SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005.
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)
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DELAWARE 77-0289371
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3175 S. WINCHESTER BOULEVARD, CAMPBELL, CALIFORNIA 95008
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 866-3666
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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 May 11, 2005 there were 11,827,426 shares of the Registrant's Common Stock
outstanding, par value $0.0001 per share.
This quarterly report on Form 10-Q consists of 38 pages of which this is page 1.
The Exhibit Index appears on page 35.
P-COM, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION Number
------
Item 1 Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2005
and December 31, 2004............................................ 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003............................. 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2005 and 2004............................. 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........ 31
Item 4 Controls and Procedures.......................................... 32
PART II.OTHER INFORMATION
Item 1 Legal Proceedings................................................ 33
Item 2 Changes in Securities............................................ 33
Item 3 Defaults Upon Senior Securities.................................. 33
Item 6 Exhibits and Reports on Form 8-K................................. 34
Signatures............................................................... 34
PART I - FINANCIAL INFORMATION
ITEM 1.
P-COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2005 2004
ASSETS (unaudited)
--------- -----------
Current assets:
Cash and cash equivalents $ 1,264 $ 2,280
Accounts receivable, net 3,680 2,828
Inventory 1,283 4,722
Prepaid expenses and other assets 1,300 1,519
Assets held for sale, net of liabilities 826
--------- -----------
Total current assets 8,353 11,349
Property and equipment, net 1,220 1,755
Goodwill 11,991 11,991
Other assets 277 328
--------- -----------
Total assets $ 21,841 $ 25,423
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,103 $ 3,139
Other accrued liabilities 7,032 3,500
Loan payable to bank 974 --
Notes payable current 3,192 3,178
Liabilities of discontinued operations 203 249
--------- -----------
Total current liabilities 14,504 10,066
--------- -----------
Other long-term liabilities 2,402 1,743
--------- -----------
Total liabilities 16,906 11,809
--------- -----------
Series B Preferred Stock 1,622 1,569
Series C Preferred Stock 3,057 2,537
Series D Preferred Stock 2,000 2,000
--------- -----------
Total Preferred Stock 6,679 6,106
--------- -----------
Stockholders' equity (deficit):
Common stock 38 35
Treasury stock, at cost; 30 shares (74) (74)
Additional paid-in capital 376,687 376,430
Accumulated deficit (378,266) (368,885)
Accumulated other comprehensive loss (129) 2
--------- -----------
Total stockholders ' equity (deficit) (1,744) 7,508
--------- -----------
Total liabilities and stockholders' equity (deficit) $ 21,841 $ 25,423
========= ===========
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
March 31,
2005 2004
-------- --------
Sales $ 2,497 $ 6,837
Cost of sales 2,545 5,099
-------- --------
Gross profit (loss) (48) 1,738
-------- --------
Operating expenses:
Research and development/engineering 1,197 1,257
Selling and marketing 1,235 1,451
General and administrative 924 1,183
Restructuring charges 5,362
-------- --------
Total operating expenses 8,718 3,891
-------- --------
Operating loss (8,766) (2,153)
Interest expense (219) (75)
Other income (expense), net 187 (113)
-------- --------
Loss from continuing operations (8,798) (2,341)
Loss from discontinued operations -- (40)
-------- --------
Net loss (8,798) (2,381)
Preferred stock accretions (580) (776)
-------- --------
Net loss attributable to common stockholders $ (9,378) $ (3,157)
======== ========
Basic and diluted loss per common share:
Loss from continuing operations $ (0.79) $ (0.39)
Loss from discontinued operations (0.00) (0.00)
-------- --------
Basic and diluted loss per common share $ (0.79) $ (0.39)
======== ========
Shares used in basic and diluted per share computation 11,816 8,154
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(In thousands, unaudited)
Three months ended
March 31,
2005 2004
------- -------
Cash flows from operating activities:
Net loss $(8,798) $(2,381)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss from discontinued operations -- 40
Depreciation 244 421
(Gain) or loss on disposal of property and equipment (242) 7
Amortization of warrants 23 69
Gain on vendor settlements (92) (94)
Loss on restructuring 5,362
Changes in operating assets and liabilities:
Accounts receivable (651) (1,241)
Inventory (727) 1,336
Prepaid expenses and other assets (116) (946)
Accounts payable 552 235
Other accrued liabilities 1,744 598
------- -------
Net cash used in operating activities (2,701) (1,956)
------- -------
Cash flows from investing activities:
Proceeds from sale of investment in Speedcom 100
Acquisition of property and equipment (2) (63)
Proceeds from sale of property and equipment 192
------- -------
Net cash used in investing activities 190 37
------- -------
Cash flows from financing activities:
Proceeds (payments) on bank loan 974 (1)
Proceeds from debt financing 850
Payments under capital lease obligations (327) (201)
------- -------
Net cash provided by (used in) financing activities 1,497 (202)
------- -------
Effect of exchange rate changes on cash (2) (1)
------- -------
Net decrease in cash and cash equivalents (1,016) (2,122)
Cash and cash equivalents at beginning of the period 2,280 6,185
------- -------
Cash and cash equivalents at end of the period $ 1,264 $ 4,063
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
P-COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONTINUED
(In thousands, unaudited)
Three months ended
March 31,
2005 2004
------ ------
Supplemental cash flow disclosures:
Cash paid for interest $ 25 $ 20
------ ------
Non-cash investing and financing activities :
Warrants issued in connection with convertible
promissory notes $ 19 $ --
------ ------
Conversion of Series C Preferred stock into Common stock $ 10 $ 439
------ ------
Warrants issued in connection with lease termination $ 233 $ --
====== ======
The accompanying notes are an intergral part of these condensed consolidated
financial statements
6
P-COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
consolidated financial statements.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of P-Com,
Inc.'s (referred to herein, together with its wholly-owned subsidiaries, as
"P-Com" or the "Company") financial condition as of March 31, 2005, and the
results of their operations and their cash flows for the three months ended
March 31, 2005 and 2004. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's audited 2004
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, 2004. Operating results for the three-month
period ended March 31, 2005 are not necessarily indicative of the operating
results that may be expected for the year ending December 31, 2005.
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 three-month
period ended March 31, 2005, the Company incurred a net loss of $8.8 million and
used $2.7 million cash in its operating activities. As of March 31, 2005, the
Company had a deficit in stockholders' equity of $1.7 million, and accumulated
deficit of $378.3 million. Also as of March 31, 2005, the Company had
approximately $1.2 million in cash and cash equivalents, and a working capital
deficiency of approximately $6.2 million. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
The Company's current working capital requirements are being met principally
from available borrowings under a credit facility ("Credit Facility") with
Silicon Valley Bank (the "Bank"), discussed below. The amount outstanding under
the Credit Facility was approximately $974,000 at March 31, 2005. In addition,
the Company issued additional promissory notes aggregating $850,000 under the
terms of a Note and Warrant Purchase Agreement (the "Purchase Agreement") during
the period ending March 31, 2005, discussed below. Additional borrowings of
$850,000 were available under the Purchase Agreement as of March 31, 2005.
Management currently anticipates that the Restructuring Plan will substantially
reduce, and ultimately eliminate, the Company's dependence on external sources
of financing. However, available borrowings under the Credit Facility and
Purchase Agreement may be inadequate to satisfy the Company's liquidity needs
for the remainder of 2005. As a result, in addition to (i) issuing additional
promissory notes under the Purchase Agreement, (ii) accessing available
borrowings under the Credit Facility, and (iii) significantly curtailing current
spending, and substantially reducing liabilities and operating and other costs
under the Restructuring Plan, management intends to seek additional financing in
order to satisfy its liquidity needs. There can be no assurance that the
Restructuring Plan will be successful, or that additional financing will be
available on acceptable terms, if at all. Accordingly, management is also
evaluating the merits of a strategic acquisition or other transaction that would
substantially improve its liquidity and capital resource position and the merits
of an outright sale of the Company's operation. If ultimately required, there
can also be no assurances that these actions will be successful. If management
is unsuccessful in its plans, the Company will no longer be able to continue as
a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
to amounts and classification of liabilities that may be necessary if the
Company is unable to continue as a going concern.
