, the Company is currently negotiating to
restructure the Agilent Note. See "Current Liquidity" below for a discussion of
management's plan to satisfy the Company's requirements with respect to the
Agilent Note and to provide cash to finance projected operations.
24
CURRENT LIQUIDITY
As of September 30, 2004, our principal sources of liquidity consisted of
borrowing availability under the Credit Facility, and approximately $3.7 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 September 30, 2004 were approximately $1.5 million, compared to $3.7
million at December 31, 2003. The Credit Facility expires on September 17, 2005.
At September 30, 2004, our total liabilities were approximately $13.2 million,
compared to $20.6 million at December 31, 2003. At September 30, 2004 our
working capital was approximately $1.7 million, compared to a negative working
capital of $2.1 million at December 31, 2003. To address its working capital
position, the Company entered into a Note and Warrant Purchase Agreement with an
investor to provide up to $5.0 million in debt financing to the Company (the
"Debenture Financing"). The first tranche, of $3.3 million, is expected to close
on or before November 15, 2004, and the second tranche, of $1.7 million, is
anticipated to close on or before December 31, 2004, subject to the satisfaction
of certain conditions, including the restructuring of the Agilent Note. Together
with available borrowings under the Company's existing Credit Facility with
Silicon Valley Bank, the proceeds from the Debenture Financing are expected to
satisfy the Company's liquidity requirements through the first quarter of 2005.
No assurances can be given that the conditions to closing the Debenture
Financing will be satisfied, or that additional financing will be available to
P-Com on acceptable terms, or at all.
To further address its working capital needs, and ultimately return P-Com to
profitability, management's plan is to seek opportunities to consolidate, seek a
strategic partner or engage in some other corporate transaction. If the Company
is unsuccessful in its plans to: (i) close the Debenture Financing, or obtain
additional debt or equity financing; (ii) generate sufficient revenues from new
and existing products sales; (iii) diversify its customer base; (iv) decrease
costs of goods sold, and achieve higher operating margins; (v) restructure the
Agilent Note; (vi) negotiate agreements to settle outstanding claims; or (vii)
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. 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 September 30, 2004, our
aggregate net loss is approximately $364.9 million. Our cash position has
declined to $3.7 million at September 30, 2004, and is deteriorating. We had
positive working capital of $1.7 million as of September 30, 2004, and, while no
assurances can be given, we are anticipating obtaining an additional $5.0
million in debt financing prior to December 31, 2004 (the "Debenture
Financing"). In the event we are unable to close the Debenture Financing,
P-Com's known and likely short term cash requirements 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.
The continued worldwide softness in the telecommunications equipment and
services sector, and heightened competition, is affecting us. Our customers,
particularly systems operators and integrated system providers, continue to
defer 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, substantially improve gross margins on its sales, or
obtain additional debt or equity financing.
OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN AND FAILURE TO
CLOSE THE DEBENTURE FINANCING OR OTHERWISE 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 close the Debenture Financing, 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 make the required amortization payments on the Debenture
Financing using our Common Stock, or raise additional funds by issuing equity
securities, additional significant dilution to our stockholders will result.
If the Company is unable to increase sales, decrease costs, close the Debenture
Financing, 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 nine-months ended September 30, 2004, sales to four customers accounted
for 68% 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
September 30, 2004, five customers accounted for 79% 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.
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.
27
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.
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.
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.
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.
28
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 90% of P-Com's sales in the nine-month period
ending September 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. The current strength of the value of Euro currency relative to the
United States dollar results 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: 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; changes in regulatory requirements; and costs and risks of
localizing systems (homologation) in foreign countries; timing and availability
of export licenses, tariffs and other trade barriers; difficulties in managing
distributors; 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; and difficulty in accounts receivable
collections.
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.
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.
29
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 is currently evaluating options to consolidate, seek a strategic partner
or engage in some other corporate transaction intended to increase stockholder
value. Corporate transactions, including mergers and acquisitions, are typically
complex and are subject to a lengthy process to close. P-Com may not be able to
close any strategic transaction on the timetable it anticipates, if at all. If
P-Com is unable to compete a corporate transaction, P-Com will incur significant
non-recoverable expenses that may have a material adverse effect on P-Com's
financial position.
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.
30
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.
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. In addition, as a result of the anticipated Debenture Financing, P-Com
anticipates issuing additional shares of Common Stock in connection with
scheduled amortization payments. When the shares of Common Stock that are
issuable upon conversion of these securities, or paid in connection with
required amortization payments, are subsequently sold in the public market, the
trading price of P-Com Common Stock may be negatively affected. As of September
30, 2004, the last reported sale price of P-Com common stock was $0.63. Future
sales of P-Com's Common Stock 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 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. The conversion or exercise of these securities
will 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.
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.
31
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 September 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 September 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 September 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.
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.
While no assurances can be given, the Company is currently negotiating to
restructure the amount due Agilent. 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.