7
2. NET LOSS PER SHARE
For purposes of computing basic and diluted net loss per common share for the
quarterly period ended March 31, 2005 and 2004, the weighted average common
share equivalents do not include stock options with an exercise price that
exceeds the average fair market of the Company's Common Stock for the period
because the effect would be anti-dilutive. Because losses were incurred in the
first quarter of 2005 and 2004, all options, warrants, and convertible notes are
excluded from the computations of diluted net loss per share because they are
anti-dilutive.
3. BORROWING ARRANGEMENTS
On September 17, 2004, we renewed our 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 of our receivables, deposit
accounts, general intangibles, investment properties, inventories, cash,
property, plant and equipment. We also issued a $4.0 million secured promissory
note underlying the Credit Facility to the Bank. As of March 31, 2005, $974,000
was outstanding under the Credit Facility.
As of March 31, 2005, we were not in compliance with the minimum tangible net
worth covenant established in the Credit Facility. The Company and the Bank are
currently negotiating non-compliance waivers, as well as an amendment to the
Credit Facility in light of the Restructuring Plan. In the event the Bank ceases
to extend credit under the Credit Facility, or declares a default, the Company
will no longer have access to external sources of bank financing.
On November 3, 2004, we entered into a Note and Warrant Purchase Agreement (the
"Purchase Agreement") with a purchaser ("Purchaser") whereby the Purchaser
agreed to purchase debentures in the aggregate principal amount of up to
$5,000,000 (the "Notes") (the "Debenture Financing"). In addition, the Company
agreed to issue warrants to purchase in the aggregate up to 800,000 shares of
the Company's common stock. The warrants have an initial exercise price of $1.50
and a term of five years. The Purchase Agreement provided that the Notes and
warrants be issued in multiple closings. The first closing took place on
November 26, 2004 and consisted of a $3,300,000 Note and warrants to purchase
580,000 shares of the Company's common stock. The second and third closings took
place on March 21, 2005 and March 31, 2005 and consisted of Notes for $250,000
and $600,000, and warrants to purchase 40,000 and 96,000 of the Company's common
stock, respectively.
On November 30, 2004, Agilent Financial Services ("Agilent") entered into an
agreement with us to restructure the $1,725,000 due Agilent on December 31,
2004. Under the terms of the agreement, we paid Agilent an initial payment of
$250,000 on December 1, 2004; with the balance payable in sixteen monthly
payments of $92,187 beginning January 1, 2005, up to and including April 1,
2006. In addition, we issued Agilent a warrant to purchase 178,571 shares of our
common stock. The warrant has an initial exercise price of $0.56 and a term of
five years. On March 31, 2005, the Company and Agilent entered into an agreement
whereby one half of the remaining debt of $1,111,599 would be paid in equal
payments over eighteen months beginning April 1, 2005, with the other half would
be paid in the form of senior preferred stock convertible at any time at the
option of the holder into common stock at a price of $.50 per share. We expect
to realize a gain of $387,000 on the conversion of the debt in the quarter
ending June 30, 2005 after the preferred stock has been authorized and issued.
8
4. BALANCE SHEET COMPONENTS
Inventory
Inventory consists of the following (in thousands of dollars, unaudited):
MARCH 31, DECEMBER 31,
2005 2004
--------- ------------
Raw materials $ 55 $ 475
Work-in-process 75 299
Finished goods 1,153 3,948
--------- ------------
$ 1,283 $ 4,722
========= ============
Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands, unaudited):
MARCH 31, DECEMBER 31,
2005 2004
--------- ------------
Purchase commitment $ 1,255 $ 278
Accrued warranty (a, b) 491 491
Accrued compensation and employee benefits 1,340 987
Value added tax payable 135 175
Customer advances 261 298
Impairment charge for P-Com Italia 826
Accrued rent 6 308
Deferred revenue 2,285 112
Other 433 851
--------- ------------
$ 7,032 $ 3,500
========= ============
a) A summary of product warranty reserve activity for the quarterly period
ended March 31, 2005 is as follows:
Balance at January 1, 2005 $ 491
Additions relating to products sold 94
Payments (94)
---------
Balance at March 31, 2004 $ 491
b) A summary of product warranty reserve activity for the quarterly period
ended March 31, 2004 is as follows:
Balance at January 1, 2004 $ 1,110
Additions relating to products sold 102
Payments (255)
---------
Balance at March 31, 2004 $ 957
9
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
The authorized capital stock of P-Com consists of 35 million shares of Common
Stock, $0.003 par value (the "Common Stock"), and 2 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 (see discussion below),
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 as Series D Convertible Preferred
Stock (the "Series D Preferred Stock"). Effective July 19, 2004, P-Com effected
a one for thirty reverse stock split. All numbers have been restated to reflect
the stock split.
PREFERRED STOCK
The Board of Directors is authorized to issue shares of Preferred Stock in one
or more series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series,
including the dividend rights, dividend rates, conversion rights, voting rights,
term of redemption, including sinking fund provisions, redemption price or
prices, liquidation preferences and the number of shares constituting any series
or designations of any series, without further action by the holders of Common
Stock.
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. Certain holders of Series B Convertible
Preferred Stock agreed to convert the Series B Convertible Preferred Stock into
Common Stock upon receipt of stockholder approval to increase the number of
authorized shares of the Company's Common Stock to allow for conversion of the
Series B Preferred Stock. The Company received the stockholder approval on
December 2, 2003 and these holders converted their Series B Convertible
Preferred Stock into Common Stock. If declared, the holders of the Series B
Preferred Stock shall be entitled to receive dividends payable out of funds
legally available therefore. Holders of Series B 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 Preferred Stock had
converted into Common Stock.
10
Any time after January 31, 2004 and subject to certain limitations, the Company
may require the holders of Series B Preferred Stock to convert all outstanding
shares of Series B 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
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
Preferred Stock are authorized and reserved for issuance; registered
for resale under the 1933 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 Preferred Stock
("Certificate of Designation") shall have been paid.
Upon the occurrence of the following events, the holders of Series B Preferred
Stock may require the Company to purchase their shares of Series B Preferred
Stock for cash:
o Company fails to remove any restrictive legend on any Common Stock
certificate issued to Series B Preferred stockholders 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 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 Preferred Stock
is required to create any securities that rank senior or pari passu to the
Series B Preferred Stock. Upon a liquidation event, any securities senior to the
Series B Preferred Stock shall receive a distribution prior to the Series B
Preferred Stock and pursuant to the rights, preferences and privileges thereof,
and the Series B 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 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
11
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
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 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 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 Preferred Stock into Common Stock. The
Series B Preferred Stock does not have voting rights.
A summary of Series B Preferred Stock activity is as follows (in
thousands):
Shares Amount
--------- ---------
Balances as of December 31, 2004 108 $ 1,569
Preferred stock accretions to accrete
the fair value to the stated value 53
--------- ---------
Balances as of March 31, 2005 108 $ 1,622
========= =========
(a) The Company, after consideration of several valuation models, determined the
fair value of the Preferred Stock as an amount equals to the fair value of the
number of common shares into which the Series C Preferred Stock is convertible
into using the trading market price on the date the Series C Preferred Stock was
issued.
(b) The Company accretes its Series B Preferred Stock to redemption value
through periodic charges to retained earnings.
(c) The Series B Preferred Stock is classified as a mezzanine security, outside
of stockholders equity in the accompanying consolidated balance sheets due to
the cash redemption provisions noted above. Under Statements of Financial
Accounting Standards No. 150, this security would have been classified as equity
in a non-public filing context.
(d) As of March 31, 2005, outstanding Series B Preferred Stock is convertible
into 381,916 shares of common stock.
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 4.64 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.
These shares of Series C Convertible Preferred Stock outstanding on March 31,
2005 are convertible into approximately 3,465 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.
12
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 February 21, 2005,
approximately 3,933 shares of Series C Convertible Preferred Stock had been
converted into approximately 2.29 million shares of Common Stock and
approximately 6,009 shares of Series C Convertible Preferred Stock remained
outstanding. As of February 21, 2005, 3,933 shares of the Series C Warrants have
been exercised.
The shares of Series C Convertible Preferred Stock that remain outstanding are
convertible into approximately 3.5 million 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.
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 has 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 has 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 (See Common Stock Warrants, below).
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 percent (50%) 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;
13
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.
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 the
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.
A summary of Series C Preferred Stock activities is as follows (in thousands):
Shares Amount
--------- ---------
Balance as of December 31, 2004 6.0 $ 2,537
Preferred stock accretions to accrete the
fair value to the stated value 530
Conversion of Series C preferred stock for
2,275 shares of common stock (.06) (10)
--------- ---------
Balances as of March 31, 2005 5.94 $ 3,057
========= =========
14
(a) The Company, after consideration of several valuation models, determined the
fair value of the Preferred Stock as an amount equal to the fair value of the
number of common shares into which the Series C Preferred Stock is convertible
into using the trading market price on the date the Series C Preferred Stock was
issued.
(b) The Company allocated proceeds between the Series C Preferred Stock and the
Warrants based upon their relative fair values.
(c) The beneficial conversion feature was calculated using the adjusted
conversion rate, following the allocation of proceeds to warrants discussed in
item (b) above.
(d) The Company accretes its Series C Preferred Stock to redemption value
through periodic charges to retained earnings.
(e) 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 above. Under Statements of Financial Accounting
Standards No. 150, this security would have been classified as equity in a
non-public filing context.
(f) As of March 31, 2005, outstanding Series C Preferred Stock are convertible
into approximately 3,465 shares of Common Stock.
Beneficial conversion feature represents the excess of the aggregate fair value
of the of the Common Stock, using the market price at around the Series C
commitment date, that the Preferred Stockholders would receive at conversion
over the proceeds received, and it is accreted over a five-year period.
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. The
Series D Preferred Stock are convertible into approximately 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.
15
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.
There was no Series D Preferred Stock activity during the three months ended
March 31, 2005.
(a) The Company, after consideration of several valuation models, determined the
fair value of the Preferred Stock as an amount equal to the fair value of the
number of common shares into which the Series D Preferred Stock is convertible
into using the trading market price on the date the Series D Preferred Stock was
issued
(b) 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 above. Under Statements of Financial Accounting
Standards No. 150, this security would have been classified as equity in a
non-public filing context.
(c) As of March 31, 2005, outstanding Series D Preferred Stock is convertible
into 444,444 shares of Common Stock.
STOCKHOLDER RIGHTS AGREEMENT
On September 26, 1997, the Board of Directors of P-Com adopted a Stockholder
Rights Agreement (the "Rights Agreement"). Pursuant to the Rights Agreement,
Rights (the "Rights") were distributed as a dividend on each outstanding share
of its Common Stock held by stockholders of record as of the close of business
on November 3, 1997. Each Right will entitle stockholders to buy Series A
Preferred at an exercise price of $125.00 upon certain events. The Rights will
expire ten years from the date of the Rights Agreement.
In general, the Rights will be exercisable only if a person or group acquires
15% or more of P-Com's Common Stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 15% or
more of P-Com's Common Stock. In the case of the State of Wisconsin Investment
Board, Firsthand Capital Management, Alpha Capital and StoneStreet Limited
Partnership the threshold figure is 20% rather than 15%. If, after the Rights
become exercisable, P-Com is acquired in a merger or other business combination
transaction, or sells 50% or more of its assets or earning power, each
16
unexercised Right will entitle its holder to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common shares
having a market value at the time of twice the Right's exercise price. At any
time within ten days after the public announcement that a person or group has
acquired beneficial ownership of 15% or more of P-Com's Common Stock, the Board
of Directors, in its sole discretion, may redeem the Rights for $0.003 per
Right.
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 licensed, and its other legacy product
lines. In the quarter ended March 31, 2005, the Company decided to discontinue
selling certain licensed products which resulted in a charge to restructuring of
$3.0 million in licensed inventory.
A summary of inventory reserve activities is as follows:
Inventory
Reserve
------------
Balance at January 1, 2005 $ 25,312
Additions charged to Statement of Operations 2,987
Deductions from reserves (3,149)
------------
Balance at March 31, 2005 $ 25,150
In April 2005, P-Com announced a formal restructuring plan that will
significantly reduce current spending and substantially reduce liabilities and
operating and other costs (the "Restructuring Plan"). The Restructuring Plan was
necessitated in order to curtail the substantial operating losses incurred by
P-Com and management's assessment that substantial operating losses would
continue absent a plan to restructure the business, and substantially reduce its
cost structure. In addition, absent such a plan, P-Com would likely be unable to
attract financing on reasonable terms, if at all.
The Restructuring Plan includes the divestiture of certain unprofitable product
lines, which includes certain of our licensed point-to-point microwave products.
P-Com will, however, continue the sale of its unlicensed radio products, and
certain of its licensed radio products, including refurbished licensed products
in connection with our repair and maintenance business. The Restructuring Plan
also includes a reduction in work force from approximately 130 full and
part-time employees to approximately 60 employees by the end of the third
quarter of 2005. The anticipated cost of the Restructuring Plan is approximately
$5.0 million and includes severance and related liabilities, costs associated
with the cancellation of purchase order commitments, the write-down of certain
inventory, and the loss anticipated from the divestiture of P-Com's engineering
operation in Italy. Management currently anticipates that the Restructuring Plan
will be completed by the end of the third quarter 2005.
A summary of restructuring costs are as follows:
Restructuring
Costs
------------
Severance $ 524
Purchase commitment charge 975
Impairment charge on P-Com Italia 826
Licensed product inventory charge 2,987
Other 50
------------
Balance at March 31, 2005 $ 5,362
17
8. SALES BY GEOGRAPHIC REGION AND CONCENTRATIONS
The breakdown of product sales by geographic region is as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
2005 2004
--------- ---------
North America $ 198 $ 480
United Kingdom 1,018 2,015
Europe 420 1,400
Asia 233 470
Latin America 152 1,807
Other Geographic Regions 476 665
--------- ---------
$ 2,497 $ 6,837
========= =========
During the three-month period ended March 31, 2005 and 2004, three and four
customers accounted for a total of 49% and 67% of our total sales, respectively.
9. NET LOSS
The Company's reported net loss includes the currency translation adjustment
associated with our foreign operations. Net loss was $9.4 million and $3.2
million for the three months ended March 31, 2005 and 2004, respectively.
10. CONTINGENCIES
In June 2000, two former consultants to P-Com Italia S.p.A. filed a complaint
against P-Com Italia in the Civil Court of Rome, Italy seeking payment of
certain consulting fees allegedly due the consultants totaling approximately
$615,000. The Civil Court of Rome has appointed a technical consultant in order
to determine the merit of certain claims made by the consultants. On April 20,
2005, the Civil Court of Rome issued judgment dismissing the case, and ordered
the consultants to pay P-Com Italia's legal fees. The Company anticipates that
the Court's order will be appealed to the Court of Appeal of Rome.
11. SUBSEQUENT EVENTS
On May 3, 2005, we issued an additional $350,000 in Notes, resulting is
additional borrowing availability of $500,000 under the Purchase Agreement. In
addition, we issued warrants to purchase 50,000 of the Company's common stock
The Notes are payable in eight equal quarterly installments and 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 Registrant'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. On April 1, 2005,
the Registrant was required to make the first quarterly installment of $412,500
with respect to then issued and outstanding Notes, of which the Company paid
$200,000 to the Purchaser. Due to certain ownership limitations set forth in the
Purchase Agreement, the Registrant currently anticipates paying the remaining
$212,500 due in connection with the first quarterly installment in shares of
preferred stock to be issued.
On April 28, 2005, announced the Restructuring Plan, designed to significantly
curtail current spending, and substantially reduce liabilities and operating and
other costs. The Restructuring Plan was caused by the substantial operating
losses incurred by P-Com, and management 's assessment that substantial
operating losses would continue in the short term absent a plan to restructure
the business, and substantially reduce its cost structure. In addition, absent
such a plan, P-Com would likely be unable to attract financing on reasonable
terms, if at all.