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 the claims made by the consultants. P-Com believes
that the claims are without merit and will ultimately be rejected. However,
while not probable in management's opinion, there is a possibility
that all or some portion of the claim will be allowed to proceed.
On July 14, 2004, P-Com entered into a Settlement Agreement and Release (the
"Release") with Siemens Aktiengesellschaft and Siemens Information and
Communication Networks, Inc. (referred to collectively as "Siemens"), thereby
settling all claims and potential claims between the parties under certain
agreements. Under the terms of the Release, P-Com is obligated to pay Siemens
$500,000, of which P-Com has paid $100,000. P-Com entered into a promissory note
for $400,000 (the "Note") to provide for the payment of the remaining settlement
amount. Under the terms of the Note, P-Com is obligated to pay Siemens an
additional $100,000 upon the earlier of P-Com receiving additional financing in
an amount greater or equal to $100,000, or December 31, 2004. The remaining
$300,000 is payable in monthly installments of $25,000, commencing on January 1,
2005 and ending on December 1, 2005. To secure payment of the amounts due
Siemens under the terms of the Note, P-Com and Siemens entered into an Affidavit
of Confession of Judgment.
32
The amount of ultimate liability with respect to each of the currently pending
actions is less than 10% of P-Com's current assets. In the event P-Com is unable
to satisfactorily resolve these and other proceedings that arise from time to
time, its financial position and results of operations may be materially
affected.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On July 19, 2004, we effected a 1-for-30 reverse stock split of our outstanding
Common Stock, for which we had received stockholder approval at our annual
meeting of stockholders held on December 2, 2003. As a result of the reverse
stock split, each outstanding share of Common Stock automatically converted into
one-thirtieth of a share of Common Stock, with the par value of each share of
Common Stock remaining at one hundreth of one cent ($.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.
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 Delaware Secretary of State of on October 12,
2004.
10.1 Employment Letter Agreement, dated November 3, 2004, between P-Com, Inc.
and Don Meiners.
10.2 Employment Letter Agreement, dated November 3, 2004, between P-Com, Inc.
and Randall L. Carl.
10.3 Note and Warrant Purchase Agreement, dated November 3, 2004, between
P-Com, Inc. and Purchasers.
10.4 Registration Rights Agreement, dated November 3, 2004, between P-Com, Inc.
and Purchasers.
10.5 Form of Promissory Note.
10.6 Form of Warrant.
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.
33
(b) Reports on Form 8-K
On September 23, we filed a Form 8-K current report announcing the renewal of
the Company's credit facility with Silicon Valley Bank for an additional year.
On August 2, 2004, we filed a Form 8-K current report reporting the Company's
financial results for the second quarter ended June 30, 2004.
On July 19, 2004, we filed a Form 8-K current report announcing the
implementation of a one-for-thirty reverse stock split of the Company's
outstanding common stock, effective 8 a.m. Eastern time on July 19, 2004.
On July 12, 2004, we filed a Form 8-K current report announcing a one-for-thirty
reverse stock split of the Company's outstanding common stock.
34
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: November 12, 2004
By: /s/ Daniel W. Rumsey
-------------------------------------
Daniel W. Rumsey
Interim Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 2004
35
EXHIBIT INDEX
3.1 Certificate of Amendment of Restated Certificate of Incorporation of
P-Com, Inc. filed with the Delaware Secretary of State of on October
12, 2004.
10.1(1) Employment Letter Agreement, dated November 3, 2004, between P-Com,
Inc. and Don Meiners.
10.2(2) Employment Letter Agreement, dated November 3, 2004, between P-Com,
Inc. and Randall L. Carl.
10.3(3) Note and Warrant Purchase Agreement, dated November 3, 2004, between
P-Com, Inc. and Purchasers.
10.4(4) Registration Rights Agreement, dated November 3, 2004, between P-Com,
Inc. and Purchasers.
10.5(5) Form of Promissory Note.
10.6(6) Form of Warrant.
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.
(1) Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report
on Form 8-K, filed with the Securities and Exchange Commission on November 9,
2004.
(2) Incorporated by reference to Exhibit 10.2 to the Registrant's Current Report
on Form 8-K, filed with the Securities and Exchange Commission on November 9,
2004.
(3) Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report
on Form 8-K, filed with the Securities and Exchange Commission on November 8,
2004.
(4) Incorporated by reference to Exhibit 10.2 to the Registrant's Current Report
on Form 8-K, filed with the Securities and Exchange Commission on November 8,
2004.
(5) Incorporated by reference to Exhibit 10.3 to the Registrant's Current Report
on Form 8-K, filed with the Securities and Exchange Commission on November 8,
2004.
(6) Incorporated by reference to Exhibit 10.4 to the Registrant's Current Report
on Form 8-K, filed with the Securities and Exchange Commission on November 8,
2004.
36