18
The Restructuring Plan includes the divestiture of certain unprofitable product
lines, which includes certain of our licensed point-to-point microwave products.
P-Com will, however, continue the sale of its unlicensed radio products, and
certain of its licensed radio products, including refurbished licensed products
in connection with our repair and maintenance business. The Restructuring Plan
also currently includes a reduction in work force from approximately 130 full
and part-time employees to approximately 60 employees worldwide by the end of
the third quarter 2005, and the divestiture of P-Com's research and development
operations conducted by P-Com, Italia, which was completed on April 14, 2005,
and resulted in an impairment charge of $826,000 which was recorded in the
quarter ending March 31, 2005.
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 develop, manufacture and market licensed exempt, next generation
wireless mesh routers and other licensed and unlicensed point-to-point, spread
spectrum and point-to-multipoint radio systems to carriers, systems integrators
and value added resellers, and provide repair, maintenance and other services to
our licensed and other customers worldwide.
On April 28, 2005, we announced a restructuring plan that will significantly
curtail current spending, and substantially reduce liabilities and operating and
other costs (the "Restructuring Plan"). The Restructuring Plan was caused by the
substantial operating losses incurred by P-Com, and management's assessment that
substantial operating losses would continue in the short term absent a plan to
restructure the business, and substantially reduce its cost structure. In
addition, absent such a plan, P-Com would likely be unable to attract financing
on reasonable terms, if at all.
The Restructuring Plan includes the divestiture of certain unprofitable product
lines, which includes certain of our licensed point-to-point microwave products.
P-Com will, however, continue the sale of its unlicensed radio products, and
certain of its licensed radio products, including refurbished licensed products
in connection with our repair and maintenance business. The Restructuring Plan
also currently includes a reduction in work force from approximately 130 full
and part-time employees to approximately 60 employees worldwide by the end of
the third quarter 2005. Management currently anticipates that the Restructuring
Plan will be completed by the end of the third quarter 2005.
Critical Accounting Policies
MANAGEMENT'S USE OF ESTIMATES AND ASSUMPTIONS. The preparation of financial
statements in accordance with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates, and such differences could be material and affect
the results of operations reported in future periods.
REVENUE RECOGNITION. Revenue from product sales is recognized upon transfer of
title and risk of loss, which is upon shipment of the product, provided no
significant obligations remain and collection is probable. Provisions for
estimated warranty repairs, returns and other allowances are recorded at the
time revenue is recognized.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful accounts
for estimated losses from the inability of our customers to make required
payments. We evaluate our allowance for doubtful accounts based on the aging of
our accounts receivable, the financial condition of our customers and their
payment history, our historical write-off experience and other assumptions. In
order to limit our credit exposure, we require irrevocable letters of credit and
even prepayment from certain of our customers before commencing production.
19
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.
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 its
trading market prices, 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 has
occurred since the Wave Wireless acquisition. The Company performs this test
annually, on the first day of the fourth fiscal quarter of each year.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist principally of cash
equivalents and trade accounts receivable. The Company places its cash
equivalents in a variety of financial instruments such as market rate accounts
and U.S. Government agency debt securities. The Company, by policy, limits the
amount of credit exposure to any one financial institution or commercial issuer.
The Company performs on-going credit evaluations of its customers' financial
condition to determine the customer's credit worthiness. Sales are then
generally made either on 30 to 60 day payment terms, COD or letters of credit.
The Company extends credit terms to international customers for up to 90 days,
which is consistent with prevailing business practices.
At March 31, 2005 and 2004, approximately 84% and 55%, respectively, of trade
accounts receivable represent amounts due from five and three customers,
respectively.
20
RESULTS OF OPERATIONS
SALES. For the three months ended March 31, 2005, total sales were approximately
$2.5 million as compared to $6.8 million for the same period in the prior year.
The significant decrease in revenue as compared to the same period last year is
attributable to lower revenue in certain licensed product lines and lower than
anticipated refurbished licensed product revenue associated with our repair and
maintenance business (the "RMA Business"). The lower revenue attributable to our
licensed product lines principally reflects the substantial decrease in sales to
a single customer in Latin America, while the decrease in sales attributable to
our RMA Business principally reflects lower sales volume attributable to a
single customer in Europe. Because of the significant decline in sales
attributable to our licensed product lines, a substantial portion of our product
sales during the quarter ended March 31, 2005 came from our RMA Business, which
generated approximately $1.3 million of our sales in the first quarter of 2005,
but were down from the $3.5 million recorded in the comparable period in 2004.
Management currently does not anticipate sales attributable to our RMA Business
to reach levels experienced in the first quarter of 2004.
During the three months ended March 31, 2005, approximately 6% of our sales were
to the Latin American market, and 9% of our sales were to the Asia-Pacific Rim
areas. During the same period in 2004, we generated 26% of our sales to the
Latin American market and 14% of our sales in the Asia-Pacific Rim. The United
Kingdom market contributed 41% of the Company's revenue in the three months
ended March 31, 2005, compared to 29% in the same period in 2004. The European
continent generated approximately 17% of the Company's revenue in the three
months ended March 31, 2005, compared to 20% in the same period in 2004. The
decrease in sales to the Asia-Pacific Rim in the three-month period ended March
31, 2005, compared to the comparable period in 2004 is principally due to a
substantial decrease in sales to China.
As a result of the Restructuring Plan, management is currently divesting certain
unprofitable product lines, and therefore anticipates that sales levels for the
remaining periods in 2005 will not reach the levels achieved in the comparable
periods in 2004. Our sales in subsequent periods will be substantially dependent
on sales of legacy product lines, sales of our unlicensed products, and sales
attributable to our RMA Business.
GROSS PROFIT (LOSS). Gross profit (loss) for the three months ended March
31, 2005 and 2004, was $(.5) and $1.7 million, respectively, or (2)% and 25% of
sales in each of the respective quarters. The lower gross margin during the
quarter ended March 31, 2005 was principally attributable to the significantly
lower sales volume achieved during the quarter compared to the same period in
2004. The significantly lower sales volume during the quarter ended March 31,
2005 resulted in a substantial amount of unabsorbed overhead relative to the
comparable period in 2004. As a result of the Restructuring Plan, and the
consequent divestiture of certain unprofitable product lines, management
currently anticipates that gross margins will improve in subsequent periods.
RESEARCH AND DEVELOPMENT. For the three months ended March 31, 2005 and
2004, research and development ("R&D") expenses were approximately $1.2 million
and $1.3 million, respectively. As a percentage of sales, research and
development expenses were at 48% for the three months ended March 31, 2005,
compared to 18% for the three months ended March 31, 2004. The percentage
increase is due to the significant reduction in revenue partially offset by
reductions in spending. As a result of the Restructuring Plan, management
currently anticipates that research and development costs will substantially
decrease in subsequent periods relative to the level experienced in the quarter
ended March 31, 2005.
SELLING AND MARKETING. For the three months ended March 31, 2005 and 2004,
sales and marketing expenses were approximately $1.2 million and $1.5 million,
respectively. The decrease in sales and marketing expenses in the quarter ended
March 31, 2005 is due to headcount reductions and other related expense
reductions, and lower commissions in light of decreased sales. As a percentage
of sales, selling and marketing expenses was 49% for the three months ended
March 31, 2005, compared to 21% for the three months ended March 31, 2004. As a
result of the Restructuring Plan, management currently anticipates that sales
and marketing costs will substantially decrease in subsequent periods relative
to the level experienced in the quarter ended March 31, 2005.
GENERAL AND ADMINISTRATIVE. For the three months ended March 31, 2005 and
2004, general and administrative expenses were approximately $.9 million and
$1.2 million, respectively. The decrease in general and administrative expense
in the first quarter of 2005 is principally attributable to a realization of
savings from cost reduction efforts that continued from 2004 to 2005, including
reduced consulting and legal expenses, and facilities consolidation. As a
percentage of sales, general and administrative expenses were 37% for the three
months ended March 31, 2005, compared to 17% for the three months ended March
31, 2004. The percentage decrease is due to our success in significantly
reducing our expenses throughout the year, as discussed above. As a result of
the Restructuring Plan, management currently anticipates that general and
administrative expenses will further decrease in subsequent periods relative to
the level experienced in the quarter ended March 31, 2005.
21
ASSET IMPAIRMENT AND 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 April 2005, P-Com announced the adoption of the Restructuring Plan that will
significantly curtail current spending, and substantially reduce liabilities and
operating and other costs. The Restructuring Plan includes the divestiture of
certain unprofitable product lines, workforce reductions, write-down of certain
inventory, and a loss associated with the divestiture of the Company's research
and development operations in Italy. A restructuring charge of nearly $5.4
million was taken as of March 31, 2005, to cover the costs associated with the
Restructuring Plan.
INTEREST EXPENSE. For the three months ended March 31, 2005 and 2004,
interest expense was $0.2 million and $0.8 million, respectively. Interest
expense for the first quarter of 2005 was primarily for interest paid on
short-term bank borrowings and interest on debentures and promissory notes. As a
result of the Company's dependence on the Credit Facility with the Bank to meet
its working capital needs, as well as the issuance of the Notes, interest
expense is anticipated to increase in subsequent periods relative to the levels
incurred in the three months ended March 31, 2005.
OTHER INCOME, NET. For the three-month period ended March 31, 2005, other
income (loss), net, totaled $.2 million compared to a loss of $(0.1) million for
the comparable three-month period in 2004. The gain in the three-month period
March 31, 2005, was due primarily to a gain on the sale of property and
equipment, versus a loss on foreign exchange rate for the same period in 2004.
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 three-month period ended March 31,
2005, we used approximately $2.7 million of cash in operating activities,
primarily due to our net loss of $8.8 million, increases in accounts receivable
of $.7 million, increases in inventory of $.7 million, and increases in prepaid
and other assets of $.1 million, offset by the non-cash restructuring charge of
$5.4 million, higher accounts payable $.6 million, and higher other accrued
liabilities of $1.7 million.
During the three-month period ended March 31, 2004, we used approximately
$2.0 million of cash in operating activities, primarily due to our net loss of
$2.4 million, a $0.1 million non-cash gain from vendor settlements, which were
offset by a $0.1 million non-cash loss related to amortization of warrants and
loss on discontinued operations, and depreciation expenses of $0.4 million.
Significant contributions to cash flow resulted from a net reduction in
inventories of $1.3 million, and a net increase of accounts payable and other
accruals of $0.8 million. These were partially offset by a net increase of $1.2
million in accounts receivable, and a net increase of $0.9 million in prepaid
and other assets.
CASH FROM INVESTING ACTIVITIES. During the three-month period ended March
31, 2005, we received approximately $.2 million in proceeds from the sale of
property and equipment. During the three-month period ended March 31, 2004, we
received approximately $.1 million from the sale of our investment in Speedcom,
offset by $.06 million for property and equipment acquisitions during the
quarter.
22
CASH FROM FINANCING ACTIVITIES. During the three-month period ended March
31, 2005, we received approximately $1.5 million of cash from financing
activities, primarily from $1.0 million in loans under the Credit Facility, and
$.8 million in Note proceeds from the Debenture Financing, offset by $0.3
million in repayments related to outstanding Notes.
During the three-month period ended March 31, 2004, we used approximately $0.2
million of cash flows for financing activities, primarily $0.2 million in
payments related to capital lease obligations.
CURRENT LIQUIDITY. As of March 31, 2005, our principal sources of liquidity
consisted of borrowing availability under the Credit Facility, and approximately
$1.2 million of cash and cash equivalents, compared to approximately $2.3
million in cash and cash equivalents at December 31, 2004. Available borrowings
under the Credit Facility at March 31, 2005 were approximately $1.4 million,
compared to $1.8 million at December 31, 2004. As of March 31, 2005, we were not
in compliance with the minimum tangible net worth covenant established in the
Credit Facility. The Company and the Bank are currently negotiating
non-compliance waivers, as well as an amendment to the Credit Facility in light
of the Restructuring Plan. In the event the Bank ceases to extend credit under
the Credit Facility, or declares a default, the Company will no longer have
access to external sources of bank financing.
In additional to accessing available borrowings under the Credit Facility,
management currently intends to issue additional Notes under the Purchase
Agreement. Additional borrowings of $850,000 are available under the Purchase
Agreement as of March 31, 2005; however, we issued an additional $350,000 in
Notes on May 3, 2005, resulting in additional borrowing availability of $500,000
under the Purchase Agreement.
At March 31, 2005, our total liabilities were approximately $16.9 million,
compared to $11.8 million at December 31, 2004. Our current assets of $8.4
million and our current liabilities of $14.5 million at March 31, 2005, resulted
in negative working capital of approximately $6.2 million, compared to working
capital of $1.3 million at December 31, 2004.
Management currently anticipates that the Restructuring Plan will substantially
reduce, and ultimately eliminate, the Company's dependence on external sources
of financing. However, available borrowings under the Credit Facility and
Purchase Agreement may be inadequate to satisfy the Company's liquidity needs
for the remainder of 2005. As a result, in addition to (i) issuing additional
promissory notes under the Purchase Agreement, (ii) accessing available
borrowings under the Credit Facility, and (iii) significantly curtailing current
spending, and substantially reducing liabilities and operating and other costs
under the Restructuring Plan, management intends to seek additional financing in
order to satisfy its liquidity needs. There can be no assurance that the
Restructuring Plan will be successful, or that additional financing will be
available on acceptable terms, if at all. Accordingly, management is also
evaluating the merits of a strategic acquisition or other transaction that would
substantially improve its liquidity and capital resource position and the merits
of an outright sale of the Company's operation. If ultimately required, there
can also be no assurances that these actions will be successful. If management
is unsuccessful in its plans, the Company will no longer be able to continue as
a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
to amounts and classification of liabilities that may be necessary if the
Company is unable to continue as a going concern.
COMMITMENTS AND OFF BALANCE SHEET INSTRUMENTS. Rent expense under operating
leases totaled approximately $400,000 for the three months ended March 31, 2005.
The Company expects to incur rent expense of approximately $150,000 during the
second quarter of 2005, which amount the Company anticipates continuing each
quarter through the remainder of 2005. The Company does not have any future
non-cancelable lease payments under operating leases.
During the first quarter of 2005, 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 March 31, 2005, the total amount remaining to be
paid under those agreements totaled approximately $900,000, of which
approximately $600,000 is scheduled to be paid in eighteen monthly installments
beginning April 1, 2005. This amount is reflected as other accrued liabilities
on the Company's balance sheet. See "Current Liquidity" below for a discussion
of management's plan to satisfy the Company's requirements with respect to these
obligations and to provide cash to finance projected operations.
23
We do not have any material commitments for capital equipment. Additional future
capital requirements will depend on many factors, including our plans to
increase manufacturing capacity, working capital requirements for our
operations, and our internal free cash flow from operations.
CERTAIN RISK FACTORS AFFECTING P-COM
An investment in our Common Stock is subject to many risks. You should
carefully consider the risks described below, together with all of the other
information included in this Prospectus, including the financial statements and
the related notes, before you decide whether to invest in our Common Stock. Our
business, operating results and financial condition could be harmed by any of
the following risks. The trading price of our Common Stock could decline due to
any of these risks, and you could lose all or part of your investment.
RISKS RELATED TO P-COM'S FINANCIAL CONDITION AND OPERATIONS
WE NEED ADDITIONAL FINANCING.
Our core business product sales are still significantly below levels necessary
to achieve positive cash flow, and are anticipated to decline significantly as a
result of the execution of the Restructuring Plan. From inception to December
31, 2004, our aggregate net loss is approximately $368 million. Our cash
position has declined to $1.2 million at March 31, 2005. We had negative working
capital of $6.2 million as of March 31, 2005. In November 2004, we obtained a
commitment for an additional $5.0 million in debt financing (the "Debenture
Facility"), and have borrowed $4.5 million as of May 5, 2005 under the Debenture
Facility. To continue as a going concern, we may be required to secure
additional debt or equity capital. To address our liquidity requirements, we are
aggressively reducing expenses in connection with the implementation of our
Restructuring Plan. We also currently plan to raise additional equity and/or
debt capital prior to the end of the third quarter of 2005. No assurances can be
given that we will be successful in our Restructuring Plan, or in our attempts
to raise additional debt or equity financing.
OUR CURRENT BUSINESS AND FINANCIAL CONDITION RAISE DOUBTS ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
Our independent accountants' opinion on our 2004 consolidated financial
statements includes an explanatory paragraph indicating substantial doubt about
our ability to continue as a going concern. The financial statements
incorporated in this prospectus by reference have been prepared assuming that we
will continue as a going concern. The financial statements do not include
adjustments that might result if we were required to cease operations. These
adjustments would include, among other things, a write-down in the value of our
assets from book value to liquidation value. To continue as a going concern, we
will have to significantly increase our sales, and we may be required to raise
additional equity and/or debt financing. We may not accomplish these tasks. If
we are unable to raise additional debt or equity financing, we may not be unable
to continue as a going concern.
OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN AND FAILURE TO
OBTAIN NEEDED FINANCING MAY AFFECT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
In the event we are unable to raise additional debt or equity financing, or
otherwise improve our liquidity position, we may not be able to continue as a
going concern. Our future capital requirements will depend upon many factors,
including the success of our Restructuring Plan, the continuation of our RMA
Business, development costs of new products and related software, 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. Our history of substantial operating losses could also severely limit
our ability to raise additional financing.
24
WE MAY NOT BE ABLE TO REPAY OUR EXISTING DEBT AND ANY REPAYMENT OF OUR DEBT WITH
SHARES OR BY RAISING ADDITIONAL FUNDS MAY RESULT IN SIGNIFICANT DILUTION TO OUR
STOCKHOLDERS.
At March 31, 2005, we owed, excluding accrued but unpaid interest, an aggregate
amount of $4.15 million to SDS Capital Group SPC, Ltd ("SDS"), and it is
anticipated that such indebtedness will increase to $5.0 million prior to the
end of the second quarter of 2005. Interest accrues on such debt at an annual
interest rate of 7%, increasing to 8% on July 1, 2005 and 10% on April 1, 2006
through the maturity date of the loan, December 31, 2006. If we are unable to
generate sufficient cash flow from our operations, secure funds from the capital
markets or lenders or restructure our debt to SDS, we will not be able to
continue as a going concern.
We may make the principal and interest payments under our Debenture Facility in
either shares of our common stock, cash or a combination of both. The number of
shares of ccommon stock that may be used to pay the quarterly installments is
capped at 6,000,000 shares of common stock. We currently do not have enough cash
to make the required payments under the Debenture Facility and anticipate making
the vast majority if not all of the payments in shares of our common stock. 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.
WE MAY NOT BE ABLE TO REPAY THE DEBENTURE FACILITY INSTALLMENT PAYMENTS IN
SHARES OF OUR COMMON STOCK.
Under our Debenture Facility, we may not issue shares of common stock to
make the quarterly installment payments if the issuance of such shares would
result in SDS beneficially owning (as determined in accordance with Section
13(d) of the Exchange Act) more than 9.9% of all of the common stock outstanding
at such time. SDS may waive this ownership blocker but it is not obligated to do
so. In the event that we are prevented from making an installment payment in
shares of common stock due to the ownership blocker and SDS does not waive
compliance with this provision, then we may be required to issue preferred
stock, or default on our payment obligations under the Debenture Facility. Also,
the terms of the Debenture Facility limit the number of shares of common stock
that we may issue as quarterly installment payments to 6,000,000 shares. If we
make the required payments in shares of common stock, given the Company's
current stock price, we will exceed the share cap. In such event, if SDS does
not waive the share cap, then we may default on our payment obligations under
the Debenture Facility.
AS A RESULT OF THE RESTRUCTURING PLAN, OUR REVENUE WILL DECREASE SUBSTANTIALLY.
As a result of the Restructuring Plan, our revenue is anticipated to decrease
substantially. While we believe that a consequence of the Restructuring Plan
will be to return P-Com to profitability, no assurances can be given that we
will achieve the objectives of the Restructuring Plan, or that the sales in our
remaining product lines can sufficiently increase to allow us to achieve
positive cash flow from operations. Until sales levels in our remaining product
lines can sufficiently increase, our business, financial condition and results
of operations will continue to be adversely affected.
WE RELY ON A LIMITED NUMBER OF CUSTOMERS FOR A MATERIAL PORTION OF OUR SALES.
THE LOSS OF OR REDUCTION IN SALES TO ANY OF OUR CUSTOMERS COULD HARM OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATION.
For the quarter ended March 31, 2005, sales to our top four customers accounted
for 56% of total sales. We expect that a limited number of customers will
continue to account for a significant portion of our sales for the foreseeable
future. The loss of any one of these customers would have an immediate and
material adverse effect on our sales. If we are unsuccessful in obtaining
significant new customers or if one of our top customers or several small
customers cancel or delay their orders for our products, then our business and
prospects could be harmed which may cause the price of our common stock to
decline. Our customer concentration also results in concentration of credit
risk. As of March 31, 2005, five customers accounted for 84% of our total
accounts receivable balances. If any one of these customers is unable to fulfill
its payment obligations to us, our revenue could decline significantly.
25
AS A RESULT OF THE RESTRUCTURING PLAN, WE ARE SUBSTANTIALLY DEPENDENT ON THE
SALE OF REFURBISHED LICENSED PRODUCTS, AND A REDUCTION IN SUCH SALES WILL
MATERIALLY HARM P-COM'S RESULTS OF OPERATIONS.
For the year ended December 31, 2004, and for the quarter ended March 31, 2005,
sales of refurbished licensed products was $1.3 million and $3.5 million, or 52%
and 51% of total sales, respectively. As a percentage of total sales and total
sales of licensed products, sales of refurbished licensed products will
substantially increase in 2005 relative to 2004 as a result of the substantial
decrease in sales of new licensed products anticipated in 2005 as a result of
the Restructuring Plan. Total sales of refurbished licensed products will
decline over time in the event our customers determine to replace existing
radios with new product, rather than send them to us for continued repair and
maintenance. In addition, our customers may elect to source refurbished licensed
products from third parties rather than us, as was the case in the fourth
quarter of 2004 when one of our customers elected to contract with a third party
for its refurbished licensed product requirements. Although we were ultimately
able to recapture that customer's business, no assurances can be given that we
will not lose customers in the future, or that customers will not elect to
purchase new licensed products rather than send them to us for repair and
maintenance. In the event of a reduction in the sale of refurbished licensed
products, our results of operations will be materially harmed.
OUR OPERATING RESULTS IN THE PAST ARE NOT ANTICIPATED TO REFLECT OUR OPERATING
RESULTS IN THE FUTURE, WHICH MAKES OUR RESULTS OF OPERATIONS DIFFICULT TO
PREDICT.
As a result of Restructuring Plan, our future operating results will vary
significantly from our past operating results. Factors that will significantly
affect our operating results include the following:
o the divesture of certain licensed product lines, that in the year
ended December 31, 2004, and quarter ended March 31, 2005,
contributed approximately $10.2 million and $.2 million in revenue
to P-Com, respectively;
o the increased reliance on our RMA Business, that in the year ended
December 31, 2004, and quarter ended March 31, 2005, contributed
approximately $11.2 million and $1.3 million in revenue to P-Com,
respectively; and
o the increased reliance on the sale of unlicensed radio products,
that in the year ended December 31, 2004, and quarter ended March
31, 2005, contributed approximately $2.8 million and $.8 million in
revenue to P-Com, respectively.
As we execute our Restructuring Plan, these factors will cause our operating
expenses to be disproportionately high or our gross revenues to be substantially
lower in future periods.
P-COM FACES SUBSTANTIAL COMPETITION AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
We face 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, Harris
Corporation-Farinon Division, NEC, Sagem, Nortel, 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. We face actual and potential competition not only
from these established companies, but also from start-up companies that are
developing and marketing new commercial products and services. Some of our
current and prospective customers and partners have developed, are currently
developing or could manufacture products competitive with our products.
The principal elements of competition in our market and the basis upon which
customers may select our systems include price, performance, software
functionality, perceived ability to continue to be able to meet delivery
requirements, and customer service and support. Recently, certain competitors
have announced the introduction of new competitive products, including related
software tools and services, and the acquisition of other competitors and
competitive technologies. We expect competitors to continue to improve the
performance and lower the price of their current products and services and to
introduce new products and services or new technologies that provide added
26
functionality and other features. New product and service offerings and
enhancements by our competitors could cause a decline in our sales or loss of
market acceptance of our systems. New offerings could also make our systems,
services or technologies obsolete or non-competitive. In addition, we are
experiencing significant price competition and we expect that competition will
intensify.
P-COM'S OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BY DETERIORATING GROSS
MARGINS AND SALES VOLUMES.
The intense competition for our licensed products has resulted in a continued
reduction in 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 our product lines. These deteriorating gross margins will
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, the intensification of competition, and the recent decrease in sales
volumes.
If we cannot significantly reduce costs, develop new products in a timely manner
or in the event we fail to achieve increased sales of new products at a higher
average selling price, then we will be unable to offset declining average
selling prices in many of our product lines. If we are unable to offset
declining average selling prices, or achieve corresponding decreases in
manufacturing operating expenses, our gross margins will continue to decline.
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 we have installed and have in operation over 150,000 radio units
globally, we have not developed a large installed base of our equipment or the
kind of close relationships with a broad base of customers of a type enjoyed by
larger, more developed companies, which would provide a base of financial
performance from which to launch strategic initiatives and withstand business
reversals. In addition, we have not built up the level of capital often enjoyed
by more established companies, so from time to time, it faces serious challenges
in financing its continued operations. We may not be able to successfully
address these risks.
WE RELY ON THIRD PARTY MANUFACTURERS AND SUPPLIERS AND ANY FAILURE OF OR
INTERRUPTION IN THE MANUFACTURING, SERVICES OR PRODUCTS PROVIDED BY THESE THIRD
PARTIES COULD HARM OUR BUSINESS.
We rely on third-party manufacturers for the manufacturing, repair and
maintenance of a substantial portion of our products. We have limited internal
manufacturing, repair and maintenance capacity, which may not be sufficient to
fulfill customers' requirements. Our contract service providers may not be able
to react to our demands on a timely basis. In addition, certain components and
subassemblies necessary for the manufacture of our systems are obtained from a
sole supplier or a limited group of suppliers.
Our reliance on third-party manufacturers, service providers and suppliers
involves risks. From time to time, we have 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 has been due to a variety
of factors, including, in some cases, our financial condition. As a result of
our reliance on these third parties, we have reduced control over the price,
timely delivery, reliability and quality of finished products, components and
subassemblies. Any failure by us, or our contract manufacturers to repair,
maintain, manufacture, assemble and ship systems and meet customer demands on a
timely and cost-effective basis could damage relationships with customers and
have a material adverse effect on our business, financial condition and results
of operations.
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.
Our future operating results depend upon the continued growth and increased
availability and acceptance of our products 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 our systems.
Predicting which segments of these markets will develop and at what rate these
markets will grow is difficult.
27
DUE TO OUR INTERNATIONAL SALES AND OPERATIONS, WE ARE EXPOSED TO BUSINESS,
POLITICAL, REGULATORY, OPERATIONAL, FINANCIAL AND ECONOMIC RISKS, ANY OF WHICH
COULD INCREASE OUR COSTS AND HINDER OUR GROWTH.
As a result of our current heavy dependence on international markets, especially
in the United Kingdom, the European continent, the Middle East, China, and Latin
America, we face business, political, regulatory, operational, financial and
economic risks that are often more volatile than those commonly experienced in
the United States. Approximately 92% and 89% of our sales in the year ended
December 31, 2003 and December 31, 2004, respectively, were made to customers
located outside of the United States.
Due to political and economic instability in new markets, economic, political
and foreign currency fluctuations may be even more volatile than conditions in
developed countries. Countries in the Asia/Pacific, African, and Latin American
regions have in recent years experienced weaknesses in their currency, banking
and equity markets. These weaknesses have adversely affected and could continue
to adversely affect demand for our products.
WE FACE RISKS ASSOCIATED WITH CURRENCY EXCHANGE RATE FLUCTUATIONS.
Approximately 89% and 92% of our sales in the year ended December 31, 2004 and
the quarter ended March 31, 2005 were made to customers located outside of the
United States and a larger portion of our revenues is denominated in foreign
currencies. Historically, our international sales have been denominated in
British pounds sterling, Euros or United States dollars. Conducting business in
currencies other than U.S. dollars subjects us to fluctuations in currency
exchange rates that could have a negative impact on our reported operating
results. Fluctuations in the value of the U.S. dollar relative to other
currencies impact our revenues, cost of revenues and operating margins and
result in foreign currency translation gains and losses. For example, 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 us if we have 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 us on Euro or
British pounds sterling denominated sales as our functional currency is in
United States dollars. For international sales that we would require to be
United States dollar-denominated, such a decrease in the value of foreign
currencies could make our systems less price-competitive if competitors choose
to price in other currencies and could adversely affect our financial condition.
We fund our Italian subsidiary's operating expenses, which are denominated in
Euros. Historically, we have not engaged in exchange rate-hedging activities.
Although we may implement hedging strategies to mitigate this risk, these
strategies may not eliminate our exposure to foreign exchange rate fluctuations
and involve costs and risks of their own, such as ongoing management time and
expertise, external costs to implement the strategy and potential accounting
implications.
GOVERNMENTAL REGULATIONS AFFECTING MARKETS IN WHICH P-COM COMPETES COULD
ADVERSELY AFFECT ITS BUSINESS AND RESULTS OF OPERATIONS.
Radio communications are extensively regulated by the United States and foreign
governments as well as by international treaties. P-Com's systems must conform
to a variety of domestic and international requirements established to, among
other things, avoid interference among users of radio frequencies and to permit
interconnection of equipment. Historically, in many developed countries, the
limited availability of radio frequency spectrum has inhibited the growth of
wireless telecommunications networks. Each country's regulatory process differs.
To operate in a jurisdiction, P-Com must obtain regulatory approval for its
systems and comply with differing regulations.
Regulatory bodies worldwide continue to adopt new standards for wireless
telecommunications products. The delays inherent in this governmental approval
process may cause the cancellation, postponement or rescheduling of the
installment of communications systems by P-Com's customers and P-Com. The
failure to comply with current or future regulations or changes in the
interpretation of existing regulations could result in the suspension or
cessation of operations. Those regulations or changes in interpretation could
require P-Com to modify its products and services and incur substantial costs in
order to comply with the regulations and changes.
28
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, any of which could be material to our business, operating results and
financial condition. Corporate transactions, including mergers and acquisitions,
are risky, are subject to a lengthy process to close and could divert
management's time and focus from operating our business. 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 complete a corporate transaction, P-Com will incur
significant non-recoverable expenses that may have a material adverse effect on
P-Com's financial position. If a transaction is completed, it could result in
unanticipated operating difficulties and expense and the anticipated benefits of
the transaction may not materialize.
OUR BUSINESS AND GROWTH MAY SUFFER IF WE ARE UNABLE TO HIRE AND RETAIN KEY
PERSONNEL WHO ARE IN HIGH DEMAND.
We depend on the continued contributions of our senior management and other key
personnel, including Daniel W. Rumsey, the Chief Restructuring Officer, and Don
Meiners, the Company's President. The loss of the services of any of either of
these executives, or any of our key personnel could harm our business. We do not
maintain key person life insurance policies on any of our executive officers.
Competition for senior management in our industry is intense and we may not be
able to retain our senior management or attract and retain new personnel in the
future. Volatility or lack of performance in our stock price may also affect our
ability to attract and retain our key personnel. Our future success also depends
on our ability to identify, attract and retain highly skilled technical,
managerial, finance and marketing personnel. Qualified individuals are in high
demand, and we may incur significant costs to attract them. If we are unable to
attract or retain the personnel we need to succeed, our business may suffer.
THIRD PARTIES MAY SUE US FOR INTELLECTUAL PROPERTY INFRINGEMENT THAT, IF
SUCCESSFUL, COULD REQUIRE US TO PAY SIGNIFICANT DAMAGE AWARDS OR LICENSING FEES.
We cannot be certain that we do not and will not infringe the intellectual
property rights of others. We may be subject to legal proceedings and claims in
the ordinary course of our business and third parties may sue us for
intellectual property infringement or initiate proceedings to invalidate our
intellectual property. Any intellectual property claims, whether or not
meritorious, could result in costly litigation and could divert management
resources and attention. Moreover, should we be found liable for infringement,
we may be required to enter into licensing agreements (if available on
acceptable terms or at all), pay damages or limit or curtail our product or
service offerings. Moreover, we may need to redesign some of our products to
avoid future infringement liability. Any of the foregoing could prevent us from
competing effectively and harm our business and results of operations.
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IF WE FAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES, WE COULD LOSE
CUSTOMERS AND OUR SALES MAY DECLINE.
The telecommunications equipment industry is characterized by rapidly changing
technologies, evolving industry standards, frequent new product and service
introductions and changing customer demands. The introduction of new products
and services embodying new technologies and the emergence of new industry
standards and practices can render existing products and services obsolete and
unmarketable or require unanticipated investments in technology. Our future
success will depend on our ability to internally develop, source or license
leading technologies to enhance our existing products and services, to develop
new products and services that address the changing demands of our customers,
and to respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis. We may experience difficulties
that could delay or prevent the successful design, development, introduction or
marketing of new products and services. Any new products, services or
enhancement that we develop will need to meet the requirements of our current
and prospective customers and may not achieve significant market acceptance.
RISK RELATING TO CAPITAL MARKETS AND P-COM COMMON STOCK
THE NASDAQ SMALL CAP MARKET HAS DELISTED OUR STOCK AND OUR COMMON STOCK IS
DEEMED TO BE "PENNY STOCK," WHICH MAY SEVERELY LIMIT THE ABILITY OF STOCKHOLDERS
TO SELL 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 "penny
stock" regulation. For transactions covered by this regulation, broker-dealers
must make a special suitability determination for the purchase of the securities
and must have received the purchaser's written consent to the transaction prior
to the purchase. Additionally, for any transaction involving a penny stock, the
rules generally require the delivery, prior to the transaction, of a risk
disclosure document mandated by the SEC relating to the penny stock market. The
broker-dealer is also subject to additional sales practice requirements.
Consequently, the penny stock rules may restrict the ability of broker-dealers
to sell the company's Common Stock and may affect the ability of holders to sell
the Common Stock in the secondary market, and the price at which a holder can
sell the Common Stock.
OUR STOCK PRICE HAS BEEN VOLATILE AND HAS EXPERIENCED SIGNIFICANT DECLINE, AND
MAY CONTINUE TO BE VOLATILE AND DECLINE.
Our common stock currently trades sporadically on the OTC Bulletin Board. The
market for our common stock may continue to be an inactive market, and the
market price of our common stock may experience significant volatility. 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 ours, 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,
30
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. 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, and our
stockholders may not be able to resell shares of our Common Stock at or above
the price paid for those shares.
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 borrowings under the Debenture Facility, P-Com
anticipates issuing up to an additional 6.0 million shares of Common Stock in
connection with the scheduled amortization payments. When the shares of Common
Stock that are issuable upon conversion of our preferred stock, 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 December 31, 2004, the last reported sale price of P-Com common
stock was $0.44. Future sales of P-Com's Common Stock or the perception that
future sales will occur 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.
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 may issue additional shares of
common stock in the future, which would further dilute its stockholders.
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 March 31, 2005, 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.
31
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. As of the end of the
quarter ended March 31, 2005, the Company's management, including its chief
restructuring 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 restructuring
officer concluded that the Company's disclosure controls and procedures were
effective as of March 31, 2005 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.
32
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On June 20, 2003, Agilent Financial Services, Inc. ("Agilent") 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 31, 2004. On November 30, 2004, Agilent entered
into an agreement with us to restructure the $1,725,000 due Agilent on December
31, 2004. Under the terms of the agreement, we paid Agilent an initial payment
of $250,000 on December 1, 2004; and are required to pay monthly payments of
$92,187 for sixteen months, from January 1, 2005, up to and including April 1,
2006. Also, we issued Agilent a warrant to purchase 178,571 shares of our common
stock. The warrant has an initial exercise price of $0.56 and a term of five
years. On March 31, 2005, the Company and Agilent entered into an agreement
whereby one half of the remaining debt of $1,111,599 would be paid in equal
payments over 18 months beginning April 1, 2005, with the other half being paid
in the form of senior preferred stock convertible at any time at the option of
the holder into common stock at a price of $.50 per share. 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, as amended to reflect
the agreements described above. 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 certain claims made by the consultants. On April 20,
2005, the Civil Court of Rome issued judgment dismissing the case, and ordered
the consultants to pay P-Com Italia's legal fees. The Company anticipates that
the Court's order will be appealed to the Court of Appeal of Rome.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Pursuant to a Note and Warrant Purchase Agreement, dated November 3, 2004, by
the Company and SDS Capital Management Group SPC, Ltd. ("SDS"), SDS agreed to
purchase debentures in the aggregate principal amount of up to $5,000,000 (the
"Notes"). In addition, the Company agreed to issue warrants to purchase in the
aggregate up to 800,000 shares of the Company's common stock. The warrants have
an initial exercise price of $1.50 and a term of five years. The Purchase
Agreement provided that the Notes and warrants be issued in multiple closings.
The first closing took place on November 26, 2004 and consisted of a $3,300,000
Note and warrants to purchase 580,000 shares of the Company's common stock. The
second and third closings took place on March 21, 2005 and March 31, and
consisted of Notes for $250,000, and $600,000, and warrants to purchase 40,000
and 96,000 of the Company's common stock, respectively.
On March 31, 2005, the Company entered into a Lease Termination Agreement with
Bryan Family Partnership II, Ltd. ("Bryan"). In partial consideration for the
Company's obligations under the Termination Agreement, the Company issued Byran
a warrant to purchase 2,000,000 shares of Common Stock at an exercise price of
$0.20 per share (the "Bryan Warrant").
The Notes and Bryan Warrant were issued in reliance on the exemption from
registration provided by Securities Act Section 4(2), and Rule 506 of Regulation
D, because the transactions were non-public offerings to accredited investors.
33
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
31.1 Certification of Principal Executive Officer Pursuant to
Exchange Act Rule 13a-14(a).
31.2 Certification of Principal Financial Officer Pursuant to
Exchange Act Rule 13a-14(a).
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On February 10, 2005, we filed a Form 8-K to announce our financial
results for the fourth quarter and fiscal year ended December 31,
2004.
On March 1, 2005, we filed a Form 8-K announcing the resignation of
Brian T. Josling as a director and member of the Audit Committee of
P-Com and appointment of Richard Reiss to serve as a director.
On March 15, 2005, we filed a Form 8-K to announce the resignation
of Sam Smookler as President, Chief Executive Officer and director
of P-Com and the appointment of Daniel W. Rumsey to serve as Chief
Restructuring Officer.
On March 28, 2005, we filed a Form 8-K announcing the issuance of a
promissory note in the amount of $250,000 and security agreement
with the holder.
On April 28, 2005, we filed a Form 8-K to announce a restructuring
plan that will significantly curtail current spending and
substantially reduce liabilities and operating and other costs.
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/ Daniel W. Rumsey
-----------------------------------------
Daniel W. Rumsey
Chief Restructuring Officer
(Principal Executive Officer, Principal
Financial Officer and Principal
Accounting Officer)
Date: May 12, 2005
34
EXHIBIT INDEX
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.
35